Westwood Holdings Group Inc (WHG) 2015 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Westwood Holdings Group, Inc., Second Quarter Earnings Conference Call. (OPERATOR INSTRUCTIONS) As a reminder, this call is being recorded. I would now like to introduce your host for today's conference, Senior Vice President and Chief Compliance Office Sylvia Fry. Please go ahead.

Thank you. Good afternoon, and welcome to our Second Quarter Earnings Conference Call. I would like to start by reading our forward-looking statements disclaimer.

The following discussion will include forward-looking statements. These forward-looking statements are subject to known and unknown risks, uncertainties, and other factors which may cause actual results to be materially different from those contemplated by the forward-looking statements. Additional information concerning the factors that could cause such a difference is included in our press release issued earlier today as well in our annual report on Form 10-K for the year ended December 31, 2014, filed with the Securities and Exchange Commission. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. You are cautioned not to place undue reliance on forward-looking statements.

In addition, in accordance with SEC rules concerning non-GAAP financial measures, the reconciliation of our economic earnings and economic earnings per share to the most comparable GAAP measures is included at the end of our press release issued earlier today.

On our call today we will have Brian Casey, our President and Chief Executive Officer; and Tiffany Kice, our Chief Financial Officer.

I will now turn the call over to Brian Casey, our CEO.

Good afternoon and thanks for taking time to join Westwood's Second Quarter 2015 Earnings Call. Similar to previous conference calls, I'll discuss the current environment for our business, how our investment teams are performing, as well as the trends our sales and client service teams are seeing within their market segments.

But before we delve into those areas, I'm pleased to report that we successfully closed the acquisition of Woodway Financial Advisors, and their results are included in our financials for the first time. It has been a long-held strategic objective for Westwood Trust to expand into the vibrant Houston market and we really feel like we're partnering with the premier firm in Houston.

We are in the process of integrating Woodway within the broader Westwood organization and we are pleased to say that it's been business as usual with Westwood clients so far.

Now turning it over to investments, I'll start with some broad commentary on the macro environment that our three distinct investment teams have faced in recent months.

Uncertainty over a possible default by Greece and the country's exit from the euro, along with macro concerns in China, created high levels of market volatility resulting in flat to negative returns for most equity markets.

Yield-oriented assets were also negatively impacted by an increase in interest rates in anticipation of the Federal Reserve raising the fed funds rate later this year.

Given this backdrop, as was the case in the first quarter, the importance of individual security selection and investors placing greater focus on company fundamentals bode well for our active style of management. This was particularly true for the investment strategies managed by the US value team during the most recent quarter.

On a relative basis, our value strategies continue to perform well, with most products outperforming their respective benchmarks during the period. On a year-to-date basis, through June 30 every value equity strategy posted a positive return and is ahead of its benchmark.

Also, for the first half of 2015 every value equity strategy ranked in the top half of its peer group, with many of the strategies, including LargeCap Value, Smid, Smidcap Plus, and AllCap Value ranking in the top quartile or higher for the period.

Lastly, our concentrated LargeCap and AllCap value strategies, which leverage our analysts' highest conviction recommendations, continue to perform well, with both ranking in approximately the top decile of their respective peer groups since their inception six quarters ago.

We started these strategies given our belief that many investors will place a greater emphasis on higher conviction strategies in the years ahead and we're delighted with the initial performance our portfolio teams have delivered.

Within Westwood's multi-asset strategies, our income opportunity strategy posted a return of minus 0.9% for the second quarter despite significant pressure on yield-oriented assets. For the second quarter and year to date, the strategy displayed a lower volatility profile than the broader market while also outperforming its benchmark for both periods.

Our worldwide income opportunity strategy, which we launched earlier in the year, registered a decline of 1.3% in the second quarter, also outperforming its benchmark.

Reflecting the challenging environment in the energy sector, our MLP strategy declined 3% in the second quarter, but outperformed the benchmark by over 300 basis points. This outperformance benefitted us significantly in earning a performance fee of $1.9 million for the year ended June 30, 2015. I want to specifically recognize Todd Williams, Matthew Na, newest MLP team member Hollis Ghobrial, and Casey Flannigan for a great year.

While we expect volatility to remain a characteristic of the energy sector over the near team, we continue to view the MLP asset class as an attractive long-term opportunity.

It's now over three years since we established Westwood International Advisors, our global and emerging markets business, in Toronto. The team has proven to be a great cultural fit within Westwood and now manages over $4 billion on behalf of clients around the globe. We believe that the team has potential to grow further in the coming years and we'll continue to focus on improving returns for clients.

During the most recent quarterly period, our global equity mandate performed well, building on its year-to-date out-performance while the emerging markets strategy slightly under-performed their respective indices.

As we analyze our strategies today, we continue to see very favorable portfolio characteristics which show a greater emphasis on higher quality and return on invested capital metrics. Historically, these higher-quality characteristics have worked well for us in generating excess returns and, we believe, position us well to outperform going forward.

Our newest investment team, the global convertible securities team, has had a strong start to life at Westwood. Performance for the core strategic global convertible strategy remains ahead of its benchmark for the first six months of 2015 and the UCITS version of the strategy is one of the top performing convertible funds available to European investors.

During the second quarter, we launched mutual funds for both the long-only convertible strategy as well as the liquid alternative fund, which we called Market Neutral Income. This fund incorporates various convertible investment techniques within an absolute return-focus framework.

As we look forward, with volatility levels rising and uncertainty prevalent, convertibles are well positioned relative to many traditional asset classes. The pairing of short-duration bonds with long-dated options offers investors both upside potential and downside protection. The risk-adjusted return nature of the global convertible asset class, with its asymmetric profile, should provide a level of support in a volatile environment.

I'll now turn the attention to distribution trends at the firm, starting with our private wealth business. First, the acquisition of Woodway, our private wealth business now has combined assets of over $5.6 billion and accounts for approximately 25% of total firm assets under management.

Growing and building a geographically diversified footprint within our private wealth business has been a key initiative for Westwood Trust for many years. The client base of our private wealth business combines high-net worth individuals and smaller institutions. This client base is one that, if taken care of in the right way, can deliver steady growth and very long-tenured client relationships with low levels of redemption.

After a six-year bull market, tax season provided some challenges for many clients as higher tax rates, combined with the lack of unrealized losses the could be harvested to reduce realized capital gains, resulted in higher tax bills. Team members counseled clients on maintaining diversification and made portfolio adjustments as required.

Similarly, the low interest rate environment continues to challenge those clients that rely on portfolio income. New product offerings such as global convertible securities and master limited partnerships have proven to be welcome additions to client portfolios by boosting income levels.

In terms of organic growth, we saw strong net flows, particularly from our Dallas office, during the second quarter. One of these new accounts was $100 million. It's a short-term partnership account that will likely only be with us for 12 to 36 months, but has already led to other longer more permanent relationships with the principals.

As we look forward, we will continue to analyze opportunities to further expand our private wealth business, particularly in geographies that offer strong growth potential and where we can find partners that share similar cultural values.

Turning to our mutual funds business, for the second quarter we posted positive net mutual fund sales, albeit at a much slower pace than the first quarter. A continued bright spot is the second consecutive quarter of positive flows for our emerging markets fund as well as our MLP and strategic energy fund, which we launched at the end of 2014.

As you know, we've invested significantly in our mutual funds complex in recent years. With the addition of the two aforementioned convertible funds as well as the launch of the Worldwide Income Opportunity Fund in the second quarter, we now have 15 mutual funds diversified across a number of categories.

The new funds, as well as improved performance of our existing funds such as LargeCap Value and SmidCap, position us well to grow this part of our business in the years ahead.

After a very strong start to the year, our institutional business saw a slowdown in the second quarter. While net institutional flows were negative for the quarter, they remain positive for the year-to-date period. Most of the outflows in the second quarter resulted from asset allocation decisions and were partial redemptions of larger mandates that clients have kept with Westwood.

Our institutional client retention rate has historically been very high and remains well over 90% for 2015.

In April, we launched the UCITS offering of our Emerging Markets Plus strategy for Canadian institutional clients as the third sub funds in our UCITS platform.

As we look forward, the institutional pipeline remains quite strong and the sales team is working hard on bringing new business to the firm over the remainder of the year.

Before wrapping up, I also wanted to inform you that we've hired our first Chief Information Officer. As we've grown and our business has become more complex, we felt that now is the appropriate time to add a senior technology leader that will ensure we're thinking strategically and operating efficiently as we move forward.

Fabian Gomez brings over 25 years of senior-level technology experience in the asset management industry and we welcome him to the Westwood leadership team.

To conclude, we're very happy with how our business is progressing as we move through 2015. While no doubt a competitive environment for asset management firms, we believe it's truly unique for a firm our size to have multiple platforms for growth. A seasoned institutional business of over 30 years, a trust business that is nearly 20 years old, a mutual fund business that will be 10 years old later this year, and a UCITS business that is young but already profitable.

Our focus will always be on creating a culture of employee ownership with a focus on investment and client service excellence. This combination of factors is at the center of what has made Westwood successful and what will drive our success in the future.

We just surpassed 13 years as a public company on the New York Stock Exchange and I'd like to thank our long-term shareholders for your support and to all of my long-tenured colleagues for making Westwood what it is today.

I'll now turn the call over to Tiffany Kice, our CFO.

Thanks, Brian, and good afternoon, everyone. As Brian mentioned earlier, we have completed the acquisition of Woodway on April 1 and Woodway's financial results have been consolidated in our financial statements for the second quarter of 2015.

For the second quarter of 2015 we are reporting total revenues of $37.3 million, up 21%, or $6.4 million, from the same period in 2014, with asset-based advisory fees up 24%, or $5.4 million, and trust fees up 54%, or $2.8 million.

We recorded performance-based advisory fees of $1.9 million during the quarter compared to $3.4 million in the second quarter of 2014.

Net income of $9.8 million increased 14% from the second quarter of 2014, and diluted earnings per share of $1.23 increased 10% from $1.12 in the same period of 2014.

Economic earnings, a non-GAAP metric, of $14.4 million increased 23%, as compared to $11.7 million in the second quarter of 2014

Economic earnings per share increased $1.80 per share from $1.52 per share in the same period of 2014.

Firm-wide assets under management increased to a record $23.1 billion, primarily due to the Woodway acquisition, which contributed $1.6 billion in assets under management.

At quarter end, our assets under management consisted of institutional assets of $13.2 billion, or 57% of the total; private wealth assets of $5.6 billion, or 24% of the total; and mutual fund assets of $4.3 billion, or 19% of the total.

Our balance sheet continues to be very solid, with cash and investments of $69 million and no debt.

Our Board of Directors approved a quarterly cash dividend of $0.50 per share payable on October 1, 2015, to stockholders of record on September 11, 2015. This represents an annualized dividend yield of 3.4% at yesterday's closing price.

We encourage you to review the presentation we've posted on our website reflecting second quarter highlights as well as longer-term trends in the growth of our assets under management, revenues, earnings, and dividends.

I'll now turn the call back over to Brian to conclude.

Thanks, Tiffany. Great job. If anybody has a question, please let the operator know.

(OPERATOR INSTRUCTIONS) Mac Sykes, Gabelli.

Well good afternoon, everyone. Thank you for letting me ask questions. My first is do you think that the volatility in the energy space has dampened longer-term investment appetites for both the MLP and income opportunity strategies?

I don't. I believe -- in fact, one of our large clients just put some additional funds with us in the last couple of weeks. In fact, we, at our trust company, just heard a presentation on opportunistic investing in the energy area. So I do think there's a lot of discussion. There's obviously a lot of uncertainty, but uncertainty creates opportunity. So I think you'll see continued investment in that area.

Great, and congratulations on the new hire in the CIO role. Do you think you will ramp up technology spending from here, or do you just expect him to find some efficiencies for you?

Well, I think there'll be -- our technology spend as a firm has been pretty consistent over the years, in lock step with our growth. I think he'll find efficiencies and I think he'll find ways to make us better as a firm. Our business has become more complex, and more variables in the last several years, and it was time to make a hire like that.

Great, and congratulations on the record AUM. Thanks, Brian.

Thanks, Mac; appreciate your questions.

(OPERATOR INSTRUCTIONS) Bob Mitchell, Conestoga Capital.

Hello, Brian and Tiffany, this is Larry Carlin, sitting here with Bob Mitchell.

Hi, Larry; hi, Bob.

A question on the institutional business. You talked about the pipeline being strong. What products are you seeing that strength in, and is there any way to give us a general sense of how much that pipeline has increased year over year?

I'll answer the first part. The interest level oftentimes performance (inaudible) to search activity and we've had terrific activity in our SmallCap and AllCap strategies; the search activity has picked up there. We've had continued ongoing interest in our EM strategies, so we've had a lot of interest there.

It was great to see our LargeCap performance do so well over the last 12 months. We've actually moved close to the top quartile for the last 12 months. And we have a 31-year record in LargeCap, that when you look at it, it doesn't take very many quarters of good performance to make that long-term record look really attractive.

So those are really the areas. Our global converts team is off to a fantastic start. That's a niche product but it's also one where there's an appetite, especially from Europeans, for that asset class. And the fund is off to a terrific performance start. So those would be the areas just in terms on a relative basis year over year.

We've had pretty strong search activity. It's been pretty consistent. I can't really tell you whether it's higher today than it was a year ago; I can just tell you that it's positive and there's no shortage of opportunities.

Okay, thank you. And on the Woodway acquisition, can you talk about what's involved in integrating that and what type of synergies do you think you can get from Woodway?

Well, Woodway, as I've said in prior calls, is -- they didn't need us to be successful; they were already a successful business. Some areas where I think we can add some efficiencies -- obviously, there's efficiencies with respect to duplicative areas in the finance and accounting areas and the HR areas -- those are kind of the low-hanging fruit. And then, we have some things that we've learned operationally over the years that may be helpful. Those are really the -- from a financial perspective the most help we can do financially.

But there's also things that as a firm we can do. We certainly have a pretty broad-based research department, we have a lot of things that are available. We want to be really careful in how we introduce those to clients. We want them to be value-add as opposed to, this is how we do it. Their clients are already happy so they, again, don't need us.

So there's lots of opportunities. We had our Trust Board meeting this afternoon and we had the leaders of our Dallas business, our Omaha business, and our Houston business all together. It's a great opportunity to learn from each other and for all of us to get better.

Okay, great. Thanks, Brian, Tiffany, and congratulations on the quarter.

Thanks, Larry and Bob. We appreciate it.

Thank you. I am showing no further questions. I would now like to turn the call back to President and CEO Brian Casey for any further remarks.

I don't have anything further. I'd just reiterate again -- to thank all of our long-term shareholders, including Bob and Larry and the Gabelli organization, for their support over what is now 13 years. It's been a terrific run and we really think this is just the beginning.

So thank you. If you have any further questions, feel free to call us or visit our website at westwoodgroup.com. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone have a great day.