Westwood Holdings Group Inc (WHG) 2016 Q4 法說會逐字稿

Good day ladies and gentlemen, and welcome to the Westwood Holdings Group fourth-quarter 2016 earnings conference call.

(Operator Instructions)

As a reminder, today's conference is being recorded. I would now like to introduce you host for today's conference, Julie Gerron, Senior Vice President and General Counsel. Please go ahead.

Thank you, and good afternoon. 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 as in our annual report on form 10K for the year ended December 31, 2016 filed with the Securities and Exchange Commission. We undertake no obligation to publicly update or revise any forward-looking statement, 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 today's press release. On the call today we 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, or CEO.

Thank you Julie, and thank you to all of you for taking the time to listen to our earnings call today. I will begin with comments from are three distinct investment teams, discuss our sales and service efforts, our notable business results, and update you on some of the strategic initiatives we've accomplished last year. It was a year of dramatic out performance of value over growth and small caps over large caps.

Our small cap product rose nearly 30% and remains a top-rated strategy over multi-year periods. Large cap kept pace with the S&P 500, but lagged the Russell 1000 value as our quality value focus was less preferred over deep value names. We were excited to reach a three-year anniversary of our large cap concentrated product, which outperformed the Russell 1000 value over the three-year period by over 250 basis points, and solidly in the top quartile over our peers.

Our SMidCap performance improved during the fourth quarter, but we realize there's more work to do there. While active versus passive continues to be a focal point for the industry, the current environment appears even more favorable for active management, as we note that correlations declined in the year-end. Our multi-asset strategy, income opportunity, generated output from both stock selection and asset allocation in 2016, while posting positive low volatility returns each quarter.

Our worldwide income opportunity strategy, a non-dollar-based version of the same process and designed to generate the same return profile, celebrated its second anniversary, and we remain excited about its prospects. Finally, our MLP strategy saw strong absolute gains in the commodity complex, including oil recovered from the lows put in place during the first quarter of 2016.

Looking forward in 2017, Westwood strategies remain well-positioned in areas of the market where active management can deliver excess return and specific outcomes for clients. Our focus remains, as it has for 30 plus years on downside protection and absolute risk. Our suite of high active share strategies is designed to accommodate varying levels of volatility exposure for our clients.

Our global and emerging markets equity team delivered both attractive absolute performance and out performance relative to their benchmarks. Among the five strategies, emerging markets SMidCap, which recently completed its three-year track record in September, 2016 beat its benchmark in the fourth quarter and provided the best relative performance from all of our strategies, with over 700 basis points of out performance for 2016. Our emerging markets and emerging market plus strategies also finished the year strongly, with relative out performance in top quartile peer rankings.

Our global team travel is always active with numerous trips completed in the fourth quarter for research around North America, Europe, and Asia, specifically India. They attended conferences as well as industry-specific events covering sectors such as energy, consumer staples, real estate, and SynTech]. In addition to the research travel, we travelled to Australia and the UK to visit clients and prospects. Looking forward in 2017, the team expects the procyclical orientation to be generally favored by markets, and our focus will continue to be on high-quality companies with talented management teams intent on executing their strategic growth plans around the world.

Finally, our global convertible team notes that convertible issuance continue to be robust in the fourth quarter, with 2016 reaching levels just shy of 2015. Convertible valuations remain attractive as a whole, but have rebounded from the low levels of early 2016. Our long only global convertible strategy outperform for the quarter, and the year, and is ranked above median in its peer group in all-time periods since inception. The team's liquid alternative strategy, market neutral income, has also performed well this year with nearly top quartile rankings among its peers.

As mentioned in previous quarterly reports, it is the least sensitive of all Westwood's offerings, and this was again referenced with good performance during equity market pullbacks. Looking forward to the balance of 2017, our convertible products are well positioned relative to our European peer group, and we are excited about the prospects of earning more clients in the year ahead.

On the sales and service front we saw institutional net outflows during the quarter, as investors rebalanced their value portfolios, and one of our multi-asset strategies clients sold out ahead of the election. Their account remains open, and we hope to see them return during 2017. Our pipeline of potential services is building on the back of excellent performance from EM, small cap, income opportunity, global converts, and MLPs.

We hired a third-party marketing firm to carry the bag in Europe, and we have already had a good set of meetings with our global convertible team. We recently expanded our third-party distribution in Canada and look to see more opportunity for our emerging market strategies this year.

We are particularly excited to find an audience from our emerging markets SMid product, as that category expands and gains traction with client sponsors. We found out last week that we won a sizable small cap that should fund in the second quarter, and we have more searches in the pipeline.

Income opportunity continues to attract search activity, as high-quality, low volatility, and competitive yields remains high on investors' wish lists. We are in the third year of the global version of income opportunity, worldwide income, and we hope to bring in a strong three-year record to position ourselves for a successful institutional launch in 2018. We have had numerous on-site visits and consultant rating upgrades, especially in the emerging market and small-cap areas.

We now do business with nearly 60 different institutional consulting firms, many of whom are becoming more positive towards active management. In the trust area, all three of our trust offices were very active and experienced positive net flows for the quarter. We held client and prospect meetings both pre-and post election with great success. Our pipeline is active in all three offices, and we are excited to talk to our clients about our recently launched tax efficient investment strategy.

The product, select equity is designed to offer high network investors a high-quality, low turnover, tax efficient experience. We secured approximately $10 million of new money to get the strategy launched at year end, and we are in the process of transitioning a number of clients into the new strategy. The message of a well researched, high conviction, best ideas portfolio resonates well with highly successful private wealth investors, and we are excited to introduce this to the marketplace.

In the mutual fund area, our 10-year streak of positive net inflows came to an end with slight net outflows of $24 million for the quarter, and $149 million for the entire year. However, we see some positive signs. Our redemption rate improved year-over-year, that is 2016 was better than 2015.

Small-cap had an exceptional performance year, and we are optimistic that this performance will attract sales. As mentioned in previous calls, we hired a third party mutual fund sales firm in late November to promote the small-cap fund to six broker-dealer firms. While they are just getting started, we are encouraged with their activity thus far.

Our emerging market fund, WWEMX was up 12.5% versus the MorningStar category performance of 8.5%, ranking the fund in the 20th percentile. Net flows to WWEMX in 2016 were $43.5 million, on the positive side. Despite a tough year for many of our sub advisory clients, and the pressures on their business, we were able to retain 100% of our sub advisory client base.

From an institutional and private wealth service standpoint, our client retention ratio remained very high relative to the industry. We achieved 94% institutional client retention and 95% retention of our Westwood trust clients. This is a testament to more than three decades of high quality attentive service to our customers.

Turning now to business results, we were pleased to see that our stock performed well last year. We finished the year second in our peer group with over a 20% return. We increased the dividend for the 14th consecutive year, and maintain a competitive current yield for our shareholders. We completed a number of strategic initiatives during the year.

On the technology front we migrated our infrastructure to the cloud on the Microsoft Azure platform and office 365. We converted our trade order management system to Bloomberg so that we now support a true multi-asset and multi-currency platform. We established the foundation of our data architecture strategy, and modernized our information security platforms with new firewalls and network switches, while improving desktop and mobile security.

Our human capital department completed a best practice compensation program, implemented a performance management system, and continued to work on ways to attract, retain, and motivate A-level talent. Our marketing department focused on building a new marketing foundation for the firm, including the rebranding of existing materials and developing innovative strategic marketing content for our newer strategies.

We completed a project outline for rebranding the corporate website later this year. We will continue to diligently pursue, and evaluate opportunities to expand our Company through the acquisition of private wealth companies and strong geographic markets. We feel that we are an ideal partner for a strong and growing business.

We know the business inside and out. We have a publicly traded stock to incent long-term employees. We have scale in our overall business and a robust suite of investment products to offer clients. We are disciplined with our use of shareholder capital for expanding our business through acquisitions, and will only spend corporate capital on the best opportunities that we discover and evaluate to reduce our risk and ensure a strong and profitable company in the future, as we've done in the past.

In this constantly changing investment marketplace there are more investment options than ever for high net worth investors to choose from. We continue to believe that having a strong long tenured firm and advisor in your corner is still a valuable service, and that it will be long into the future.

With that, I would like to thank you for your continued interest in Westwood and turn the call over to Tiffany Kice, our CFO.

Thanks, Brian, and good afternoon, everyone. Today we reported total revenue of $31.1 million for the fourth quarter of 2016 compared to $31.6 million in the prior year's fourth quarter. The decrease is primarily related to lower quarter-over-quarter performance based advisory fees of $0.5 million.

Net income was $7.6 million, or $0.92 per share compared to $4.7 million or $0.58 per share in the prior year fourth quarter, which included a $1 million net noncash charge for acceleration of stock based compensation expense for a particular grant and a $0.8 million tax charge for uncertain tax positions related to prior years. Economic earnings and non-metrics was $12 million, or $1.45 per share compared to $10.4 million, or $1.28 per share in the prior year fourth quarter. For FY16 total revenues were $123 million compared to $130.9 million for FY15.

The decrease primarily related to a $7.8 million decrease in asset-based advisory fees, reflecting lower average AUM coupled with a $2.1 million decrease in performance-based advisory fees. These decreases were partially offset by a $1.5 million increase of trust fees due to a full year of revenue reported by Woodway. Net income was $22.6 million, or $2.77 per share compared to $27.1 million, or $3.33 per share for 2015.

The decrease was primarily driven by the decrease in total revenue. Economic earnings was $41.1 million, or $5.03 per share compared to $46.5 million, or $5.71 per share for 2015. Firm light assets under management totalled $21.2 billion at year end and consisted of institutional assets of $11.9 billion, or 56% of the total, private wealth assets of $5.5 billion, or 26% of the total and mutual fund assets of $3.8 billion, or 18% of the total. We experienced net outflows of $289 million for the quarter, partially offset by market appreciation of $257 million. For FY16 we experienced market appreciation of $2 billion, partially offset by net outflows of $1.5 billion.

Our financial position continues to be very solid with cash and investments at year end totaling $90.2 million and a debt-free balance sheet. We are pleased to announce that our board of directors approved a quarterly cash dividend of $0.62 per share. The dividend will be payable on April 3, 2017 to stockholders of record on March 10, 2017. This represents an annualized dividend yield of 4.5% at yesterday's closing price.

That brings our prepared comments to a close. We encourage you to and review our investor presentation we've posted on our website reflecting fourth quarter and FY16 highlights, as well as a discussion of our business, product developments and longer-term trends and revenues, earnings and dividends. We thank you for your interest in our Company, and we will open the line for questions now.

(Operator Instructions)

Our first question comes from the line of Mac Sykes with Gabelli. Your line is now open.

Good afternoon, thank you for taking my questions. Can you just remind us how much AUM is in your EM products currently, and how that compares year over year?

I'm sorry your question was how much AUM in?

Your EM products.

EM products was about $4 million -- $4 billion, sorry, altogether.

I'm sorry?

The EM products altogether are at about $4 billion.

Can you expand on your comments about the EM products to start the year in terms of just given your strong 2016 and may the [Barco] returns already in January. I'm just curious whether we should expect sort of an uptick going into the first half of the year.

I would say that as I noted in the call that we have had a number of positive meetings with consultants. We've had a number of consultant upgrades. I don't think the story has changed at all that EM remains an asset class that is in demand, and the consultants think a lot of our team.

So I'm very optimistic about our ability to generate [close] at the EM complex and look forward to see what happens for the rest of the year.

And one for Tiffany on tax sensitivity. We've been focusing on corporate tax rates and potential changes with the Trump administration. If your tax rate or the corporate tax rate were to drop to 20%, how much would that affect WHD in terms of impact to EPS?

My best guess on impact to EPS would probably be somewhere between $0.30 and $0.40, and that would really be looking at the run rate. That's not really a whole lot of specifics. But you also have to think about the deferred tax assets that would reverse out, so there would be some adjustments that would happen at the beginning.

Thank you very much.

Thanks for your question, Mac.

Thank you.

(Operator Instructions)

I am not showing any further questions at this time. I would now like to turn the call back to Brian Casey, CEO for any closing remarks.

Thank you, we appreciate you taking the time to listen to our call today. If you have any further questions, please feel free to call myself or call Tiffany or visit our website at WestwoodGroup.com and look under the investor relations tab for all of our filings, including our updated IR presentation, which we just posted today. Thank you again.

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.