Westwood Holdings Group Inc (WHG) 2017 Q1 法說會逐字稿

(technical difficulty)

Ladies and gentlemen, and welcome to the Westwood Holdings Group Q1 2017 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

I'd like to introduce your host for today's conference, Mr. Julie Gerron, General Counsel. Ma'am?

Thank you. Good afternoon, and welcome to our First Quarter 2017 Earnings Conference Call.

The following discussion will include forward-looking statements. These 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 Form 10-Q for the quarter ended March 31, 2017, which is 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 the 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 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, our CEO.

Thanks, Julie, and thanks to all of you for taking the time to listen to our first quarter earnings call. We celebrated our 34th anniversary this month. I want to thank our long-term shareholders for their support of Westwood over the years and all of my colleagues for their commitment to our clients and for making Westwood a great place to work.

We held our 15th Annual Shareholders' Meeting this morning, and I'm pleased to report that all 6 of our proposals were approved by shareholders today. We appreciate your support, and we will endeavor to continue to deliver positive results in the year ahead.

Today, I'll begin with comments from our 3 distinct investment teams, discuss our sales and service efforts and include updates from our Trust and mutual fund businesses.

Markets again moved higher in the first quarter as larger-cap stocks outperformed smaller-cap stocks and higher-quality securities took the lead. Attention seemed to shift away from an investment environment driven by monetary policy and multiple expansion to one focused on earnings growth. This type of environment is supportive of active management and Westwood's investment style. Not surprisingly, our U.S. Value Equity strategies beat their value benchmarks for the quarter, and we were particularly pleased that our SMidCap strategy continued to improve while exhibiting good downside capture in March as the Russell 2500 Value Index retraced some of last year's gain.

Our multi-asset strategies, Income Opportunity and Worldwide Income Opportunity, and our MLP strategies produced positive absolute gains and outperformance relative to their benchmarks. The Income Opportunity strategy continues to resonate well with those individuals and institutions looking for income and downside protection.

Our LargeCap strategy reached its 30-year anniversary this quarter. And while it's sometimes hard to remember all of the ups and downs over the past 3 decades, the results speak for themselves. We've beaten the S&P 500, the Russell 1000 and Russell 1000 Value indices, and we're in the top decile of our peer group since inception. We've earned these competitive risk-adjusted returns by building high-quality, high-conviction portfolios that are very different from the large-cap passive indices representing the broader market.

Our philosophy, developed by our founder, Susan Byrne, of seeking to find reasonably priced great companies with strong balance sheets and superior dividend growth potential has served our clients well over our 34-year history. Since our humble beginnings, we've developed an entire suite of products with varying levels of volatility exposure targeted to address specific outcomes for clients, and we're confident they will find a broader audience in the years ahead.

Emerging markets outpaced developed markets in the first quarter, driven by strong performance out of Asia, particularly India and South Korea, and Latin America, specifically Chile and Mexico. Our emerging market funds also had a strong start, outperforming their indices due to regional and stock-specific contributors like India and Mexico, as well as strong performance by companies in the information technology and industrial sectors. The balance of the year will be filled with headlines of the politics of European elections in France and Germany and the growing political uncertainty around the world.

Our team takes a long-term view and remains focused on the companies we own and our clients' portfolios. The team recently traveled to China for a facility tour, as well as Indonesia and Hong Kong to visit companies. Contrary to political headlines and some policy setbacks, the team reports that global economic fundamentals are heading in the right direction with positive sentiment, improving leading economic indicators and rising global employment. We do want to note that our lead emerging markets portfolio manager Patricia Perez-Coutts' home country of Peru was recently hit hard by devastating floods, where over 800 cities declared a state of emergency and thousands were rendered homeless. Our employees in Toronto and in the United States raised funds to support the relief efforts for those affected. The rebuilding has only just begun, and the region continues to need all of our help.

Turning to our Global Convertible strategy. Our team outperformed for the quarter and posted top-quartile rankings among its peer group. Our partnership with The Cardinal Partners' third-party marketing group in Europe has begun to gain traction with several promising prospects materializing over the quarter, and we're excited about the potential for earning additional clients in the year ahead.

Our liquid alternative strategy, Market Neutral Income, also performed well and saw its assets under management in the Aviva absolute return fund increased to over $350 million by quarter-end. We've seen further flows during April and now bring the total AUM to over $400 million.

As mentioned in the previous quarterly reports, it is the least sensitive of all of Westwood's offerings. And this was again evidenced with good performance during the equity market pullback in March.

Our Global Convertibles team notes that convertible issuance was again strong in the first quarter, boosted by M&A activity, higher rates and robust equity markets. With uncertainty rising worldwide, future volatility should move higher. This, coupled with attractive risk-reward dynamics, should bode well for future relative returns for these strategies.

Turning now to sales and service. Our institutional net flows were negative at $237 million in the first quarter, with most coming from our U.S. equity products, particularly LargeCap and SMidCap. The largest outflow was from an existing European client who believes the U.S. market and the U.S. dollar are overvalued and sold most of their U.S. positions. On a more positive note, we added a new $45 million large-cap account, and we received another $145 million into the Market Neutral Income strategy.

Our pipeline includes opportunities across several strategies, including emerging markets, Income Opportunity, SmallCap Value and our Global Convertible strategies. We've seen an increase in SmallCap Value search activity, and we anticipate funding in the second quarter of approximately $200 million from a defined contribution plan that selected us earlier this year. We're also in the late stage for a search by a large public fund, along with several other small-cap value searchers across a variety of client types, including public, corporate and endowment funds.

We continue to see opportunities for our emerging market strategies. We hosted an on-site due diligence visit in Toronto earlier this month for a large non-U. S. public fund, and we expect them to make a decision within 90 days. We're pleased to see other opportunities progressing as well and expect to see an additional $150 million for our EM strategy from an existing client later this quarter, while another on-site is in progress with a large Canadian pension plan.

We've recently competed -- completed a marketing piece for our EM SMid strategy, which completed a 3-year record late last year, and we intend to step up our marketing efforts in the months ahead. Recent meetings on Income Opportunity have been positive, and we remain hopeful that a large firm will partner with us on the strategy later this year. With respect to Global Convertibles, the sales team at Aviva has grown more positive on our Global Convertible and Market Neutral Income strategies, and we continue to see additional funding and more opportunities for prospect meetings on the calendar.

Turning to our Trust business. We had modest net outflows of $51 million. However, our pipeline for new business is better than we've seen in several years. Wealth continues to grow for our prospective customers. Money is in motion again, and we're seeing a growing pipeline across our Trust business. The rebranding of our Trust materials has been very well-received by Westwood Trust customers and prospects.

Our advisory council in Dallas has had several meetings, and we're starting to see more referrals from third-party professionals in Dallas and in Houston. Michael Meadows continues to build our foundation and philanthropic advisory services business, and he's currently attending the Council on Foundations' annual conference held in Dallas where Westwood is a sponsor. We're working on additional exciting developments for our private wealth business, and we'll have more to discuss with you over the balance of the year.

We're pleased to report that our new product for taxable investors, known as Select Equity, had a strong first quarter, and the outperformance continues into April. As mentioned previously, Select Equity has targeted to deliver taxable investors a well-researched portfolio of high-quality best ideas with an emphasis on low turnover and tax minimization. We outperformed the broad U.S. market in the first quarter, and we're even more encouraged to see the portfolio outperform on a recent down days in March and April. We're working with an outside vendor to develop technology to help us track, manage and execute taxable portfolio decisions, and we expect to have that available by year-end.

Finally, turning to our mutual fund business. Flows were essentially flat with a net outflow of $6.9 million. Most of the outflows were from SMidCap, but we're encouraged to see that one of our large long-term customers recently reopened our SMidCap fund to their defined contribution plan. We were pleased to see positive net inflows for Income Opportunity, SmallCap and our Market Neutral Income funds.

Our SmallCap fund recently celebrated its 10-year anniversary, and we hope to capitalize on its solid track record supported by a new marketing piece we created for our sales team. Our partnership with third-party marketing firm Piedmont Capital Distributors is progressing as they target Merrill, UBS, RBC and LPL, leading to 5 consecutive months of positive net inflows into the fund. We've also seen modest but consistent net inflows into our Market Neutral Income Fund over the last 8 months as we're seeing a broader audience for a strategy with downside protection.

We have a number of strategic initiatives under way, including a revised website, which is targeted for completion by year-end. We've nearly completed the rebranding of our marketing materials firm-wide, and they've been well received in the marketplace. We will have more exciting news coming with respect to enhanced digital capabilities as well as a dedicated effort to build a stronger presence serving the charitable endowment and foundation world.

As always, we appreciate your confidence in Westwood and look forward to the year ahead.

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

Thanks, Brian, and good afternoon, everyone.

Today, we reported total revenues of $32.6 million for the first quarter of 2017 compared to $29.1 million in the prior year's first quarter and $31.1 million in the fourth quarter of 2016. The increase was primarily driven by higher average assets under management for the period and performance fees of approximately $400,000 earned in the first quarter of 2017.

Net income was $6.1 million or $0.73 per share compared to $3.5 million or $0.44 per share in the prior year first quarter and $7.6 million or $0.92 per share in the fourth quarter of 2016. The increase from the first quarter of 2016 primarily relates to the increase in revenues, partially offset by a $1.2 million increase in employee compensation and benefits related to higher compensation and additional headcount. The decrease from immediately preceding quarter is primarily related to seasonal payroll tax and benefit plan matching expenses from cash bonuses paid in the first quarter of 2017 and, to a lesser extent, higher estimated incentive compensation for 2017 and salary increases. This was partially offset by the increase in revenues.

Additionally, our first quarter 2017 income tax expense was positively impacted by a $1 million tax benefit related to the adoption of accounting guidance related to stock-based compensation awards, reducing our effective tax rate to 22%. Without the adjustment, our effective tax rate would have been 34.2%.

Economic earnings, a non-GAAP metric, were $10.6 million or $1.28 per share compared to $8.1 million, $1.01 per share in the prior year first quarter, and $12 million or $1.45 per share in the fourth quarter of 2016.

Firm-wide assets under management totaled $22.1 billion at quarter-end and consisted of institutional assets of $12.4 billion or 56% of total, private wealth assets of $5.7 billion or 26% of the total and mutual fund assets of $4 billion or 18% -- I'm sorry, that one was 26% of total, and mutual fund assets of $4 billion or 18% of the total.

We experienced market appreciation of $1.1 billion for the quarter, partially offset by net outflows of $295 million.

Our financial position continues to be very solid with cash and investments at quarter-end totaling $75.4 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 July 3, 2017, to stockholders of record on June 9, 2017. This represents an annualized dividend yield of 4.4% at yesterday's closing price.

That brings our prepared comments to a close. We encourage you to review our investor presentation we posted on our website reflecting first quarter of 2017 highlights, as well as the discussion of our business, product development and longer-term trends in revenues, earnings and dividends.

We thank you all for your interest in our company, and we'll open up the lines for questions now.

(Operator Instructions) Our first question is from Macrae Sykes of Gabelli.

Brian, you gave a number of data points on WIA. Overall, though, as the quarter progressed in that strong performance that was put up, are you getting a sense that there's now increased appetite for EM and international strategies? And also, is the perception around growth internationally helping as well?

Yes, thanks for your question. I definitely am seeing an uptick in interest. We have a really good on-site. Recently, we've got another one scheduled. We've got an existing client that's going to put another $150 million in before the end of the quarter. We also -- and I don't know this, but we could end up being a beneficiary of some of the M&A activity that's going on with some of our competitors in the EM space. So I anticipate that we will have further opportunities as the year progresses.

Okay. And then could you just remind me about the AUA, what strategies that encompasses and how that's marketed?

Sure. The bulk of the AUA is the Aviva relationship, which has been a long process in moving from a subadvisory-type situation or moving to a subadvisory situation, which they refer to as sub-delegation. We hope to have that done by the end of this quarter. And if we are able to get that done, then you'll see that move from AUA to AUM. But it has been a much longer process than we would have thought when we started.

Good news is we continue to manage the money. It's simply a matter of which bucket it goes into.

(Operator Instructions) I see no other questions in queue. I'll turn it back to Mr. Casey for any closing remarks.

All right. Well, thanks very much. We appreciate you taking the time to listen to our call and for being a Westwood shareholder or being a prospective Westwood shareholder. And if you have any further questions, please feel free to call me or Tiffany Kice, or visit our website at westwoodgroup.com. Thanks again for your time.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes your program. You may now disconnect. Everyone, have a great day.