Westwood Holdings Group, Inc. (WHG) Q2 2017 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Westwood Holdings Group Inc. Second Quarter 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will be given at that time. [Operator Instructions] As a reminder, today's program may be recorded. I would now like to introduce your host for today's program, Julie Gerron, General Counsel. Please go ahead.

Thank you. Good afternoon and welcome to our second quarter 2017 earnings call. 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 Form 10-Q for the quarter ended June 30, 2017 that is 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 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 second quarter earnings call. We celebrated 15 years as a public company on July 1 and I'd like to take a minute to thank all of our long-term shareholders for believing in us and supporting us over the past decade and half. I'd also like to thank my colleagues at Westwood for always doing their best for our clients and putting our client's interest at the forefront of everything we do. When went public 15 years ago, we said we wanted to run our company the way that companies that we would own in our clients' portfolio run theirs. That is to say, we value quality earnings, strong free cash flow, solid balance sheets, transparency, management continuity and a growing dividend. We've managed to growth the market cap nearly 10 fold. We've increased revenues and free cash flow nearly every year, have a debt-free balance sheet and have grown the dividend for 15 consecutive years. And in a transient world, we've managed to keep the majority of our original team together and added the talent that will drive the business forward in the next 15 years. Today, I'll begin with comments from our three distinct investment teams, discuss our sales and service efforts and our business [Technical Difficulty]. The market continues to move upward, with both domestic and global markets advancing for the seventh quarter in a row. As we noted last quarter, the shift continues away from an investment environment, driven by monetary policy to one focused on earnings growth. This return to an earnings per share driven market is very supportive of management and Westwood's investment strategies. Globally, financial assets were supported by renewed strength in economic growth and improving industrial activity, a modest resurgence of growth in China and abating deflationary pressures. Eurozone equities also advanced with healthy corporate earnings growth and receding political risk. Lastly, emerging markets continue to outperform the developed world as weakness in the U.S. dollar provided relative gains to many emerging market currencies. At the halfway point, the prospects for our strategies remain bright for the balance of the year and looking forward into 2018. Within our U.S. Value Equity strategies, we were pleased to build upon the positive performance momentum as our investment teams again posted strong absolute and relative returns across the board. All our U.S. Value Equity strategies beat their value benchmarks for the quarter, including Westwood SmallCap and Westwood SMidCap, which both saw lower downside capture during the volatile months of the quarter, a hallmark of the Westwood portfolio and added to their relative gains for the year. The Westwood large cap strategy also performed again this quarter, while our Low Vol Equity strategy posted absolute gains and continues to build its performance track record. Our multi-asset strategies, income opportunity and worldwide income opportunity delivered strong absolute gains and modest volatility. The MLP space was challenged by the decline in commodity prices. But our MLP strategies performed well on a relative basis, and maintained an attractive yield as compared to fixed income alternatives. Our Global and Emerging Markets equity team extended their double-digit start to the year with another quarter of gains, and approached a nearly 20% return for the first half of 2017. The team believes the opportunity to invest in international and emerging markets will improve further, as the global economy gains momentum against the backdrop of low inflation and diminishing risk premiums. And while macroeconomic conditions are important to our analysis, we continue to focus on the fundamental attributes of companies and their ability to generate sustainable economic profits. The team maintains an extensive travel schedule to visit companies and meet with management teams. This quarter, the team met with local economic experts and management teams in South Korea and Singapore, the UK, France and Italy, while attending North American conferences in New York and London. Turning to our Global Convertible strategy, our long-only strategy performed in line with its benchmark that remains ahead on a year-to-date basis. Our partnership with The Cardinal Partners, third-party marketing group in Europe also continues to gain traction, and we continue to work with them on promising prospects that have materialized. The sub-delegation mandate with Aviva became official on July 10, and the $690 million in long-only Global Convertible will officially move from assets under advisement to assets under management for the next reporting period ending September 30. This in addition to the Global Convertibles' absolute return fund, which we sub-advise through Aviva, grew to approximately $550 million in assets under management. The Global Convertibles absolute return fund and our liquid alternative strategy, the Market Neutral Income Fund performed in line with our expectations as the short duration holdings in the fund were aided by several positive stock specific catalysts. Within the Global Convertibles market, valuations remain reasonable with only some pockets of overvaluation. Drivers of recent issuance activity, namely M&A activity, higher rates, and robust equity market remain in place, and we've seen over $41 billion in new convertibles issued globally in 2017. With strong issuance and attractive valuations, we feel the strategy as well positioned if we return to more normal levels of market volatility and investors focused more towards outcome driven performance. Turning now to sales and service, institutional flows were slightly positive on a net basis for the quarter with large inflows into SmallCap, Emerging Markets and Market Neutral income. The SmallCap finals we mentioned last quarter was postponed until August, but we did see funding on the large public funds SmallCap mandate we want earlier this year. Emerging Markets [Technical Difficulty] inflows and we are seeing interest from a number of consulting firms. The Aviva Global absolute return fund experienced further positive flows and now exceeds $550 million. LargeCap experienced outflows primarily from a longstanding sub-advisory relationship that made a decision to consolidated manager lineup. SMidCap [expand those] [ph] primarily from the large European pension plan that reduced its exposure to SMid based on valuation and desire to pare their list of managers. Our mutual fund business had its best quarter and over two years with positive net outflows. Income Opportunity, SmallCap, Emerging Markets and Market Neutral all have positive inflows, while LargeCap and SMidCap had net outflows. The growth redemption rate continues to improve year-over-year, and Emerging Markets have had four consecutive months of positive inflows. Our private wealth business experienced net outflows during the quarter, part of this was due to a very large of state tax payment that was made during the quarter along with the tax payments of other clients do April 15. The good news is now that the estate is settled and taxes paid, we have a greater opportunity to manage the remaining assets. On another positive note, our select equity product, which is designed to give taxable investors a high-quality, low turnover, tax efficient portfolio has continued to perform well. We have moved most of the discretionary clients in Houston to this strategy and have seen interest growth from prospective new clients. We have several in the pipeline and expect to see continued growth in the strategy over the balance of the year. Overall, our client retention rate across institutional mutual funds and private wealth remains high and well ahead of comparable industry levels. We have a great team of people, who endeavor to give every client an attentive client experience of Westwood. We also celebrated the five year anniversary of Westwood international advisors. We open the office in Toronto in the spring of 2012, and now, combined with our Global Convertibles assets, our global assets under management exceed $5 billion. We are proud of the success of the WIA team and the converts team and look forward to continued growth in the years ahead. In closing, I'll make a few comments on our business results and strategic initiatives. We were pleased with the quarter and improved revenues and earnings. We continue to look for opportunities to grow our firm organically as well as looking for opportunities in the private wealth space. As we've said before, we feel that we're an ideal partner for a strong and growing business. We have a debt-free balance sheet, an attractive stock and a history of disciplined growth to offer potential partners. We've invested a lot of money in technology, and we'll further expand our private wealth offerings later this year with new digital experience and a completely redesigned website. We are always working internally to make our business stronger and look forward to sharing more with you on this in 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 $33.8 million for the second quarter of 2017, compared to $31 million in the prior year second quarter and $32.6 million in the first quarter of 2017. The increase was primarily related to higher average assets under management for the period and performance-based fees of approximately $1 million earned in the second quarter of 2017. Net income was $6.9 million, or $0.83 per share, compared to $5.7 million, or $0.69 per share in the prior year second quarter, and $6.1 million, or $0.73 per share in the first quarter of 2017. The 21% increase in net income in the second quarter of 2016 was primarily related to higher revenues. The 13% increase in net income in the first quarter of 2017 was primarily driven by higher revenues coupled with the lower employee compensation costs related to seasonal payroll tax and benefit plan matching expenses on cash bonuses paid in the first quarter of 2017. Economic earnings, a non-GAAP metric was $11.7 million, or $1.41 per share compared to $10.4 million, or $1.27 per share in the prior year second quarter, and $10.6 million, or $1.28 per share in the first quarter of 2017. Firm-wide assets under management totaled $22.6 billion at quarter end and consisted of institutional assets of $12.8 billion or 57% of the total, private wealth assets of $5.7 billion or 25% of the total, and mutual fund assets of $4.1 billion or 18% of the total. We experienced market appreciation of $566 million for the quarter partially offset by net outflows of $89 million. Our financial position continues to be very strong with cash and investments at quarter end totaling $88.8 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 October 2, 2017 to stockholders of record on September 8, 2017. This represents an annualized dividend yield of 4.2% at yesterday's closing price. That brings our prepared comments to a close. We encourage you to review our investor presentation we've posted on our website reflecting second quarter 2017 highlights, as well as the discussion of our business product development and longer term trends in revenues, earnings and dividends. We thank you for your interest in our company. And we'll open up the lines to questions, now.

Certainly. [Operator Instructions] Our first question comes from the line of Mac Sykes from Gabelli. Your question, please.

Good afternoon and thank you for taking my questions. Brian, I have two actually. Maybe you could just talk about the distribution of the convertibles products through Aviva, perhaps how many sales people, different channels, geographies you intend to reach; just more color on how you expect to distribute that?

Okay. Sure, thanks, Mac, appreciate your question. So I can't tell you the number of sales people that Aviva has. But I can tell you that the team worked there for a decade and they're well known within the sales channels. And the guys are excited to have our team back in the fold and managing both the long-only strategy and the global absolute return strategy. And they've been doing a good job of getting the guys meetings and we've seen some really nice flows over the last couple of months. And we really expect that to continue. Beyond that, I would say that the third-party marketing group that we hired, Cardinal Partners group has also done a good job of getting our guys meetings. And we had our first subscription here recently. It was a small amount, but it was great to see them have really their first small win. And I think it's the first of many to come, because they really - there is lot of interest in the strategy, the valuation are attractive and the asset class for those that know it well, they want it and like it.

Great. I think you've done a little bit of this so far. But several larger institutions are seeing good progress with retail SMAs and model delivery. Given your success institutionally with multi-asset, is this an area you've explored in terms of a market opportunity for you?

Yeah, I would say, Mac, that we do some of it. It hasn't been a cornerstone of our strategy over the years. Certainly, it is an area in retail that is increasingly becoming the way that they prefer to have a sub-advise. It used to be the SMAs were the way to do it and now they're preferring the model business. And there are pros and cons to it. I guess, the reason we've never dove in headfirst is because we like to stay connected to our customers. We feel like it's important that they understand what we do. And when you give somebody a model that goes out to the world, you don't necessarily have an opportunity to control that customer. But whether we like it or not, Mac, that's the way the retail world is going. And it's certainly something that we're participating in to a limited degree.

Great. Thank you so much.

Thanks, Mac.

Thank you. [Operator Instructions] And this does conclude the question-and-answer session of today's program. I'd like to hand the program back to Brian Casey for any further remarks.

Well, thanks everybody for taking some time to listen to our call today. And as Tiffany, visit our website at westwoodgroup.com or give us a call if you have any follow-up questions. Have a great afternoon. Thank you.

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.