Westwood Holdings Group, Inc. (WHG) Q3 2017 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Third Quarter 2017 Westwood Holdings Group Earnings Conference Call. [Operator Instructions]. As a reminder, this conference is being recorded. I would like to introduce your host for today's conference, Ms. Julie Gerron, General Counsel. Ma'am?

Thank you. Good afternoon, and welcome to our Third Quarter 2017 Earnings Conference 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 September 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 third quarter earnings call. We appreciate the support of our long-term shareholders, and we're pleased to report our 15th consecutive annual increase in our dividend. We're always mindful of the fact that nearly half of the total return from stocks has historically come from dividends. And to date, we returned to shareholders cumulative dividends of more than $165 million since becoming a public company. With respect to the third quarter, I'll start our call today with comments on the investment environment and more specifically, from our 3 distinct investment teams. Third quarter marked the 8th consecutive positive quarter for the S&P 500 and the sixth consecutive positive quarter for the Russell 2000. Global Equity markets, as measured by the MSCI Equity Index, have also added another quarter of positive returns, led higher by emerging markets. In the U.S., the most important theme is the shift away from an investment environment driven by monetary policy to one focused on earnings growth. 2 rate hikes this year and the likelihood for more on the way, clearly signal that the end of the Fed's financial crisis monetary policy is underway, that the markets appear to be turning to earnings growth as the key driver for future returns. This would be a welcome trend as an earnings-driven market has historically been supportive for active management and for Westwood's investment strategies. Although the Caribbean and regions of the U.S. and Mexico were severely impacted by a number of natural disasters, the overall macro picture globally continued to improve for most regions, and European countries saw a number of upticks in GDP growth. Within our U.S. Value strategies, we're pleased that the momentum exhibited in the first half of this year in performance persisted in our U.S. Value Equity strategies in both absolute and relative terms. Westwood's SmallCap had an especially strong performance in the third quarter, while Westwood's LargeCap and concentrated LargeCap also outperformed markedly this quarter and year-to-date. Westwood's SMidCap continues to show improvement and posted results that were ahead of the Russell 2500 Value Index, but below the core Russell 2500 Index. Westwood's multi-asset strategies also displayed strong returns, particularly Income Opportunity and Worldwide Income Opportunity. The Master Limited Partnership space was again challenged by a decline in commodity prices, but our MLP strategies performed well on a relative basis against the benchmark. Our Emerging Market strategies are up over 20%, and Global Equity is up over 15% through the first 9 months. And given the strength seen in the global economy, we are well positioned in the year-end. On a relative basis, the funds lost some ground relative to their benchmarks in the third quarter as we lacked presence in high-beta, growth-oriented names, which drove much of the index performance. Our approach in investment discipline has always been to invest long term and focus on quality companies, which are reasonably valued. Turning to our Global Convertible strategy. Our team's long-only strategy lagged slightly with its benchmark, but remains ahead on a year-to-date basis. U.S. dollar weakness was a drag to results, but strong security selection offset much of the weakness. Our liquid alternative strategy, the Market Neutral Income Fund, returned positive numbers, and our year-to-date performance remains solid. Third quarter performance was aided by short-duration and higher-yield holdings. Overall, within the Global Convertibles markets, valuations continue to be reasonable with only some pockets of overvaluation, and drivers of issuance activity remain on track. The current low-volatility environment could prove to be a further tailwind when volatility picks up as the embedded option and convertible bonds are likely mispriced due to the unprecedented volatility levels that we have experienced. As we move into the end of 2017, the impact on the economy and earnings for the third quarter from the natural disasters remains to be seen. Our hearts go out to all those affected, particularly our colleagues and clients in Houston and our many clients in Florida. While there are surely near-term challenges to overcome, the longer-term silver lining will be the positive impact from reconstruction and rebuilding of people's homes and businesses. As the year comes to a close, the prospects remain bright looking at the balance of the year and into 2018, particularly for active management given the aforementioned investing landscape. Turning now to sales and service. The biggest news for our institutional flows was the move to subdelegation for our mandate with Aviva, which became official in July.Flows to both the Aviva long-only strategy and Aviva Absolute Return Fund have been very strong this year. We now manage nearly $700 million in the long-only strategy and over $650 million in the Aviva Absolute Return Fund. Aviva is doing an amazing job of expanding their sales force in Europe and around the world. They have kept our team very busy with road trips in the U.K., Germany, Luxembourg, Switzerland, Spain, France, Austria and Italy and trips planned in the coming month to the Netherlands, Chile and Peru to raise awareness for the funds. We are excited about the potential to further expand our partnership with Aviva in the years ahead. With respect to our other institutional prospects, we experienced outflows in LargeCap, SMidCap and Income Opportunity with inflows to Emerging Markets. We were pleased to report that the finals opportunity for SmallCap that we mentioned last quarter took place in August and was a win for Westwood. We competed against 5 other firms and won over a $200 million mandate. We're pleased to welcome the Los Angeles Fire and Police Pensions as our newest SmallCap client. With respect to our mutual fund business, we are pleased that one of the major rating agencies did a deep dive into 2 of our funds, Income Opportunity and SmallCap, and we received favorable ratings for process, people and performance. For the quarter, we saw modest net outflows of $41 million from our mutual funds business. Our private wealth business is expanding our financial planning capabilities and looking for ways to broaden our overall service offering. We experienced some new client growth in our Dallas office but lost momentum in Houston due to the hurricane. While the lobby of our Houston office was flooded, we did not experience any flood damage to our offices. The recovery for full power and Internet service has been slow, but the investments we made last year by moving our infrastructure to the cloud proved invaluable as we were able to remain functional during the disaster. Our people were able to connect to our systems from home, and I want to especially thank Dan Long on our IT team who made individual trips to our employees' homes through rain and high water to make sure everyone was fully supported. Thank you, Dan. With regard to our Omaha private wealth business, we made a strategic decision to sell this business to Bridges Investment Management in Omaha. Bridges will assume the office lease and associated expenses at closing, which we expect to occur at year-end. The final purchase price will be determined based on client consent approvals and is not anticipated to result in a material book, gain or loss. Our Omaha business is small and represents less than 5% of our overall revenue. Joining Bridges will allow our existing staff to be part of a larger, local organization, which should provide greater opportunities for their career growth. They will continue to take care of the clients, and Westwood expects to continue to subadvise a significant portion of the client assets. For those clients with custody at TD Ameritrade, there's no change anticipated in this relationship. In closing, you may have seen our press release last week that we've resolved our litigation with AGF. We're pleased to get this behind us and believe it is in the best interest of our company and our shareholders. As stated in the press release, we are subject to confidentiality requirements, so we're limited with respect to what we can say about the settlement. I'll now turn the call over to Tiffany Kice, our CFO, and I'll be available for questions at the conclusion of her remarks.

Thanks, Brian, and good afternoon, everyone. Today, we reported total revenues of $33.5 million for the third quarter of 2017 compared to $31.8 million in the prior year's third quarter and $33.8 million in the second quarter of 2017. The increase from the prior year quarter primarily related to higher average assets under management, while the decrease from the immediately preceding quarter was primarily due to the performance fees earned in the second quarter of 2017, partially offset by higher average assets under management in the current quarter. During the third quarter of 2017, we recorded a $2.5 million legal settlement charge net of insurance recovery and taxes related to resolution of litigation, which decreased our third quarter 2017 diluted earnings per share by $0.30. Third quarter net income of $4.1 million or $0.49 per share compared to $5.9 million or $0.72 per share in the prior year third quarter, primarily related to the legal settlement previously discussed, partially offset by an increase in total revenues. Third quarter net income of $4.1 million or $0.49 per share compared to $6.9 million or 83% -- $0.83 per share in the second quarter of 2017, primarily related to the legal settlement. Economic earnings, a non-GAAP metric, was $9 million or $1.07 per share compared to $10.6 million or $1.30 per share in the prior year third quarter and $11.7 million or $1.41 per share in the second quarter of 2017. Firm-wide assets under management totaled $23.6 billion at quarter end and consisted of institutional assets of $13.7 billion or 58% of the total, private wealth assets of $5.8 billion or 25% of the total and mutual fund assets of $4.1 billion or 17% of the total. We experienced market appreciation of $683 million for the quarter and net flows of $391 million, including $713 million that transitioned from assets under advisement to assets under management. Our financial position continues to be very strong with cash and investments at quarter-end totaling $99.5 million and a debt-free balance sheet. We are pleased to announce that our Board of Directors approved a quarterly cash dividend of $0.68 per share, an increase of 10% from the previously quarter -- previous quarterly dividend. The dividend will be payable on January 2, 2018, to stockholders of record on December 8, 2017. This represents an annualized dividend yield of 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 the third quarter 2017 highlights as well as the discussion of our business, product development and longer-term trends in revenue, earnings and dividend. We thank you for your interest in our company, and we'll open up the lines to questions.

[Operator Instructions]. Our first question is from Mac Sykes with Gabelli.

Brian, I have three. The first one's a two-parter. With respect to the Omaha divestiture, will that impact your appetite for acquiring other wealth managers going forward? And then on the second part, maybe you could provide a little color about what you're seeing in the marketplace today.

Okay. So no, it would not affect our appetite for other acquisitions in this space. This was our first acquisition. We did it in 2010, and we have some great client relationships in Omaha. It just made more sense for us for the clients to be serviced locally and for us to continue as a subadviser. So we continue to have conversations around the country with others and continue to have that as a part of our growth strategy. Secondly, in terms of the color, are you asking for color on the M&A environment for private wealth or color on something else?

Yes, exactly. Just what you're seeing in terms of pricing or appetite for sales or -- just any incremental will be great.

Yes, okay. Well, I would say we've had lots of conversations. And I would say with the rise in the market, sellers are asking for prices that we're not willing to pay. So we are always going to be disciplined with our capital. And so far, I have not been able to get anything across the line, because I would say the color is that things are priced dearly right now in the private wealth space.

Got it. And one of the nice parts about your business is the little need for incremental from capital. Assuming we did get a tax cut, have you thought about how you might consider allocating those additional resources?

Well, I would say that we probably have more capital than we need right now. So in terms of how we would allocate them in the event that we found something that we thought would be -- that get us a better return on our capital than we're getting now, then we would pursue that. Certainly, we don't know what tax policy is going to be. In the early years as a public company, when the dividend, tax rates were much lower, we often did special dividends. I don't know if that's going to be part of our future, but I think we're just going to have to wait and see just what shakes out on the actual corporate tax front.

[Operator Instructions]. I see no other questions in queue. I'll turn it to you, Mr. Casey, for closing remarks.

Okay, great. Well, thanks again. We're excited to increase our dividend again for the 15th year in a row, and we appreciate all of your support. We are here in Houston today to celebrate the 35th anniversary of Woodway, which we bought 3 years ago. I want to tell everybody that Houston is back in business and things are good down here, so come to Houston when you can. It looks much different than it did a month or so ago. And if you have any further questions, please feel free to give us a call or visit our website at westwoodgroup.com. Thank you.

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