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Edited Transcript of WHG earnings conference call or presentation 24-Apr-19 8:30pm GMT

Q1 2019 Westwood Holdings Group Inc Earnings Call

DALLAS Apr 26, 2019 (Thomson StreetEvents) -- Edited Transcript of Westwood Holdings Group Inc earnings conference call or presentation Wednesday, April 24, 2019 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Brian O'Connor Casey

Westwood Holdings Group, Inc. - President, CEO & Director

* Julie Kramer Gerron

Westwood Holdings Group, Inc. - Senior VP, General Counsel, Chief Compliance Officer & Corporate Secretary

* Murray Forbes

Westwood Holdings Group, Inc. - Senior VP, CFO & Treasurer

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Conference Call Participants

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* Macrae Sykes

Gabelli Funds, LLC - Research Analyst

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the Westwood Holdings Group First Quarter 2019 Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded. At this time, I'd like to turn the call over to your host, Julie Gerron, General Counsel. Please go ahead.

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Julie Kramer Gerron, Westwood Holdings Group, Inc. - Senior VP, General Counsel, Chief Compliance Officer & Corporate Secretary [2]

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Thank you and good afternoon. Welcome to our first quarter 2019 earnings conference call. The following discussion will include forward-looking statements which are subject to known and unknown risks and 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, 2019, 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 Terry Forbes, our Chief Financial Officer.

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

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Brian O'Connor Casey, Westwood Holdings Group, Inc. - President, CEO & Director [3]

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Good afternoon and thank you for taking the time to listen to our first quarter earnings call. As always, I'll start with comments on the investment teams and environments then finish with comments on our business.

In the U.S., we saw a snapback from the fourth quarter's steep decline, and the S&P 500 posted one of the single best quarters in 10 years and the best first quarter in the last 20 years. It was a risk on market fueled by a dovish Fed and more optimism about a trade deal with China and reversed the market's concerns of the previous quarter.

GDP growth appears to be moderating but still positive. The yield curve flattened, in some parts are inverted, which bears watching. Volatility has continued to moderate as well. But similar to last quarter, risk assets like equities remained susceptible to bouts of fear and volatility. While potential market-moving events like the Mueller report and Brexit appeared to be contained for the moment, it is important to remember that these and other events could still disrupt markets.

We continue to look for increasing dispersion in returns amongst individual stocks as we move later to the business cycle and various headwinds and tailwinds impact each business differently. Ultimately, we believe that the investing landscape will continue to move towards one that allows active managers to more clearly identify winners and losers.

Our U.S. value products benefited from the equity markets rally. All posted positive absolute returns with SmallCap outperforming our larger cap products. Our SmallCap strategy, which just completed its 15th year, delivered over 300 basis points of outperformance against the Russell 2000 value in the first quarter.

SmallCap ranks in the top quartile on trailing 3- and 5-year periods and in the top decile over the 7-year and since inception time periods. We are excited about opportunities in 2019 for the SmallCap product. We recently funded a new client during the quarter and continue to carefully monitor remaining capacity of this investment strategy.

Our SMidCap strategy also finished better than its Russell 2500 value benchmark in the quarter. The SMid asset class is underowned globally, is the less efficient part of the market and our strategy ranks highly since inception. We believe we will have the opportunity to grow this product in the years ahead if near-term performance continues to improve.

Our LargeCap Value product, after posting a series of benchmark-beating quarters, underperformed its Russell 1000 value. Its rankings over the past 3 and 5 trailing years remains in the top quartile. We are excited about the traction our LargeCap Select strategy and our recently launched Sensible Fees structure are gaining across the industry. With just over 5 years of strong performance, LargeCap Select is ranked in the first percentile among its peers and is attracting interest across a variety of asset owners, consultants and channels.

Sensible Fees allows us to innovate and evolve our business to align with investors and change the probability of winning for asset owners. We have attracted interest from numerous industry publications such as FundFire, The Wall Street Journal and dozens of others. We are committed to ongoing product and pricing innovation and further alignment between asset owners and asset managers as we recognize the need for outflow will only increase in the future.

Within our Multi-Asset class strategies, we are investing for the future and we'll look to continue expanding and filling out our product lineup. We have built an array of products with different teams over the years across the risk/return spectrum, including Market Neutral Income, Short Duration High Yield, Income Opportunity, Flexible Income, Balanced and Low Volatility Equity, all tailored for a client's specific risk profile and investment objective.

Our newest product, Flexible Income, got off to a great start in 2019 with benchmark meeting performance and a top-decile ranking among institutional peers. We're excited about the future for that product with our recently launched mutual fund, WFLEX, and the opportunity for investors to earn income in the 6% to 7% range with a stable NAV. Flexible Income has a 3-year history that places it in the first percentile among institutional peers, and it will begin building its mutual fund record as well.

As we announced last quarter, we have a new leader of our Multi-Asset group, Adrian Helfert. Adrian is leading our Multi-Asset strategies group and along with David Clott is managing our Income Opportunity strategy. He and Dave have impressive track records and vast experience, which will serve investors in Income Opportunity well. The fund started the year strongly with a top quartile ranking and a Morningstar 30% to 50% equity category.

In Global Convertibles, securities rebounded with the equity and credit markets in the first quarter as the risk on attitude gained steam. We also saw convertible valuations move higher and issuance levels maintained a good pace, especially out of China. Our global long-only and U.S. long-only strategies were both positive in the quarter although behind their respective benchmarks, while our Market Neutral strategy enjoyed an excellent start to the year.

This outcome-oriented strategy performed well with both convertible arbitrage and yield segments. Impressively, the strategy provided superior downside protection during the fourth quarter sell-off and has been able to take advantage of some of the resulting dislocations during the first quarter. Market Neutral Income is positioned to continue to deliver uncorrelated, low volatility and steady returns that are the hallmark of this strategy. It was one of the top market-neutral strategies in its category during 2018 and continues to stack up well versus other alternative offerings.

Our Boston team is now an integral part of our Multi-Asset group and working together to capitalize on our history as a pioneer in the multi-asset space. We believe that multi-asset is one of the best areas for experienced, active managers to displace skill and judgment that asset owners appreciate. Furthermore, multi-asset outcomes are more difficult to deliver passively and provide a more stable foundation for our average fee levels.

Emerging Markets also experienced a rising market as sentiments seem to brush off a momentary inversion of the U.S. yield curve, a brief escalation between India and Pakistan, Thailand's elections and Mexico's political fears and focused on potential positive developments for Chinese government stimulus, expectations for a trade deal and the U.S. Fed's more dovish tone. These all helped risk assets, including Emerging Markets.

Overall, our Emerging Markets strategy outperformed its benchmark and our Emerging Markets MidCap strategy, which completed a 5-year record in 2018, outperformed its benchmark by nearly 300 basis points with a top quartile peer ranking. Our team continues to focus on the execution of our investment philosophy of owning high-quality companies that will stand out in challenging periods as they did in 2018 when our avoidance of crowded trades were important sources of outflow.

We expect that markets will continue to be on edge and volatile, react swiftly and [opt internationally] to global and regional developments, and we will focus on allocating our portfolios in a well-diversified manner among high-quality emerging market opportunities.

Shifting now to institutional and intermediary sales. We have continued in our path to reorganize and significantly expand our sales, service and infrastructure teams. We added 2 proven, highly experienced institutional professionals, one veteran intermediary sales professional and we'll add 3 more intermediary professionals later this quarter. This will be the largest sales team we have ever had in our 36-year history as we are committed to turning around our new business and flows trajectory.

We began our rollout of our new pricing structure known as Sensible Fees, and we are really pleased with the initial reception from the industry, consultants, Morningstar and the financial press. Sensible Fees is a simple and innovative fee solution to create better alignment with investors and efficient asset classes that have been prone to move to pass the strategies over the past decade. Focusing on risk-adjusted returns by using either alpha or information ratio is an industry first with respect to performance fees. We will offer this fee construct initially for our LargeCap Select product.

While LargeCap has been a source of funds in most asset allocation models and an asset class that is considered more passively, it is still one of the largest slices of the asset allocation pie. As alpha becomes more precious in the years ahead, we believe that some asset owners will prefer a high-quality active approach as long as the fees are aligned properly with risk and return objectives. Westwood LargeCap Select is highly liquid and scalable with huge potential for us in the years ahead.

LargeCap Select and SmallCap are key areas of sales focus in 2019. And during the quarter, SmallCap was invited to present in 2 finals presentations. SmallCap's on net positive flows for the quarter due to the funding of a new client as well as additional flows from current clients.

Interest in other strategies have increased and in total, we participated in 6 RFPs this quarter for various strategies. We also have exciting prospects on the horizon for our Emerging Markets strategies, but we'll continue to focus efforts on communicating a clear message to current EM clients surrounding our intense research efforts and outlook for their portfolios.

Similarly, with the transition of portfolio managers and our Income Opportunity product, our sales and service representatives are working to ensure that all interested parties clearly understand the path forward that we see for Income Opportunity and the Multi-Asset class team. We believe that we can significantly improve the Income Opportunity risk and return profile with a dedicated team of experienced professionals.

Some consultants have embraced our expanded approach to Multi-Asset while others have not. We had net outflows of $1.3 billion which were primarily institutional and centered in our Emerging Markets and Income Opportunity strategies. We expect to see further outflows in the second quarter in our Income Opportunity strategy but feel that flows will stabilize and improve in the second half of the year.

Our sales and service teams are focused on higher activity, strategic targeting and client engagement in 2019. Our product management and investment teams are also working closely together to ensure that our product offerings are focused in areas where we can add value and grow longer term. We are reviewing the entire product line and we'll rationalize those with poor performance or limited sales potential and add products where we believe we can provide alpha and grow.

On the Private Wealth front, our Houston team is off to another great start. They achieved a client retention rate of 99% while also growing inflows by over 130% year-over-year. Our taxable Select Equity strategy managed out of the Houston office rebounded with the markets and grew assets nearly 15% from year-end. We have several events planned in Houston for 2019 and expect that new business will continue to be robust with several large families filling a healthy pipeline.

Our team also continues to benefit from a trend away from big banks towards the smaller, more flexible firms with trustee service, and we are seeing that our high-touch service model is exceeding their expectation.

Our Dallas Private Wealth business has also started the year off well with positive net inflows and also posted a 99% client retention rate. Their pipeline continues to grow as they have expanded their array of available strategic solutions. We expect to complete our bank partnership in the second quarter and will be able to offer checking accounts, debit cards and lending capabilities to our existing and future clients. We are already benefiting from cross-referrals, which should increase when the bank branch opens in a new space adjacent to our existing headquarters.

As we complete our digital platform next year, we will have a truly holistic offering that helps clients organize their financial lives and allows us to constantly deliver unexpected value through digital engagement. Our clients will enjoy efficient, frictionless onboarding and proactive personalized interactions that remind them that we are constantly thinking of them.

Since most new clients in the Private Wealth area come from client referrals, we will utilize our advisory council of third-party centers of influence as well as creating interesting and enjoyable events to cultivate our existing clients as brand ambassadors for Westwood. Clients are the center of our universe, our greatest asset and our most reliable source of growth in the years ahead.

We've been disappointed by recent outflows, but we are not standing still, and we feel good about where we're going. Our investment teams, our operations, sales and marketing teams are meeting our challenges head on. Many firms have been complacent with the decade-long bull market, and our industry is plagued by legacy technology, redundant processes and inefficient operating models. We started 3 years ago on a journey that is more than halfway towards our goal of becoming a best practices state-of-the-art environment.

A quick review of our journey so far. Beginning in 2016, we moved our entire technology infrastructure to the Microsoft Azure platform and now have cloud-based, anytime-anywhere, secure access for all our employees while also eliminating the need for future network hardware purchases. We created a data warehouse in 2017 with Markit EDM and changed our investment operations workflows so that we now have a central repository for all our data with golden copies of all of our intellectual property. We upgraded our trade order management and trade compliance systems. We now have a true multi-asset, multicurrency platform.

In 2018, we started developing a new portfolio accounting and performance and reconciliation system with InvestCloud to replace the Advent Axys software which we've been using for over 2 decades. Simultaneously, we've been developing a fully digital platform for institutional and Private Wealth clients and expect to roll both out later this year.

Next year, we will join a consortium of trust companies to develop a new trust accounting platform with InvestCloud, which, when implemented, will give us a unique platform that allows us to view our assets across all our (inaudible).

Our vision to drive deeper engagement with superior operational, regulatory and reporting efficiency has been an expensive one. We have invested more heavily than our peers, and we are much better positioned to take on the industry disruption in whatever form it takes over the next few years. More importantly, we will be able to better support our client's needs now and in the future.

If you're investing in Westwood for just the next quarter, you're in the wrong stock. If you're patient and you believe in the new initiatives we are building, we feel confident that we can execute over the next few years to deliver market-leading returns, exceptional client service and return to positive flows through the aggressive buildup in our sales and sales infrastructure. In the meantime, you will enjoy an above-market dividend with a highly competitive current yield. We appreciate those of you who have stuck with us over the years, and we intend to deliver for you in the years ahead.

I'll now turn the call over to Terry Forbes, our CFO.

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Murray Forbes, Westwood Holdings Group, Inc. - Senior VP, CFO & Treasurer [4]

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Thanks, Brian, and good afternoon, everyone. Today, we reported total revenues of $23.9 million for the first quarter of 2019, which compared to $26.1 million in the fourth quarter of 2018 and $33.6 million in the prior year's first quarter. The decrease from the prior year's fourth quarter was primarily due to lower average assets under management resulting from net outflows. The decrease from the prior year's first quarter was primarily due to lower average assets under management resulting from net outflows and lower performance-based fees.

First quarter net income of $0.4 million or $0.05 per share compared to $5.4 million or $0.64 per share in the fourth quarter of 2018. The prior year fourth quarter benefited from higher asset-based fees and foreign currency transaction gains. Economic earnings, a non-GAAP metric, was $4.1 million or $0.49 per share in the current quarter versus $9.5 million or $1.12 per share in the prior year's fourth quarter.

First quarter net income of $0.4 million or $0.05 per share compared to $8 million or $0.93 per share in the prior year's first quarter. The decrease primarily related to lower total revenues and a $0.6 million foreign currency loss net of tax, partially offset by lower compensation expenses for reductions and incentive compensation. Economic earnings of $4.1 million for the current quarter or $0.49 per share compared to $12.6 million or $1.48 per share in the first quarter of 2018.

Firm-wide assets under management totaled $16.8 billion at quarter end and consisted of institutional assets of $9.2 billion or 55% of the total, wealth management assets of $4.4 billion or 26% of the total and mutual fund assets of $3.2 billion or 19% of the total. Over the year, we experienced net outflows of $1.3 billion and market appreciation of $1.5 billion. Our financial position continues to be very solid with cash and short-term investments at quarter end totaling $102 million and a debt-free balance sheet.

I'm happy to announce that our Board of Directors improved a quarterly cash dividend of $0.72 per share payable on July 1, 2019, to stockholders of record on June 7, 2019. This represents an annualized dividend yield of 7.9% as of the closing price on April 22.

That brings our prepared comments to a close. We encourage you to review our investor presentation we have posted on our website reflecting first quarter highlights as well as a 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 the lines to questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) I show our first question comes from Mac Sykes from Gabelli.

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Macrae Sykes, Gabelli Funds, LLC - Research Analyst [2]

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So congratulations on the press. Sensible Fees seems like it really took off around the different news agencies. I was curious, Brian, about your goals both in the intermediate and long term for this product. I mean do you see it eventually being kind of the flagship aspect of the franchise? Or how do you see it in terms of evolving over maybe 3 years and longer?

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Brian O'Connor Casey, Westwood Holdings Group, Inc. - President, CEO & Director [3]

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Well, first of all, thank you for the congrats. It has been interesting, humbling, amazing really for the last month. We've been in 14 major publications. We've been embraced by consultants, by Morningstar, by folks that have all said to us that this kind of a fee construct where you only pay if we outperform is the perfect alignment between asset owners and asset managers, and it's been really refreshing.

As far as where it is headed, I think it's a little too early to tell. We've had a lot of good meetings. We've had over 20 institutional meetings. We've had over 30 intermediary meetings. We found it to be a very positive door opener for us. And as I've mentioned throughout my comments, we have spent an enormous amount of money and time building out a robust sales force.

And we have more folks out selling. We are backed by an infrastructure that we've never had before, and we are putting out thought leadership pieces on a weekly basis. So I'm very excited about it. It's highly scalable and something that could be a real game changer for us. But I think it's a little too early to say just what are the intermediate or longer-term goals.

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Macrae Sykes, Gabelli Funds, LLC - Research Analyst [4]

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Okay. I appreciate your color on all your investments that you made. It does seem like the pace of IT's expense fell this quarter. Should we think about 2019 as being a year when the expenses start to taper off a little bit versus the previous years?

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Murray Forbes, Westwood Holdings Group, Inc. - Senior VP, CFO & Treasurer [5]

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I think the expenses in 2019 will be somewhat consistent because as Brian mentioned, we're still investing in the digital platform as well as we have some overlapping systems running because we have to make sure that we are ready to go live on other systems. So I don't think you're going to see a significant drop-off there.

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Brian O'Connor Casey, Westwood Holdings Group, Inc. - President, CEO & Director [6]

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But I do think that what you will see is there's a stat out there, which is rather remarkable, and that's when a firm gets to $35 billion in assets under management, they have roughly 37 different pieces of technology. And we have called literally a dozen or more various pieces of technology. And when we're done with this, we're going to have one very stable and efficient platform for most of what we do.

We've also wrapped in our annual license fee to include a number of the services that InvestCloud offers and wrapped it all together. So we'll get things like a state-of-the-art CRM system. We will get -- we will benefit from some of the work that they've done for other clients in the financial planning area. So we're really excited to see what our platform looks like when we're finished.

We should have -- we should be through the first phase of green, which is -- they use colors when they talk about their products. We should be through that in the next month or so. We are running parallel currently. So as Terry mentioned, that means we're paying Advent and we're paying InvestCloud at the same time, but we have to do that to ensure the accuracy of what we're doing. But we're excited with what we see. All of our operations folks find the new technology to be really amazing, makes their jobs easier and really much more efficient.

The next thing we'll see this summer is we will roll out a beta version of Wealth Coach 2.0, which will be our online digital offering for the smaller-tier clients. That will then, as -- we'll work with that and refine that with friends and family, and then we'll be able to roll that out in a more meaningful way in the third or early fourth quarter.

We will also have a beta of our fully digital platform later this year with the rollout more likely in the first quarter of next year. And that will be a real game changer for not only our high net worth clients but our institutional clients as well. So again, a lot of good things going on, a lot of money spent under the bridge, a little more to spend, but we do see daylight on the other side, and we see a really functional and highly efficient platform.

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Operator [7]

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(Operator Instructions) I show no further questions in the queue at this time. I'd like to turn the call over to Brian Casey, President and Chief Executive Officer, for closing remarks. Please go ahead.

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Brian O'Connor Casey, Westwood Holdings Group, Inc. - President, CEO & Director [8]

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Great. Well, thanks very much for taking the time to listen to our call. As I said, I know you've been disappointed. We've been disappointed with our flows recently, but we really do feel like the future is bright. We feel like we've made the investments for us to make it to the other side and for us to really thrive and grow in the future, and we appreciate your being a shareholder. And please visit our website or give myself or Terry a call if you have any further questions. Have a great afternoon. Thank you.

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Operator [9]

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Thank you, ladies and gentlemen, for attending today's conference. This concludes the program. You may all disconnect. Good day.