U.S. markets closed

Edited Transcript of WHG earnings conference call or presentation 29-Apr-20 8:30pm GMT

Q1 2020 Westwood Holdings Group Inc Earnings Call

DALLAS Jun 17, 2020 (Thomson StreetEvents) -- Edited Transcript of Westwood Holdings Group Inc earnings conference call or presentation Wednesday, April 29, 2020 at 8:30:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* 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

================================================================================

Conference Call Participants

================================================================================

* Macrae Sykes

Gabelli Funds, LLC - Research Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Ladies and gentlemen, thank you for standing by, and welcome to the First Quarter 2020 Westwood's Holding Group earnings conference call. (Operator Instructions) As a reminder, today's program is being recorded.

I would now like to introduce your host for today's program, Julie Gerron, General Counsel and Chief Compliance Officer. Please go ahead.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thank you, and welcome to our first quarter 2020 earnings conference call. The following discussion will include forward-looking statements, which 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, 2020, 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 Terry Forbes, our Chief Financial Officer.

I will now turn the call over to Brian Casey.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Good afternoon. Thank you for taking time to listen to our quarterly earnings call during these unprecedented times. We hope you're keeping safe in what are difficult circumstances for all of us. As always, I'll discuss our quarterly earnings and will cover the impact of the COVID-19 crisis on our company.

Looking back, the past quarter was one for the record books. The global COVID-19 pandemic swept across the globe, sending liquidity and returns sharply lower with much of the pain felt in March. The S&P 500 suffered the worst first quarter performance since 1928, while global equity and fixed income markets were equally battered. Investors remain focused on when a number of new cases of the virus may peak for clues about the future, though the path to economic recovery is anything but clear.

In our U.S. value equity products, the unprecedented sell-off in equities was large in absolute terms, but higher quality companies up and down the market cap spectrum were the best relative performers. Every single one of our U.S. value strategies outperformed its passive benchmark as the benefits of active management were clearly evident. Our flagship LargeCap Value strategy showed resilience during the sell-off, capturing only about 85% of the downside and posting nearly 400 basis points of outperformance relative to the Russell 1000 Value Index. LargeCap Value is ahead of the benchmark over multiple time periods, and its ranking among institutional LargeCap Value peers remain strong. Through the first quarter, our LargeCap Value strategy was in the top decile for the trailing 3-year period and in the top quartile for the trailing 1-, 5- and 7-year periods.

Our LargeCap Select strategy also finished the quarter ahead of the Russell 1000 value benchmark, and it now possesses a ranking in the top decile among institutional peers in the eVestment LargeCap Value manager universe for the trailing 3-year time period.

Our SMidCap strategy also beat the Russell 2500 Value Index by over 400 basis points and now has returns above the benchmark in most trailing year periods. Rankings among institutional peers were also strong. The strategy now ranks in the top half ranking for the trailing 5 and 7 years and the top quartile for the trailing 1- and 3-year time periods. Our portfolio managers have worked hard to improve the track record, and we are seeing growing interest in the strategy from the institutional channel.

SmallCap was the hardest hit sector of our U.S. value strategies, but our portfolio managers continue to focus on finding companies with strong fundamental qualities and finished the quarter ahead of the Russell 2000 value benchmark by approximately 260 basis points. Our institutional strategy also maintained attractive peer rankings with a top 1/3 placement for the quarter and trailing 1-year time period. SmallCap's longer-term track record places it in the top decile over the trailing 7-, 10- and since-inception time periods.

As we work through the economic situation created by the COVID-19, market volatility will create an attractive investment opportunity for high-conviction, actively managed portfolios centered around quality and value. While the value style, which emphasizes companies priced at low valuation levels, has historically performed best coming out of a recession, today, many companies have higher debt levels than in past cycles and may find themselves with limited options.

Financial distress is particularly acute in the energy sector, and we're already seeing several companies filing for bankruptcy protection. As the market pays more attention to balance sheets, the cream will rise to the top, and the debt-laden companies of the past cycle will falter. Our investment process has always incorporated a fundamental understanding of a candidate's balance sheet, and that has historically served our clients well in times of stress.

Many index funds hold more than 1/3 of their portfolio and companies with 0 profits and high debt levels. Increasing losses and debt will kill a lot of these companies, and we believe this to be an opportune time for investors to sell index funds and lean in on active managers who can thoughtfully navigate through the minefield of winners and losers.

Turning now to our Multi-Asset group. Our product lineup in Multi-Asset holds an array of strategies aligned across the risk and return spectrum that are tailored for a client-specific risk profile and investment objective. Income Opportunity, our largest strategy in the group, showed attractive characteristics relative to the equity markets. However, investors rushed to assets perceived as safe, pushing treasury returns up and holding back our relative performance.

Asset classes such as preferreds, convertible bonds and mortgage-backed securities experienced large declines during the quarter. The drop in convertible securities has provided opportunities not seen since the global financial crisis and has created an opportune time for investors to look at strategies such as our Global Convertible and Alternative Income strategies that have historically delivered solid risk-adjusted results.

Our Global Convertible and Alternative Income strategies performed as expected and acted as diversifiers in an asset allocation mix during a very difficult and volatile time. Correlations across capital markets went to 1, and volatility shot up to levels last seen during the global financial crisis. The Westwood Alternative Income strategy, ticker symbol WMNIX, was raised to 4 stars by Morningstar. Among institutional peers, our Alternative Income strategy ranked in the top 20% for the trailing 1 year and top decile in the trailing 5-, 7- and 10-year time periods.

In Emerging Markets, the valuation case remains positive, particularly relative to developed markets, following the asset classes' underperformance of recent years. In our strategies, performance fell behind, primarily due to our underweights in China and Hong Kong. Globally, Emerging Markets had unprecedented volatility, and the reaction at COVID-19 was swift and indiscriminate. Investors reach for any kind of liquidity, and these markets were particularly impacted by this flight to liquidity and safety. This reaction also caused currencies in several emerging market countries in which we invest, including Brazil, Indonesia, Mexico and Chile, to see larger sell-offs. We do not believe this volatility is over yet. The duration and depth of the shock waves are still to be determined and will vary across geographies.

Outside China, some of the largest emerging markets are in the middle of lockdowns and government economic reactions are evolving. As in our other strategies, dislocations in these markets have created opportunities to invest in companies with strong management teams, strong cash flow and solid balance sheets. Our emphasis on quality companies has enabled us to manage through past crises and gives us conviction that our holdings will be well positioned for the long run.

Shifting to wealth management, our teams in Dallas and Houston have been actively contacting clients to assist them through the market's uncertainty. Many of our larger high net worth clients are choosing to add to their accounts during this time to take advantage of the sell-off and position themselves for an eventual recovery. We have broadened service offerings at Westwood Private Bank for our high net worth clients, improving our ability to retain clients in the Westwood branded ecosystem. The combination of banking services integrated with Westwood's existing financial planning, trust and investment services is resonating well with our clients. As we move forward, Westwood Trust will begin rolling out our new digital portal to allow us to better engage with clients.

The Select Equity strategy, managed out of Westwood Trust Houston office, saw its risk management metrics were as expected this quarter, posting outperformance against its benchmark. Select Equity and its tax-efficient counterpart is designed to provide a high-quality, low-turnover portfolio with risk controls for downside protection. At the market's lows this quarter, both held up well due to the emphasis on risk control and investments in companies with high-quality balance sheets. Both versions of our strategy recently completed their 3-year track record and are ahead of their global benchmark. Additionally, we tax-loss harvest throughout the year instead of waiting until year-end, which helps lower our clients' tax bills and has provided over 200 basis points of additional annualized alpha over the last 3 years.

In our institutional and intermediary sales group, we had inflows of nearly $400 million and $950 million in outflows for total net outflows of $560 million. Most of the outflows were in our sub-advisory relationships in LargeCap Value, Global Converts, Alternative Income and Emerging Markets. SmallCap was, again, our most successful strategy with net inflows in the quarter as existing clients added funds to their accounts and new clients were earned into our mutual fund.

With the strong relative performance in our U.S. strategies, we feel that we're well positioned to capture sales in the current environment. The investments we've made in distribution infrastructure and alignment of investment teams, vehicles, pricing, product definitions, risk guidelines and messaging have allowed us to create a cohesive message that positions our sales teams for success.

Our intermediary and institutional investment teams continue to work on adding consultant approvals, and overall, our pipeline remains healthy and spread across several different strategies. New opportunities were added in SmallCap and Income Opportunity during the quarter, and a large portion of our pipeline is in the mid- to late-stage. And we are hopeful of decisions throughout the year. We have made it well within the red zone on approvals for our SmallCap-fund at several of the largest wirehouses.

Although COVID-19 has created market disruptions and slowed the sales cycle with prospects, our distribution teams continue to execute on our plan to build a broader, more sustainable distribution business. And our client services teams continue to provide strong service to our clients. While we're not able to conduct face-to-face meetings, our teams are functioning quite normally. We did an online campaign to 25,000 advisers a few weeks ago, and we were thrilled to see over 10,000 views. Conference calls, portfolio updates, RFPs and questionnaires continue as usual.

We are cognizant of the fact that clients and consultants need timely and relevant communication. They need communication on how the pandemic is affecting portfolios and our portfolio investment decisions, and they're interested to know how our business continuity plan is functioning and changing. Our success working remotely is also a key point of inquiry as clients work to understand how we've protected the integrity of our business in this environment.

Prior to COVID-19, the asset management industry was already experiencing disruption on several fronts, including fee compression, margin erosion and rising data, technology and other costs. As I've noted in the past, Westwood made major investments in technology to reduce costs, gain operational efficiencies, prepare our business for disruptions and increase our agility. Given recent events, these have proven to be a wise investment as we have not only increased efficiency, but we're able to move to a fully operational, remote working environment with little to no disruption. We will continue to evaluate our business and take meaningful steps to reduce our cost structure. To date, we've identified over 750,000 of cost reductions that are being implemented or in process over the balance of the year.

We've been researching the outsourcing of trading for the past 6 months and recently made the decision to move forward with this project. We will move to an outsourced trading model later this summer and expect to save over $1 million per year beginning in 2021.

We will continue to utilize technology to define our future state to be more efficient wherever possible. We will close or eliminate commercially unviable funds and put only our best products and people on the field. Although financial performance over the last year has been disappointing, we continue to execute on numerous initiatives to strengthen our foundation for the future. Our partnership with InvestCloud continues to reap operational benefits. The U.S. Value and Multi-Asset strategies are delivering alpha, and we have commitments from private wealth clients for a new credit opportunities fund that we launched a few weeks ago. We expect industry-wide disruption to continue, and the steps we've taken to reinvent ourselves have placed us in a position to survive and grow.

Finally, I want to emphasize that the health and safety of our employees and their families is our first priority. All our employees are well, working remotely and completing their work in an efficient manner. We understand that we have a business to run, and we're working hard to balance the company's needs with the employee's personal needs. And I'm really proud of everyone at Westwood and how well everyone is working together, yet apart, during this difficult time. Our customers still have goals and priorities, and we will continue to service them to the best of our ability.

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

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thanks, Brian, and good afternoon, everyone. Today, we reported total revenues of $16.7 million for the first quarter of 2020 compared to $18.6 million in the fourth quarter of 2019 and $23.9 million in the prior year's first quarter. The decrease from the fourth quarter and the prior year's first quarter was primarily due to lower average assets under management.

First quarter net income was $1.1 million or $0.13 per share compared to $2.5 million or $0.30 per share in the fourth quarter of 2019. The decrease primarily related to lower total revenues and unrealized losses on private investments, partially offset by lower operating expenses and income taxes. Economic earnings, a non-GAAP metric, was $4.2 million or $0.50 per share in the current quarter versus $5.4 million or $0.64 per share in the fourth quarter of 2019.

First quarter net income of $1.1 million or $0.13 per share compared to $0.4 million or $0.05 per share in the prior year's first quarter. The increase primarily related to lower operating expenses, particularly employee compensation and benefits, foreign currency transaction gains and income taxes, partially offset by lower revenues and unrealized losses on private investments. Economic earnings for the quarter was $4.2 million or $0.50 per share compared to $4.1 million or $0.49 per share in the first quarter of 2019.

Firm-wide assets under management totaled $11.6 billion at quarter end and consisted of institutional assets of $6.3 billion or 55% of the total, wealth management assets of $3.8 billion or 33% of the total and mutual fund assets of $1.5 billion or 12% of the total.

Over the quarter, we experienced market depreciation of $3 billion and net outflows of $0.6 billion. Our financial position continues to be very solid with cash and short-term investments at quarter end totaling $82.4 million and a debt-free balance sheet.

In the first quarter, we repurchased approximately 272,000 shares of our common stock for an aggregate purchase price of $4.9 million. In April, we repurchased an additional 407,000 shares for an aggregate purchase price of approximately $8.1 million. This completed the amount authorized under our share repurchase program.

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 and earnings.

We thank you for your interest in our company, and we'll open the line to questions.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) And our first question comes from the line of Mac Sykes from Gabelli.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Brian, I was wondering if you could talk a little bit about the outsourced trading aspect. How is that work? And how is it viewed in terms of institutional, operational due diligence questionnaires?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Sure. Well, thanks for your question. So we've spent about 6 months researching this. And as we've described over a series of calls, we've always been very interested in being as efficient as possible. Technology really allows you to be efficient, and we've spent a lot of time and energy on our technology journey over the last 3.5, 4 years. This is simply a continuation of that journey. Trading is something that has become much more automated in the last few years. I'm always reminded of my first visit to the New York Stock Exchange, which was about 1985, and it was -- you had paper up to your ankles and everyone was yelling and screaming. And I went -- took my family there a few years ago to visit, and it was like being in church. It was quiet. People are spending their day on their computers, and it was a completely different experience. So the world has become connected technologically. Trading is done technologically. And it's simply the next rung in the ladder for us in terms of our evolution to becoming a more efficient and cutting-edge technological firm.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Okay. And just along that line, in terms of the wealth management, you've been making some inroads in terms of the applications and engagement with clients. I mean given that we've seen some stress in the markets and that would have been a place to improve engagement, what did you see in terms of your technology there and the client conversations and, I guess, engaging with the newer technologies that you've put forth?

--------------------------------------------------------------------------------

Brian O'Connor Casey, Westwood Holdings Group, Inc. - President, CEO & Director [5]

--------------------------------------------------------------------------------

Well, it's been really amazing. You plan, you test, you do everything you can to try to anticipate what might happen if you're not able to come to work. And I guess when you think about that, you think of things like an earthquake or a flood or -- I don't think worldwide pandemic was really on the forefront of anybody's minds. But nonetheless, we've -- none of us have been able to come to work. And we have not missed a beat at Westwood. I mean we have been communicating every day as a management team. We have communicated a couple of times a week on our crisis management team to deal with any issues or problems. But as far as reaching out to clients, we are able to do it through a number of different ways. And I think more than anything, just picking up the phone and calling our clients the good old-fashioned way is a good way to remind them that we're here, remind them that we care and that we're here to help. And we had a number of existing clients add money to their accounts to take advantage of some of the volatility.

But certainly, in terms of -- just to answer your question about technology, I mean we have the ability to communicate in multiple ways. And I think what you learned is what is the preferred way that a customer wants to communicate with you. And with some people that's in person, with some people that's on the phone, some people it's you get on and do a Face Time or a Zoom meeting or just all the things that all of us have been doing. But I think clients have really warmed up to the idea that we can still get a lot done without having to drive, park their car and come into an office.

Anything else, Mac?

--------------------------------------------------------------------------------

Macrae Sykes, Gabelli Funds, LLC - Research Analyst [6]

--------------------------------------------------------------------------------

Sorry. Just one last question. In terms of the wealth management engagement on the physical presence, how do you see that evolving kind of as the states open up? How do you see the office management and getting in touch with clients on a physical basis in the bank as well?

--------------------------------------------------------------------------------

Brian O'Connor Casey, Westwood Holdings Group, Inc. - President, CEO & Director [7]

--------------------------------------------------------------------------------

Well, it's interesting. I think we have 2 different client groups, I would say, not only at Westwood but in the industry. Historically, the wealth management industry has catered to the baby boom generation because they're the ones that had all the money. And that is shifting now to the Gen X, Gen Y, the millennials. And their preference all along, forget about the pandemic, is to communicate through technology, not to come and visit an office. So I really think it will -- it may evolve to where the baby boomers don't feel like they need to come to the office as often as some of them like to come. So it's going to be a profound change, I think, for the world. It's going to be interesting to see. I'm looking out my window in Dallas at lots of cranes of office buildings going up. And 60 days ago, we were close to 0% unemployment and one of the fastest-growing cities in America. And it will be interesting to see how that changes when we do open back up.

--------------------------------------------------------------------------------

Operator [8]

--------------------------------------------------------------------------------

(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.

--------------------------------------------------------------------------------

Brian O'Connor Casey, Westwood Holdings Group, Inc. - President, CEO & Director [9]

--------------------------------------------------------------------------------

Okay. Well, thanks again for listening to the call. And in closing, I'd like to add that while we would qualify for government loans, we really want that money to go to those who need it the most. So we have not applied for, nor do we intend to apply for any government loans. I hope everybody stays healthy and safe, and we appreciate your interest in Westwood. Please visit westwoodgroup.com if you have any questions or give us a call directly. Thanks so much.

--------------------------------------------------------------------------------

Operator [10]

--------------------------------------------------------------------------------

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