Westwood Holdings Group, Inc.
Q3 2018 Earnings Call Transcript

Published: 24 Oct 2018

[Operator:]

Good day, ladies and gentlemen. And welcome to the Third Quarter Westwood Holdings Group Inc. Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct the question-and-answer session and instructions will be given at that time [Operator Instructions]. As a reminder, today’s conference maybe recorded. I would now like to turn the call over to Ms. Julie Gerron, General Counsel and Chief Compliance Officer. Ma’am you may begin.

[Julie Gerron:]

Thank you. Good afternoon. And welcome to our third quarter 2018 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 difference is included in our press release issued earlier today, as well as in our Form 10-Q for the quarter ended September 30, 2018, 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. I will now turn the call over to our President and Chief Executive Officer, Brian Casey.

[Brian Casey:]

Good afternoon, and thanks for taking time to listen to our third quarter earnings call. I'll start with some comments on the investment environment and then dive deeper into our investment performance and business. In the U. S., economic data continue to be strong and despite the news on trade wars, we saw some nice top line revenue growth for many of the companies we follow. Tariff relief for large multinationals came in the form of a newly renegotiated NAFTA agreement, now called USMCA or the U.S, Mexico, Canada agreement and helped LargeCap to outperform SmallCaps by nearly a 2

[Tiffany Kice:]

Thanks, Brian and good afternoon, everyone. Today, we reported total revenues of $29.9 million for the third quarter of 2018 compared to $33.5 million in the prior years' third quarter, and $32.8 million in the second quarter of 2018. The decrease from the prior year was primarily due to net outflows and the sale of the Omaha-based component of our private wealth business. The decrease is immediately preceding quarter was primarily due to net outflows and performance-based fees earned in the second quarter. Third quarter net income of $5.4 million or $0.62 per share compared to $4.1 million or $0.49 per share in the prior year's third quarter. The third quarter benefited from reduction in compensation following the sale of the Omaha-based component of our private wealth business and reductions in short and long-term incentive compensations, offset by lower asset-based fees and higher information technology implantation costs as we continue to invest in our technology infrastructure. Additionally, the prior year quarter was negatively impacted by $2.5 million legal settlement charge, net of insurance recovery and taxes. Third quarter net income of $5.4 million or $0.62 per share compared to $8 million or $0.94 per share in the second quarter of 2018. The second quarter benefited from higher asset based and performance-based fees in addition to foreign currency transaction gains. Economic earnings and non-GAAP metric was $9.5 billion or $1.11 per share compared to $9 million or $1.07 per share in the prior year's third quarter and $12.2 million or $1.43 per share in the second quarter of 2018. Firm wide assets under management totaled $20.8 billion at quarter end and consisted of institutional assets of $12 billion or 58% of the total, private wealth assets of 4.8 billion or 23% of total and mutual fund assets of $4 billion or 19% of total. We experienced net outflows related to our ongoing business of $1.2 billion with the remaining net outflows related to sale of our Omaha-based private wealth operations and market appreciation of $690 million. Our financial position continues to be very solid with cash and short-term investments at quarter end, totaling $119.1 million and a debt free balance sheet. We have no significant updates on the impact of tax legislation since our last earnings call, and we continue to expect our fiscal 2018 effective tax rate to be in the range of 26% to 28%. I will now turn the call back over to Brian.

[Brian Casey:]

Thank you, Tiffany. And as you probably saw in our 8-K filed earlier this month, this will be Tiffany's last quarterly call for Westwood as she resigned as CFO, effective October 31st. I would like to thank Tiffany for her hard work and dedication at Westwood over the past four years and wish her well in her next endeavor. And I'd like to introduce you to Terry Forbes, who we've promoted to CFO.

[Terry Forbes:]

Thank, Brian. I'm excited for the opportunity to lead the accounting and finance team, and I look forward to building relationships with our investors and our stakeholders over the coming months. I'm happy to announce that our Board of Directors approved a quarterly cash dividend of $0.72 per share, which represents an increase of 6% from the previous quarterly dividend rate. The dividend will be payable on January 2, 2019 to stockholders of record on December 7, 2018. This represents an annualized dividend yield of 6.5% as of yesterday's closing price. That brings our prepared remarks to a close. We encourage you to review our investor presentation we have posted on our Web site, reflecting third quarter 2018 highlights, as well as the discussion of our business, product development and longer-term trends and revenues, earnings and dividends. We thank you for your interest in our Company and we will open up the lines for questions.

[Operator:]

[Operator Instructions] And our first question comes from the line of Mac Sykes with Gabelli. Your line is open.

[Mac Sykes:]

Brian, you talked a little bit about your select equity and your success with the RI channel, and that’s been a bigger focus of distribution for the industry just given that it’s a growing faster. I was wondering if you could dig in a little bit just talk a little more about why that specific product that’s being successful with the channel there? And what other products could you be more successful with in terms of sell-through?

[Brian Casey:]

As far as select equity, as you know, we started that fund about three years ago. And the idea behind it was to have a high quality low turnover tax efficient portfolio. It's basically the portfolio that I would want as an individual investor. And it's resonated really well with those that we've spoken to about it. The performance has been very good. And as we complete our third year this year, we hope to have even greater success in the future. I mentioned a couple of other products during my remarks, one of them is EM. EM has had a remarkable improvement in the third quarter. As you know, our team tends to own companies for a long period of time. When they invest in the Company, they would like to own it for five or six years. Their annualized turnover is about 12% or 13%. And they have always underwritten the companies like they want to own them for a long time. And the index has really gotten crazy over the last several years as China has become a bigger and bigger part of that index. They've had a cap relative to that, so they've underperformed when China has run up. They've made a lot of that back here recently and they feel really good about how they're positioned going forward. So the performance has improved quite a bit and we're excited about the prospects for the EM franchise. In addition to that, our SMid performance has improved recently, that’s been a sticking point for us the last several years. So, we're good to see -- we're glad to see some continued improvement there.

[Operator:]

[Operator Instructions] And I'm showing no further questions at this time. I would now like to turn the call back to Mr. Brian Casey for closing remarks.

[Brian Casey:]

Great, thank you. And we appreciate everybody taking the time to listen to our call. It’s a very character building day on Wall Street but the market town big, so we know you've got lots of other companies to listen to. So, thank you again and please visit our Web site westwoodgroup.com for more information on our firm and any of our public filings. Feel free to call me or Terry if you have any questions as a follow-up. Thanks for your time.

[Operator:]

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone, have a great day.