Westwood Holdings Group, Inc.
Q4 2014 Earnings Call Transcript

Published: 5 Feb 2015

[Operator:]

Thank you all for holding and welcome to the Westwood Holdings Group Fourth Quarter 2014 Earnings Conference Call. Today’s call will begin with a presentation followed by a Question-and-Answer Session. Instructions on that feature will begin later in the program. I would like now to turn the call over to your host for today’s conference; Sylvia Fry, Senior Vice President and Chief Compliance Officer. Ms. Fry, your line is now open.

[Sylvia Fry:]

Thank you. Good afternoon and welcome our fourth quarter conference call. I’d like to start by reading our forward-looking statements disclaimer. 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 Annual Report on Form 10-K for the year ended December 31, 2013 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 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 will 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.

[Brian Casey:]

Thanks Sylvia and thanks to you everyone for taking time to join our call today. We are really pleased to close out another great year with assets under management of over $20 billion, the addition of a new investment team and the recent announcement of the expansion of our trust business. Since Westwood’s founding, nearly 33 years ago, our company has evolved from a single product provider into a multi investment team firmed with the diversified stable of investment strategies and business lines. We maintain a strong institutional product line thriving mutual funds group, a dependable private wealth business and a rapidly growing non U.S. business. We are able to consistently diminish the impact of downturns and remain under trajectory of positive growth. And this begins with our commitments to expanding both our expertise and investment capabilities. We will remain fully focused on meeting the needs of our existing clients. The U.S. market environment during the fourth quarter of 2014 was defined by a sharp rise in volatility associated with falling oil prices beyond a quantitative easing and concerns over the pace of global growth. Despite these factors, Westwood’s domestic investment strategies finished 2014 on a strong note with nearly every strategy posting a gain for the fourth quarter. Our large-cap value strategy had an exceptional fourth quarter well under the top quartile versus figures and joins all cap value, small-cap value and dividend growth in the top 40% of their respective peer groups for the year. We were especially pleased with the first year of our performance of our large-cap value and all-cap value concentrated strategies, which are an expression of our highest conviction ideas and leverage Westwood’s expertise in indentifying undervalued securities. Our large-cap concentrated strategy gained 19% outperforming the benchmark by 560 basis points and ranking in the top 5% of its peer group. The all-cap concentrated strategy gained 13.5% in 2014 outperforming the index by 89 basis points and ranking in the top 20% of its peer group. Westwood Smith Cap value strategy experienced a challenging year in terms of relative performance. But, the long term track record remains strong and the portfolio team is actively working to improve performance this year. Reflecting the market environment during the fourth quarter Westwood's multi asset an MLP strategy registered a wide range of absolute returns during the period. Westwood’s income opportunity strategy continued to deliver positive returns in a lower volatility profile in a challenging environment gaining 2% in the fourth quarter and 10.3% for 2014 ranking in the top 20% of its peer group for the year. Westwood's MLP strategy was negatively impacted by the sharp selloff in the energy sector in response to the dramatic decline in crude oil prices posting a decline of an 11.3% for the period compared to a decline of 12.3% for the benchmark. However, the fund still managed to register a positive gain of 8.6% for all of 2014 outperforming the Alerian benchmark by 380 basis points. Well, we expect commodity prices to remain volatile over the near term, we continue to view MLPs as an attractive investment over the long term. As we have noted in the past, we expect market volatility to return to a more normal level and along with rising dispersion and falling correlations among stock prices, we foresee an environment that has historically favored active management. In addition, periods of Fed tightening have been associated with the decline in investor risk tolerance and a greater focus on company fundamentals such as strong balance sheet, earning visibility and free cash flow which is also highly supportive of a fundamental investment management process. In Toronto, our global emerging markets equity team was able to hit the ground running at the start of 2014. They focused on integrating new team members and on generating resource for the portfolios. The team traveled extensively during the year meeting with over 550 companies and most recently visiting Europe, South Africa, North Africa and Eastern Europe. The team's long term focus on fundamental research really paid off last year as emerging markets registered in the top decile for performance. However, global products underperformed as the portfolios faced continual headwinds from Europe. With respect to growth and emerging market assets under management, it was notably a successful year for the emerging markets team with assets increasing 50% year-over-year to end the year at $3.3 billion. In the fourth quarter we opened another three accounts on behalf of an existing institutional plan and we expect a large sovereign wealth fund to begin funding a substantial account early next week. As we handed at the beginning of the call, an exciting and promising development for Westwood in 2014 was the official launch of our new global convertible securities team offering investment opportunities for clients distinct from those of our U.S. values team and emerging markets team, the addition of the global convertible securities team significantly broadens our capabilities as a multi investment team firm. The team came on board in October at which time we seeded for them two commingled funds within our Westwood trust fund structure. They continued to manage over 400 million on behalf of Aviva and a sub advisory mandate and they recently received an award in relative value arbitrage for Mondo Alternative in Italy. We also launched the first UCITS fund for the team in December and are in active discussions about that fund with prospects in Europe. One of the attractions to Westwood for the global converts’ team was the platform we developed within our institutional business whereby clients can access us through separate accounts, mutual funds and commingled fund structure. In line with this the launch of our UCITS platform in 2013 has enabled us to increase our strategic focus on non U.S. markets. Our emerging market UCITS fund now has over $800 million in assets with underlying clients from the U.K., the Netherlands and Canada. And the launch of the strategic global convertibles UCITS in the fourth quarter of 2014, as we’ve just detailed has put in a strong position to build assets in the platform and we are confident that we will see that particular fund grow as we move throughout the year. The first quarter of 2015 will likely also see the launch of our third UCITS fund with a Canadian investor having agreed to seed it for the emerging market plus strategy. From a broader perceptive, our institutional business enjoyed strong performance in 2014. We’ve continued to expand our client base and our asset bases become more diversified in terms of the strategies our clients have hired us for. In particular during the year emerging markets and income opportunity were the strategies where we saw the most significant interest and influence. We expect to see continued secured demand and in fact have been awarded a number of new emerging market mandates in 2015 including the new sovereign wealth fund I mentioned earlier. In addition, we have recently had two finals presentations for our income opportunity strategy. The area of most disappoint for us has been our failure to add significant assets in our small-cap value strategy. Our investment team has done a terrific job from a performance perspective and our peer group rankings are strong across all time periods. From a sales perspective, we have added a number of consultant rating approvals for the strategy and we have seen a significant increase in interest from European investors. And as you know many European investors have been under weighed the U.S. market and the U.S. dollar for some time. We are hopeful that these factors will result in seeing us increase our assets in the small-cap strategy during 2015. Shifting our attention to the fourth quarter mutual fund flows and sub-advisory, the Westwood mutual funds netted inflows of 223 million, which proved to be the highest for any quarter in 2014. Now, to give you some context, Westwood funds second highest quarter of net inflows was in the third quarter which experienced 165 million inflows. The 2014 net inflows totaled 672 million representing an organic growth rate of 24%. By the end of the year, the Westwood funds reached the total AUM of 3.7 billion. It’s important to note that we have experienced positive annual flows every year since inception of our funds over a decade ago. Sub-advisory mandates continued to be a meaningful part of our business both in the U.S., Europe and Canada where our partnership with national bank has reached over 600 million in total assets under management. Turning to Westwood trust, our asset growth has been slow, but [indiscernible] activity has reached new heights as recently hired trust officers have kept their calendars full with perspective customer meetings. Westwood's Omaha office celebrated its fourth anniversary with WHG serving the trustee and investment needs of wealthy individuals, families and businesses in Nebraska and beyond. The Westwood name is becoming widely recognized in the marketplace among investors and professionals who can refer business to the Omaha office. The Westwood trust Omaha team is driven to exceed client expectations to every level and our clients have benefited from an increased level of fiduciary oversight and expanded investment capabilities and enhanced also by help from the Dallas Westwood team. As we continue to grow our institutional and mutual fund efforts, we are always looking to grow our private wealth management businesses as well. In [indiscernible] we were pleased to announce a definitive agreement to acquire Woodway financial advisers the premiere private wealth management company in Houston, Texas. Woodway has 1.6 billion in assets under management and 27 employees. On January 16, we released an 8K which includes the details of the transactions which we expect to close in the first quarter of 2015. As the agreement with Woodway delivers on a strategic aim that we have talked about on numerous on previous calls, you can imagine that we are very excited about the potential of this transaction. According to our recent study by RBC, Houston is the second fastest growing population of high network individuals within the 12 largest metropolitan areas in the United States. Acquisition opportunities in the private wealth business that meet our criteria for purchase are few and far between. They have a long lead time to develop into a merger stage and we will work diligently over the next year to integrate Woodway into our company. We are also continuing our efforts to further expand the Westwood Trust footprint with intelligent acquisitions in dynamic wealth management markets as they arise. As a final and very meaningful note to us at Westwood concerning 2014, we are deeply to be recognized for the strength of our company’s culture and the active role we play within our community. Westwood was awarded first place for best places to work among companies of our size by pensions and investments age, our industries leading trade magazine. The award recognizes those companies who must exhibit in alignment interest across their people and who also make a significant contribution to society. The award is particularly meaningful as it is voted unanimously in surveys of employees across the industry. In addition, we were recognized as the Dallas Corporate Citizen of the Year in the SMid Cap Category for contribution to the surrounding community. Thanks as always for your support and your interest in Westwood. I will now turn the call over to our CFO, Tiffany Kice and I will be available for questions at the conclusion of her remarks.

[Tiffany Kice:]

Thanks Brian and good afternoon everyone. For the fourth quarter of 2014, we’re reporting total revenues of $28.3 million, net income of $6 million and diluted earnings per share of $0.77. Economic earnings and non-GAAP metric was $9.7 million or $1.24 per share, assets under management increased to a record $20.3 billion at quarter end with positive inflows during the quarter. Total revenues were up 12% or $3 million from the same period in 2013 with advisory fees up 15% or $3.1 million and trust fees up 3% or $0.2 million. Diluted earnings per share of $0.77 and economic earnings per share of $1.24 were up 3% and 4% from the prior year respectively. For the fiscal 2014, total revenues were $113.2 million up 23% or $21.4 million from 2013. Net income increased 53% to $27.2 million compared to $17.8 million in 2013 and economic earnings increased 38% to $41.4 million compared to $30 million in 2013. Diluted earnings per share of $3.45 and economic earnings per share of $5.24 were up 49% and 34% respectively from the prior year demonstrating strong operating leverage due to increase in revenue. Firm wide assets under management of $20.3 billion consisted of institutional assets of $12.5 billion or 62% of the total, private wealth assets of $4.1 billion or 20% of the total and mutual fund assets of $3.7 billion or 18% of the total. Included in these amounts are Westwood International strategies of $3.3 billion or 34% increase from the prior year. Net inflows for the quarter were concentrated principally in our emerging markets and income opportunity strategies while large cap continued to experience outflows. Our balance sheet continues to be very solid with cash and investments at yearend of $98 million up $22 million from fiscal year end 2013 and a debt free balance sheet. This has given us the flexibility to opportunistically expand our private wealth platform via the Woodway acquisition into a market it’s very strategic task. Our Board of Directors approved a quarterly cash dividend of $0.50 per share payable on April 01, 2015 to stockholders of record on March 13, 2015. This represents an annualized dividend yield of 3.3% at yesterday’s closing price. We encourage you to review the presentation we posted on our website reflecting fourth quarter highlights as well as longer-term trends in the growth of our assets under management, revenues, earnings and dividends. I will now turn the call back over to Brian to conclude.

[Brian Casey:]

Thanks Tiffany. If anybody has any questions you can [Indiscernible] operator now.

[Operator:]

[Operator Instructions]. Our first question comes from the line of John Fox with Fenimore Asset Management. Your line is now open.

[John Fox:]

Hello everyone.

[Brian Casey:]

Hi John.

[John Fox:]

Congratulations on a great year and on the local awards that sounds terrific. I said couple of minor questions that the global convertible products which I think was 500 when you announced it. Number one where is that reported I assume it’s an institutional but if you could just confirm that and how’s that doing in terms of growing at this point?

[Brian Casey:]

Sure, well the assets were not included because we have not finished the sub delegation agreement but there will be at some point here soon.

[John Fox:]

Okay.

[Brian Casey:]

The growth of the assets is like you would expect with any new product you have the challenge of chicken and egg problem where you got to get to a $100 million before people want to put a lot of money in there. So one of the things that we’ve just approved in our usage structure is a founders share class whereby for the first group of prospects that sign up they will receive a reduced fee and to incentivize them to participate. Our group was just in Europe a week and half ago, they spent a week doing meetings. They have got several prospects that look promising and I would expect we will see some funds coming into that fund pretty soon.

[John Fox:]

Okay. So just to confirm there is nothing in there today in your 20 billion AUM for that product at all?

[Brian Casey:]

That’s correct.

[John Fox:]

Okay. Do you have the sales and redemptions by the three segments like you normally have in queue so it likely [Indiscernible].

[Brian Casey:]

Yes, you will have to wait for the [Indiscernible] sorry John, I know it’s exciting reading but…

[John Fox:]

It is, I was anxious but okay and you have the employee headcount end of the year?

[Brian Casey:]

130.

[John Fox:]

Okay. Thank you.

[Brian Casey:]

Thank you John. We appreciate your support.

[Operator:]

Our next question comes from the line of Mac Sykes with Gabelli & Company. Your line is now open. Please go ahead.

[Mac Sykes:]

Good afternoon gentlemen. And I would back to the John's comment about the great year and congrats on the Woodway announcement. In terms of that announcement in the headlines I guess there was [Indiscernible] through the Trust business do you accelerate the potential volume transactions or do you feel that you are going to be more focused on the integrations and organic goals internally?

[Brian Casey:]

Well, I think we will accelerate interest from others who might want to talk to us. This transaction is one that took place after many years of talking to the folks at Woodway. I think we first met them over a decade ago and just like your prospecting for new institutional accounts, we are always prospecting for great companies who might want to be part of us and in this case it just all came together in a way that made sense for everybody and we decided to move forward. We have got lots of those prospects that we talked to over the years and I think if nothing else it shows that we are very serious about it, we are very selective. It's important that any of these acquisition opportunities meet our criteria culturally they have to be a good fit and we expect them to be just in terms of Woodway.

[Mac Sykes:]

And my follow-up you certainly generated significant growth over the last year, can you highlight any specific areas where you plan to increase headcount and given all sort of the geographic changes are there any places where you don't necessarily feel you have the right resources in place?

[Brian Casey:]

Yes, we have worked really hard over the last couple of years to build out the sales part of our business and we have opportunistically added investment talent where we felt like they could help us. So we have added both in terms of talent on the investment side we have added both veteran analysts as well as additions to our research associate program which I have talked about in previous calls where we hired kids directly out of school, we hired some of the best and brightest. We put them through the CFA program. We pair them with senior analysts and they work over a period of many years to develop into an analyst. But beyond that with the addition of all the sales folks that we have hired really the next phase is to build the marketing support behind the sales people. We hire a lot of sales people they need brochures, they need thought leadership pieces, they need information to take up to the market. So that’s really another area that we are going to start to add people as in the marketing support area. Tiffany you may comment on couple of other areas where we have got some open positions but from my perspective those are counted too much important.

[Tiffany Kice:]

I would agree with Brian. I mean we are building out our infrastructure as well so there is certain positions that are open and available there that we are expanding on.

[Mac Sykes:]

Great and then on the southern wealth mandate that you mentioned congratulations on that by the way, is this - should we think this is sort of a onetime allocation or the potential for additional allocations overtime and also the potential for other parts in the platform, just maybe a little more color on that would be great. Thank you.

[Brian Casey:]

Sure. Well I would expect this to be funded over a period of months. It will go into our emerging markets plus strategy. It is one of the premiere southern wealth funds and while they are interested in that strategy as with all of our institutional customers, we hope to introduce them to other strategies that they might benefit from.

[Mac Sykes:]

Great. Thank you, really nice quarter gentlemen.

[Brian Casey:]

Thank you Mac, appreciate it.

[Operator:]

[Operator Instructions] Our next question comes from the line of Robert Mitchell with Conestoga Capital. Your line is now open. Please go ahead.

[Robert Mitchell:]

Hi, good afternoon.

[Brian Casey:]

Hi Bob. Good. How are you?

[Robert Mitchell:]

Good. Great year again and it's going to be the third questioner on the call. But I wanted to ask you about the expenses in terms of particularly fourth quarter kind of year-over-year. It looks like there has been a little bit of step up in terms of some expenses particularly at the professional services line I mean you mentioned your investments in sales and marketing so that add some color to that but maybe just talk about little bit increase in expenses and were there any one time items in the quarter or how should we think about that going forward.

[Tiffany Kice:]

Yes, I mean the professional service line is probably the biggest one we are looking at. It's got a lot of legal cost for the Woodway acquisition that are in that. Those I would consider onetime type cost. The Boston team came on board in the last quarter obviously so there was a lift there from that. We hired a number of new people in the last quarter. The on boarding cost as well for bringing on the Boston team to certain research tools software licenses that kind of thing.

[Robert Mitchell:]

Okay. Thank you.

[Operator:]

[Operator Instructions]. And I am showing no further questions on the phone lines at this time.

[Brian Casey:]

Okay. Very good. Well, if you have any additional questions please call us directly either Tiffany or myself. Visit our website at westwoodgroup.com and thanks again for being our shareholder. We appreciate your interest in Westwood.

[Operator:]

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.