Westwood Holdings Group, Inc.
Q2 2023 Earnings Call Transcript

Published: 4 Aug 2023

[Operator:]

Good day and thank you for standing by. Welcome to the Second Quarter 2023 Westwood Holdings Group, Inc. Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today John Ehinger, Head of Legal.

[John Ehinger:]

Thank you, and welcome to our second quarter 2023 earnings conference call. The following discussion will include forward-looking statements that 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 June 30, 2023 that will be 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 Chief Executive Officer; and Terry Forbes, our Chief Financial Officer. I will now turn the call over to Brian Casey.

[Brian Casey:]

Good afternoon, and thank you for listening to our quarterly earnings call. As of July 1, Westwood has been a publicly traded company on the New York Stock Exchange with the symbol WHG for 21 years. Throughout our entire 40-year history, Westwood has remained focused on helping our clients achieve their objectives by executing our disciplined investment processes to generate portfolio alpha without taking excessive risk, and this has delivered excellent compound rates of return for our clients. John Wooden's Pyramid of Success has been an essential road map for us since our firm's inception and his principles formed the foundation of our firm's culture. Our culture has enabled us to innovate and grow over time in a principled way. We've shared our long-held values and principles with our new team members at Salient, as we think about new ways to serve clients using the broader spectrum of strategies that are now available to us. We will continue to embrace our values, as we tackle the substantial changes confronting our industry, including the continued speed of innovation, and related demands for technology, consolidation among many asset managers, the rise of alternative investments, and shifting demographics that have influenced buyer behavior, and I didn't even mention AI. Looking back over the first half of the year, I'm pleased to share several positive items with you. LargeCap and SMidCap experienced positive net inflows in the institutional channel during the second quarter. Despite significant outflows affecting our industry, Westwood retained all of its institutional clients and maintained its consultant ratings. Just as an example, the month of May saw the largest outflows in the LargeCap value category for 15 years, while Westwood's LargeCap value flows were positive for the second quarter. The broad market particularly in the last two months of the quarter gained a surprising amount of bullish momentum despite many potential risks, including continued tightening of an already restricted monetary policy. The S&P 500 Index gained 8.74% for the quarter, but these returns were skewed by a handful of growth in tech names, which pushed the index higher. The stock market has become very top heavy recently with performance driven by the largest market cap names in the index. However, we have also been seeing increasingly broad participation with more risk-on stocks across the market cap spectrum. Growth stocks were the clear standout overall for the quarter, outperforming value stocks by more than 3

[Terry Forbes:]

Thanks, Brian, and good afternoon, everyone. Today, we reported total revenues of $21.9 million for the second quarter of 2023 compared to $22.7 million in the first quarter and $15.6 million in the prior year second quarter. Revenues were lower than the first quarter on lower performance-based fees. Revenues were higher than last year's second quarter reflecting higher average AUM following the acquisition of Salient Partners Asset Management business during the fourth quarter of last year. Second quarter net income of $2.9 million or $0.36 per share compared favorably with $0.7 million or $0.09 per share in the first quarter due to changes in the fair value of contingent consideration, offset by lower revenues and higher income taxes. Non-GAAP economic earnings were $5.7 million or $0.70 per share in the current quarter versus $3.6 million or $0.45 per share in the first quarter. Second quarter net income of $2.9 million or $0.36 per share compared favorably with last year's second quarter net loss of $0.4 million or $0.05 per share, primarily due to changes in the fair value of contingent consideration and higher revenues partially offset by higher expenses, primarily employee compensation and benefits expenses following the acquisition of Salient Partners Asset Management Business in 2022. Economic earnings for the quarter were $5.7 million or $0.70 per share compared with $1.6 million or $0.20 per share in the second quarter of 2022. Firm-wide assets under management and advisement totaled $16.2 billion at quarter end consisting of assets under management of $15 billion and assets under advisement of $1.2 billion. Assets under management consisted of institutional assets of $7 billion or 46% of the total, wealth management assets of $3.9 billion or 26% of the total and mutual fund assets of $4.2 billion or 28% of the total. Over the quarter, our assets under management experienced market appreciation of $0.5 billion and net outflows of $482 million and our assets under advisement experienced market appreciation of $46 million and net outflows of $56 million. Our financial position continues to be very solid with cash and short-term investments at quarter end totaling $38.1 million and a debt-free balance sheet. I'm happy to announce that our Board of Directors approved a regular cash dividend of $0.15 per common share payable on October 2, 2023 to stockholders of record on September 1, 2023. That brings our prepared comments to a close. We encourage you to review our investor presentation posted on our website reflecting quarterly 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.

[Operator:]

Thank you. [Operator Instructions] Our first question comes from Macrae Sykes with GAMCO. You may proceed.

[Macrae Sykes:]

Good afternoon, everyone.

[John Ehinger:]

Good afternoon, Mac.

[Macrae Sykes:]

Great. I had just two questions. The first was, given where we've moved away now from the closing date of this merger, do you think there's any attrition or churn that sometimes occurs with mergers? Do you think that is affecting any of the flows at this point?

[Brian Casey:]

I think we've done a really good job of hanging on to our clients. I think the -- any deterioration in AUM has come from really -- primarily, the energy sector and that has been more due to a big decline in price from 130 last year to under 70 in June. And simply just a real bias towards not owning energy, I mean I've been in this business a long time and I can remember when energy was north of 20% of the S&P and it's less than 5% now. And yet it's something that we all use every single day. So, it is interesting what's going on. We're value investors at heart and we like to see opportunities and we think there's a lot of opportunity in the energy space.

[Macrae Sykes:]

Great. And I wonder if you could go a little bit deeper kind of on the wealth management effort. I mean you've done a good job putting the Salient and Westwood together, and wealth is been some outflows. And it seems like you have the brand you have the tech at this point you have the local scale. What's sort of missing there to get to healthier trends?

[Brian Casey:]

I don't know that anything is missing. I think we've worked really hard to put all the pieces together. I think there's clearly a lot of competition in the wealth space. Everybody's got a little different mousetrap. We've spent a lot of time in the last few years building on the planning side of our business, which is in much slower sales cycle. When you start with a financial plan, sometimes it takes many months, many quarters to get somebody across the line. And I'm always reminded that when we're prospecting for new business, in our high net worth business, you're talking to somebody who may have had a relationship with an adviser for decades. And so, we've got to show them that we have a much better offering and we have to disrupt the relationship that they have. So, it's not easy to bring in new business into the wealth channel. But when you do, if you do a good job for them over time, they tend to stick with you. And we've had across the board pretty good performance in our wealth products. They're designed to protect capital on the downside and participate on the upside. We've also done some unique and interesting things that are more opportunistic. We did a bank fund here in the -- a couple of months ago. We've done an electric vehicle fund. We've done a High Alpha fund that is very much a growth-oriented strategy. So, we have a lot of entrepreneurs that are clients and they like for us to give them an opportunity to show the expertise that we have. And we're entrepreneurs too. So it's fun to respond to that with a product offering that they're excited about and that we have fund manager.

[Macrae Sykes:]

Great. Thank you, and congrats on the strong strategy performance this quarter.

[Brian Casey:]

Great. Thanks Mac. Appreciate your questions.

[John Ehinger:]

Thank you. Anybody else?

[Operator:]

No more further questions. And I can turn it back to Brian Casey for any closing remarks.

[Brian Casey:]

Great. Well thanks very much for taking time to listen to our call today. We appreciate you being interested in Westwood and being a shareholder. Please visit our website westwoodgroup.com. Call me directly or Terry Forbes our CFO, if you have any additional questions. Have a great afternoon.

[Operator:]

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.