Q4 2019 Earnings Call

Ladies and gentlemen, thank you Christina and welcome to the Westwood Holdings Group fourth quarter 2019 earnings Conference call. At this time all participants are in listening.

Only mode. After the speakers presentation, there will be a question and answer session to ask a question. During this that shouldn't you'll need to press star one on your telephone as a reminder, things program may be recorded and now I'd like to introduce your host for today's program, Judy Garland General Counsel and Chief Compliance Officer. Please go ahead.

Thank you and good afternoon, welcome to our fourth quarter 2019 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 does contemplated by the forward looking statements.

Additional information concerning factors that could cause such a difference is included in our press release issued earlier today as well as in our form 10-K for the year ended December 31st 2019, but as filed with the Securities and Exchange Commission.

We undertake no obligation to publicly update or revise any forward looking statements whether as a result at new information future events or otherwise you are cautioned not to place undue reliance on forward looking statements.

In addition in accordance with the FCC rules concerning non-GAAP financial measures reconciliation of our economic earnings and economic earnings per share to the most comparable GAAP measures is included in 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 for our Chief Financial Officer, I'll now turn the call over to Brian.

Good afternoon, and thank you for taking the time to listen to our quarterly earnings call as always I'll start with comments on the market environment and investment teams and finish with comments on our business.

[noise] volatility continued in the third quarter as markets worldwide fell in August only to rally once more in September.

Caps outpaced large cap some growth stocks rallied overvalue stocks.

As market sentiment change and we saw strong risk on rally beginning in October.

Markets were buoyed by rising optimism on economic and trade developments and finished with a string of new all time highs for most major equity indices.

Similarly fixed income markets also finished the year in positive territory.

The federal reserve against supported markets with a third rate cut and comments from Chairman Pal suggests this level is likely to persist in 2020.

Interest rates recovered much of their decline from the prior quarter the yield curve returned to normal and initial phase one trade deal was struck between the U.S. in China, which helped fuel confidence in an improving 2020 economic environment, both here and abroad.

GDP growth remained steadily positive supported by strong trends in consumer spending low unemployment and low inflation.

Sentiment indicators, such as the I S. M. P. M. I for manufacturing also continued to improve building on recent positive ratings.

Trends outside the U.S. began to show some potential early signs of stabilization and improvement as well.

With 2020 presidential election, rhetoric heating up and rising geopolitical tensions investors will continue to grapple with high levels of uncertainty around the world.

As we look into 2020 Wall Street analysts are estimating another year of corporate earnings growth no questions remain regarding trade and other geopolitical risks.

Hi, labor market remains supportive of consumer spending, which should help keep GDP growth nicely positive as the economic cycle continues to progress the preference for high quality cash generating businesses will likely increase well those companies with high leverage or lower cash generation will fall out of favor.

This dispersion should create a favorable environment for active managers, who can assess both absolute and relative risk and their clients portfolios.

Turning to investment performance within our U.S. value equity products, our domestic equity products fell behind during the fourth quarters risk on rally due to their focus on high quality and value, but they remained well ahead of their benchmarks for the full year.

Largecap value and large cap select finished the year ahead of the benchmark by approximately 170 and 130 basis points respectively.

Institutional pure rankings for large cap value at large cap select strategies are strong over multiple periods and their respective peer universes, our large cap value strategy as in the top cortile over the trailing three five and seven year periods and since its inception isn't the seventh percentile.

Largecap select is in the second percentile since its inception in 2014 and is ranked in the fourth percentile or the trailing five year periods.

Small cap delivered another strong year of outperformance, finishing over 600 basis points ahead of the Russell 2000 value benchmark.

Our small cap mutual fund W.H.G.S. FX completed 2019, and the Twentyth percentile and is in the top decile for the seven and 10 year trailing periods and Morningstar small blend universe.

Our institutional strategy also has attracted peer rankings with top 20 performance for the trailing one in five year periods and top decile rankings for annualized seven and 10 year periods and since its inception in 2004.

Our smid cap strategy finished the fourth quarter ahead of its Russell 2500 value benchmark and 700 basis points better for the year.

Trailing three your returns are ahead of the benchmark and smid cap has improved its peer rankings with a top quartile institutional ranking for 2019.

And a 26 percentile ranking over the trailing three years in the investment universe.

Smid cap mutual fund W.H. GE Amex completed 29 team and the 28 percentile and Morningstars Midcap blend category.

These performance numbers are a great accomplishment for our portfolio management teams and our entire group of research analysts to provide investment ideas for the U.S. value strategies. We're excited about the opportunity in the years ahead for U.S. equity strategies.

Within our multi asset group our product lineup holds an array of strategies aligned across the risk and return spectrum that are tailored for client specific risk profile and investment objective.

Income opportunity put together a great year with compelling idea generation from our research analysts.

So on benefited from the new leadership team of Adrian Helford, and David Clark, who made positive asset allocation decisions and timely duration extension calls ahead of the drop in interest rates, our mutual fund WH G.I. ex finished the year and the 11th percentile and Morningstars, 30% to 50% equity category.

It also ranked in the top 10% for the trailing three seven in 10 years as of yearend.

Our high income total return and flexible income strategies also all produced strong absolute returns for the fourth quarter and the full year and our flexible income mutual fund W. F. L. E X finished with the Fiveth percentile ranking and the Morningstar, 15% to 30% equity category.

Strong security selection, coupled with timely asset allocation adjustments produced attractive results for our multi asset strategies.

Our global convertible strategy was ahead of its benchmark the Thomson Reuters convertible global focus index for the fourth quarter and the full year among its institutional peers. Our strategy ranked in the 13th percentile for the quarter.

Our alternative income strategy also known as market neutral continue to build on its excellent start by finishing the year with strong absolute returns and our mutual fund W.M. and I ex finished with a ninetyth percentile ranking in Morningstars market neutral category for the fourth quarter and a top decile ranking for the full year.

Among institutional peers in the investment database. The strategy finished 2019 with a top decile ranking for the trailing 157 and 10 year periods.

In emerging markets most markets posted strong rallies over the fourth quarter to cap off one of their best years since the global financial crisis of 2009.

Emerging markets outperform U.S. domestic markets in the fourth quarter, though investor focus shifted toward high beta high volatility cyclical securities, which are not traditionally favored by our investment process.

Our emerging markets and the Mplus strategies underperformed for the fourth quarter in the us in this environment, but our emerging market strategy remained ahead of the benchmark MSC I emerging markets index for the full year.

Yeah, I'm smid markets trailed the broader E M universe with a lower exposure to China's rally at year end, our EPM smid cap strategy underperform, the M. Sci emerging markets Midcap index in the fourth quarter, but finished the full year more than 400 basis points ahead of its benchmark.

The valuation case for emerging markets remains positive, particularly relative to develop markets. Following the m. asset classes underperformance of recent years. Despite the challenges of a global trade war growth concerns and geopolitical instability that precipitated uncertainty and volatility through most of last year the development.

In trade negotiations and growth indicators that helped fuel and end of year market rally also provide reasons for optimism in the coming year.

Long term investors, who invested through past crises, we remain disciplined to our process avoiding the lower the herd mentality and positioning for the long term growth story that is yet to come.

Shifting now to wealth management, our teams in Dallas and Houston produced great results in 2019.

Client retention was high at 96% and in total our wealth management group head over 400 million in new inflows for the year.

We've begun to gain traction in our full suite of financial services with high network clients, which allows us to provide a range of services tailored towards managing and simplifying the increased financial complexity of their lives nearly half of our new business in 2019 was from new relationships, which included several new large clients and importantly.

A younger age demographic.

Westwood private bank has been open for over a quarter through our partnership with the bank, we have broaden our offering for high net worth client improving our ability to retain clients in our Westwood branded ecosystem. The concept of providing banking services integrated with existing financial planning Trust and investment management services.

Including the ability to lend against an existing portfolio combined with bill paying and concierge private banking services is resonating extremely well with our clients.

And institutional on intermediary sales, our institutional and retail business had fourth quarter inflows of approximately 400 million that were offset by outflows of 800 million producing net outflows of 400 million.

Outflows were primarily in the income opportunity strategy, which despite excellent performance had a large capital gain distribution, which caused several investors to sell out of the fund ahead of the December distribution.

We're going back to many of these clients and hopes they will return to the fund this year and we feel income opportunity is poised for a return to positive flows in retail with its strong performance over multiple year periods.

Our alternative income strategy also known as market neutral had net inflows of over 100 million and with our largest gainer for the fourth quarter as our partner a veeva investors allocated additional assets to the strategy.

Our small cap franchise continues to gain momentum with searches on the institutional and retail front.

Small cap was our most successful strategy in terms of net inflows for 29 team and our small cap mutual fund and separately managed account vehicles are expected to be approved by one of the major wirehouses. This month.

It's midcaps recent improvement in performance has resulted in new searches in the quarter and we can now move into offense with this strategy in fact, we're making progress on smid with one of the largest consulting firms OCI O platform and hope to see additional flows this year.

Performance was strong across several of their strategies in 2019, and we are optimistic and our ability to grow assets. We made significant investments in our distribution infrastructure over the last two years, including people and technology to support growth than in years ahead.

Some highlights include the following the completion of the Buildout of our institutional intermediary sales teams and the establishment of dedicated client relationship managers and client portfolio managers.

The creation of well defined territories and top quartile activity levels with over 900 meetings held during the quarter.

The pursuit of additional platform approvals to make our funds more widely available to investors. We were pleased to hear that are small cap mutual fund was added to the Schwab one source select list. This is an exclusive group of funds that are selected based on performance risk and expense levels.

Possible edition of our strategies on a large turnkey asset management program or tamp based in the Midwest. We've submitted the RFP is and expect to be available by the end of the first quarter.

The redesign of our Salesforce technology to provide better data and feedback for our sales professionals.

A reduction in pricing for many of our strategies along with the introduction of sensible fees to expand our brand awareness and improve our discoverability.

Enhancement of our digital marketing initiatives with new content and a focus on our quality value approach for our domestic valued equity strategies.

The conscious alignment of our investment teams vehicles pricing product definitions risk guidelines and messaging in order to increase our commercial competitiveness going forward.

With increased sales activity and key consultant approvals, our pipeline is healthy and spread across several different strategies.

We've seen a nearly threefold increase in pipeline value from the end of 2018 to the end of 2019 as a result of our focus sales efforts and investment performance.

There are several late stage institutional opportunities, we are participating in and expect decisions and the first half of 2020.

We are hopeful and feel that net flows have the potential to be positive. This year with particular strength coming from small cap smid cap and eventually several of our multi asset strategies, including income opportunity.

Clients are looking for differentiated results and we have demonstrated an ability to deliver a differentiated client experience as evidenced by our high active share equity strategies with strong track records.

The asset management industry is experiencing disruption on several fronts recent financial results have been disappointing and the industry continues to experience rising data technology compliance and distribution costs.

The major technologies investments we've made in recent years have resulted in operational efficiencies equally important the value of our investment in our partner invest cloud has increased by more than 50% in the past year.

Further as part of our cost sharing agreement with invest cloud for the implementation of our new portfolio mate accounting system, we anticipate potentially receiving payments related to this partnership over the next two years.

We expect industrywide disruption to continue in the steps we've taken to reinvent ourselves have placed us in a position to survive and grow we have taken meaningful steps to reduce our cost structure by reducing personnel and cutting underperforming and commercially unbuyable funds, we've partnered with affirmative India to reduce our marketing costs and you.

Realizing a freelance writers to replace a former employee we're looking at our mutual fund and Usats platforms for potential cost savings later, this year and fine tuning our invest cloud technology to create an information superhighway to further improve efficiency.

While disappointed with our financial performance over the last year, we've made several investments and executed on numerous initiatives to strengthen our foundation for the future, namely we partnered with them best cloud to build test and install a cutting edge portfolio accounting system that has increased our efficiency and reduced our operating cost.

We produced excellent investment performance for U.S. value and multi asset strategies by delivering alpha generation with high active share.

We created a partnership with Harris bank, forming Westwood private bank with new space delivered on schedule and under budget.

We partnered with Blackstone to give our clients access to Blackstone private equity opportunities at attractive investment minimums.

We enhanced our financial planning and estate planning capabilities with new hires in Dallas and Houston.

We became a signatory to the you NPR eye and improved our firm wide SG rating.

We addressed industry fee challenges by introducing a flexible and innovative fee construct known as sensible fees to meaningfully improve investor alignment.

We expanded our multi asset capabilities to include multiple strategies that allow us to demonstrate skillen judgment across a broad spectrum of risk.

We received FCC approval to utilize sensible fees in three of our public mutual funds.

We launched SMS accounts on several platforms and have increased platform availability for our mutual funds.

We achieved a 70% year over year increase and social media impressions and web site sessions.

We built in institutional intermediary and marketing team of over 30 people to grow future sales and build our brand.

And finally, we're pleased to be recognized by pensions and investments best places to work for the sixth consecutive year.

I want to thank our entire team for all their work on this long list of accomplishments while much of this has not yet lifted our financial results. We remain confident that we are on a great path to a solid future state.

We believe the industry will continue to face major headwinds and we will further consolidate in the years ahead. We believe that Westwood is viewed as a great home for teams that want to hardworking entrepreneurial culture superior technology broad distribution and a public currency that can impact with their hard work and results.

We are seeing more inorganic opportunities than at any time in our history with over 100 million in cash and investments we are ideally positioned to execute on an accretive acquisition.

We are fortunate to have many opportunities to choose from and we'll remain disciplined with our shareholder capital.

I will now turn the call over to Terry Forbes our CFO.

Thanks, Brian and good afternoon, everyone. Today, we reported total revenues of 18.6 million for the fourth quarter of 2019 compared to 26.1 million in the prior years fourth quarter and 19.9 million in the third quarter 2019.

The decrease from the prior year was due to lower average assets under management due to net outflows, partially offset by market appreciation. The decrease from the prior quarter was due to lower other revenues.

Fourth quarter net income of 2.5 million or 30 cents per share compared to 5.4 million or 64 cents per share in the prior years fourth quarter.

The decrease primarily related to lower revenues and higher foreign currency transaction losses.

Partially offset by lower incentive compensation costs and unrealized gains on private investments.

Economic earnings a non-GAAP metric was 5.4 million for the current quarter or 64 cents per share compared to 9.5 million or $1.12 cents per share in the fourth quarter of 2018.

Fourth quarter net income of 2.5 million was higher than the third quarter 2019.

Net income of 1.1 million the current quarter benefited from unrealized gains on private investments, partially offset by higher foreign currency transaction losses.

Economic earnings of 5.4 million was also higher than 3.9 million in the third quarter.

For fiscal 2019 total revenues of 84.1 million compared to 122.3 million in 2018.

The decrease was due to at 32.3 million decrease in asset based advisory fees, a $3.5 million decrease in trust fees, reflecting lower average.

And at $2.2 million decrease in performance based advisory fees earned in 2019.

Fiscal 2019, net income was 5.9 million or 70 cents per share compared to 26.8 million or $3 in 13 cents per share in the prior year.

The current year decreased primarily due to lower revenues and foreign currency transaction losses, partially offset by lower incentive compensation expenses and unrealized gains on private investments.

Economic earnings and non-GAAP metric was 18.2 million or $2.15 per share compared to 43.9 million or $5 in 14 cents per share in 2018.

Firm wide assets under management totaled 15.2 billion at quarter end and consisted of institutional assets of 8.7 billion or 57% or the total private wealth assets of 4.4 billion or 29% of the total and mutual fund assets of $2.1 billion or 14%.

No.

Over the year, we experienced net outflows of 4.4 billion end market appreciation of 3 billion.

Our financial position continues to be strong with cash and short term investments at quarter end totaling 100.1 million added debt free balance sheet.

Today, our board of directors approved a quarterly cash dividend of 43 cents per share payable on April 1st 2020 to stockholders of record on March six 2020. This represents an annualized dividend yield of 6% as of the closing price on February 4th.

That brings our prepared comments to a close we encourage you to review our investor presentation on our website, reflecting fourth quarter and fiscal 2019 highlight as well as 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 up the lines to questions.

Certainly ladies and gentlemen, if you have a question at this time. Please press Star then one you've touched on telephone. If your question has been answered and you'd like to move yourself from the Q. Please press the pound key.

Our first question comes from the line of Mac Sykes from Gabelli Your question. Please.

You might have your phone on mute.

Oh I pods as good afternoon, everyone.

My first question I'm at Teria than two for Brian.

On the invest cloud investment is that how is that carried on the.

Balance sheet is cost and will that.

The adjusted as you start to take in revenue there.

Yes. It did the initial investment was.

At cost and then the accounting treatment is cost plus or minus observable market transactions. So in the fourth quarter. There wasn't another transaction with another party, which is why we had an increase in the value of our investment which was part of the private investment right up that we discussed.

Okay, and then Brian you had mentioned in the release.

You are seeing attractive M&A opportunities I wonder if you could expand on.

The businesses that you might be targeting for opportunities there what you're seeing.

Sure well, we are we're seeing a lot of opportunities out there. We have always had a strong interest and private wealth businesses, we find that private wealth businesses are attractive on many fronts, particularly because the assets are very sticky and it dovetails well with what we've been doing.

Around here for two and a half decades that our trust company. So we've seen a lot in that area and we've seen a lot of teams that are stranded that are looking for a home.

And for us we'd be particularly interested in.

Affirm that has private wealth and has some of the capabilities that we don't currently have such as fixed income.

Okay and my last question is on the estimate strategy, maybe you could just give us an update on the strategy there.

What.

From strategies are leading in terms of sales interest and what kind of.

Platforms targeting.

Sure well one of the benefits of SDMA is which is something that we have not done a lot of historically is that you're not you don't inherit the tax liability like you do in a mutual fund and unfortunately for US last year on our income opportunity fund.

The fund shrank in size, but had a really good year and performance and so the folks in December that on the fun on a taxable basis got hit with a a large capital gain in the case Vess Amaze you build the portfolio one security at a time, so that the tax treatment goes.

With the individual over the life that the habit.

We've made a really conscious decision to build our intermediary distribution force over the last the last year, when we hired Harvey steel to run that area for us He hired six wholesalers that all started in July.

And we have covered the country and divided it into six different territories. We've added three internal wholesalers and we have focused on all the major platforms and had probably our most success with Raymond James So far.

We have we got great news last week that we got approved at RBC. So we'll be selling into RBC and we've got to other wires now where we are first and goal for approval.

We're really excited about and we will expand the opportunity set.

For our wholesalers.

December and January were the best months for intermediary sales that we've had in three years.

Yes, the pipeline on the institutional side has nearly tripled we've got 11, new consultant approvals and 16 in process.

Our direct calls on institutions is up 155% year over year.

And we feel like we're in really good shape. We've spent a lot of time building the foundation and I think this is going to be a year, where we have some good success because as I mentioned at the top our performance and U.S. value and multi asset has really been exceptional is one of the better years, we've ever had.

Great.

So the question and congratulations on the outlook.

Thanks, Mike we appreciate the question.

Thank you once again, ladies and gentlemen, happy question at this time. Please press Star then one.

And I'm not showing any further questions in the queue at this time I'd like to hand that program back to management for any further remarks.

Thank you Jonathan.

Thanks, everyone for your time, if you have any further questions. Please feel free to call me Rytary and visit Westwood group Dot com for more information. Thanks again.

Thank you ladies and gentlemen few participation in today's conference. This does include the program you may now disconnect good day.

Okay.

[music].