Westwood Group [WHG] Conference call transcript for 2022 q2
2022-07-27 21:57:05
Fiscal: 2022 q2
Operator: Hello. Thank you for standing by and welcome to Westwood Holdings Group, Inc. Second Quarter 2022 Earnings Conference Call. Please be advised that todayâs conference is being recorded. I would now like to hand the conference over to your speaker today, Julie Gerron, General Counsel. Please go ahead.
Julie Gerron: Thank you. Hello, everyone and welcome to our second quarter 2022 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 June 30, 2022 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 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 thanks for listening to our quarterly earnings call. Last quarter, I shared with you the results from our Multi-Asset and distribution teams as well as our successes in expanding our wealth management business. This month, we are celebrating an important milestone, our 20th anniversary as a publicly traded company. While our recent stock performance has been disappointing to us all, we are enormously proud to have delivered over $258 million in dividends to our shareholders over the past two decades. We feel good about our position as a firm and look forward to integrating the Salient team and building our business together in the years ahead. There were several notable items from our investment, distribution and business teams to highlight this quarter. We announced an agreement to acquire Salient Partnersâ asset management business, which delivers a unique, complementary product set along with highly accretive earnings to Westwood. Our U.S. Value team outperformed their benchmarks in every product strategy during a difficult down market. Our Multi-Asset Systematic SmallCap Growth product continues to pose strong relative returns, and our Alternative Income strategy ranked first percentile in its Morningstar category for the quarter. The first half of this year witnessed the worst-performing stock and bond market in over 50 years as markets factored in accelerating inflation, rising interest rates and record Fed tightening amid continuing geopolitical tensions. All domestic asset classes declined, and the damage was not confined solely to equities as fixed income securities experienced rising yields and lower prices. Against this backdrop, I am pleased to report that all our U.S. Value strategies outperformed in this very difficult quarter. Our SmallCap strategy bounced back from last quarterâs underperformance, beating the Russell 2000 Value Index by almost 390 basis points. Among its institutional peers, SmallCap Value ranks in the top quartile in the SmallCap Value universe. SMidCap also showed improvement versus the Russell 2500 Value benchmark and finished the quarter ahead by 125 basis points and beat the trailing 1 year by almost 130 basis points. In LargeCap, our team beat the Russell 1000 Value Index by over 100 basis points. LargeCap has outperformed its benchmark year-to-date and over all trailing time periods. Among institutional peers in the eVestment LargeCap Value universe, LargeCap ranks in the 37th percentile for the trailing 1 year ended June 30. To wrap up, our AllCap and MidCap strategies also beat their benchmarks this quarter, outperforming the Russell 3000 Value by 150 basis points and Russell MidCap Value by 304 basis points respectively. AllCap ranked in the top third of institutional peers in the eVestment AllCap Value universe for the quarter and MidCap Value ranked in the 29th percentile among its institutional MidCap Value peers. Three Multi-Asset strategies, Total Return, Income Opportunity and High Income, saw the positive effects of the first quarterâs equity overweight shift into reverse. Equity markets were negatively impacted by PE compression, and fixed income markets were hurt by changes in interest rates and the yield curve. Our largest Multi-Asset strategy, Income Opportunity, finished 170 basis points behind its benchmark, which consists of 40% S&P 500 and 60% Bloomberg Barclays Aggregate Bond Index. WHGIX, our Income Opportunity mutual fund, retained its strong 4-star Morningstar rating in the 30% to 50% equity category through midyear with a 28th percentile ranking for trailing 3 years, 30th percentile for trailing 5 years and 19th percentile for trailing 7 and 10 years. Our Total Return mutual fund, WLVIX, and High Income mutual fund, WHGHX, trailed their blended benchmarks this quarter by 101 basis points and 247 basis points, respectively, due in part to an overweight in equities. Our Alternative Income mutual fund, ticker WMNIX, declined 2.3% on an absolute basis for the quarter. This strategy invests a meaningful portion of its funds and convertible securities, and the asset class saw unusual large draw-downs this quarter. Despite these headwinds, Alternative Income mutual fund outperformed its peers and finished in the first percentile for the quarter and 10th percentile for the year-to-date and trailing 1-year period in Morningstarâs relative value arbitrage category. Credit Opportunities, which we launched 2 years ago, outperformed the ICE BofA High Yield Index by approximately 284 basis points for the quarter. Credit spreads remained cheap, and our team is finding attractive risk return opportunities throughout the high-yield universe. Lastly, our systematic strategies outperformed their respective benchmarks. Our Systematic LargeCap Growth strategy outperformed the Russell 1000 Growth by 284 basis points this quarter and is ahead year-to-date. For the quarter, Systematic SmallCap Growth outperformed the Russell 2000 Growth by nearly 600 basis points. Our SmallCap Growth mutual fund, WSCIX, is certainly off to a great start, achieving a seventh percentile ranking this quarter relative to its Morningstar SmallCap Growth peers. And it landed in the third percentile year-to-date. Systematic SmallCap Growth and Credit Opportunities have both reached their 2-year anniversaries. We plan to offer these strategies to institutional prospects soon, and we are excited for the future of them both. The current environment lends itself well to our philosophy of aligning bottom-up fundamental security selection and top-down macroeconomic views. Our approach strives to generate attractive total returns while maintaining lower volatility, a key factor given the uncertainty in the markets. By investing across a diversified allocation of asset classes and risk exposures, we seek to target the most efficient alpha generation in the most attractive market areas, allocating risk between idiosyncratic and systematic risks. In our private wealth strategies, performance was mixed this past quarter. Dividend Select and Select Equity outperformed the Russell 1000 Value and Russell 3000 indices by 242 basis points and 284 basis points, respectively, this quarter and are ahead year-to-date and over the trailing 1-year time period. Dividend Select, which focuses on high-quality dividend-paying domestic securities, recently celebrated its third anniversary and remains ahead of the benchmark since inception. Its dividend yield is over 70% higher than the S&P 500âs dividend yield and continues to be an attractive alternative for high net worth clients seeking income and long-term capital appreciation. High Alpha lagged its benchmark as growth stocks have been under pressure. Innovation and disruption remain major investment themes in High Alpha as capital will likely continue to be invested in industries such as alternative energy and in emerging technologies such as blockchain, AI and machine learning. Weâre excited about the outlook for High Alpha as our team is finding many investment opportunities in these broad-based trends. Shifting to distribution, market performance was the largest driver of lower AUM this quarter. But on a positive note, within our distribution teams, we saw strong client retention. And given our improved performance in many products, we remain positioned to compete for new assets. Total assets under management this quarter included inflows of approximately $152 million, offset by outflows totaling $278 million, which net to $125 million in outflows. In our equity strategies, SMidCap had net positive flows generated by our institutional team. Our SmallCap and SMidCap strategies also funded two new consultant-driven accounts during the quarter. While client flows in the institutional group were negative, all flows were driven by client rebalances and participant-directed DC plan changes rather than client losses. In our intermediary channel, our best gross sales came in through SmallCap, Income Opportunity and Alternative Income. Our intermediary team continues to focus on client retention across all of our strategies. Within the realm of U.S. Value, the most promising prospects for intermediary sales look to be in SmallCap Value, where we detect a potential rebound in demand if the asset class and our strategy perform well during the second half. Our current pipeline has selected wins awaiting funding in the SmallCap and SMidCap strategies with some promising prospects in early review stages. Our institutional team is focused on leveraging the opportunities provided by our attractive U.S. Value strategies as well as defined contribution replacement searches, which continue to generate new business activity. Newly launched strategies such as SmallCap Growth, along with expanding consultant approvals, form the basis of the key growth initiatives for the institutional distribution team in 2022. Turning to wealth management, our teams produced inflows of approximately $190 million, offset by outflows of about $286 million. Inflows were driven largely by new clients, additions to existing client accounts, including sales proceeds and retirement plan contributions, while outflows primarily reflected federal tax payment, one asset transfer to support a line of credit and a few client losses. Our client retention year-to-date is running close to 97%. The first half of each year tends to be more challenging due to tax payments made by our high net worth clients, and we expect to see better flows in the second half of the year. Our wealth teamâs optimism is based on a strong pipeline with several large opportunities in the wings. Our advisers have invested a lot of time with CPAs and other centers of influence partners to deepen existing ties and form new relationships. We recently consolidated our Dallas and Houston offices under the leadership of Leah Bennett after running the two teams separately for several years. Consolidating our wealth teams in this way strengthens our ability to serve as a family office for clients across the State of Texas, allows us to provide a more proactive, expanded planning service to clients and to convey a unified marketing message. As the largest independent trust company in Texas, our scale makes us attractive to high net worth individuals, especially in the $10 million to $50 million range. Our experience is that clients want a more holistic and customized approach that banks with less flexibility or smaller firms with limited resources find difficult or impossible to provide. Texas is a very attractive market as people continue to move into the state. And in fact, Dallas is one of the top 10 fastest-growing markets in the world for high net worth individuals. We believe these exciting changes will enable us to grow faster while providing unparalleled service to our clients. We were extremely pleased to announce an agreement to acquire the asset management business of Salient Partners, which has offices in Houston and San Francisco. Salient is a well-known, highly respected asset manager focused on energy infrastructure, real estate and tactical allocation strategies. As I mentioned earlier, this acquisition will be highly accretive for Westwood. Salientâs team is a great cultural fit, and their products are scalable as we leverage the capabilities of our combined distribution teams. Our Multi-Asset team will benefit from Salientâs enhanced energy, real estate and tactical asset allocation strengths through their affiliate, which is called Broadmark, and we also foresee many opportunities to collaborate on new product offerings. An added plus is that the Salient suite of products looks very timely, given global energy supply shortages, commodity markets near all-time highs and increasing inflationary pressures. We plan to consolidate Salientâs Houston team adjacent to our current Houston office space. And we will consolidate the Broadmark tactical equity team and real estate team into shared space in San Francisco. Deal-related costs for the second quarter totaled $731,000, and the transaction is targeted for close in the fourth quarter. We were pleased to announce the promotion of Fabian Gomez from Chief Operating Officer to President of Westwood Holdings Group. Fabian will leverage his broad-based asset management experience in supervising our enterprise support services as well as our distribution teams. Porter Montgomery was promoted to replace Fabian as Westwoodâs Chief Operating Officer, where he will bring his strong operational skills to the oversight of our investment operations team supporting our wealth and institutional businesses. As for me, Iâll remain as CEO, and as a result of this reorganization, Iâll be able to devote more time to the successful integration of Salient Partners and other M&A opportunities that may come down the road. We clearly have plenty of exciting opportunities looking forward, but itâs also fun from time to time to reflect on where weâve come from. Itâs been 20 years since we began trading on the NYSE. For sure, weâve had to navigate many challenges, but Iâm proud to say that weâve never strayed from our investment disciplines and that weâve continuously worked to improve our business model with significant and timely investments in people, product development and technology. We delivered over $0.25 billion of dividends to our shareholders over the past 2 decades, and weâd like to thank all who have supported us over the years, including our investors. We plan to continue building on that success, and look forward to integrating Salient and seizing more opportunities that lie ahead. Iâll now turn the call over to Terry Forbes, our CFO.
Terry Forbes: Thanks Brian and good afternoon, everyone. Today, we reported total revenues of $15.6 million for the second quarter of 2022 compared to $17.2 million for the first quarter and $17.5 million in the prior year second quarter. Revenues were lower than first quarter and last yearâs second quarter, reflecting lower average assets under management mainly attributable to the downdraft affecting markets worldwide. The second quarter net loss of $0.4 million or $0.05 per share compared unfavorably with net income of $0.1 million or $0.01 per share in the first quarter due to lower revenues, partially offset by lower expenses, primarily employee compensation and benefits. Non-GAAP economic earnings were $1.6 million or $0.20 per share in the current quarter versus $1.9 million or $0.24 per share in the first quarter. The second quarter net loss of $0.4 million or $0.05 per share declined from last yearâs second quarter net income of $1 million or $0.12 per share, primarily on lower revenues, partially offset by lower expenses, primarily employee compensation and benefits. Economic earnings for the quarter were $1.6 million or $0.20 per share compared with $2.8 million or $0.35 per share in the second quarter of 2021. Firm-wide assets under management totaled $12.1 billion at quarter end and consisted of institutional assets of $5.9 billion or 49% of the total, wealth management assets of $3.7 billion or 30% of the total and mutual fund assets of $2.6 billion or 21% of the total. Over the quarter, we experienced market depreciation of $1.5 billion and net outflows of $183 million. Our financial position continues to be very solid with cash and short-term investments at quarter end totaling $73.6 million and a debt-free balance sheet. I am happy to announce that our Board of Directors approved a regular cash dividend of $0.15 per common share payable on October 1, 2022, to stockholders of record on September 2, 2022. 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 will open the line to questions.
Operator: Our first question comes from Macrae Sykes with Gabelli. You may proceed with your question.
Macrae Sykes: Good afternoon and congratulations to the firm and on Adrianâs article in Barronâs. Quite impressive.
Brian Casey: Thanks Mac.
Macrae Sykes: I have two questions, and I will just ask them so itâs easier, both related to Salient. So, first, maybe you could just provide us some feedback that you have gotten since the announcement in May from, I guess the clients, consultants, perhaps the intermediary channel, just about your acquisition going forward on Salient. And then my second question is, once you close the deal, how should we think about ramping up the timing of realizing some of the revenue synergies from the combination? Thank you.
Brian Casey: Great. Okay. Well, first, I will say, Mac, that the Salient products include midstream energy, renewables, real estate and hedged equity with Broadmark in San Francisco. And they are highly complementary to our U.S. Value and Multi-Asset product line. And the feedback we have received so far has been very positive. We think that we can help them immediately in the institutional area, particularly in the midstream product area. They are one of the survivors that has a good long-term track record in a space that is increasingly getting flows. After a couple of rough years, it started to turn the other way with the realization that energy is 4% or 5% of the S&P now, whereas historically, itâs been more than double that. So, people are beginning to take a look and look at the long life return potential for the asset class. In the intermediary channel, we feel like expanding the team is going to help us in both the RIA and the broker-dealer channels. Salient has a really good footprint in the broker-dealer area, and we have a really strong presence in the RIA area. And I think putting the two together will really allow us to further attack the market. And to answer your second question, while we canât do anything about the stock and bond market decline, which hit all asset managers, our core business performed relatively well from a flow perspective and exceptionally well from a client retention perspective. We have not lost a single institutional client this year, and our client retention rate in the wealth business is 96%. We had some unusual non-operating expenses this quarter, as many of you saw, with BlackRock and some of the other asset managers that have reported recently. The total non-operating expense losses for us were $1.656 million, which consisted of $731,000 of deal expenses, seed money and deferred bonus pool mark-to-market write-downs of $623,000 and a fair value adjustment to our investment in Westwood Private Bank of $302,000. So, absent all of these non-operating expenses, we would have posted a much better quarter. And in the meantime, we continue to prune expenses, buyback stock and prepare for the highly accretive integration of Salient and their subsidiary, Broadmark. And as mentioned previously, Salient is a $30 million-plus run rate revenue business. And we modeled it at industry average margins of 25% to 35%, which would be $7.5 million to $10.5 million in earnings to the bottom line. So, nothing we have seen thus far in our due diligence has changed our view, but we have got more work to do towards closing.
Macrae Sykes: Great. Thank you.
Brian Casey: Thanks for your question.
Operator: And I am not showing any further questions at this time. I would now like to turn the call back over to Brian Casey for any further remarks.
Brian Casey: Well, thank you. We appreciate your interest in Westwood, and please follow-up, visit our website at westwoodgroup.com or call myself or Terry directly if you have any further questions. Thanks for your time.
Operator: Thank you. This concludes todayâs conference call. Thank you for participating. You may now disconnect.
