Westwood Holdings Group, Inc. (NYSE:WHG) Q4 2024 Earnings Call Transcript

Westwood Holdings Group, Inc. (NYSE:WHG) Q4 2024 Earnings Call Transcript February 12, 2025

Operator: Good day and thank you for standing by. Welcome to the 4Q 2024 Westwood Holdings Group Inc. Earnings Conference Call. At this time, all participants are in a listen-only mode. Please be advised that today’s conference is being recorded. After the speaker’s presentation, there will be a question-and-answer session. [Operator Instructions]. I would now like to hand the conference over to your speaker today, Brian Casey, CEO.

Unidentified Company Representative: Thank you and welcome to our fourth quarter 2024 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-K for the year ended December 31, 2024 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 joining us for Westwood’s fourth quarter 2024 earnings call. I’m very pleased to share our results and key developments from the past quarter, and I’ll also comment about our outlook for the year ahead. Today you’ll hear about our distribution channel progress. Our institutional team won and funded eight mandates totaling over $600 million last year, a 100% increase over the prior year. Despite some headwinds, we were able to take advantage of some positive trends across several channels. Our SMidCap strategies dominated with new institutional flows, and we also enjoyed growth in our SMid CIT vehicle. ETF success, one of our greatest strategic successes in 2024, was our entry into the fast-growing ETF market with the launch of two active ETFs, leveraging our expertise in the midstream and broad energy space.

As part of the launch of these first two funds, we built out a world-class ETF ecosystem developing new strategic relationships for Westwood that will support additional ETF launches in the future as we continue to pursue innovation and white spaces in our ETF marketplace. Our innovative ETF initiatives continued their initial momentum with Westwood Salient Enhanced Midstream Income ETF, ticker MDST, reaching 73 million in assets by year-end amid strong trading volumes. We also expanded our ETF platform late last year with two new products offered through our Westwood-Engineered Beta, known as WEBs, partnership with Ben Fulton, a well-known pioneer of the ETF industry. Strategic growth initiatives. We’ve completed the build-out for our managed investment solutions platform, and promising client conversations are underway.

Q&A Session

Our Energy Secondaries Fund is performing as expected, and we continue to seek opportunities to meet investor demand for these types of investments. A few comments on the market’s performance on our investment results. The stock market closed out a truly historic year, with the S&P 500 gaining 25%. When paired with the prior year’s return, these two consecutive years marked the best performances by the index since 1997-1998 period. The Federal Reserve began cutting rates in the third quarter and reduced the Fed funds rate by 100 basis points through year-end. Market interest rates moved higher on continuing inflation concerns, however, with the 10-year Treasury yield rising from 3.74% to 4.58% during the last quarter. With heightened risk appetite, growth stocks significantly outperform value stocks across all market caps.

The Russell 1000 Growth Index gained more than 33% for the year, while the Russell 1000 value only rose about 14%. The Magnificent Seven stocks, consisting mostly of mega-cap tech stocks, dominated, accounting for 50% of the S&P 500’s 2024 stellar performance. As for our investment performance, we were behind the benchmark for most of our U.S. value products, but 80% of our value strategies are ahead of their benchmarks over trailing three-year periods, and three-quarters of them, with track records extending into five years, are leading their benchmarks. Income opportunity, our flagship multi-asset strategy, executed a terrific turnaround and finished ranked in the top quartile for trailing one, five, seven, and ten-year and since inception periods in its Morningstar category.

Its sister strategy, multi-asset income, also performed strongly last year, earning a five-star Morningstar rating in its conservative allocation category. Our real estate income strategy gained ground after a slow start, finishing ahead of its benchmark and now ranks in the 29th percentile in its Morningstar universe over trailing three years. Within the energy sector, our MLP separately managed account strategy remains ahead of the Alerian Midstream Index across all trailing periods. Looking ahead, we subscribe to a cautiously optimistic outlook. With benign credit conditions, patches of attractive equity valuations, and an accommodative federal policy, we believe our strategies will continue to perform well. As the post-COVID bull market ages, investors may begin to shift focus from the risk-on trade toward quality companies, an environment in which our investment style historically excels.

Moving to distribution, I’m extremely pleased to report that our institutional team exceeded its ambitious $1 billion annual growth sales goal for 2024, meeting and beating a 100% year-over-year challenge. We won and funded eight mandates, primarily in SMidCap, with new clients totaling over $600 million last year. The remaining flows were gained from existing clients. In the intermediary channel, despite net outflows of $229 million, there were some notable bright spots. Our Westwood Salient Enhanced Midstream Income ETF, ticker symbol MDST, was launched late last May and quickly became a market leader in reaching $73 million in assets by year-end, far exceeding our first-year target. In addition, several strategies achieved positive net flows for the year, including our MLP and Energy Infrastructure Mutual Fund and small-cap UMA offerings.

In wealth management, we experienced an uptick in net flows during the fourth quarter, and this positive momentum continued into December. As you know, I have reassumed executive-level responsibility for this division, leveraging my direct experience in managing Westwood Wealth from 1996 to 2013. We strengthened our team with key hires in the latter half of the year, which have been very well received by our clients. It is nice to see new advisors already showing positive results with several new significant client relationships. Looking ahead, we’re focused on strengthening our core infrastructure while pursuing strategic growth. On the technology front, we successfully launched, on time, our new client portal at year-end. This new platform offers a streamlined, intuitive interface for clients to access investment information, and we’ll be rolling out further enhancements this quarter.

To further enhance our client service capabilities, we implemented a comprehensive client relationship management system last quarter. This system will provide our advisors and client service teams with enhanced tools to maintain detailed client information and deliver even more personalized service. We expect to complete this rollout this quarter. And while technology is important, we’re also committed to maintaining the personal relationships that distinguish Westwood’s client service, and we will continue to invest in our talented team of professionals to enhance our client-facing capabilities. We remain committed to providing unique insights for our clients by hosting exclusive events, including intimate gatherings held last year in Houston and Dallas, featuring expert analysis of the election and markets.

We were very pleased with the turnout at these events, which reinforces the value of providing our clients with direct access to distinguished market experts. To wrap up, here are a few of Westwood’s significant highlights from last year. We marked the two-year anniversary of our acquisition of Salient Partners’ asset management business, and this strategic combination continues to exceed expectations. Our enhanced capabilities in energy and real estate income strategies, both particularly relevant in today’s market environment, have extended our product reach and improved our average fee by 17%. A clear shift in investor sentiment last year led to positive net flows into our energy strategies. Building on this success, we launched two new ETFs, Westwood Salient Enhanced Midstream Income ETF, MDST, and Westwood Salient Enhanced Energy Income ETF, WEEI, leveraging the deep expertise of our combined teams.

Strong fundamentals in the energy sector underpin our positive outlook for these strategies. Our Westwood Energy Secondaries Fund One is performing in line with expectations, and we are exploring additional investment vehicles to launch in this space. Also, the real estate income strategy acquired from Salient has proven to be an excellent complement to our platform, offering our clients alternative sources of income, inflation protection through real asset exposure, and portfolio diversification benefits through low correlations to traditional asset classes. The success of the Salient acquisition demonstrates our ability to identify and integrate complementary businesses that enhance our value proposition to clients while driving growth for our shareholders.

The Managed Investment Solutions Initiative has completed its initial portfolio management system build-out, and we have hosted a national consulting firm for an on-site review. We have several promising conversations underway that should result in onboarding our first MIS client during the first half of this year. Finally, we have just announced a partnership with ETF veteran Ben Fulton to scale Westwood’s ETF platform, offering investors and advisors new, highly innovative strategies. Westwood formed the partnership by investing in a new company, WEBs Investments Incorporated. WEBs, which stands for Westwood Engineered Beta, just launched its first two ETFs, utilizing its proprietary defined volatility strategy. The WEBs defined volatility SPY ETF, ticker symbol DVSP, and the WEBs defined volatility QQQ ETF, ticker symbol DVQQ, are designed to provide a more stable investment experience across market conditions using a dynamic rules-based strategy to adjust exposure to equity markets based on real-time volatility.

The formation of WEBs and the launch of these two ETFs have received considerable coverage in ETF trade publications. Westwood’s intermediary sales team is leading a collaborative effort with WEBs to educate financial advisors and ETF strategists about these new, highly innovative ETFs. We are very excited about the potential of this new partnership that could provide a truly scaled ETF platform for Westwood. We’re very excited about our expanded ETF initiative and look forward to providing you with further updates on WEBs progress going forward. We’ve also continued our commitment to return capital to shareholders, buying back 108,225 shares for approximately 1.34 million during the past year. I’m also proud to note that Westwood was named a Pensions and Investments Best Places to Work in Money Management for the 10th year, reflecting our ongoing commitment to culture, values, and investment discipline.

Summing up, we see significant opportunities across our business. Our traditional strategies are improving, our institutional pipeline remains robust, and we are particularly excited about the potential of our expanded ETF platform and our new managed investment solutions capabilities. The energy space continues to present attractive opportunities, and we are well positioned with our full suite of products across various vehicles. Thank you for your continued interest in Westwood. I will now turn the call over to Terry Forbes, our CFO.

Terry Forbes: Thanks, Brian, and good afternoon, everyone. Today, we reported total revenues of $25.6 million for the fourth quarter of 2024, compared to $23.7 million in the third quarter and $23.2 million in the prior year’s fourth quarter. Revenues increased from the third quarter and 2023’s fourth quarter, primarily due to higher average assets under management and higher performance fees. For fiscal 2024, total revenues of $94.7 million compared to $89.8 million in 2023, also driven by higher average assets under management. Our fourth quarter comprehensive income of $2.1 million, or $0.24 per share, compared to the third quarter’s $0.1 million, or $0.01 per share, reflecting higher revenues and changes in the fair value of contingent consideration, partially offset by higher income taxes.

Non-GAAP economic earnings are $3.4 million, or $0.39 per share, in the current quarter versus $1.1 million, or $0.13 per share, in the third quarter. Our fourth quarter comprehensive income of $2.1 million, or $0.24 per share, compared to the prior year’s fourth quarter net loss of $2.6 million, or $0.32 per share, due to higher revenues offset by changes in the fair value of contingent consideration and higher employee expenses, driven by performance-related incentive compensation. Economic earnings are $3.4 million, or $0.39 per share, compared with $2.8 million, or $0.34 per share, in the fourth quarter of 2023. Our 2024 comprehensive income of $2.2 million, compared to 2023 is $9.5 million, on higher revenues and lower income taxes, offset by changes in the fair value of contingent consideration, higher employee expenses, driven by higher performance-related incentive compensation, and life insurance proceeds received in 2023.

Economic earnings for the year were $7 million, or $0.82 per share, compared with $18.3 million, or $2.26 per share, in 2023. Firmwide assets under management and advisement totaled $17.6 billion at quarter-end, consisting of assets under management of $16.6 billion and assets under advisement of $1 billion. Assets under management consisted of institutional assets of $8.3 billion, or 50% of the total, wealth management assets of $4.4 billion, or 26% of the total, and mutual fund assets of $3.9 billion, or 24% of the total. Over the year, our assets under management experienced net outflows of $0.8 billion and market appreciation of $1.9 billion, and our assets under advisement experienced net outflows of $211 million and market appreciation of $92 million.

Our financial position continues to be very solid, with cash and liquid investments at quarter-end totaling $44.6 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 April 1, 2025, to stockholders of record on March 3, 2025. That brings our prepared comments to a close. We encourage you to review our investor presentation. We have posted on our website reflecting quarterly highlights, as well as a discussion of our business, product development, and longer-term trends and revenues and earnings. We thank you for your interest in our company, and we’ll open the line to questions.

Operator:

Brian Casey : Well, great. Well, thanks for taking time with us today. We’re excited about our new business pipeline and our growing ETF platform and really landing our first client for our managed investment solutions team. Please let us know if you have further questions. You can reach out to me or Terry at any time or visit our website, westwoodgroup.com. Have a great afternoon.

Operator: Thank you. This concludes the conference. Thank you for your participation. You may now disconnect.