Westwood Holdings Group, Inc. (WHG) Earnings Call Transcript

Thank you. Good day and thank you for standing by. Welcome to the second quarter 2026 Westwood Holdings Group Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentations, there will be a question and answer session. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference call is being recorded. I would now like to hand the conference over to your first speaker today, John.

manager, managing director, head of legal and compliance. Thank you and welcome to our second quarter 2026 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, 2026. 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.

Good afternoon and thanks for joining us for Westwood's second quarter 2026 earnings call. I'm very pleased to share our results and key developments from the past quarter as well as our outlook for the remainder of the year. Before we dive into the details, I'd like to highlight several key points from the quarter. Our ETF platform surpassed $400 million in assets in July. We closed $147 million in new private capital commitments. The multi-asset and wealth team strategies posted strong long-term rankings, and we're celebrating our 24th anniversary as a public company. After a shaky start, equity markets rebounded sharply in the second quarter, with the S&P 500 gaining more than 15 percent, its second strongest quarterly advance since 2020, and the Russell 2000 rose more than 21 percent. MegaCap technology and AI infrastructure stocks led much of the advance in April and May, though market leadership broadened out later on to include industrials, healthcare, and financials. A remarkably resilient economy with a 2.1% GDP growth and historically low unemployment rate bolstered investor sentiment, even as inflation, driven largely by rising energy prices tied to the police conflict, reemerged as a key concern and pushed bond yields higher. Turning to long-term performance, our results over the three-year and longer periods are mixed across strategies, with some notable bright spots. Within our U.S. value strategies, results have been mixed over longer periods and softer over recent periods. However, our SMTCAP strategy ranked in the top third over three and five year periods among institutional peers. since inception performance and peer rankings remain intact for large cap, mid cap, and small cap. Our multi-asset strategies have delivered strong long-term results, with more than half of them ranking in the top third or better against peers over three-year and longer periods. Multi-asset income scores 12% or better peer rankings for trailing three- and five-year periods, and in the top 1% for seven- and ten-year periods. And our income... income opportunity strategy ranked in the top third among peers over multiple periods. MLP-focused strategies have done particularly well, with MLP SMA and MLP in Energy Infrastructure achieving top half or better peer rankings over longer-term periods, including a top decile ranking since inception for MLP SMA. Wealth Team strategies have also performed well long term, with enhanced balance ranking in the top third over multiple periods, and thematic innovation and growth has achieved a top 13% ranking since inception. By U.S. values recent short-term underperformance, we believe in the durability of our investment approach, regardless of the macro backdrop. Valuations have risen from levels seen earlier in the year, but equity leadership continues to broaden beyond mega-cap technology into more defensive, quality-oriented sectors such as industrials, health care, and the like. healthcare, and financials. Whether corporate earnings and economic growth surprise to the upside or inflation concerns and geopolitical developments cause investors to reassess their appetite for risk, we believe our disciplines focus on high-quality businesses, those with strong free cash flow, recurring earnings, low leverage, and attractive active evaluations, positions us well to deliver strong long-term results. particularly true within the small cap space where limited sell side coverage continues to reward fundamental bottom-up stock selection Westwood experienced net outflows this quarter, notably from U.S. value institutional clients. However, these were anticipated as core equity allocations continued to evolve toward lower fee passive options such as ETFs. advantage of this shift in investor preference we have been strategically positioning the firm for a number of years by investing in three growth areas ETFs alternatives and managed investment solutions And I'm very pleased to report that we're seeing meaningful pipeline growth across all three of these areas. Our institutional channel, which includes our private capital business, generated $382 million in gross sales during the quarter, with net outflows of $1.3 billion. Top close were concentrated in our legacy large cap value business, which has been impacted by performance challenges and industry dynamics as investors increasingly shift to passive ETFs. Small cap value also experienced outflows. However, these were primarily related to a single client consolidating its small and mid cap allocations into a combined mid cap mandate. As a result, assets were redeemed from small cap value in June, and our client has already funded a significantly larger allocation our SMIDCAP strategy in July. Managed Investment Solutions clients funded new accounts during the quarter, which brings year-to-date flows to $350 million. Our institutional pipeline remains robust across value and energy strategies, with a significant increase in Managed Investment Solutions, where four new opportunities were added in the second quarter alone. Private Capital completed a very successful co-investment fundraising effort of nearly $147 million for the quarter. Our private markets platform is attracting substantial interest across RIAs, family offices, and independent advisors, building on the brand recognition established through previous successful fundraisers. Looking ahead, our private capital platform is well positioned to attract institutional investors following recent enhancements to our personnel and organizational structure. We anticipate receiving continued mandates in SMIDCAP for defined contribution plans, driven by the largest national consultants, and we continue to have constructive conversations regarding our managed investment solutions capability with consultants and prospective investors. Our mutual fund and ETF flows for the quarter included $168 million in gross sales and net outflows of $165 million. All right. Our enhanced midstream, MDST, and enhanced energy income, WEEI ETFs, exceed $370 million in combined assets and continue to win approvals from major national platforms, while our enhanced income opportunity ETF, YLDW, is approaching $35 million in assets. assets and is also beginning to gain platform approvals. Midstream Income also posted a strong Morningstar peer ranking of 20th percentile for the period. Energy and real asset strategies actually led the firm in both gross and net sales during the quarter. Our ETF suite continues to gain momentum, and we expect our platform availability to increase as assets grow. Finally, our broad mark strategies are also gaining momentum as investors refocus on risk mitigation amid increased market volatility. Our wealth management team continues to build momentum as we strengthen our multifamily office platform. Client engagement remained elevated through the first half of this year, especially over the summer months, which reflects ongoing market uncertainty and continued demand for proactive planning and thoughtful portfolio oversight. Our advisors have maintained a disciplined, long-term approach to asset allocation, which has helped reinforce client confidence during periods of volatility, while conversations with clients increasingly focus on holistic planning, including tax positioning, liquidity management, and coordination with trust structures, areas where our integrated models are more efficient. continues to resonate. Operationally, we made further progress on process standardization and cross-functional alignment across our advisory, client service, and trust teams, improving scalability while enhancing the overall client experience. We're also evaluating our technology to ensure that we have a solid foundation going forward Business activity remains steady, and we continue to prioritize high-quality relationships with long-term potential. Looking ahead, we're focused on refining internal processes, enhancing reporting and communication, and strengthening collaboration to support sustainable growth. We've just entered into a strategic partnership with ETF Capital Markets Advisors, led by Nicholas Phillips, to provide dedicated capital markets consulting in support of our growing ETF platform. Nicholas has more than 25 years of ETF market making and capital markets experience and will advise on trading, execution, and market structure across our ETF lineup, including our Enhanced Income Series and WEBS-defined volatility ETFs with the goal of enhancing liquidity, pricing, and execution quality for our investors. We are very pleased with our success with our enhanced income series ETFs. They have received tremendous interest from advisors and investors. We are naturally very excited that our ETF platform has just crossed 400 million in assets under management. Our ETFs offer investors attractive income, combining dividend yield and options premiums from covered calls, while also offering the potential for asset appreciation. Our latest addition, the Enhanced Income Opportunity ETF, YLDW, which we launched at the end of 2025, offers investors current income and capital appreciation from a variety of asset classes and has gotten off to a great start. We currently have three ETFs in the Enhanced Income Series. The next edition of the series, the Westwood Salient Enhanced Power and Infrastructure ETF, or PWRX, Power X, will be truly historic in that it will be the first new ETF to lift on the Texas Stock Exchange in mid-September. We believe that the TXSE, located right in our own backyard in Dallas, Texas, is the ideal exchange to list our funds. Texas is widely regarded as the energy capital of the world, and our PWRX investment team located in Houston has decades of combined experience in managing investments along the energy value chain and deep relationships with key players in the energy space. Texas is on track to be one of the largest data center hubs in the United States due to its vast land availability, favorable tax incentives, and robust energy infrastructure. We have a front row seat to witness the convergence of the explosive growth in AI data center capacity and the resulting tailwinds for power demand. Westwood has deep roots in Texas, and many of the PowerX ETF holdings will be companies we know well and in which we have invested in for years. The opportunity to bring the PowerX ETF to market with our partners at TechSeed was a logical choice. Texi has built its exchange from the ground up, and they've developed an industry-leading lead market maker program offering significant incentives that will lead to excellent market quality, liquidity, and better execution outcomes for investors in PWRX. Our private capital business has closed $147 million in new commitments across our energy secondaries co-investment platform. We've added four new members to our Energy Secondaries investment team and three members to our Private Capital Operations team, and we continue to build out our private capital infrastructure, including new vendor and technology relationships. Finally, this quarter marks Westwood's 24th anniversary as a publicly traded company. We're very grateful to our shareholders, many of whom have supported us for years, for their continued confidence and partnership as we build for the future. To summarize, Westwood continued to execute against our long-term strategy, growing our ETF and private capital platforms, while our multi-asset and wealth team strategies posted strong results. While we saw outflows in select institutional value strategies, our pipeline across managed investment solutions, energy, and selected value strategies remains robust. As we mark our 24th anniversary as a public company, we remain confident that we have positioned Westwood well to deliver long-term value for our clients and shareholders. Thank you for your continued support and confidence in Westwood. I'll now turn the call over to our CFO, Terry Forbes. Thanks Brian and good afternoon everyone. Today we reported total revenues of 25.3 million for the second quarter of 2026 compared to 25 million in the first quarter and 23.1 million in the prior year's second quarter. Second quarter revenues were consistent with the first quarter second quarter were higher than last year's second quarter due to continued growth in our business, particularly from our ETF and private energy secondaries funds. Our second quarter income of 1.5 million or 17 cents per share compared with 0.8 million or 9 cents per share in the first quarter on lower compensation expenses offset by higher income taxes and first quarter recognition of gains from our investment in a private bank. non-GAAP economic earnings were $3 million or $0.33 per share in the current quarter versus $2.8 million or $0.31 per share in the first quarter. Our second quarter income of $1.5 million, or $0.17 per share, compared favorably to last year's second quarter of $1 million, or $0.12 per share, due to higher revenues partially offset by higher compensation and professional services expenses and higher income taxes. Economic earnings for the quarter were $3 million, or $0.33. cents per share compared with 2.8 million or 32 cents per share in the second quarter of 2025. Firmwide assets under management and advisement totaled $17.9 billion at quarter end, consisting of assets under management of $17 billion and assets under advisement of $1 billion. Assets under management consisted of institutional assets of $8.3 billion, or 49% of the total, wealth management assets of $4.5 billion, or 26% of the total, and mutual fund and ETF assets of $4.2 billion, or 25% of the total. Over the quarter, our assets under management experienced net outflows of $1.6 billion and market appreciation of $1.2 billion. And our assets under advisement experienced market appreciation of $53 million and net outflows of $4 million. quarter end, we had cash and investments totaling 56.5 million. Happy to announce that our board of directors approved a regular cash dividend of 15 cents per common share, payable on October 1st, 2026 to stockholders of record on September 1st, 2026. 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 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.

Thank you. At this time we will conduct the question and answer session. As a reminder to ask a question you will need to press star 1 1 on your telephone and wait for your name to be announced. To withdraw your question please press star 1 1 again. Please stand by while we compile the Q&A roster. Our first question is from Max Sykes of Gabelli Funds. Your line is now open. afternoon and congrats on the product innovation. Thanks, Mac.

I guess I'd like to get your thoughts a little bit more on the trend in your average fee rate for the firm. essentially flat, but you seem to be adding nicely to the ETF bucket, the private capital. So within that mix, it does seem to be additive to the overall fee rate. I was sort of curious as to where you could see that going and the lift there as the mix gets more beneficial. And then if you could just, for my second question, if you could just remind us, is there embedded carrier or performance fees in the secondaries business, and is there locks associated with that in 4Q, or is that kind of on a rolling basis? Thank you.

Great. Well, first of all, on the fees, We have traditionally had asset-based fees over the course of 41 years. And over the last couple of years, we have added both ETFs and private capital to the mix. And ETFs, in fact, carry a little bit higher fee. When you're building those businesses and building those ETFs, they have to get to a point of scale where you begin to realize that full fee. In the early years, you'll have some fee waivers in order to keep the expense ratio down. So I expect as we grow the ETF assets, that average fee will grow as well. As far as the private capital, we could not be more excited about where we are today. We are over half a billion in commitments now to our private capital funds. And those carry an annual management fee of at least 1% and as high is 1.5%. But more importantly, down the road, we hope to achieve carry, and the carry is 10% over an 8% PREF or 15% over an 8% PREF. And so far, the investments that we have made in our funds have performed exceptionally well. You have to remember that what we are buying in a lot of these funds are energy secondaries where we are trying to buy 70% LP interest and 30% GP-led and co-investments. at on average 70 cents on the dollar. So we're taking fresh capital and putting into something that is already at a nice discount. We have an energy team in Houston that has been managing energy assets for two decades. So they're able to evaluate quickly the opportunities that are to us and we have had some great success in the investments that we've chosen thus far and we're very much excited about the upcoming years in terms of carry.