Welcome to the Diamond Hill Third Quarter 2017 Equity Portfolio Manager Conference Call. My name is Toled and I'll be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions] Please note that this conference is being recorded. I will now turn the call over to Kristen Sheffield. You may begin.

Thank you. Good afternoon, everyone and welcome to the Diamond Hill third quarter equity portfolio manager conference call. Thank you for joining us this afternoon. We'll begin today with a few firm updates. Then, I'll hand the call over to research analyst, Bobby Murphy, who will provide some comments about consolidation in the chemical industry and our portfolio holdings in that space. After Bobby's remarks, our equity portfolio managers will provide commentary on their respective funds, which will be followed by an opportunity to ask questions. As a reminder, we will host a separate fixed income portfolio manager call at 2 o'clock PM Eastern time tomorrow. Dial in information is available on the home page website and we hope you will join us. When we are ready for the Q&A session, the operator will provide instructions if you want to ask a question over the phone. You can also type a question on your screen at any time throughout the call. As always, we have a few important compliance statements to go over before we begin. The opinions expressed by portfolio managers are their own and are subject to change at any time as circumstances change. Any discussion of specific portfolio holdings will be as of September 30, 2017. Portfolio holdings are subject to change without notice and a complete list of portfolio holdings as of September 30, 2017 is available on our website. This next slide provides additional important disclosures. We encourage you to read these carefully at a later time. We wanted to take a moment to update you on some personnel additions. Jo Ann Quinif joined Diamond Hill in late August as Managing Director and Head of Institutional Sales. Prior to joining Diamond Hill, Jo Ann was Vice President and Director of Sales and Marketing at Weitz Investment Management in Omaha. She brings 17 years of sales, marketing and client service experience in the investment industry to this new role. We're excited to have her on board as our firm continues to grow. We also added two senior research associates to the investment team. Adam Xiao joined the technology, media and telecommunications team, specifically covering networking equipment and telecom. Chris Piel joined the consumer team, covering retail companies. Adam and Chris are great addition to our deep and talented research team. With that, I will hand the call over to Bobby Murphy. Bobby?

Thanks, Kristen. My name is Bobby Murphy and I'm a research analyst at Diamond Hill. I've been covering the chemical and paper and packaging industries at Diamond Hill for nearly the past five years. The primary responsibility of our research team is to develop business and industry expertise over time. This cumulative knowledge base coupled with our long-term intrinsic value philosophy should enable us to cover - uncover attractive investment opportunities. The focus of this industry perspective is consolidation in the chemicals industry. Over the last few years, a majority of the top 10 chemical firms have been involved in very large global merger or acquisition transactions. Why was this the case? First, for many of these companies, organic volume growth has been stubbornly low since the financial crisis in the 1% to 2% range, we've prevented these companies from achieving earnings growth at rates they had been accustomed to in the past. Second, the 2015-2016 timeframe was especially challenging for chemical companies with industrial indoor agriculture end market exposure, given cyclical headwinds from lower commodity prices and slower overall economic growth. Third, several acquisitions were at least aided in part by the low cost of debt financing available in the capital markets. Thus, these firms saw a greater certainty of earnings growth through combining with other large chemical firms and aiming to achieve significant potential cost synergies as you can see on the table. Later in this presentation, I will address the largest merger in the chemical industry between Dow and DuPont and potential investment opportunities that can result from the merger. Against the backdrop of industry consolidation, we believe that our holdings are well positioned to benefit from this trend. Our first holding, Axalta Coating Systems has already been a direct beneficiary of consolidation in the coatings industry.…

Thanks Bobbie. I will now hand the call over to Tom Schindler, Portfolio Manager Small Cap Funds. Tom?

Thanks Kristen. In the third quarter of 2017 the Diamond Hill Small Cap Fund Class I returned 4.93%, about 75 basis points less than the Russell 2000 Index and 18 basis points behind the Russell 2000 value index. Our performing sectors within the portfolio included industrials, consumer discretionary, and energy. The major underperformers were healthcare and information technology both from an allocation and security selection perspective. Looking at best and worst performers, in the third quarter, Avis was up about 40% and competitor Hertz 94%. This was despite both companies reporting second quarter results that were dismal, Hertz especially more so than Avis. However, each company spoke about pricing turning positive in the month of July and what many investors have taken as a sign of an inflection point for industry pricing. To say that there has been a hyper focus on North American pricing for these companies would be an understatement. Hertz especially appeared to take action to reduce fleet in order to more accurately reflect demand and set the stage for sustainable pricing in industry profits. The Hurricanes have also led to some strength in used car prices that had a minimum short-term results in the industry. Hurricanes were a very topical event in the third quarter, I'll let John Loesch discuss their impacts in greater detail, but the main remaining negative impact in the portfolio is on Puerto Rican bank Popular. Live Nation and Vail Resorts both continue to perform well fundamentally and have seen their stock prices follow. Cimarex continues to show well results above industry peers aided greatly by their Permian and mid-continent positions and has been among our favorites in the E&P sector. Looking at changes in sector allocations, the most noteworthy changes come from relative performance within the portfolio. For instance in industrials,…

Thank you, Tom. Next Chris Welch will provide comments on the small med and midcap portfolios. Chris?

Thanks Kristen. The small mid-cap strategy returns trail the benchmark the Russell 2500 Index in the third quarter. Primary reasons for that by over 200 basis points; primary reasons were stock selection in the technology and material sectors as well as our cash position that was partially offset by favorable stock selection in the energy sector. If you look at a longer time period five years and since inception, the portfolio is ahead of the benchmark. Moving on to the best and worst performers, I'll just highlight a couple of these, BorgWarner had a strong performance in the quarter. Investors got a little more comfortable with their positioning and their products in the growing electric vehicle field. And then NPR, homebuilder we saw continued home price appreciation and they were able to improve their gross margins. On the negative side, LifePoint Health, there was kind of - a lot of ups and downs, a lot of discussion of volatility with respect to discussions about healthcare reform. The actual changes in healthcare regulations were primarily related to the exchange business, which is a small part of what impacted LifePoint relative to healthcare reform. The impact to them was more on the Medicaid expansion side of things. So there hasn't really been a lot of change there. Though LifePoint also, their hospitals are primarily in rural areas. And rural areas have had a tougher economic go of things than some more urban areas. So that's been a bigger factor in some of the headwinds for them. And then finally three of the stocks on the worst performer list had some impact in the short term from the hurricanes, Newell Brands, Axalta as well as XL Group all had some impact from Hurricane through either rising raw material prices or for exile losses…

Thanks, Chris. Next, Chuck Bath will discuss results for the large-cap fund. Chuck?

Thank you, Kristen. The performance of the large-cap fund is shown on the exhibit, the shorter term performance numbers are about in line with the market, a market that's been very strong, but very happy with the long term numbers, not just in terms of the absolute returns, but the relative returns as well. In terms of the best performers in the portfolio, Tom talked about Alere. We owned Abbott Labs who was the acquirer of Alere. Now that Alere acquisition has been hanging over Abbott for quite some time, having that deal finalized and the issues behind us caused Abbott to perform better and that combined with our other acquisitions, St Jude, which had some early hiccup is now performing better. I think that's helped drive Abbott's - group Abbott's performance. Citigroup is really indicative of the strong performance in the entire financial services sector. Citi is our largest holding in that group and therefore representative of the strong performance of financials. In terms of BorgWarner, auto has just become very much out of favor, auto and auto related become very much out of favor in the first half of the year, so the stock was very expensive in this. As auto sales have held up and maybe even picked up a little bit, while BorgWarner stock has recovered as well. And I think it - most of the performance reflects the fact that stock is being too cheap early in the year. In terms of the worst performers, some of the consumer staples companies whose valuations may be a bit stretched, just as the auto stocks become a bit, we're a bit cheaper in the year, Kimberly-Clark and Philip Morris. I think the performance of those names is more indicative of the fact they started at a relatively…

Thanks, Chuck. Next, Rick Snowdon will give us an update on the All Cap Select fund. Rick?

Okay. Thanks, Kristen. For the third quarter of 2017, the All Cap Select Fund returned roughly 4.5%, which was in line with our benchmark, the Russell 3000. Relative to the benchmark, the best sectors for us were consumer discretionary and healthcare, both of those were due to positive stock selection. This was offset a bit by poor performance in energy, where we were underweight and in fact did well and materials were our single holding, had a tough quarter. On the next slide, you can see some the best and worst performers. A lot of them have been discussed already. So I'll just mention one on each side of the ledger. NVR, which is a very efficient home builder with a great balance sheet and great history of capital allocation, they continue to show strength and order growth and gross margins. So t hat's likely why they did well and on the negative side was United Continental, they offered weaker guidance sort of owing to three different things, hurricanes, really Harvey In particular, there are - some friction around the introduction of their basic economy class and then fair battles, I mean, it's pricing battles with ultra-low cost carriers like spirit in front here. The hurricane is obviously transitory. Basic economy, we think, should work itself out and if it doesn't, they can always ditch that effort. So either way, things get better. The ultra-low cost carrier fare battle I think is a bit more concerning. Although as United gets into sort of battle with those guys, it's a much bigger impact on the ultra-low cost carriers than it is on United, because it affects every seat on the low cost carriers, whereas it only affects a portion of the seats, a minority of the seats on the United flight.…

Thanks Rick. Next Chris Bingaman, Portfolio Manager for the Long-Short Fund will provide an update on recent results. Chris?

Thanks Kristen. In the third quarter the long-short fund was down about 0.5% versus 278 basis points for our blended 60/40 benchmark. The under-performance was primarily driven on the short side. On the long side it was underweight allocation in tech and selection and industrials. On the short side primarily selection and tech industrials and consumer discretionary. In terms of best and worst, on the top performers, best performs a lot of these have been mentioned many of them are weighty positions that have been in the portfolio for a number of years. The worst performers I think Jason is talking about Boeing and Stamps a bit next when he addresses research opportunities. I think John Loesch is going to discuss Popular a bit which has been mentioned. Arista Networks, a tech company that we've been short for a period of time is definitely surprised us in terms of the strength of their underlying fundamentals. We've reduced the position because of that. But we still maintain the positions, the stock trades are very, very lofty valuation. Again fundamentals have been very good surprises on the upside, but it is a hardware business very developed sophisticated both competitors and customers and I feel fairly confident that there will be a competitive response combined with the current valuation still provides an opportunity on the short side again. We have reduced it though because the thesis is much more evaluation based than fundamental based at this point. Moving along to sector allocations, not a lot of changed. Similar to last quarter a bit of a reduction in financials and healthcare, some of the weightier positions are a bit less compelling after a fairly strong year of appreciation. And on the short side, again we've mentioned this in the last couple of quarters reducing…

Thank you. Now Jason Downey will review the Research Opportunities Fund. Jason?

Thank you, Kristen. The Diamond Hill Research Opportunities Fund Class I shares declined 1.2% during the quarter trailing the 4.6% again for the Russell 3000 Index and a 3.5% gain for our secondary blended benchmark. This brings our trailing five-year return to 10.1% versus 14.2% for the Russell 3000 and 10.7% for the blended benchmark. The short side of the portfolio is the primary driver of the underperformance during the quarter. The largest attractors were short positions in the industrial and information technology sectors led by short positions at Boeing, Stamps.com and Arista. Chris has already discussed Arista, so I'll touch on Boeing and Stamps. During the quarter, Boeing reported strong earnings and issued guidance that implies cost saving measures in the supply chain are offsetting revenue and mix headwinds. Margins have remained resilient despite year-over-year revenue decline of close to 8% year to date. Boeing's most recent guidance implies further margin expansion in the aerospace unit despite mixed headwinds as they begin to reduce production of their high margin 777 aircraft. Further the company is articulating plans to aggressively grow their exposure to the higher margin aftermarket during the next several years. They've indicated they are targeting an incremental 35 billion in revenue. While they will face obstacles in achieving this goal and companies within the supply chain are taking action to be in a better competitive position to combat these efforts, it's a large potential opportunity and an additional risk to the thesis. As a result of these factors, we have lower conviction in our short thesis as it rests now more on evaluation than declining fundamentals and we trimmed the position size accordingly. Stamps.com [indiscernible] strong quarter and after they posted a blog in which the Chief Marketing Officer of the US Postal Service seemed to endorse…

Thanks Jason. And finally John Loesch will discuss the financial long-short fund. John?

Thanks Kristen. The financial long-short fund returned 2.97% in the third quarter, trailing the 3.96% return of our blended benchmark, modestly lower net exposure, the impact of hurricanes and several holdings, and new positive movement in the short book were the primary drivers of underperformance in the quarter. Over the five year the fund is modestly ahead of our blended benchmark. Looking closer at the performance of some individual holdings, Chuck discussed Citigroup earlier, so I'll highlight Atlas. Atlas Financial shares continue to appreciate after the company reported strong second quarter results with solid topline growth and margin performance. Additionally, the company reported stable results in their Michigan business for the second quarter in a row after reporting a large loss in Q4 2016. Another attractor as Tom Schindler mentioned, the hurricane impact on the portfolios both Popular and Validus were impacted by the hurricanes. Validus which is a reinsurer, sold out meaningfully in late August and early September on the back to back to back hits of hurricanes Harvey, Irma and Maria. Validus shares were down about 20% for the quarter through the first week of September, when it looked like Irma was going to hit Miami directly, which would have been an enormous insurance and humanitarian event. Due to the uncertainty at the time and increased negative tail risk of these events, we decided to not meaningfully increase our insurance holdings during this period, despite the sell-off. The shares have now recovered nearly all of that decline and the company recently reported estimated losses below market expectations. Going forward, we believe these events should have a modestly positive impact on insurance pricing. After narrowly escaping a direct hit from Irma, Hurricane Maria battered Puerto Rico, causing extensive damage and impacting the shares of Popular, the largest bank in…

Thanks, John. That concludes our prepared remarks. We're now ready to begin the question-and-answer segment of today's call.

[Operator Instructions]

While we wait for questions on the phone, we did get a question from the webcast and this is for Bobby. Bobby, do you believe that consolidation is likely to continue in the coatings industry?

Yes. Thanks for the question. The short answer is yes. I expect consolidation to continue. The coating industry remains very fragmented. For a perspective, the top four coatings firms control less than 50% of the global coatings market versus closer to 75% in industrial gases. The remainder of the coating industry are not controlled by these players, consist of greater than 5000 firms. So there's a long runway of consolidation left in many coatings industries and especially in industrial coatings which is an area the business Axalta has been growing rapidly. And as I mentioned earlier, PPG could decide to reengage Akzo Nobel and take care of discussions or Axalta itself could become an acquisition target at some point. Also, all of the CEOs of these companies have been fairly vocal on their expectations for industry consolidation to continue over the next several years. So as I said, there is a very high probability that this trend will continue.

Thanks, Bobby. Paula, do we have any questions on the phone?

We're showing no audio questions.

Okay. We have no questions on the webcast and no questions on the phone. So we'll go ahead and wrap up. As a reminder, for those of you who missed parts of the call or would like to listen to it again, we will post a replay on our website in a few days. Once again, thank you for joining us today and for your continued support of Diamond Hill. We look forward to speaking with you next quarter.

Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for participating and you may now disconnect.