Westwood Holdings Group Inc (WHG) 2007 Q2 法說會逐字稿

Thank you all for holding. Welcome to the Westwood Holdings Group second quarter 2007 earnings conference call. (OPERATOR INSTRUCTIONS) I would now like to turn the call over to your host for today's call. Please go ahead.

Good afternoon. Welcome to our second quarter earnings conference call. I'd like to start by reading our forward-looking statement disclaimer.

The following discussion will include forward-looking statements. These forward-looking statements 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 annual report on Form 10-K for the year ended December 31st, 2006, 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 cash earnings, cash earnings per share and cash expenses to the most comparable GAAP measures is included at the end of our press release, issued earlier today.

On the call today we have Susan Byrne, our Founder and Chief Investment Officer, Brian Casey, our President and Chief Executive Officer, and Bill Hardcastle, our Chief Financial Officer. I will now turn the call over to Brian Casey.

Thanks, Sylvia. I'll open with a few comments and then ask Bill Hardcastle, our CFO, to review our financials with you.

We sent a press release earlier, along with our earnings, regarding the addition of Bob McTeer to our board of directors. Bob was the former President of the Dallas Federal Reserve Bank, and is respected worldwide as an accomplished economist and independent thinker. We're all very excited to have someone of Bob's caliber on our board and we look forward to his contribution as a director.

Our product performance in the second quarter was excellent across the board. Those of you who have access to the commercially available asset management databases or the publicly available mutual funds databases, such as Morningstar, will see that we were well ahead of the benchmarks in the top of our respective peer groups. I want to thank all the members of our investment team for another outstanding quarter.

Our marketing teams have been very busy. We've had a record number of new business meetings. Several of our products have been approved by use by institutional consulting firms. We've also been successful in winning a number of finals presentations at several of our institutional products.

The WHG Funds continue to grow and we've successfully been added to several mutual fund platforms that utilize institutional mutual funds. We recently exhibited at the Morningstar conference and continue to follow up on those contacts and leads and we're seeing positive inflows into the WHG Funds and increasing interest overall.

Westwood Trust referrals have kept up at a steady pace as we continue to advocate our multi-style, enhanced balance strategy. Most of our Westwood Trust sub-advisors also performed well in the quarter. The overall enhanced balance strategy is comfortably ahead of its benchmark.

Earlier this month we celebrated our fifth year as a public company. We've accomplished a lot during this time and I wanted to share a few statistics with you on our first five years.

We created four new institutional products, reached a competitive three-year record for each of them and crossed $100 million in assets in three out of the four new products.

Our customer base has grown 70%. Westwood Trust crossed $1 billion and is now on its way to $2 billion in assets under management. We launched five new mutual funds and eight new co-mingled funds. We added a net total of nine new professionals.

Our market capitalization more than tripled and we paid out over $30 million in dividends. Now much of the $30 million in dividends came in the form a special dividend and we want to thank all of our long-term shareholders for their patience during our formative years.

Now that our ongoing quarterly dividend has reached an annualized level of $1 per share and our new products are gathering assets, the need for special dividends has greatly diminished. Our ongoing dividend yield is well ahead of the SNL asset manager index and the board will continue to review our dividend yields in the future.

To close my comments, I want to do so by congratulating Susan Byrne, who is pictured alongside Warren Buffett on the cover of "Smart Money" magazine's August issue where she was recognized as one of the world's greatest investors. Such accolades are not handed out lightly, but rather earned through years of hard work and producing strong results for clients. We're very proud of Susan and our entire investment team.

I'd like to turn the call over to Bill to review our financials. We'd be happy to take your questions at the conclusion of Bill's presentation.

Thanks, Brian. Good afternoon, everybody.

As you may have seen, we filed our earnings release and 10-Q this afternoon, right after the market closed. If you have any questions after reading the 10-Q, feel free to give me a call at the phone number listed on our website.

After I review our financial highlights for this quarter, I will review some slides with you that we have posted on the investor relations section of our website at www.westwoodgroup.com under the events and webcast link.

For the second quarter 2007, our total revenues were $8 million, a 20% increase compared to $6.6 million in the second quarter of 2006. Comparing second quarter revenue in 2006 versus second quarter-- I'm sorry, second quarter 2007 versus 2006, Westwood Management posted a 16% increase in advisory fees, primarily due to the market appreciation of assets under management and inflows from new clients, partially offset by the withdrawal of assets by certain clients.

Westwood Trust posted a 23% increase in trust fees, primarily due to cash flows from new and existing clients, as well as market appreciation of assets under management.

GAAP operating income for the second quarter of 2007 was $2.2 million, a 39% increase compared to $1.6 million for the second quarter of 2006. GAAP net income for the second quarter of 2007 was $1.5 million, a 49% increase compared to $1.0 million for the second quarter 2006. GAAP earnings per share was $0.24 per diluted share for the second quarter of 2007, compared to $0.18 for the second quarter of 2006.

Cash earnings -- which we define as net income plus non-cash, equity-based compensation expense -- for the second quarter 2007 was $2.8 million, a 30% increase compared to $2.2 million for the second quarter of 2006. Cash EPS was $0.46 per diluted share for the second quarter of 2007 compared with $0.39 for the second quarter of 2006.

We believe that certain non-GAAP financial measures as cash earnings, cash expenses and cash EPS are useful metrics for measuring the performance of our underlying business in addition to GAAP results. These non-GAAP financial measures are defined, explained, and reconciled with the most comparable GAAP financial measures in tables included at the end of our earnings release, which is posted on our website.

Total expenses for the second quarter 2007 were $5.7 million, a 14% increase compared to $5.0 million for the second quarter 2006. Cash expenses, which include non-cash, equity-based comp expense, increased 14% to $4.4 million for the second quarter 2007 compared to $3.8 million for the second quarter 2006.

The primary drivers of the increase in total GAAP expenses for the second quarter of 2007 compared to the second quarter of 2006 were as follows.

Compensation and benefits cost increased by approximately $536,000. The largest component of the increase was an increase in non-cash and restricted stock expense of approximately $236,000 due to additional annual grants in July of 2006. The other primary components of the increase in comp and benefits costs were an increase in incentive compensation expense of approximately $220,000 due to higher pretax income this year, as well an increase in salary expense of approximately $97,000 due to salary increases for certain employees and increased headcount.

Also contributing to the increase in total expenses was an increase of approximately $71,000 in financial advisory fees that we pay to external sub-advisors due to the growth in assets under management in the International Equity and Growth Common Trust Fund sponsored by Westwood Trust.

Expenses related to the WHG Funds increased by approximately $51,000. This was primarily due to increased fund-related marketing expenses as we work to build scale in the funds. We also incurred increased fund reimbursement expenses as a result of the launch of the WHG Small Cap Value Fund during the second quarter of 2007.

We are providing a partial subsidy of the cost of these funds to shareholders. We have chosen to cap the total expense ratio of the funds in order to competitively position them in the institutional and defined contribution marketplace. Fund expense reimbursements for the remaining WHG funds continues to decline as asset levels in the funds increase.

We recognized a non-cash expense of approximately $470,000 in the second quarter of 2007 and 2006 related to the expected vesting of performance-based restricted stock that was awarded to our Chief Executive Officer and Chief Investment Officer in May of 2006. The compensation expense related to these shares cannot be recognized until we conclude that it is probable that the performance goal, which is set annually by our Compensation Committee, will be met.

In the second quarter of 2007, we concluded that it is probable that we will meet the 2007 performance goal and thus we began to recognize this related expense. We expect to recognize a similar amount of expense in the third and fourth quarters of 2007 related to these performance-based shares.

The annual expense related to the vesting of the shares, which is based on the 2006 grant date fair value, would be approximately $1.4 million. There was no expense recognized in the first quarter of 2007 or 2006 related to these grants.

Assets under management were $6.8 billion as of June 30th, 2007, an increase of $1.4 billion or 26% compared to $5.4 billion as of June 30th, 2006. The year-over-year increase was primarily due to the market appreciation of assets under management and inflows of assets from new clients gained over the past year, offset to some extent by the withdrawal of assets by certain clients. Assets under management increased sequentially from the first quarter 2007 by $711 million or 11% due to inflows of assets from new clients and market appreciation.

The WHG Funds continued to see solid growth in assets. We now have five funds available and assets have reached $223 million as of June 30th, 2007. This is a year-over-year increase of approximately 266% compared to June 30th, 2006, and a 45% sequential increase compared to March 31st, 2007. With an average tenure per fund of just over year, we are very pleased with the reception these funds have received in the market.

Also today, our board of directors approved the payment of a quarterly cash dividend of $0.25 per common share, which was a 25% increase from the previous quarterly dividend of $0.20 per share. The board has approved a special-- the payment of a special cash dividend of $0.25 per share, as Brian mentioned. Both quarterly and special dividends will be payable on October 1st, 2007, to stockholders of record on September 14, 2007.

As I mentioned earlier, we have again prepared a few slides to highlight the growth of our business. Those slides are available on our website in the investor relations section under the webcast and events link and I'll go over those now.

The first slide is a bar graph with quarterly assets under management over the last two-plus years. The graph illustrates the solid growth in our assets under management over this timeframe.

From March 31st, 2005, to June 30th, 2007, our assets under management have grown by more than 68% to $6.8 billion. This represents a compound annual growth rate of over 25%. This growth is due to the strong performance that we delivered for our clients over this time period, as well as new account wins. We have continued to see meaningful inflows in SMidCap product. Westwood Trust continues to be a consistent source of new assets and, as I mentioned, the WHG Funds have grown to $223 million.

The second slide is a bar graph of quarterly revenue over the same time period as the AUM graph. This graph shows nice growth in revenues as a result of our growth in assets under management. Revenue in the second quarter of 2007 of $8.0 million was 57% higher than the first quarter 2005 revenue of $5.1 million. This represents a compound annual growth rate of over 22%. I would also note that revenue and assets under management have increased each quarter since the first quarter of 2005.

The next slide shows the benefits of the scalability of our business, as both cash and GAAP earnings have risen faster than the growth in revenue in recent periods. Cash earnings increased 52% in 2006 versus 2005 and increased 27% in the first half of 2007 versus the first half of 2006. GAAP earnings increased 24% in 2006 versus 2005 and increased 31% in the first half of 2007 versus the first half of 2006. The difference between cash and GAAP earnings, as I mentioned before, is primarily due to the non-cash, equity-based compensation expense.

Our strong cash generation has enabled us to provide our fellow stockholders with a rising dividend stream, as well. The fourth slide is a bar graph that shows our quarterly dividends since we have been public. We initiated quarterly dividend payments in the third quarter of 2002 with a dividend of $0.02 per share.

We have increased the quarterly payout significantly since then as a result of the strong fundamentals and growth of our business. With the increase in the quarterly dividend to $0.25 per share or a $1 annual rate, we have increased our quarterly dividend per share at a compound annual rate of over 65% since we initiated a quarterly dividend in 2002.

This concludes our-- my discussion of our financials and we will now be happy to answer any questions you may have and I'll turn it over to the operator to see if there are any questions in the queue.

(OPERATOR INSTRUCTIONS) There are no questions at present, sir.

We'd like to thank everyone for joining us today. We appreciate your time. If you have any followup questions, please give Bill or myself a call. We'd also encourage you to visit our website, westwoodgroup.com, where you can access all of our financial information and learn a little more about what we're doing. Thanks again. Have a great day.

That concludes today's presentation. Thank you for your participation. You may now disconnect.