Westwood Holdings Group Inc (WHG) 2007 Q3 法說會逐字稿

Thank you all for holding and welcome to the Westwood Holdings Group third quarter 2007 earnings conference call. Today's call will begin with a presentation followed by a question and answer session. Instructions on that feature will be given later in the program.

I would now like to turn the call over to your host for today's call, Sylvia Fry, Vice President and Chief Compliance Officer. Ms. Fry, your line is now open.

Thank you. Good afternoon and welcome to our third quarter earnings conference call. I would like to start by reading our forward-looking statements 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 our 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 will 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.

Thanks, Sylvia. And I'd like to thank all of you for taking time out of your busy day to listen to our call, and especially for your flexibility in moving the conference call a day early. We have a new business opportunity tomorrow that conflicted with our originally scheduled call, and we're please to be able to speak with you today.

Bill has prepared a lot of material, including some charts to share with you so my comments will be very brief. We've just completed another terrific quarter for investment performance across all of our equity products, and we remain well ahead of our respective benchmarks for the calendar year.

We experienced significant growth in assets and new client relationships, and our pipeline for new business activity remains strong.

The acceptance of our small cap product is growing and we're seeing approvals from several consulting firms, and would expect search activity to continue to gain momentum in the months ahead for this capacity constrained product.

During the quarter one of our existing clients seeded a new product in the MLP area, and we're excited to add this new offering to our income oriented product line. We expect that the appetite for high current yield, low correlation, low volatility will only increase in the years ahead. And this product, along with our income opportunity and balance products, are well positioned to serve this growing need.

Before I turn the call over to Bill, I'd like to thank all of the owner-operators of Westwood for another outstanding quarter. You're the reason for our success and I appreciate all your hard work and dedication to our clients.

I'll be available to answer your questions and I'll turn the call over to Bill.

Thanks, Brian.

As you may have seen, we filed our earnings release and 10-Q this afternoon 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 the 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 third quarter of 2007 our total revenues were $8.7 million, a 27% increase, compared to $6.9 million for the third quarter of 2006, and a 10% sequential increase compared to $8.0 million for the second quarter of 2007.

Comparing third quarter revenue in 2007 versus 2006, Westwood Management posted a 32% increase in advisory fees, primarily due to the market appreciation of assets under management and inflows from new and existing clients, partially offset by the withdrawal of assets by certain clients.

Westwood Trust posted a 28% increase in trust fees, primarily due to cash flows from new clients, as well as market appreciation of assets under management.

GAAP operating income for the third quarter of 2007 was $2.6 million, a 69% increase compared to $1.6 million for the third quarter of 2006. GAAP net income for the third quarter of 2007 was $1.7 million, an 83% increase, compared to $921,000 for the third quarter of 2006. GAAP earnings per share was $0.27 per diluted share for the third quarter of 2006 (sic - see Press Release) compared to $0.16 for the third quarter of 2006.

Cash earnings -- which we define as net income plus non-cash, equity-based compensation expense -- for the third quarter 2007 was $3.2 million, a 39% increase, compared to $2.3 million for the third quarter of 2006. Cash EPS was $0.51 per diluted share for the third quarter of 2007, compared to $0.40 for the third quarter of 2006.

As we have stated before, 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. As Sylvia mentioned, 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 available on our website.

Total expenses for the third quarter 2007 were $6.1 million, a 14% increase, compared to $5.3 million for the third quarter 2006. Cash expenses, which exclude non-cash, equity-based compensation expense, increased 16% to $4.6 million for the third quarter 2007, compared to $3.9 million for the third quarter of 2006.

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

Compensation and benefits costs increased by approximately $611,000. The largest components of this amount were an increase in incentive compensation expense of approximately $340,000 due to higher pretax income, an increase in non-cash and restricted stock expense of approximately $150,000 due to additional annual grants in July of 2007, and increased salary expense of approximately $107,000 due to increased headcount and salary increases for certain employees.

Also contributing to the increase in total expenses was an increase of approximately $85,000 in financial advisory fees paid to external sub-advisors due to the growth in assets under management at International Equity and Growth Common Trust Fund sponsored by Westwood Trust.

Assets under management were a record $7.7 billion as of September 30th, 2007, an increase of $2 billion or 35%, compared to $5.7 billion as of September 30th, 2006. The year-over-year increase was due to the market appreciation of assets under management and inflows of assets from new clients gained over the past year, as well as inflows from existing clients. Assets under management increased sequentially from the second quarter of 2007 by $845 million, or 12%, due primarily to inflows of assets from new and existing clients.

The WHG Funds, with five funds now available, had assets of $228 million as of September 30th, 2007, a year-over-year increase of approximately 145%.

Also today, our Board of Directors approved the payment of a quarterly cash dividend of $0.25 per common share, payable on January 2nd, 2008 to stockholders of record on December 14th, 2007.

I will also mention that, as we have previously disclosed in our 10-Q, we have a client with a performance-based fee structure. Our performance to date has been good and we might earn a performance fee on this account. We will not know the amount of any performance fee until the end of the year and, as a result, we cannot accrue this fee until the fourth quarter.

As I mentioned earlier, we have again prepared a few slides to highlight the growth of our business. The slides are available on the Investor Relations section of our website. I'll go through those now.

The first slide is a bar graph with quarterly assets under management over the last 2.5 years. The graph illustrates the solid growth in our assets under management over this timeframe.

From March 31st, 2005, to September 30th, 2007, our assets under management have grown by more than 88% to $7.7 billion, representing a compound annual growth rate of over 28%. This growth is due to the strong performance that we have delivered for our clients, as well as new account wins and additional inflows from existing clients.

The second slide is a bar graph of quarterly revenue over the same time period as the AUM graph. Our revenues have also posted solid growth over the last 2.5 years. Revenue in the third quarter of 2007 of $8.7 million was 72% higher than the first quarter 2005 revenue of $5.1 million, representing a compound annual growth rate of over 24%. Both revenue and assets under management have increased each quarter since the first quarter of 2005.

The next slide shows 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 31% for the first 9 months of 2007, compared to the same period 2006. GAAP earnings increased 46% for the first 9 months of 2007, compared to the same period of 2006. And I'll also note that GAAP earnings for the first 9 months of 2007 exceed full-year 2006 GAAP earnings.

The fourth slide is a bar graph that shows our quarterly dividend since we have been public. As a result of the strong fundamentals and growth of our business, we have been able to provide our fellow stockholders with a rising dividend stream, as well. Our current $1.00 annual dividend rate provides a yield of over 2.5% based on our current stock price, which places our yield well above the average yield of companies in the S&L Asset Manager Index.

This concludes my discussion of our financials and we'll be happy to now answer any questions you may have.

(OPERATOR INSTRUCTIONS.) And right now, I currently have no questions in queue. I currently have no questions in queue right now.

Okay. If we have no questions, then this will conclude our call. If you have any thoughts after the call or any questions, please call Bill Hardcastle or myself, Brian Casey, and we'd be happy to answer them. Thanks for your time today.

That does conclude today's conference. Thank you for your participation. Everybody may disconnect.