Westwood Holdings Group Inc (WHG) 2007 Q4 法說會逐字稿

Thank you all for holding and welcome to the Westwood Holdings Group first quarter 2008 (sic) earnings conference call. Today's call will begin with a presentation followed by a Q-and-A 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 fourth quarter earnings conference call for 2007. We want to thank you for joining us today. And I'd 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 10K 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 statement, 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 have 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, our Chief Executive Officer.

Thanks, Sylvia, and thanks to everyone for taking a moment out of your time to hear our thoughts today. We're very pleased to report another level of record earnings and assets under management. Our investment teams produced exceptional performance during the fourth quarter and for the full year. In fact, every one of our equity investment products was ahead of their respective benchmarks and in the top cortile of their peer groups. Our clients are very pleased. And I specifically want to thank Susan Byrne and everyone in the research area for a truly remarkable year.

The 2007 performance and volume of WHG are also worth noting. The average daily volume of WHG on the NYSE more than tripled in 2007. And more importantly, the total return of WHG for 2007 was nearly 70%, including dividends. To put this in perspective relative to our peer group, there are 2,422 stocks listed on the NYSE, and WHG ranked 123rd in total return out of those 2,422 listed stocks. Looking back since inception, WHG has out-performed both the Russell 2000 and the SNL Asset Manager Peer Group Index over the past five years.

As we hope you saw on our earnings release a few minutes ago, we increased our quarterly dividend to $0.30 per share. For those shareholders who have been with us for several years, you've heard us talk about the importance we place on returning cash to our shareholders. We've combined a rising, ongoing dividend with a special dividend over the past several years. And now that the dividend is yielding well in excess of the market, our peer group and most cash investments, we no longer feel a need to utilize special dividends and will, instead, review our ongoing dividend rate annually.

With the recent market turmoil, it's probably a good time to remind newer shareholders that we try to run Westwood the same way that companies that we admire and might consider for our customers' portfolios run their companies. That is to say that Westwood has no debt, high free-cash flow, high insider ownership with over a third of the company owned by employees and directors, strong corporate governance with seven independent directors, and we attempt to be highly transparent and have a high level of integrity. Now, these are some of the same attributes that we look for in the companies that you'll find in our clients' portfolios. In 25 years of doing this, we found that these attributes are not only important running a successful business, but acutely critical during tough market conditions like many businesses are facing right now.

As we continue to execute our plan, our marketing and client service personnel have worked diligently throughout the year and capitalized on all of our good performance by securing new clients in all of our products. We're off to a good start this year in the marketing area, with a number of searches across our various product lines. We continue to spend time cultivating the investment management consulting community by hosting onsite meetings and by visiting their offices. As gatekeepers to the traditional institutional world, we found no better way than a face-to-face meeting to give them a good perspective on our investment process and our talented team of professionals.

Westwood Trust -- the reputation of Westwood Trust among private individuals, personal foundations, and local charitable organizations continues to grow and is now recognized by many as a premier wealth management firm. In fact, we did an analysis last year and discovered that over 70% of new Westwood Trust clients are referred to us by existing Westwood Trust clients. We can think of no better compliment than to receive a recommendation from an existing client. And we plan to host several events in 2008, for our Westwood Trust clients, with the hope that these kind referrals will continue.

And the WHG Funds experienced growth and assets under management last year of over 80%. We're pleased with our progress in this area and we spent much of the year working to get our funds on to fund platforms, and we recently introduced A shares in two of our funds specifically for the larger platforms. We continue to receive good press and we're working toward the important three-year milestone, when we'll receive a rating from Morningstar.

Before I turn the call over to Bill for his in-depth review of our financials, I want to thank all of our owner-employees and our directors for a truly outstanding year. If you have any questions after the call, we'd be happy to answer them. I'll turn it over to Bill now.

Thanks, Brian. Good afternoon, everybody. As you know, we just filed our earnings release today after the market closed. In addition, we expect to file our 10K by the end of this month. If you have any questions after reading the 10K, or any time, for that matter, feel free to give me a call at the phone number listed on our website.

After I review our 2007 financial highlights, 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.

We are pleased to report that we posted very strong numbers in both the fourth quarter and full year 2007. As Brian mentioned, our investment management teams posted solid performance, in most cases in the top cortile of their peer group. We experienced strong in-flows of assets from new and existing clients, and, as a result, we posted record financial performance for the history of this firm.

In the fourth quarter, we posted strong revenue growth on a sequential and year-over-year basis. Our assets under management once again rose to a record level and we generated robust cash earnings growth. For the fourth quarter 2007, our total revenues were $12.2 million, a 67% increase compared to $7.3 million in the fourth quarter of 2006, and a 40% sequential increase compared to the third quarter of 2007. For the full year 2007, our total revenues were $36.3 million, a 33% increase compared to $27.4 million in 2006.

Comparing 2007 revenue versus 2006, Westwood management posted a 41% increase in total advisory fees. This includes a 24% increase in asset-based fees, as well as a $3 million performance-based fee that we earned from 2007, the first year we were eligible to earn a performance-based fee. The performance fee was booked on the fourth quarter of 2007. The growth and asset-based advisory fees was primarily due to net in-flows from new and existing clients, as well as the market appreciation of assets under management.

Westwood Trust produced a 25% increase in trust fees, primarily due to in-flows from new clients and market appreciation. In the fourth quarter and full year 2007, advisory fees and trust fees both reached record levels. GAAP operating income for the fourth quarter 2007 was $5 million, 146% increase compared to $2 million for the fourth quarter 2006, and was $12.2 million for the full year 2007, a 68% increase compared to $7.3 million for 2006.

GAAP net income for the fourth quarter of 2007 was $3.3 million, a 152% increase compared to $1.3 million for the fourth quarter 2006, and was $7.9 million for the full year 2007, a 76% increase compared to $4.5 million for 2006. GAAP earnings per share was $0.52 per diluted share for the fourth quarter and $1.28 for the full year 2007, versus $0.22 and $0.79 for the fourth quarter and full year 2006, respectively.

Cash earnings, which we define as net income plus non-cash equity-based compensation expense for the fourth quarter 2007, was $4.8 million, an 81% increase compared to $2.7 million for the fourth quarter of 2006. For the full year 2007, cash earnings were $13.3 million, a 46% increase compared to $9.1 million for 2006.

As Brian mentioned, our Board of Directors today approved the payment of a quarterly cash dividend of $0.30 per share, an increase of 20% from the previous quarterly dividend of $0.25 per share. The dividend is payable on April 1st, 2008, to stockholders of record on March 14th, 2008.

Total expenses for the fourth quarter in full year 2007 were $7.3 million and $24.1 million, compared to $5.3 million and $20.1 million for the fourth quarter and full year of 2006, respectively. Cash expenses, which exclude non-cash equity-based compensation expense were $18.8 million for the full year 2007, compared to $15.5 million for 2006.

The primary drivers of the increase in total GAAP expenses for the full year 2007 compared to 2006, were as follows: compensation of benefits cost increased by approximately $3.5 million. The largest components of this increase were an increase in incentive compensation expense of approximately $2.1 million due to higher pre-tax income, increased restricted stock spent -- restricted stock expense of approximately $816,000, resulting from a full year of expense from the July 2006 grants and additional grants in July 2007, as well as an increase of approximately $430,000 in salary expense due to higher headcount and salary increases for certain employees.

Also contributing to the increase in total expenses was an increase of approximately $283,000 in financial advisory fees paid to external sub-advisors due to growth and assets under management and international equity and growth common trust funds sponsored by Westwood Trust.

Assets under management were a record $7.9 billion as of December 31st, 2007, an increase of $1.9 billion, or 33% compared to $5.9 billion as of December 31st, 2006. The increase was primarily due to in-flows of assets from new and existing clients gained over the past year, and the market appreciation of assets under management.

As I mentioned earlier, we have again prepared a few slides to highlight the growth of our business. The slides are available on our investor relations website under the webcast and investors -- webcast and events link.

The first slide is a bar graph showing our assets under management over the past four years. The graph illustrates the solid growth in our AUM over this time frame. From December 31st, 2004 to December 31st, 2007, our assets under management grew by 97% to $7.9 billion, representing a compound annual growth rate of over 25%. This growth is due to the strong performance that we have delivered for our clients, as well as new account wins and additional in-flows from additional clients.

The second slide is a bar graph showing our annual revenue over the same time period as the AUM graph. Our revenues have also posted solid growth over the past three years. 2007 revenue of $36.3 million was 82% higher than 2004 revenue of $20 million, representing a compound annual growth rate of 22%.

The next slide shows the strong growth of both GAAP and cash EPS over this time period. GAAP EPS was 87 -- 88% higher in 2007 than the 2004, representing a 24% compound annual growth rate over this period. Cash EPS was 125% higher in 2007 than in 2004, representing a 31% compound annual growth rate.

The fourth slide is a bar graph that shows our quarterly dividend since we have been public. With our new quarterly dividend rate of $0.30 per share announced today, our current $1.20 annual dividend rate provides a yield of over 3.6% based on our recent stock price, which places our yield well above the average yield of companies in the SNL Asset Manager Index.

And the final slide includes the required cash EPS reconciliation to GAAP EPS.

That concludes my discussion of our financials, and I'll now turn the call back over to Brian.

Thanks, Bill. Great job. If you have any questions, we'd be happy to answer them either now or if you want to follow up and call us directly.

(OPERATOR INSTRUCTIONS) Our first question is Bob Mitchell from Conestoga. Bob, your line is open.

Thank you. Good afternoon.

Hi, Bob.

I just wonder if you could go into a little more detail about the products that may have had the most success in 2007, and then talk, if you could, talk a little bit more about the performance fee and what products that was associated with.

Okay. Well, I mean, our product line, we're a value and income shop.

Right. Right.

LargeCap, SMidCap, SmallCap, and AllCap would encompass our value side of the equation, and we have an income opportunity fund, which is more of the eclectic product (inaudible) all types of securities that generate high current yield with a profile that we find attractive for total return.

No. I was asking in terms of asset flows.

In terms of asset flows --

Which are those -- which of those products have the most success?

SMidCap is a product that we've had now for a number of years and continues to see tremendous success and acceptance by the consultant community. The flows into SmallCap thus far have been -- have been impressive and we're in a number of searches right now. The LargeCap area is our flagship products.

Right.

And we continue to see business there as people look to replace either managers that are closed or looking for superior rates of return.

Are you coming up against any capacity constraints in the Small or SMid-products?

Not yet, no. We think we could more than double our capacity in SMid at the moment. And in SmallCap, we've got quite a bit of running room there.

Okay. And then with respect to the performance fee, was that triggered off multiple products or -- if you could go into a little more detail about you said this was the first year in which you were eligible for that.

Yes. For competitive reasons, we're not going to disclose which particular client or which product that was.

Okay.

But it was basically a standard type of performance fee where you have to beat a hurtle. And as you can see, if you have access to investment alliance or any --

Sure.

-- databases. We were well ahead of our benchmark in just about every product across the board.

Okay. Nice year, guys.

Thanks, Bob. We appreciate your question and your call.

Thank you.

Thank you. (OPERATOR INSTRUCTIONS) And right now, we don't have any more questions in queue.

All right. Terrific. Well, thank you all very much for your time today. And you can contact either myself or Bill directly if you have any questions. Please visit our website, westwoodgroup.com, where you'll find a lot of information and all of our filings. Have a great afternoon.

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