Westwood Holdings Group Inc (WHG) 2008 Q1 法說會逐字稿

Good day, everyone. Thank you all for holding, and welcome to the Westwood Holdings Group first-quarter 2008 earnings conference call. Today's call will begin with a presentation, followed by a question-and-answer session. (Operator Instructions).

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

Thank you. Good afternoon, welcome to our 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 31, 2007, 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 our call today we will 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 all of you for taking a moment to listen to our earnings call. My comments will be brief today since we just had a call in February and we've just returned from New York and Boston, where we had an opportunity to meet face to face with a number of you, including some prospective shareholders.

If you have not seen our updated Investor Relations material, it is available under the Downloads tab of the Investor Relations section on the westwoodgroup.com website, and we would encourage you to take a look.

While the market was challenging during the first quarter, our client performance versus their respective benchmarks and peer groups was top quartile for most products. WHG also performed well and appears to be one of the few financial services stocks to experience a positive rate of return for the first quarter.

Marketing activity is as high as it's ever been. We have increased our headcount in our marketing, client service and investment areas, commensurate with the growth in our business. And we are working hard to stay in front of the investment management consulting community to update them on our products and results.

Searches continue to be strong in smid-cap and small-cap, but we have also seen a renewed interest in large-cap value. Several new clients have selected Westwood during the first quarter and have not yet funded. We anticipate that they will fund their accounts over the next few quarters.

The WHG Funds experienced further growth in assets and continued to post strong performance. We're working hard to deliver a highly competitive three-year performance record for each fund, which will be critical for our initial Morningstar rating.

The defined contribution market continues to evolve, with plan sponsors focused on solution-based alternatives and competitive pricing. We recently partnered with SEI to establish a large-cap value and a smid-cap value comingled fund that will be priced daily and available on FundSERV for 401(k) participants. The ability for large plan sponsors to reduce costs by utilizing comingled funds is of great appeal, and we are committed to adapting as necessary to more fully penetrate the defined contribution marketplace.

Westwood Trust client accounts and our enhanced balance strategy performed well during the first quarter. Most of our client experienced a decline of only 3% to 4% versus a broad market decline of nearly 10%. Westwood Trust added a new asset class, International Growth, and hired a new subadvisor. Our clients now have up to 14 different options to utilize in building a well-diversified portfolio.

Third-party referrals continue, and new client growth has been steady at Westwood Trust. In fact, we are hosting an event this evening to celebrate our 25th anniversary, and we anticipate nearly 100 guests.

Before I turn the call over to Bill to review our financials, I would like to thank all of our owner-employees for working so hard during the first quarter. It has been very busy around here, and your efforts are both recognized and appreciated.

I will turn the call over to Bill and be available to answer any of your questions when he concludes.

Thanks, Brian. Good afternoon, everyone. As you may have seen, we filed our earnings release and 10-Q this morning in advance of our annual stockholders' meeting. 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 under the Events and Webcasts link.

For the first quarter of 2008, our total revenues were $9.1 million, a 24% increase compared to $7.4 million in the first quarter of 2007. Comparing first-quarter revenue in 2008 versus 2007, Westwood Management posted a 39% increase in advisory fees, primarily due to net inflows from new and existing clients over the past 12 months, partially offset by the withdrawal of assets by certain clients and market depreciation.

Westwood Trust produced a 16% increase in trust fees, primarily due to inflows from new clients, partially offset by market depreciation and the withdrawal of assets by certain clients.

GAAP operating income for the first quarter 2008 was $3 million, a 29% increase compared to $2.3 million for the first quarter of 2007. GAAP net income for the first quarter 2008 was $2 million, a 30% increase compared to $1.5 million for the first quarter 2007.

GAAP earnings per share was $0.31 per diluted share for the first quarter 2008 compared to $0.25 for the first quarter 2007. Cash earnings, which we define as net income plus noncash equity-based compensation expense, for the first quarter 2008 was $3.2 million, a 32% increase compared to $2.4 million for the first quarter 2007. Cash EPS was $0.50 per diluted share for the first quarter 2008 compared to $0.40 for the first quarter 2007.

These non-GAAP financial measures are defined and 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 first quarter 2008 were $6.1 million, a 22% increase compared to $5 million for the first quarter 2007. Cash expenses, which exclude noncash equity-based compensation expense, grew at a slower rate of 19% to $4.9 million for the first quarter 2008 compared to $4.1 million for the first quarter 2007.

The primary drivers of the increase in total GAAP expenses for the first quarter 2008 compared to the first quarter 2007 were as follows. Compensation and benefits costs increased by approximately $953,000. The largest components of this increase were an increase in noncash restricted stock expense of approximately $311,000 related to additional annual grants in July 2007 and February 2008; an increase in incentive compensation expense of approximately $265,000 due to higher pretax income, as well as increased headcount; and an increase in salary expense of approximately $263,000 due to increased headcount and salary increases.

I would also like to point out that there was no expense recognized in the first quarter 2008 related to performance-based restricted stock grants awarded to our Chief Executive Officer and Chief Investment Officer in May 2006. This is consistent with the last two years in which we did not recognize expense for these awards in the first quarters of 2007 or 2006.

Compensation expense related to these shares cannot be recognized before we conclude that it is probable that the performance goal, which is set annually by our compensation committee, will be met. As of March 31, 2008, we have not yet concluded that this goal will be met, and as a result have not yet begun to recognize this expense. Annual amount of cash expense related to the vesting of these shares, based on the 2006 grant date fair value, would be approximately $1.4 million.

Also contributing to the increase in total expenses were increased financial advisory fees paid to external subadvisors due to growth in assets under management and international equity in growth common trust funds at Westwood Trust, increased payroll and benefits costs due to higher headcount, and increased professional services fees.

Assets under management were $7.5 billion as of March 31, 2008, an increase of $1.3 billion or 21% compared to $6.1 billion as of March 31, 2007. The year-over-year increase was primarily due to the net inflows from new and existing clients over the past 12 months, partially offset by the withdrawal of assets by certain clients on market depreciation. Assets under management at March 31, 2008, declined by 5% sequentially from $7.9 billion at December 31, 2007, primarily due to market depreciation as we experienced net inflows in the first quarter of 2008.

Assets under management at WHG Funds grew to $247 million as of March 31, 2008, an increase of 60% compared to $154 million at March 31, 2007, and a 6% sequential increase from $234 million at December 31, 2007. We were pleased to see net inflows of approximately $19 million into the WHG Funds in the first quarter of this year.

Our Board of Directors today approved the payment of a quarterly cash dividend of $0.30 per share payable on July 1, 2008, to stockholders of record on June 13, 2008.

As I mentioned earlier, we have prepared a few slides that we wanted to go through to highlight the growth of our business. Again, the slides are available on the Investor Relations section of our website under the Webcasts and Events link.

The first slide is a bargraph with quarterly assets under management over the last four years. The graph illustrates the solid and relatively consistent growth on our assets under management over this timeframe. From March 31, 2004, to March 31, 2008, our assets under management have grown by more than 92% to $7.5 billion. This represents a compound annual growth rate of 18%.

This growth is due to strong performance, as well as new account wins. While we saw a sequential drop in assets under management in the first quarter 2008 due to the down market, we have experienced several new account wins, as Brian mentioned, that we expect to fund over the next two quarters.

The second slide is a bargraph with quarterly revenue over the last four years. This graph again shows the consistent growth that we experienced over this timeframe. Revenue in the first quarter 2008 of $9.1 million was 81% higher than the first-quarter 2004 revenue of $5 million. This represents a compound annual growth rate of 16%. On this slide, you also see the spike in revenue in the fourth quarter 2007 due to the performance-based fee we earned last year.

The third slide demonstrates how this growth in revenue has resulted in an increase cash generation. Cash earnings increased by 129% from the first quarter 2004 to the first quarter 2008, representing a compound annual growth rate of 23%. You will again notice the spike in cash earnings in the fourth quarter of 2007 related to the performance-based fee.

Due to the impact of noncash equity-based compensation expense, which is an important component of our compensation program, our solid, consistent growth in cash earnings was not as clearly evident in our GAAP net income. We believe that cash earnings is a meaningful metric to use to evaluate our business, in addition to standard GAAP metrics. Again, the required reconciliation of cash EPS or cash earnings is included at the end of the slide presentation.

As we have demonstrated, strong cash generation enables a rising dividend stream. The fourth slide is a bargraph that shows our quarterly dividend since we have been public. We initiated quarterly dividend payments in the third quarter 2002 with a dividend of $0.02 per share. We have increased the quarterly payout significantly since then as our business has grown.

We're now paying a quarterly dividend of $0.30 per share or an applied annual rate of $1.20 per share, which results in a dividend yield over 3.3%, giving us one of the highest yields among companies in the SNL Asset Manager Index.

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

Thanks, Bill. Great job. If anybody has any questions, they will press 1 on their phone.

Operator, do you have any questions?

I have no questions in queue as yet.

Okay.

I do have a question now, sir. Excuse me.

[Dan Major].

Congrats on a good quarter, in obviously a tough environment. Just wanted to see, could you quantify the flows? Are you willing to do that? The flows versus performance and the change in AUM?

We did not quantify that, and we do not do that, for competitive reasons. I would just say that marketing activity has been very strong, and we have a number of searches in the pipeline, and we have a number of business that we have been notified by clients that we have won and they will be funding over the next couple of quarters.

Okay. You mentioned something -- maybe was it Westwood Trust, that the performance was down, was it 4% to 5%? Was that at the Trust or was that at Westwood Management?

That was at Westwood Trust. And I've talked in prior calls about what we refer to as our enhanced balanced model. And most of our trust clients utilize some form of that model, which is using those 14 different options to create a diversified portfolio that we hope mitigates some of the downside in periods like we just experienced. And I was trying to point out that with the broad market down 10%, our Trust clients were only down 3% or 4%. And now that we're back in April, they are flat to positive year to date.

Okay. And do you have a similar breakdown for Westwood Management clients?

Well, our performance is available in all of the commercial databases. And as we mentioned, we were in the top quartile relative to our peer group. So you can imagine that on a relative basis, I don't think anybody got out of the first quarter unscathed, but we certainly did better than most.

Yes, I'm just trying to back into the inflows again, but that's okay. And then just -- can you remind me on how the performance fee works? That's, I presume, a fourth-quarter event, and just kind of what to expect -- is it based on absolute or relative performance in just kind of looking at the model and how I would model that?

Sure. It is a large client. And the performance is very simple. There is a passive benchmark, and if we outperform it by a certain level, then we earn a performance fee. And the performance fee is capped at a certain level, and that is how it works. And it's one of those things, as we march through the year and we get more and more comfortable, that we will either earn it or we won't earn it. Then we will disclose that to you.

At this point, in the first quarter, in April, we're only -- not even a third of the way through the year. So it would be pretty difficult to say what we think is going to happen over the next eight months.

Okay. And that is driven -- the benchmark is measured on an annual basis?

Correct.

(Operator Instructions).

Are there any other questions?

There are no other questions in queue, sir.

Okay. Well, I would like to thank everybody again for taking some time to be with us today. And should you have any further questions, please call either Bill Hardcastle or myself and let us know if you would like more information. Thanks a lot.

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