Westwood Holdings Group Inc (WHG) 2008 Q2 法說會逐字稿

Thank you all for holding, and welcome to the Westwood Holdings Group's second quarter 2008 earnings conference call. Today's call will begin with a presentation, followed by a Q&A session. Instructions on that feature will follow later in the program.

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, your line is now open.

Thank you. Good afternoon, and welcome to our call. I will 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, 2007, filed with the Securities & 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 the 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 CEO.

Thanks, Sylvia, and thanks to everyone for joining our call today. We appreciate your taking time out during an earnings season to listen to our call.

I'll start with some general observations about performance and activity in each area of our business, and then I'll turn it over to Bill Hardcastle, our CFO, who will have more extensive comments on our financial results that were released after the close today. At the conclusion of Bill's formal comments, we'll be happy to take your questions.

As all of you know, the markets were tough again this quarter, but I'm pleased to report that our primary investment products achieved strong outperformance relative to their respective [passive] benchmarks and were in the top quartile of their respective peer groups.

Now, for greater detail on the specific performance of each of our products, you can review the commercially available databases, such as [eVest Net Alliance], or you can look at the WHG Funds in Morningstar as a proxy for our net institutional performance.

Marketing activity in the institutional area was as high as we've ever seen, with several new account wins that have not yet funded, but we expect to fund over the balance of the year. We won two large subadvisory assignments that should fund during the third quarter.

The first assignment is with Principal Funds, which as many of you know is a leader in the 401(k) industry, a member of the Fortune 500, and has offices in 12 countries with over 18 million customers worldwide. And it is truly an honor to have been selected to work with them as a large cap value subadvisor to one of their seasoned mutual funds.

In addition to the Principal win, we were selected by State Farm Insurance Company as subadvisor for one of their oldest mutual funds. State Farm, as you know, is the largest insurer of autos and homes in the U.S., with over 77 million customers, and they are making a big push internally to grow their mutual fund business.

We competed against several admirable firms to win both of these mandates, and we're very excited to work with both Principal and State Farm.

We also started a new SMidCap collective fund for one of the largest retailers in the world. This new Fortune 100 client just funded during the third quarter, and we're excited to have the opportunity to work with such an elite company to create an efficient solution for their 401(k) participants. They're making several changes to their platform, and we hope to see more visibility and potentially additional flows in the years ahead.

The rest of our traditional institutional business was also very strong. We had several wins that have not yet funded, but that we will expect to fund over the balance of the year. Notably, a couple of these wins are in the SmallCap area, which as you know from listening to prior calls has been an area of emphasis for Westwood over the past few years.

The WHG Funds continued along the path of success with excellent performance and reached another milestone as we surpassed $300 million in asset center management.

Susan Byrne and our Marketing Team attended the Morningstar Conference in Chicago last month. We had a very nice reception, and Susan was featured as a Panelist. We received positive publicity and increased awareness for the WHG Funds. We also made some excellent contacts, and our Marketing Team continues to follow-up on those leads that were generated.

Westwood Trust clients invested in our enhanced balance model. That includes multiple asset classes utilizing both Westwood and numerous outside subadvisors. It held up pretty well in the recent market downturn. While not completely immune to the market pressure, their accounts were down considerably less than the market indices.

We're also very pleased to announce the addition of Dick Frazar to the Westwood Trust Team. We've been looking for a senior level person for a long time, and we're pleased to have hired Dick Frazar. He's a respected member of our community, and will have the role of new business development and client service.

We've also hired additional talented people in the client service area, as well as the investment area, to service and manage our growing list, client list in investment product line.

I'd really like to take this opportunity to thank all the members of our Marketing and Client Service Teams for an outstanding job over the last few years. They have been filling out RFPs, database information, making calls, putting together presentation books, and have truly been road warriors. So a sincere thanks from all of your fellow shareholders.

With regard to Westwood Holdings Group, I wanted to mention that we made an investor presentation on Westwood Holdings Group at the Stephens Spring Conference in New York City last month. The copy of that presentation is available on our website.

And, lastly, I would mention that a few people have inquired about the recent increase in volume of WHG, and while we cannot know for sure why the volume has increased we do know that WHG was added to both the Russell 2000 and the Russell 3000 Indexes recently.

I'll turn it over to Bill Hardcastle, our CFO, who will discuss our financial results, and then we'll be happy to take your questions.

Thanks, Brian.

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 westwoodgroup.com under the events and webcast link.

For the second quarter 2008 our total revenues were $9.7 million, a 21% increase compared to $8 million in the second quarter 2007. Comparing second quarter revenue in 2008 versus 2007 Westwood Management posted a 34% increase in advisory fees, primarily due to net inflows from new and existing clients over the past 12 months, partially offset by market depreciation and the withdrawal of assets by certain clients. We also recognized a performance based fee in the second quarter of 2008 related to a client that has an annual performance period that ends in June.

Westwood Trust produced a 6% increase in trust fees, primarily due to inflows from new clients, partially offset by market depreciation.

GAAP operating income for the second quarter 2008 was $2.6 million, a 16% increase compared to $2.2 million for the second quarter 2007.

GAAP net income for the second quarter 2008 was $1.7 million, an 18% increase compared to $1.5 million for the second quarter 2007.

GAAP earnings per share was $0.27 per diluted share for the second quarter 2008, compared to $0.24 for the second quarter 2007.

Cash earnings, which we define as net income plus noncash equity based compensation expense, for the second quarter 2008 was $3.7 million, a 30% increase compared to $2.8 million for the second quarter of 2007.

Cash EPS was $0.57 per diluted share for the second quarter 2008, compared to $0.46 for the second quarter of 2007.

These non-GAAP financial measures are defined, explained, and reconciled with the most comparable GAAP financial measures and tables included at the end of our earnings release, which is available on our website.

Total expenses for the second quarter 2008 were $7.1 million, a 23% increase compared to $5.7 million for the second quarter 2007.

Cash expenses, which exclude noncash equity based compensation expense, grew at a slower rate of 17% to $5.1 million for the second quarter 2008, compared to $4.4 million for the second quarter of 2007.

Primary drivers of the increase in total GAAP expenses for the second quarter 2008 compared to the second quarter 2007 were as follows. Compensation and benefits cost increased by approximately $1.1 million. The largest components of the increase were noncash restricted stock expense, salaries, and incentive compensation.

Noncash restricted stock expense increased by approximately $580,000 due to additional annual grants in July 2007 and February 2008. Beginning in 2008 restricted stock grants were awarded in the first quarter of the year in order to synchronize the payment of employees' cash incentive bonus awards with the personal tax liability that results from restricted stock vesting.

As a result, the second quarter includes the amortization of five years' worth of restricted stock grants, while other quarters typically include the amortization of only four years' worth of grants.

Salary expense increased by approximately $293,000 due primarily to increased headcount. Incentive compensation expense increased by approximately $146,000 due to higher pretax income as well as increased headcount. At June 30th, 2008 we had 57 fulltime employees, compared to 50 fulltime employees at June 30th, 2007.

We recognized the noncash expense of approximately $470,000 in the second quarter of 2008 and 2007 related to the expected vesting of performance based restricted stock that was awarded to our Chief Executive Officer and Chief Investment Officer in May 2006.

As we have discussed before, the compensation expense related to these shares cannot be recognized until we conclude that it is probable that the performance goal will be met. In the second quarter of 2008 we concluded that it is probable that we will meet the 2008 performance goal, and thus we began to recognize the related expense. We expect to recognize a similar amount in the third and fourth quarters of 2008 related to these stock grants. There was no expense recognized in the first quarter of 2008 related to these grants.

Also contributing to the increase in total expenses were increased sales and marketing costs due to increased levels of marketing and client service activity, increased financial advisory fees paid to external subadvisors due to growth in assets under management and international equity growth and high yield common trust funds sponsored by Westwood Trust, and increased shareholder servicing fees related to the WHG Funds.

Assets under management were $7.7 billion as of June 30th, 2008, an increase of $900 million or 13% compared to $6.8 billion as of June 30th, 2007. The year-over-year increase was primarily due to net inflows from new and existing clients over the past 12 months, partially offset by market depreciation. Assets under management at June 30th, 2008 rose by 4% sequentially from $7.5 billion at March 31st, 2008, primarily due to net inflows in the second quarter.

Our year-over-year and sequential growth in assets under management during a difficult market for broad equity indexes reflects strong net asset inflows, as well as benchmark meeting performance in most of our products that limited the erosion of assets due to market depreciation.

Assets under management in the WHG Funds grew to $319 million as of June 30th, 2008, an increase of 43%, compared to $223 million at June 30th, 2007, and a 29% sequential increase form $247 million at March 31st, 2008. The WHG Funds have received over $90 million of net inflows through the first six months of this year.

Also, our Board of Directors today approved the payment of a quarterly cash dividend of $0.30 per share, payable on October 1st, 2008 to stockholders of record on September 15th, 2008.

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

The first slide is a bar graph, with quarterly assets under management over the last four plus years. The graph illustrates the solid growth in our assets over this timeframe. For March 31st, 2004 to June 30th, 2008 our assets under management have essentially doubled to $7.7 billion, representing a compound annual growth rate of 18%.

The second slide is a line graph that compares the growth of our assets under management over this same time period, represented by the blue line, versus the price depreciation of the S&P 500 Index, represented by the green line. Both values have been indexed to 100 as of March 31st, 2004.

In case you can't see the chart, the ending values for each of these is 114 for the S&P 500 Index and 200 for WHG assets under management, which reflects the 100% growth rate over this time period.

The graph illustrates that we have achieved this growth in assets without much help from the broad market. Our growth can primarily be attributed to significant asset inflows, as well as a very strong relative performance delivered by our Investment Teams over this time period.

The third slide is a bar graph with quarterly revenue over the same period. The graph, again, shows the consistent growth that we have experienced over the last few years. Revenue in the second quarter of 2008 of $9.7 million was 91% higher than the first quarter 2004 revenue of $5 million. This represents a compound annual growth rate of 17%. This slide also shows the spike in revenue in the fourth quarter of 2007 due to the performance based fee we earned last year.

The fourth slide demonstrates how this growth in revenue has resulted in increased cash generation, as well. Cash earnings increased by 166% from the first quarter of 2004 to the second quarter of 2008, representing a compound annual growth rate of 26%. You will, again, notice the spike in cash earnings in the fourth quarter of 2007 related to the performance based fee.

We believe that cash earnings is a meaningful metric to use to evaluate our business, in addition to GAAP metrics. The required reconciliation of cash EPS is included at the end of the presentation. As we have demonstrated, strong cash generation enables a rising dividend stream.

The fifth slide is a bar graph that shows our quarterly dividend since we have been public. As our business has grown over this time period we have been able to significantly increase the amount of cash we share with our fellow stockholders via a rising dividend stream.

Our current quarterly dividend of $0.30 per share or an implied annual rate of $1.20 per share results in a dividend yield at yesterday's closing price of over 2.3%, which is still well above the average yield of companies in the S&L Asset Manager Index.

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

Thanks, Bill. Great job.

Does anybody have any questions? If you do, press pound? Operator, do we have any questions?

Yes. If you'd like to ask a question please press one on your touch-tone phone. Once again, if you would like to ask a question please press one on your touch-tone phone.

And we do have a question from [Clayton Ripley]. Your line is open.

Are you all still on schedule for the SMidCap Income Opportunity to be ready by Morningstar this December?

Yes, that's correct. We'll complete a three-year record in the WHG Income Opportunity Fund and the WHG SMidCap Value Fund at the end of this year.

Okay. And then the other funds, the LargeCap and the Small -- well, the LargeCap, those are -- that's 2009?

Correct. LargeCap will be spring of 2009, and SmallCap will be ...

Early 2010.

... early 2010.

Okay. And just looking, well, it'd be hard to say, to project what you think Morningstar is going to rate you at this point in time?

Yes, I would not want to project how they would rate us, but given our relative and peer group performance I would suspect that the rating will be a good one.

Okay. Thank you.

Thank you, Mr. Ripley.

(OPERATOR INSTRUCTIONS.)

And for the Panel, we have no questions at present.

Operator, do we have any other questions in the queue?

No, sir. No questions have rung in at present, sir.

Okay. Well, as always, if you have additional questions or a follow-up after you've had a chance to review the 10-Q, Bill or I would be happy to answer them. You can also find all of our filings and additional information on our website at westwoodgroup.com. Thanks, again, for your time today. We appreciate you.

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