Westwood Holdings Group Inc (WHG) 2008 Q4 法說會逐字稿

Thank you all for holding and welcome to the Westwood Holdings Group fourth-quarter 2008 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'd 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 2008 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 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 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 the 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.

Thanks, Sylvia, and thanks to all of you for taking time out of your day to listen to our earnings call.

While 2008 was certainly a challenging year for all market participants, our relative performance held up well against market indices. Most of our products were again in the top quartile versus our peers and experienced net inflows from new and existing customers. Institutional activity was very strong during the year and included wins across all major product lines. We were especially pleased to win new sub-advisory mandates with four major firms.

In lieu of creating our own traditional commission-based sales force, we made the decision years ago to invest in the people and systems necessary to create high quality products and serve our clients attentively. We intend to work closely with each of our new sub-advisory partners to make sure they have everything they need for Westwood to be well positioned within their sales organization for fund flows when markets recover. Over time, we hope that having access to global distribution platforms will result in a significant opportunity for Westwood to grow our assets under management within the sub-advisory channel.

With regard to our own proprietary funds, the WHG Funds, we were very pleased with our progress last year. We actually had net inflows and our relative performance was better than our benchmarks in peer groups. Two of our funds, the WHG SMidCap Fund and WHG Income Opportunity Fund, just reached a three-year milestone and received a 5-star rating from Morningstar. It is a terrific accomplishment and I want to congratulate all of our analysts on achieving the highest level of industry recognition. I also want to give special thanks to those who worked behind the scenes to allow us to have a highly successful fund in the marketplace.

Later this year two more of our funds, the WHG LargeCap Value Fund and the WHG Balanced Fund, will reach a three-year milestone and both are currently on track to deliver excess relative returns and strong peer group comparisons. While there are no guarantees, we are hopeful to have four 5-star funds in the marketplace later this year.

Westwood Trust also experienced net inflows and continued to deliver attentive service during these difficult market times. While private wealth customers are admittedly concerned about their savings and their future, Westwood Trust representatives have done an excellent job of counseling and adjusting our clients' asset allocations as needed. As a result, Westwood Trust's loyalty has been extremely high and client attrition has been minimal. We recently hosted a client event and expect to have another in late April in an effort to stay close to our customers.

In closing, I feel compelled to say a few words about our business for those who may be new to the Westwood story. As we approach the conclusion of our 26th year of managing money, and our 7th year as a public company, we are more confident than ever that our version of the old school partnership and simplistic way of running the business is the best way to align the interests of clients, shareholders, and employees.

Our clients know that we do not have hedge funds, brokerage operations, bank lending activity, or private equity investments. They know that they are dealing directly with a firm that is focused exclusively on the management of their portfolio.

Shareholders understand that we are risk averse by nature and we practice what we preach. Westwood has no debt, no exotic investments, complete transparency, a highly liquid balance sheet, a healthy dividend and growing free cash flow.

Our employees are comforted by the fact that we maintain a minimum of one year's operating expenses in treasury bills and currently have more than two years' worth of operating expenses in treasury bills. Since all of our employees are shareholders, their stock plus their dividend is an important part of their overall compensation, which helps keep our fixed costs down but, more importantly, allows them the freedom to spend their day doing their very best work for our clients instead of worrying about their jobs.

While we certainly hope to have built a better business for better markets than the one we've been in for the last year, we do believe that it's been in everyone's best interest to have run our business in a conservative way. Our culture of discipline, transparency and integrity is the only one we have ever known. We have a lot of work ahead of us, but we are confident that Westwood will continue to flourish in whatever environment comes our way.

Bill is going to review our financials and we will be available to take your questions at the conclusion of the call. I'll turn it over to CFO Bill Hardcastle.

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

After I review our financial highlights, I will review some slides with you that we have posted on the Investor Relations section of our web site at westwoodgroup.com under the Events & Webcasts link.

For the fourth quarter 2008 our total revenues were $17.6 million, a 44% increase compared to $12.2 million in the fourth quarter of 2007 and a 74% sequential increase compared to the third quarter of 2008. For the full year 2008 our total revenues were $46.5 million, a 28% increase compared to $36.3 million in 2007.

Comparing full-year 2008 revenue versus 2007, Westwood Management posted a 44% increase in total advisory fees. This includes a 24% increase in asset-based fees, as well as a 189% increase in performance-based fees. We recorded $8.7 million in performance-based fees in 2008, reflecting investment outperformance in 2008 and 2007. The growth in asset-based advisory fees was due to higher average assets under management in 2008 compared to 2007.

Westwood Trust produced a 7% increase in trust fees as a result of higher average fee realization. Average assets under management by Westwood Trust were flat year over year, as market depreciation of assets offset inflows from new and existing clients.

GAAP operating income for the fourth quarter of 2008 was $8.2 million, a 64% increase compared to $5.0 million for the fourth quarter of 2007 and was $16.5 million for the full year 2008, a 35% increase compared to $12.2 million for 2007. GAAP net income for the fourth quarter 2008 was $5.1 million, a 56% increase compared to $3.3 million for the fourth quarter of 2007 and was $10.5 million for the full year 2008, a 33% increase compared to $7.9 million for 2007. GAAP EPS was $0.79 per diluted share for the fourth quarter and $1.63 for the full year 2008 compared to $0.52 and $1.28 for the fourth quarter and full year 2007, respectively.

Cash earnings, which we define as net income plus non-cash equity-based compensation expense for the fourth quarter 2008 was $6.9 million, a 44% increase compared to $4.8 million for the fourth quarter of 2007. For the full year 2008, cash earnings were $17.3 million, a 30% increase compared to $13.3 million for 2007. 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 web site.

Total expenses for the fourth quarter and full year 2008 were $9.4 million and $29.9 million compared to $7.3 million and $24.1 million for the fourth quarter and full year 2007, respectively. Cash expenses, which exclude non-cash equity-based compensation expense, were $23.2 million for the full year 2008 compared to $18.8 million for 2007.

The primary drivers of the increase in total GAAP expenses for the full year 2008 compared to 2007 were as follows. Compensation and benefits cost increased by approximately $4.8 million. The largest components of this increase were an increase in incentive compensation expense of approximately $1.6 million due to higher pretax income; an increase in restricted stock expense of approximately $1.4 million due to additional annual grants to employees and independent directors, as well as the higher price at which these grants were made compared to prior grants; and an increase in salary expense due to increased headcount and salary increases for certain employees.

Average assets under management for 2008 were $7.7 billion, an increase of 12% compared with $6.9 billion for 2007. Assets under management were $7.2 billion as of December 31, 2008, a decline of 9% compared to December 31, 2007 assets under management of $7.9 billion. The year-over-year decline of 9% was considerably less than the decline in the broad market in which many indexes were down over 35%. This reflects the significant net inflows of assets from new and existing clients in 2008.

Our Board of Directors today approved the payment of a quarterly cash dividend of $0.30 per share payable on April 1, 2009 to stockholders of record on March 13, 2009.

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 web site under the Webcasts & Events link.

The first slide is a bar graph with quarterly assets under management over the last five years. As the graph illustrates, from March 31, 2004 to December 31, 2008 our assets under management have increased 85%, representing a compound annual growth rate of 14%.

The second slide is a line graph that compares the growth of our asset center management over the same time period versus the price appreciation of the S&P 500 index. Both values have been indexed to 100 as of March 31, 2004. While our assets under management have risen 85% over this period, the broad market is down 20%.

The third slide is a bar graph with quarterly revenue over the same time period. Revenue for the full year 2008 of $46.5 million was 133% higher than 2004 revenue of $20 million. This represents a compound annual growth rate of 23%.

The fourth slide is a bar graph of quarterly cash earnings over the same time period. Cash earnings for the full year 2008 of $17.3 million were 233% higher than 2004 cash earnings of $5.2 million. This represents a compound annual growth rate of 35%. The required reconciliation of cash EPS is included at the end of the slide presentation.

The fifth slide is a bar graph that shows our quarterly dividends since we have been public. Our current quarterly dividend of $0.30 per share, or an annual rate of $1.20 per share, results in a dividend yield at yesterday's closing price of 3.9%.

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

Thanks, Bill. Great job. If anybody has any questions?

(OPERATOR INSTRUCTIONS.) Your first question is from [Mack Sykes]. Your line is open.

Hi, guys. Thanks for the quarter. Two quick questions. Going forward for this year, where do you think the investor appetite will be for your funds? Will it be in the Income, the SmallCap, the Value? And will that affect sort of the gross realization of the whole firm?

Well, I would say that marketing activity has been strong across the board. And we've worked really hard to stay in front of consultants over the last several years and let them know what we do. Certainly LargeCap Value is an area where a lot of deep value managers have struggled over the last couple of years. And our returns have been pretty terrific. So I would continue to expect to see a lot of interest in that product. But our SMidCap, SmallCap, Income Opportunity products all have capacity. They all have excellent numbers. And we would expect to see, and currently have, searches in all of those areas.

All right. And just one quick follow-up. Can you talk a little bit more about the performance fees for this quarter and how we should model that going forward?

You know, I don't know how you model a performance fee. A performance fee is essentially a backward looking number that tells you how you've done at the end of the year. So I don't think you can really know that until December 31st. The performance fee that we earned was two years' worth of excess carry-forward from a large performance-based client. So I don't know how you'd want to model that.

Okay. Thank you.

Thank you. Our next question is from Bob Mitchell. Your line is open.

Good afternoon, guys. Nice quarter and great year.

Thanks, Bob.

Just a couple questions. One, in terms of the net $2 billion inflows that you guys had. Could you qualitatively talk about in terms of what products perhaps saw the greatest inflows? And I just wanted to -- did all of your products have net inflows or were there any that had net outflows?

You know, amazingly, they all had net inflows.

Okay.

I guess if you broke it down, LargeCap was the beneficiary of most of the assets. But I would say that search activity was likely highest in SMid. The SMidCap numbers are exceptional and the interest level has been really high.

Okay. And in terms of the WHD Funds and the flows you saw from that, could you talk about in terms of where you're having the most success in terms of the channels? Is it the large Schwab OneSource platforms? Is it -- just qualitatively talk about where -- is it retail oriented, institutionally oriented? Where are you seeing the most success and reception for your product?

Sure. It is not the Schwab OneSource or any of those programs. We started A shares last year and unfortunately those have to hit a three-year record as well before they start to see any real recognition within that channel. But most of the success has been institutionally.

Okay.

And really just the good press that we've received throughout the year. It's amazing how people will find you.

Okay, great. In terms of -- I know it's a small item, but in terms of the revenue line, Bill, the "other" revenue line was negative this quarter. I know it's not a big number, but I was just curious about what was going on there.

That's primarily negative mark-to-market on investments that we have. As Brian mentioned, we have -- the bulk of our cash in investments is in treasury bills.

Okay.

However, we do have about $4 million invested in our funds which we view as [seed] investments in those mutual funds. Obviously, the difficult year in the market last year resulted in a negative mark-to-market.

Okay. And then another financial question. In terms of the accounts receivable I know that you guys have certainly grown significantly, but it jumped a little bit more than I would have anticipated. Anything to talk about there or was that just a timing issue?

Well, the bulk of it's going to be the performance fee for 2008. That's about $8.6 million of that number is the performance fee.

Okay. It was not collected?

No. It's been collected at this point but it wasn't at December 31st.

Okay. And last quarter you talked about the new sub-advisory relationships. Of all the sub-advisory relationships that you've had, been awarded, were they all funded in the third and fourth quarter? Or are there any left to -- yet to be funded?

Yes. We do have another one yet to be funded.

And do you expect that to happen in the first half of this year or -- ?

Yes.

Great. Thanks again, guys.

Thank you, Bob.

Thank you. (OPERATOR INSTRUCTIONS). And at this time I have no more questions in queue.

Okay. If there's no more questions, once again, we appreciate your time today. Bill and I are available any time if you want to give us a call or certainly visit our website, westwoodgroup.com, where we have all of our financials and other articles of interest posted. Have a great day. Thanks.

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