Westwood Holdings Group Inc (WHG) 2009 Q3 法說會逐字稿

Thank you all for holding and welcome to the Westwood Holdings Group Third Quarter 2009 Earnings Conference Call. Today's call will begin with a presentation followed by a question-and-answer. 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; please begin.

Thank you. Welcome to our Third Quarter Earnings Conference Call. 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 10-K for the year ended December 31, 2008, 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 CEO.

Thanks, Sylvia. And as always, thanks to all of you for taking time out of a very busy earnings season to listen to our call. If you've not had a chance to review our earnings release, it is available, along with our 10-Q, under the Investor Relations tab on our website, westwoodgroup.com.

We're pleased to report the highest level of assets under management in our Company's history, and commensurate with that milestone, our highest level of nonperformance fee revenues and earnings. We also increased our quarterly dividend by 10%, to $0.33 per quarter, which represents an annual yield of approximately 3.6%.

Westwood Holdings Group was also recognized by the consulting firm DeMarche Associates as one of the 100 best companies in the US. The award is based on DeMarche's proprietary research and fundamental analysis of more than 3000 US companies in terms of managing growth and risk factors while maintaining shareholder value. The full list of award recipients and more information is available on the demarsh.com website, or you can also go to our website and hit the link on the Investor Relations page.

I have a few slides to discuss performance and would ask that you go to our website, westwoodgroup.com, and look under the Investor Relations tab, where you'll find the Webcast and Events link to the third quarter conference call presentation.

And while you're looking for those, I'll give you an update on other areas of the business and come back to these slides at the end.

Marketing activity remains strong, with several new clients earned during the quarter across all major product lines. We were particularly active in the SMidcap area and have recently announced that the SMidcap product is closed to new institutional searches. I want to congratulate the portfolio team and the marketing team on this terrific accomplishment. We do have a few more SMidcap searches in the pipeline and well as some subadvisory commitments that will be honored, and the WHG Smidcap Value mutual fund will remain open.

We had hoped that SmallCap Value would be close behind SMidcap in reaching capacity, but during the severe bear market of the last year, several previously closed small cap managers actually reopened their funds to new customers. And as a result, the pool of available small cap managers grew significantly and search activity naturally gravitated toward those managers with long records who had reopened. Well, the good news is that many of those are closing again and we hope to see search activity pick up for the Westwood SmallCap product in the year ahead.

We are pleased to have won our first institutional all-cap account this quarter. When we started this product over five years ago, the customer preference at the time was overwhelmingly in favor of a dedicated allocation to small, mid, and large-cap managers from a style viewpoint. But recently, some plan sponsors and foundations have begun to simplify their domestic equity allocation by using all-cap value as the single best way to capture best ideas across the domestic value spectrum.

And even at Westwood Trust, our investment committee has embraced the concept of a single all-cap allocation for domestic value, domestic growth, international value, and international growth. And we've found that having fewer asset classes reduces the administrative burden and is actually easier for private wealth customers to follow and to understand.

Our Income Opportunity fund continues to deliver as promised, with generous levels of income and limited volatility. Advisors tell us that there are not enough funds like this in the marketplace and we continue to believe that this is an excellent choice for the growing number of baby-boomers approaching retirement. We continue to get out and tell the story as often as possible and increase our audience of potential advisors and customers.

Our MLP product has had a terrific year, with a return in excess of 57%. As plan sponsors continue to seek income and uncorrelated alpha, we believe we'll see more activity in the MLP product in the years ahead. We've recently produced a white paper to help consultants and plan sponsors understand the MLP asset class, and we'd be happy to share that with you if you have an interest.

Westwood Trust customers are much happier these days, with the rise in the market, and especially with our enhanced balance product. The enhanced balance approach has significantly outperformed the standard 60-40 balance portfolio, and done so with less volatility. We also made some good tactical moves, especially in the high-yield area, where we took an overweight position when spreads were at historic levels and have since captured a significant return for our Westwood Trust customers.

Interestingly, the private wealth industry continues to experience a lot of dislocation. And the regulatory agencies that govern banks and trust companies are overwhelmed. As a result, we are hearing that it is becoming very difficult to obtain a de novo bank or trust company charter. This bodes well for Westwood Trust, as it creates a moat around our business.

Our customers tell us that they appreciate the transparency, highly liquid, and easy-to-understand investment programs that we offer and we will continue to work hard to convert referrals into new customers.

The Philadelphia Fund acquisition is on track, with the proxy voting taking place over the next few weeks, and is expected to close in mid-November. Pending approval of the merger, we will add over $50 million to the WHG LargeCap Value Fund. More importantly, this will put our total mutual fund assets in the WHG Fund over $500 million. And we would like for the WHG Fund to be a multi-billion-dollar business and we'll continue to look for further opportunities to acquire mutual fund assets.

We made a presentation a few weeks ago at the William Blair Small Cap Growth Conference in New York City and we had the opportunity to see a number of you, and I want to thank you for coming out to attend the conference and to hear our story. Our presentation material is available in its entirety on our website, but I thought I would take a few minutes to review some of the slides that relate to recent market performance.

I've pulled five slides from that presentation and they're included in the slide presentation I referenced at the beginning of the call. If you want to take a look at those now, the first section is entitled "Recent Market Performance," and the first three slides show three important characteristics of the recent market performance, including quality, size, and valuation.

The first slide shows the Russell 1000 Value by quality ratings according to S&P. S&P grades are based on the growth and stability of a company's earnings and dividends over the prior 10-year period. In 2008, on the left, low-quality companies were severely punished, and this year is the opposite -- on the right. The lower the quality, the higher the return.

The second slide slices the Russell 1000 Value by market cap. So far this year, the smaller the company, the better the performance. Now, all of our Westwood products have an average market cap in excess of the average or median of the benchmark index. In fact, in the case of the LargeCap Value, we do not generally own any stocks less than $5 billion in market cap. And as you can see from the chart, the highest performance came from stocks under $2 billion in market cap.

You move on to the third slide; it shows the valuation as expressed by the price-earnings ratio coming off of the March close, and the corresponding performance of each decile. It also shows the performance of those companies with no E, as in no earnings. Companies with low P-E ratios fared the worst, but those without earnings, or a P-E greater than 37 times, fared the best.

Now, customers who have been with us for a long time understand that these cycles do come around every five to seven years, the last time occurring in 2003. We think back to that time -- we were emerging from the dot com bust, we'd just invaded Iraq, we'd announced tax cuts, and we cut interest rates down to 1%. The chart on page 4 shows our 2003 calendar year performance. And you'll see Westwood in the bottom quartile versus our peers and below the benchmark index.

If you turn to the next page, you see what our customers experienced for the ensuing four-year period. This includes 2003, so it's a five-year look, and you will note that we're in the top quintile in every category -- and this includes returns versus benchmark, returns versus peers, and information ratio, alpha, and Sharp ratio.

Now, so far in 2009, it looks a lot like 2003, but we continue to focus on what we do best, which is high-quality companies with improving earnings -- those with discernable free cash flow and reasonable valuations.

Now, this last chart is interesting -- it takes a look back over the last 15 years, and our trailing performance is shown in green and the Fed funds rate is in gray. Now, we view the Fed funds as a proxy for liquidity and we note that as interest rates decline risk appetites increase, and the reverse is true when rates deepen. And while we certainly cannot predict when the Fed will increase the Fed funds rate, it has discussed an end to quantitative easing and it has a number of tools at its disposal to take liquidity out of the system.

When this occurs, risk appetites decline and Westwood has historically outperformed. In fact, we're already starting to see this as earnings come in this quarter for the third quarter, where a preference for a high-quality dividend increases and other high-quality measures are coming back into vogue.

This includes my formal remarks and I'll turn it back over to Bill Hardcastle, our CFO, who will review our financials.

Thanks, Brian. Good afternoon, everyone. After I review our financial highlights for the quarter, I will review the financial update slides that we have prepared and posted to our website.

For the third quarter 2009, our total revenues were $11.6 million, a 15% increase compared to $10.1 million in the third quarter of 2008. Comparing third quarter revenue in 2009 versus 2008, Westwood Management posted a 19% increase in advisory fees, primarily as a result of increased average assets under management due to net inflows from new and existing clients over the past 12 months as well as higher average fee realization, partially offset by market depreciation and the withdrawal of assets by certain clients.

Westwood Trust posted a 7% decrease in trust fees as a result of lower assets under management by Westwood Trust at the beginning of the quarter due to market depreciation of assets. Net asset inflows partially offset this decrease.

GAAP operating income for the quarter was $3.6 million, a 30% increase compared to $2.8 million for the third quarter of 2008. GAAP net income was $2.3 million, a 33% increase compared to $1.7 million for the third quarter of 2008. GAAP EPS was $0.35 per diluted share compared to $0.27 for the third quarter of 2008.

Cash earnings, which we define as net income plus noncash equity-based compensation expense, was $4.3 million, a 22% increase, compared to $3.5 million for the third quarter 2008. Cash EPS was $0.64 per diluted share compared to $0.55 for the third quarter of 2008.

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 press release, which is available on our website.

Total expenses for the quarter were $8 million, a 10% increase compared to $7.3 million for the third quarter 2008. Cash expenses, which exclude noncash equity-based compensation expense, increased by 9% to $6.1 million, compared to $5.6 million for the third quarter 2008.

The primary drivers of the increase in total GAAP expenses for the third quarter 2009 compared to the third quarter 2008 were as follows -- incentive compensation expense increased by approximately $572,000, due primarily to higher pretax income. Noncash restricted stock expense increased by approximately $196,000 related to additional annual grants in February 2009 as well as the higher market price at which these shares were granted compared to prior grants.

Salary expense increased by $92,000, due to increased average headcount during the third quarter 2009. These increases were partially offset by a decrease in financial advisory expense of approximately $90,000 due to lower subadvisory fees paid to external subadvisors by Westwood Trust and a decrease of approximately $80,000 in travel costs.

Assets under management were a record $9.5 billion as of September 30, 2009, a increase of 15% compared to $8.3 billion as of September 30, 2008. The year-over-year increase was primarily due to net inflows from new and existing clients over the past 12 months, partly offset by market depreciation.

Assets under management at September 30, 2009, rose by 16% sequentially from $8.2 billion at June 30, 2009, primarily due to market appreciation as well as net inflows in the third quarter. Assets under management in the WHG funds grew to $458 million as of September 30, 2009, an increase of 42% compared to $322 million at September 30, 2008, and a 23% sequential increase from $372 million at June 30, 2009.

Finally, our Board of Directors today approved the payment of a quarterly cash dividend of $0.33 per share, representing a 10% increase over the prior quarterly dividend.

Now I'll review the financial update slides that I prepared that's in the same file as the slides Brian just reviewed.

The first slide includes a bar graph with quarterly assets under management over the last five-plus years, as well as a line graph that compares the growth of our assets under management over this time period versus the value of the S&P 500 Index. Both values have been indexed to 100 as of March 31, 2004. Over this difficult period, where the market has essentially been flat, we have grown our assets under management by 145%. Approximately 85% of this increase is due to net inflows.

The second slide is a bar graph of our quarterly asset-based fee revenue and a line graph of the S&P 500 over the same time period. The revenue represented here excludes significant performance fees earned in 2007 and 2008. This graph illustrates that even during a period of great stress for the market, we have been able to grow our fee revenue substantially.

The third slide is a bar graph showing annual cash earnings over this time period as well as the growth in cash investments on our balance sheet. Cash and investments at September 30, 2009, of $37.9 million were 96% higher than at year end 2004. Our financial strength has been a differentiating factor for Westwood with our clients and perspective clients that value financial and organizational stability.

The fourth slide is a bar graph that shows our quarterly dividend since we have been public. With the 10% increase in the dividend as declared by our Board today, our total quarterly dividends declared have increased every year since we have been public.

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

Thanks, Bill. Great job, as always. If you have any questions, please indicate so on your phone.

Thank you. (OPERATOR INSTRUCTIONS) There are no questions in queue at this time.

Okay. Well, if anybody has any questions and you'd like a follow-up call, please call either myself or Bill Hardcastle and we'll be happy to visit with you.

Again, appreciate your time today and appreciate your interest in Westwood Holdings Group. Have a great day.

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