Westwood Holdings Group Inc (WHG) 2009 Q4 法說會逐字稿

Thank you all for holding, and welcome to the Westwood Holdings Group Fourth Quarter 2009 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 Earnings Conference Call.

I would like to start the call 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, 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 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 Casey, our CEO.

Thanks, Sylvia, and thanks to all of you for taking a few minutes to join us today.

We were very pleased to close the year on a high note, crossing the $10 billion mark for assets under management and the $50 million for dividends paid to shareholders for the first time in our history. This would not have been possible without tremendous dedication and hard work on the part of all of our owner employees, and I sincerely thank them for everything they've sacrificed in order to consistently deliver excellent performance and attentive service to our growing client base.

Performance for the fourth quarter improved, and most of our products outpaced their respective benchmarks for the year. The high-quality companies that we own in our clients' portfolios that lagged in the second and third quarter of '09 began to turn the right direction during the fourth quarter, and even more so over the last few days. The portfolios remain attractively valued. And as we have seen historically, we would expect that the market will continue to sort through the positive recent earnings announcements and find its way towards the higher-quality companies.

Marketing activity was again strong for the quarter and for the year, with over $2 billion in net inflows for calendar year 2009. Flows came in across the product line with Large, SMid, Small, AllCap and Income as the primary beneficiaries. Search activity remains active, and we're seeing a renewed interest in our SmallCap product. In fact, we have several members of the AllCap team in the Southeast today competing in a finals presentation for a nice all-cap placement, and we wish them good luck.

We continue to host onsite visits frequently with prospective customers and consultants. And onsite visits really allow us to efficiently showcase several members of our team in one meeting, and it allows the prospective customer to get an in-person feel for our unique culture. This may help explain our closing ratio, which is well above the industry average. We also had some success last year in calling directly on plan sponsors, where our message of high-quality value resonated well in the current environment.

The WHG Funds more than doubled in size during 2009, and we continue to see positive flows across the fund complex. We've positioned the WHG Funds well in the defined contribution niche, so we're beginning to realize the benefits of recurring payroll deduction inflows.

We also continue to work with small advisors and consultants with an interest in a high-quality offering such as the WHG Funds. And last quarter, we announced an expense reduction for the WHG Income and Balanced Funds, which received some favorable press. The SmallCap Value Fund, WHGSX, will complete a three-year record at the end of next month, the end of this quarter, and will receive a rating from Morningstar at that time.

Westwood Trust activity has been steady, and we're very pleased to announce the addition of Greg [Beaulieu] to the Westwood Trust team. Greg brings over 25 years' experience, having spent the last six years building Northern Trust's ultra-high-net worth business. We're excited to have him onboard and expect to see a nice pickup in new customers in the year ahead.

We're also pleased to announce the creation of a new product at Westwood Trust -- the Global Strategic Diversification Fund. Many of our clients have expressed concern over the growing deficit and the potential effects on the value of the dollar, and inflation in the years ahead. This fund is designed to protect US investor purchasing power and may own a variety of different positions, including US TIPS, global TIPS, foreign income securities, currencies, commodities, or global real assets.

It's a very flexible fund. And as has been the case with other Westwood Trust products, new funds are created to fulfill a need on the part of our existing customers. And after three years of building a successful track record for our Westwood Trust customers, we begin to introduce the strategy into the institutional consulting world, or possibly as a mutual fund. We have successfully completed this process for SMidCap, SmallCap and our Income products, and they're all seeing new customers in both separate accounts and WHG Funds.

The acquisition of the Philadelphia Fund by the WHG LargeCap Value Fund officially closed during the fourth quarter. We continue to look for additional acquisitions in the mutual fund space and elsewhere, and we've dedicated a three-person team internally for corporate development purposes.

I'll be available at the end of the call to answer any of your questions. I'll turn it over to Bill now to discuss our financials.

Thanks, Bryan. Good afternoon, everyone. After I review our financials, we will respond to any questions you may have.

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 at any time, feel free to give me a call at the phone number listed on our website.

After I review our financial highlights for the quarter, I will review some slides with you that we have posted on the Investor Relations section of our website, www.westwoodgroup.com, under the Events and Webcasts link.

For the fourth quarter 2009, our total revenues were $12.7 million, compared to $11.6 million in the third quarter 2009 and $17.6 million in the fourth quarter 2008. For the full year 2009, our total revenues were $42.6 million, compared to $46.5 million in 2008.

Comparing full-year 2009 revenue versus 2008, total advisory fees for Westwood Management decreased by 11% compared to 2008. Our 2008 results were positively impacted by performance-based fees of $8.7 million related to investment outperformance in 2008 and 2007, while we did not earn a performance-based fee in 2009.

Asset-based advisory fees increased by 18% compared to 2008. The growth in asset-based advisory fees was due to higher average assets under management in 2009 compared to 2008, as the result of market appreciation of assets as well as inflows from new clients.

Westwood Trust realized a 6% decrease in trust fees compared to 2008. Trust fees are almost exclusively based on assets at the beginning of each quarter, and average assets under management on that basis were down 8% in 2009 compared to 2008. However, year-end assets under management for Westwood Trust were 29% higher than year end 2008 due to market appreciation as well as inflows from new clients.

GAAP operating income for the fourth quarter 2009 was $4.3 million, compared to $8.2 million for the fourth quarter 2008; and was $12.3 million for the full year 2009, compared to $16.5 million for 2008. GAAP net income for the fourth quarter 2009 was $2.7 million, compared to $5.1 million for the fourth quarter 2008; and was $7.9 million for the full year 2009, compared to $10.5 million for 2008. GAAP EPS was $0.41 per diluted share for the fourth quarter and $1.18 for the full year 2009, compared to $0.79 and $1.63 for the fourth quarter and full year 2008 respectively.

Cash earnings for the fourth quarter 2009 were $4.7 million, compared to $6.9 million for the fourth quarter 2008. For the full year 2009, cash earnings were $15.6 million, compared to $17.3 million for 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 earnings release.

Total expenses for the fourth quarter and full year 2009 were $8.4 million and $30.2 million, compared to $9.4 million and $29.9 million for the fourth quarter and full year 2008 respectively. Cash expenses were $22.6 million for the full year 2009, compared to $23.2 million for 2008.

The primary driver of the 1% increase in total GAAP expenses for the full year 2009 compared to 2008 was an increase of approximately $520,000 in compensation and benefits costs due to increased restricted stock and salary expense, partially offset by reduced incentive compensation expense.

Assets under management were a record $10.2 billion as of December 31st, 2009, compared to $7.2 billion at December 31st, 2008. Average assets under management for 2009 were $8.5 billion, compared with $7.7 billion for 2008. The year-over-year increase in assets was due to market appreciation as well as significant net inflows from new clients in 2009.

Assets under management in the WHG Funds were $566 million at December 31st, 2009, compared to $253 million at December 31st, 2008. This increase was due to significant net inflows into the funds in 2009 as well as market appreciation and the acquisition of Philadelphia Fund Assets.

Today our Board of Directors approved the payment of a quarterly cash dividend of $0.33 per share payable on April 1st, 2010 to stockholders of record on March 15th, 2010.

As I mentioned earlier, we have again prepared a few slides to review with you. Again, the slides are available on our website.

The first slide includes a bar graph with quarterly assets under management over the last six years, as well as a line graph comparing the growth of our assets over this timeframe to the value of the S&P 500 Index. As the graph illustrates, from March 31st, 2004 to December 31st, 2009, our assets under management have increased 161%, representing a compound annual growth rate of 18%, while the market has essentially been flat.

The second slide is a bar graph with our quarterly asset-based fee revenues since the first quarter 2004. The revenue represented here excludes significant performance fees earned in 2007 and 2008. As you can see, our asset-based fees reached a record level in the fourth quarter 2009.

The third slide is a bar graph showing annual cash earnings over this time period as well as the growth in cash and investments on our balance sheet. Cash and investments at December 31st, 2009 were 121% higher than at year end 2004 as our business continues to generate significant cash flow.

The fourth slide is a bar graph that shows our quarterly dividend since we have been public. Our current quarterly dividend of $0.33 per share, or an annual rate of $1.32 per share, results in a dividend yield at yesterday's closing price of 3.7%.

That concludes my discussions of our financials, and I will now turn the call back to Bryan.

Thanks, Bill, great job.

If anybody has any questions, please press one on your keypad.

(Operator instructions) Bob Mitchell.

Good afternoon, guys. How you doing?

Hey, Bob, how are you?

Good.

Hey, just a couple questions. One, in terms of the staffing levels for the year -- could you just kind of help us understand, in terms of the -- any incremental staff added from the investment or from the operational end of the Business during the course of the year?

Yes, Bob, we added a net one employee in 2009. And as you'll recall, we added 11 in 2008. So we've added 12 --

Right.

-- new positions over the last two years.

Okay.

And as far as kind of breakdown in 2009, the addition was in the trading and managed accounts area. In 2008, we added people to the investment team, as well as marketing [and] client service and operations.

Okay.

And in terms of the fund flow, the $2 billion inflow -- Bryan, you mentioned kind of -- it was across the board on multiple products. Would you care to comment on that a little bit more, in terms of perhaps the importance of those flows to the different products?

Sure. The LargeCap product took in a lot of flows on the subadvisory side. And of course, our SMidCap product, which is now closed to new institutional investors, had some tremendous success in new flows last year. The Income Fund has had good success, both in the mutual fund itself and with small advisors who have hired us to manage separate accounts for them.

Okay. And the growth -- obviously, the growth of the WHG Funds has been exceptional, and you've carved out a nice niche. Would you -- in terms of the platforms or -- anything you would note there, in terms of the growth of the assets, in addition to what you've already said?

Well, I would say that it takes a number of years to get the funds to [build] a three-year record and to get onto the various platforms. And I would say that we're on most of the larger ones now. We continue to see requests from the institutional side, where we may have a customer who we manage money for in the defined benefit area will want to introduce one of our funds in their defined contribution plan. And that often results in their being on a platform that we may not yet be on. And so it's a terrific win for both sides. They get a low-cost, high-quality offering for our existing client, and we get onto a new platform. So that's been a real win for both of us.

Okay.

Then, one final question -- terms of -- obviously, I think I saw you in October, or late September, at a conference. And the performance -- as most high-quality managers struggled a bit in 2009, that one served you well in 2008; hurt you in 2009. Just kind of, as you talked to your clients through regular quarterly meetings and prospective new clients, what's your sense in terms of their reaction, reception? You have comments around that?

Sure.

Well, first of all, the majority of our clients did beat their benchmarks last year. And secondly, the conversations that we've had, especially with those that have been with Westwood a long time, are really very well understood from their side. When we came out of 2003, we experienced a very similar type of market, when you had the March lows. Everything that went up, straight up, after that were the lower-quality companies with no earnings. And we really began to see that turn in the fourth quarter. We had a decent fourth quarter across most of our products. And certainly, when you have weeks like we're having this week, the products tend to perform very well when you have violent downturns like you're having today.

Great, thank you.

(Operator instructions) I have no further questions in queue.

Okay. Well, as always, we appreciate very much you taking a few minutes today. And if you have any other questions, and you'd like to contact either Bill Hardcastle or myself, please do so. We also have lots of information on our website, westwoodgroup.com.

We appreciate your being a shareholder and your interest in Westwood. Thanks.

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