Westwood Holdings Group Inc (WHG) 2010 Q1 法說會逐字稿

Thank you all for holding, and welcome to the Westwood Holdings Group First Quarter 2010 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 would now like to turn the call over to your host for today's call, Silvia Fry, Vice President and Chief Compliance Officer. Ms. Fry, your line is now open.

Thank you. Good afternoon, and welcome to our first quarter 2010 earnings conference call.

I'd 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 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, 2009 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 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, everybody, for taking time to join us during earnings season. We just celebrated our 27th year in business, and I'd like to thank our employees for their terrific work they do on behalf of our clients and to our shareholders, many of whom have been with us from the very beginning.

We're pleased to see continued growth in assets under management and a healthier market environment for our clients. Our performance was strongly positive on an absolute basis, while our relative performance was mixed. It was a tough quarter for active managers, as evidenced by so many passive benchmarks performing in the top quartile of their respective categories. For example, our large cap product beat the S&P 500 but was only a few basis points behind the top quartile Russell 1000 value benchmark. Our other products did well in January and February, only to lose ground on a relative basis during the beta rally in March. Earnings season, so far, has been positive, with many of our companies beating estimates and the stocks reacting well. While too soon to tell how the rest of earnings season will go, we're pleased so far, and we remain steadfast in our focus on owning high-quality companies.

On the marketing front, we're excited about our sub-advisory partnerships, where flows are beginning to turn positive. We're especially excited to kick off a 12-city road show with (Inaudible), our European partner. It's been a challenging week to get to Europe, but it looks like our folks will make it over there in time to start the first round of meetings, where they'll be for the next two weeks.

The other institutional marketing activity is seasonally slow in the first quarter, as plan sponsors are busy formulating their game plans for asset allocation and manager searches. We do have some RFPs in the pipeline and some new search opportunities over the next few weeks.

The WHG Funds have more than doubled in size over the past year, and we continue to see consistent flows. Our marketing team has been busy attending industry conferences to target advisors and to find contribution sponsors to distribute the WHG Funds. I'm told that the general tone has improved and that we hope to benefit from a return of flows in the domestic equities.

Reception from our existing Westwood Trust customers to our new, global, strategic, diversification fund has been very positive, and an ancillary benefit has been an opportunity to generate referrals, which remains our primary source of new business for Westwood Trust.

Tonight we're hosting the semi-annual Westwood Trust client event, where our keynote speaker will be WHG board member, Bob McTeer, who is the former president of the Dallas Federal Reserve, along with our very own Mark Freeman. We expect to have over 100 attendees. And, if the past is any guide, we'll see some additional flows and some new customers for Westwood Trust in the weeks ahead.

Our corporate development team continues to meet with potential candidates in the mutual fund and private wealth space, and we're pleased to see a number of high-quality opportunities. We're finding that compliance is a growing expense and operational burden for smaller mutual funds and private wealth advisors and that our capabilities in this area are actually very appealing to prospective candidates.

I'll turn the call over to Bill now to discuss our financials, and I'll be available at the end of the call if you have any questions.

Thanks, Brian. Good afternoon, everyone. As you may have seen, we filed our earnings release and 10-q this afternoon after the market close. 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 the quarter, I will review some slides with you that we have posted on the Investor Relations section of the Website, WestwoodGroup.com, under the events and Webcasts link.

For the first quarter 2010, our total revenues were $13.2 million compared to $8.2 million in the first quarter of 2009. Comparing first quarter revenue in 2010 versus 2009, Westwood management posted a 64% increase in advisory fees as a result of increased average assets under management due to market appreciation and inflows from new and existing clients. Westwood Trust posted a 24% increase in trust fees as a result of increased assets under management, primarily due to market appreciation and inflows from new clients, partially offset by the withdrawal of assets by certain clients.

GAAP operating income for the first quarter of 2010 was $4.6 million, compared to $1.9 million for the first quarter of 2009. GAAP net income for the first quarter 2010 was $2.9 million, compared to $1.2 million for the first quarter 2009.

GAAP EPS was $0.43 per diluted share for the first quarter versus $0.19 for the first quarter of 2009.

Cash earnings for the first quarter were $4.9 million, compared to $2.7 million for the first quarter of 2009.

Total expenses for the quarter were $8.7 million, compared to $6.3 million for the first quarter of 2009, and cash expenses were $6.7 million, compared to $4.8 million for the first quarter of 2009. The primary drivers of the increase in total GAAP expenses compared to the first quarter 2009 were as follows. Incentive compensation expense increased by $1.4 million, primarily due to a significant increase in pretax income. Noncash restricted stock expense increased by approximately $408,000, related to additional annual grants in February 2009 and 2010, as well as the higher price at which these shares were granted compared to prior grants. In addition, we recognized expense in the first quarter related to the expected vesting in our performance-based, restricted stock for our chief investment officer, as we have concluded that it is probable that the performance goal established by the compensation committee will be met. We expect to recognize expense related to an award of performance-based, restricted stock to our CEO beginning in the second quarter. Financial advisory expense increased by approximately $187,000 due to higher fees paid to external sub-advisors.

Assets under management were a record $10.6 billion as of March 31, 2010, compared to $7.2 billion at March 31, 2009. Average assets under management for the quarter were $10.4 billion, compared with $7.2 billion for the first quarter of 2009. The year-over-year increase in assets was due to market appreciation and net inflows from new and existing clients over the past 12 months, partially offset by the withdrawal of assets by certain clients.

Assets under management in the WHG Funds were $652 million at March 31, 2010, compared to $285 million at March 31, 2009. This increase was due to significant net inflows into the Funds over the past 12 months, as well as market appreciation and the acquisition of Philadelphia Fund assets in November 2009.

Also, today, our board of directors approved a payment of a quarterly cash dividend of $0.33 per share, payable on July 1, 2010 to stockholders of record on June 15, 2010.

As I mentioned earlier, we have again prepared a few slides to review with you.

The first slide includes a bar graph of quarterly assets under management over the last five years, as well as a line graph comparing the growth of our assets under management over this timeframe to the value of the S&P 500 index. As the graph illustrates, from March 31, 2005 to March 31, 2010, our assets under management have increased 160%, representing a compound annual growth rate of 20%, while the broad market has essentially been flat.

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. As you can see, our asset-based fees reached another record level in the first quarter.

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 March 31, 2010 were 106% higher than at yearend 2005. The decline in our cash balance compared to yearend 2009 is due to incentive compensation payments made in the first quarter of this year.

The fourth slide is a bar graph showing our quarterly dividends since we have been public. Our 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 3.3%.

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

Great, Bill. Thanks. And, if anybody has any questions, will you, please, press pound on your phone?

(Operator instructions). Our first question comes from [Bob Mitchell]. Please go ahead, sir.

I just wanted to talk to you about two areas - one in terms of-- You mentioned the search activity as being seasonally slow. Anything-- Any more color on that?

And then my second question was related to the outflows that you saw from the client base. Could you just maybe talk about the nature of that - if it more institutional in the trust side and then maybe some of the rationale you got for those rebalancings?

Sure. I'll take the second one first. We had a large, institutional customer leave at the beginning of the year. And they left not due to anything that had to do with performance. They left because they merged with a larger state fund. And I would say that is a growing trend if you read in the news a couple of states have announced where the large state plan is, in fact, acquiring the smaller city plan. And that's what happened to us. We got lost in the shuffle, despite having terrific performance. So that was really one isolated incident. Rebalancings have not been a significant factor, and we have not had client attrition other than the one pretty large institutional customer at the beginning of the quarter.

Your other question having to do with search activity being seasonally slow-- The first quarter is always the slowest period for institutional searches. Typically, what happens is the consultants will come out in February, and they will sit down with their clients, go through their results for the prior year, formulate a game plan with respect to asset allocation shifts. And, from there, they'll do their searches for managers to replace underperforming managers and higher managers for new allocations that they may have determined. So we would expect, if history is any guide, that our search activity will pick up here later this spring. But, you know, no guarantees.

Thanks. One other question in terms-- You made the acquisition of the Philadelphia Fund in the fourth quarter. And maybe just comment on your level of activity in that space in terms of acquisition opportunities, be it in the mutual fund or other strategies.

Sure. Well, we started this process with the Philadelphia Fund over a year ago. And we've continued to meet on a weekly basis to look, really, at both spaces like we do at stocks to look for high-quality, undiscovered, perhaps undervalued businesses. And one of the things that I think we really bring to the table is some structure and some help with respect to not only distribution and maybe being a bigger entity but also from the compliance side, which is really becoming a huge burden for smaller mutual funds out there on their own or even the wealth advisors who could really use some of our expertise and help.

So I would say that, you know, in general, we continue to look for opportunities. We continue to talk to folks. And I'm excited about the opportunities that may present themselves.

Okay. Thanks.

Thank you. (Operator instructions). And currently we have no questions in queue.

Okay. Well, great. Thanks again for listening. And, if you have any follow-up questions and want to call Bill or myself directly, we'd be happy to talk to you. Or you can visit our Website at WestwoodGroup.com for any of our filings or additional information. Thanks again.

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