Westwood Holdings Group Inc (WHG) 2010 Q3 法說會逐字稿

Thank you for holding, and welcome to the Westwood Holdings Group Third Quarter 2010 Earnings Conference Call. Today's conference 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, Ms. Sylvia Fry, Vice President and Chief Compliance Officer. Ms. Fry, your line is open.

Thank you. Good afternoon, and welcome to our third quarter 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, 2009, filed with the Securities and 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 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, we will have Brian Casey, our President and Chief Executive Officer, and Bill Hardcastle, our Chief Financial Officer.

I would now like to turn the call over to Brian.

Thanks, Sylvia, and thanks to all of you for joining our call today. Well, the risk-on, risk-off market environment continued in the third quarter but fortunately ended with a strong upward advance to close out September. Westwood performance was excellent with most of our equity and income products exceeding benchmarks and performing well in their peer groups.

The market turn that we noted in our last call continues to favor our style with our preference for high-quality free cash flow generating companies. We received some great press during the quarter with Susan Byrne appearing in SmartMoney alongside Warren Buffett and Mark Freeman appearing in Barron's featuring the WHG Income Opportunity Fund.

The WHG Income Opportunity Fund continues to receive a lot of attention with a five-star rating and offering a competitive yield in a diversified risk-averse way. This product is well positioned for today's yield hungry investors and is seen very nice inflows on a daily basis. We're pleased to see record assets under management and continued positive flows to the WHG Funds family.

On the institutional side, marketing activity has been high with lots of meetings logged by our team, but the results have been slow. The velocity of money in the institutional space has slowed with domestic equity searches down industry-wide. Plan sponsors are struggling with the low-interest rate environment and high assumed rates of return, yet are fearful of the volatility associated with owning equities.

We're still finding opportunities and our RFP pipeline is building, but the decision makers have been slower to execute new hires than in years past. If the market continues to advance, we expect that results will pick up and new assets will follow.

Much was same with Westwood Trust where private wealth marketing activity has been high, but new customer growth has not. Several of our prospects have noted that they are unhappy with their provider. They have indicated they would like to move to Westwood, but have had difficulty setting the plan in motion.

Many prospects have become frozen or developed a paralysis resulting from their poor experience in the financial markets over the past decade. But, again, if markets continue to advance this will thaw and money will again be in motion. We've built up a nice pipeline in our private wealth business and we expect it will bear fruit as conditions improve.

Our existing private wealth clients are very pleased with their returns from our Enhanced Balanced offering, which has been in the top quartile versus peers over multi-year periods.

Shifting to the business development front, we've been busy looking for new opportunities. We have a five person business development team that meets weekly to research and review various businesses. We've stated publicly in the past that our top priorities for acquisition are -- number one, mutual fund assets that can be merged into the WHG Funds as we did with the acquisition of the Philadelphia Fund last year; number two, private wealth firms in attractive market areas; number three, products that expand our offerings or people that extend our research capabilities.

On September 22, we announced the acquisition of McCarthy Advisors based in Omaha and I want to spend a few minutes sharing why we are so excited to have the McCarthy people and clients as a part of Westwood. When we were doing our research and asked someone to describe McCarthy, they said things like very stable, great people, excellent performance, highly ethical. One of the competitors referred to them as the premier wealth management firm of Omaha.

One of our business development team members, CJ MacDonald, found McCarthy when looking for mutual fund opportunities. When we initially contacted McCarthy they had no interest in selling their fund or being acquired. We like them so much that we sent them our annual reports, marketing information and client list anyway. After several months of discussions we came to the conclusion that our cultures were very similar and could be aligned in a way to build something even better together.

The McCarthy clients will be supported by a financially strong parent, have an opportunity to utilize Westwood products where appropriate and no longer have a concern about succession planning. Westwood will enjoy working with smart, well-connected people in a city that was ranked by Forbes and Kiplinger as one of the top-10 cities in the US to live and work.

A large portion of the McCarthy clients utilize an asset allocation offering that is similar to the Enhanced Balanced offering of Westwood Trust and we hope to find ways to improve our respective product offerings, so that we can further improve the experience for our collective clients.

The client consent process required prior to our transaction is going extremely well and everything is on track for a fourth quarter closing. We expect the acquisition to be accretive in the first year. We're very excited about the prospects of growing the existing business and even more about the potential doors that will inevitably open for our institutional business.

I'd like to welcome all the McCarthy employees to the Westwood family and to thank CJ MacDonald and the rest of the business development team for finding this terrific company.

I'll now turn it over to Bill and I'll be able to answer your questions when Bill concludes his remarks.

Thanks, Brian. Good afternoon, everyone. After I review our financial highlights for the quarter, I'll review some slides with you that we have posted on the Investor Relations section of our website, westwoodgroup.com, under the events and webcasts link.

For the third quarter 2010, our total revenues were $13.5 million compared to $11.6 million in the third quarter of 2009. Comparing third quarter revenue in 2010 versus 2009 Westwood Management posted a 16% increase in advisory fees as a result of increased average assets under management due to market appreciation and positive net inflows over the past year. Westwood Trust posted a 7% increase in trust fees as a result of increased assets under management, primarily due to market appreciation, partially offset by net outflows.

GAAP operating income for the third quarter of 2010 was $4.1 million compared to $3.6 million for the third quarter of 2009. GAAP net income for the third quarter of 2010 was $2.6 million compared to $2.3 million for the third quarter of 2009. GAAP EPS was $0.38 per diluted share for the third quarter of 2010 versus $0.32 for the third quarter of 2009.

Economic Earnings, which we used to refer to as cash earnings, for the third quarter 2010 were $5 million compared to $4.3 million for the third quarter of 2009. 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 quarter were $9.4 million compared to $8.0 million for the third quarter of 2009. Economic Expenses, formerly referred to as cash expenses, were $6.9 million compared to $6.1 million for the third quarter of 2009. The primary drivers of the increase in total GAAP expenses for the third quarter of 2010 compared to the third quarter of 2009 were as follows.

Non-cash restricted stock expense increased by approximately $415,000, due to an award of performance-based restricted stock in April 2010, as well as additional annual grants to employees in February 2010 and the higher market price at which these shares were granted compared to prior grants.

Incentive compensation expense increased by approximately $332,000 primarily due to increased pre-tax income. Salary expense increased by approximately $223,000 due to salary increases for certain employees as well as increased headcount. Legal expense increased by approximately $195,000, primarily due to costs related to the planned acquisition of McCarthy Group Advisors.

Assets under management were $10.6 billion as of September 30, 2010, compared to $9.5 billion at September 30, 2009. Average assets under management for the quarter were $10.2 billion compared with $8.9 billion for the third quarter of 2009. The year-over-year increase in assets was due to market appreciation of assets and asset inflows from new and existing clients, partially offset by the withdrawal of assets by certain clients.

Assets under management at the WHG Funds were $760 million at September 30, 2010, compared to $458 million at September 30, 2009. This increase was due to significant net inflows into the funds over the last 12 months, as well as market appreciation and the acquisition of Philadelphia Fund assets in November 2009.

Also today, our Board of Directors approved the payment of a quarterly cash dividend of $0.33 per share and a special cash dividend of $0.33 per share. Both dividends are payable on December 15, 2010, to stockholders of record on December 1. 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 3.6%.

As I mentioned earlier, we have again prepared a few slides to review with you. The first slide includes a bar graph with 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 time frame to the value of the S&P 500 Index.

As the graph illustrates, from March 31, 2005, to September 30, 2010, our assets under management have increased by 161% representing a compound annual growth rate of 18%, while the market as represented by the price level of the S&P 500 has declined by 3%.

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. Revenue represented here excludes significant performance fees earned in 2007 and 2008. Again, this illustrates the growth in our fee revenue against the backdrop of a flat market environment.

Third slide is a bar graph showing Economic Earnings over this time period as well as the growth in our cash and investments on our balance sheet. Cash and investments at September 30, 2010, were 145% higher than at year-end 2005.

The fourth slide is a bar graph that shows our quarterly dividend since we've been public. Our current quarterly dividend of $0.33 per share or an annual rate of $1.32 per share again results in a dividend yield of 3.6%.

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

Thanks, Bill. Great job. If there's any questions, please press pound on your phone.

(Operator Instructions). We have a question from Bob Mitchell. Your line is now open.

Good afternoon. How are you?

Hey, Bob, how are you doing?

Great. Just a couple questions. One, Brian, you talked about the kind of the indecision on the institutional side of the marketplace. If you could just give your thoughts or opinions in terms of what might ease that pressure and start making, in your opinion, allow institutions to start making decisions and hiring new managers?

Sure. Well, I think I'll start with the market, Bob. I mean the environment for the past 10 years is plan sponsors get presented every quarter with a book that their consultant has put together and it shows that public equities have not delivered what they have historically delivered.

And I think it's going to take a continued improvement in the market for that to really thaw and for plan sponsors to begin to allocate money to equities again. They will always have some portion of their assets allocated, so we're always going to be competing for what's there. But what has been challenging over the last year I think for the industry is more the indecision associated with not being able to commit to what has been a very volatile asset class.

It just feels better to put money in bonds knowing that you are really not going to be able to lose anything short-term, or to put money into hedge funds, which on paper look like they protect you on the downside and also give you some upside. And of course many of them do, but I think it's just going to take an improved market.

Okay. And then your mutual, the WHG Funds has obviously experienced very strong organic growth. Just maybe talk about the channels that have been critical to that success and, yeah, I'll just stop there.

Sure. Well, we have had in contrast to the way a lot of other firms do it, who have large salesforces, who are out there, paid a commission to sell the funds -- that is not what we have. What we have -- we have spent our money on the investment side of our business to create products that produce excellent returns and we have always been very friendly towards the providers that have an interest in Westwood.

So for example, we always make ourselves available when the news media calls for comment. We have several people that are willing and able to go on television, as you may have seen Mark Freeman yesterday was on Power Lunch on CNBC and did a great job. And that's how we have done it.

We have spent the last couple of years continuing to get on to the various platforms that we need to be in order for people to buy our funds. And, Bill, you may have a comment on what that number is today, but when we started the funds five years or so ago, we weren't on any platforms and it's amazing how long it takes to get on them. In fact, to get on some platforms you have to be recommended by an existing client or a consultant and it can take six months or a year to just get on the platform.

Bill do you want to add any color to that?

Well, yeah, I'd add we're probably on close to 100 various platforms. Of course, the flows are going to be more concentrated in the Schwab, Fidelity, TD Ameritrade, Pershing type platforms.

And we've seen, as Brian mentioned, the favorable press we've received recently, we've seen significant uptick in flows on those larger platforms as a direct result of that.

We've also over time we have lowered the expense caps on some of our funds as we try to be very shareholder friendly and provide a product that is very competitively priced.

Okay. Then two other kind of financial questions. Bill, I think you mentioned in your prepared commentary about the professional services expense line jumped significantly, and did I hear you correctly to say that most of that increase was due to the services or outside services you utilized for the acquisition?

That's probably the largest driver, Bob. Another factor is, in 2009, as you know, at Westwood Trust we use outside sub-advisors for products that we do not manage internally.

Right.

And that would be domestic growth, international value and growth and high-yield. During 2009, we did not have an active sub-advisor. We had client assets in the index funds.

Right.

So there was no sub-advisor fee paid in 2009, but we hired a growth sub-advisor at the beginning of 2010, so that's another reason for that uptick.

Okay. And then you also mentioned increased headcount. Could you talk about where you've hired people in the organization?

Sure. Primarily on the investment team. We're always, as you know, in the years you've known us, we are always on the lookout to add talented individuals to our investment team and we added a total of four new employees on the investment team this year.

And actually they were from all across the country. Added one from -- moved his family from Boston, one from New York, one from Chicago. So we're continuing to upgrade the talent level on the investment team.

Okay. Was that net? Would that be four net new adds or --?

Year-over-year, we have four net new adds. We had a couple departures. We also added a new employee in our client service group as well.

Okay. Great. Thanks guys.

Thanks, Bob. Are there any other questions?

(Operator Instructions). And at this time, we have no further questions.

Okay. Well, great. If anybody has any questions, please feel free to call Bill or me or go to our website westwoodgroup.com where you can find all of our filings and more information about us. Thanks for your time.

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