Westwood Holdings Group Inc (WHG) 2011 Q2 法說會逐字稿

Thank you all for holding and welcome to the Westwood Holding's second quarter 2011 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, Sylvia Fry, Vice President and Chief Compliance Officer. Ms. Fry your line is now open.

Thank you. Good afternoon and welcome to our second quarter 2011 earnings conference call. We will 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 31, 2010, 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 economic earnings, economic earnings per share and economic 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 joining our call today. We are pleased to report record assets under management and revenues for the second quarter. We also recently celebrated our 9th anniversary as a public company, and while 2002 seems like a long time ago, when there were few public asset managers, since that time several firms have made the decision to go public.

And while no ownership model is perfect for a company that's comprised of human capital, the public model is becoming an attractive option as it provides the opportunity to share equity with employee owners and provide full transparency for all investors. The result is a unique and motivating alignment of interest that resonates well with clients, consultants, and all of the talented people that work within an organization. We're pleased to see a number of IPO's in the asset management space on the calendar, as we believe it further validates the model.

Moving to the quarter, even though the quarter started with a tsunami and went out with the fear of unstable credits, like Europe and United States, our risk-controlled investment process allowed for excellent performance across the board. All products remain ahead of their benchmarks year-to-date, and nearly all of our products are in the top half of their peer groups. All of our performance can be found in the commercial databases or in Morningstar for those strategies where we offer mutual funds.

Institutional marketing has picked up, and I'm pleased to report that the all-cap mandate I mentioned last quarter was fully funded at the end of the second quarter. We also won a second mandate at the end of the quarter for all-cap, and we seem to be gaining momentum in both all-cap and overall search activity.

We have a number of RFP's in process and hope to be invited to participate in finals presentations over the balance of the year. Our SMid Plus product continues to gain traction with several new clients and prospects during the quarter. Income opportunities had some institutional separate account wins, and we continue to increase awareness in the consulting community. As markets gyrate from month-to-month, the appetite is growing for a fund like Income Opportunity that has produced competitive rates of return with low volatility and a meaningful yield.

Westwood Trust hosted two events this spring, one in Dallas and one in Omaha. Both events were well received, and we noted some additional flows from existing clients. We also won a nice foundation account that will fund later this month. Our private activity in the well space is very high. Interest in moving assets is improving, but investors are still very cautious. And, if we get any good news near term out of Washington, we should see more money in motion as investors begin to move away from insufficiently yielding short-term investments.

The WHG funds continue to grow nicely with the five-star Income Opportunity Fund leading the way. We've seen inflows of over $250 million over the past 12 months. We also will celebrate a ten-year anniversary of the WHD Dividend Growth Fund next month. We continue to work to position all of the WHD funds in the defined contribution plans and the IRAs who cater to long-term investors. Platforms are more difficult to get on these days, but we're pleased to have secured positions on over a hundred platforms over the past 5 years. As we add additional funds in the future, this will this an important avenue for our growth.

We've had a number of technological enhancements completed or underway including a paperless filing system, improved portfolio accounting systems, performance measurement systems for both Westwood Trust and our institutional clients, better statement packages, a new e-mail archiving service, and a redesign of our Web site scheduled for completion later this year. All of these investments have been made with an eye toward supporting a much larger business in the future.

Our corporate development team has reviewed a number of acquisition opportunities. We've not yet found another Omaha, but we continue to meet each week and dedicate time to the effort. We see activity picking up in both the public market IPO area and on the private wealth side as aging founders consider the best path for their clients and families. Westwood can be a perfect home for the right opportunity, but we're very careful to only consider the very best, and only those where the culture is compatible with our own.

In closing, I would like to congratulate the MLP team and specifically, Todd Williams, for a terrific year. We earned a new MLP separate account and a performance fee on our largest existing MLP account. So, great job, Todd, and all the members of the MLP team, including Jason Hanne, and Bill Costello. I'll now turn it over to Bill, to discuss our financials, and I will be available to answer your questions at the end of the call.

Thanks, Brian. Good afternoon, everyone. After I review our financial highlights for the quarter, I will review some slides that we have posted on the investor relations section of our Web site at westwoodgroup.com under the events and Webcast link.

For the second quarter of 2011, our total revenues were $18.9 million, a 43% increase compared to $13.2 million in the second quarter of 2010. Comparing second quarter revenue in 2011 versus 2010, advisory fees increased by 50% as a result of increased average assets under management, revenue contribution from assets acquired in the McCarthy transaction in November 2010, as well as a performance-based fee of approximately $991,000 earned in our MLP product for the 12 months ended June 30, 2011. Trust fees increased by 12% as a result of increased assets under management primarily due to market appreciation, partially offset by net outflows.

GAAP operating income for the second quarter of 2011, was $5.9 million, a 50% increase compared to $3.9 million for the second quarter of 2010. GAAP net income from the second quarter of 2011 was $3.7 million, a 50% increase compared to $2.5 million for the second quarter of 2010. GAAP EPS was $0.52 per diluted share for the second quarter 2011, versus $0.34 for the second quarter of 2010. Economic earnings for the second quarter 2011 were $6.7 million compared to $5.2 million for the second quarter of 2010.

Non-GAAP financial measures, including economic earnings, are defined and reconciled with the most common GAAP financial measures in tables included at the end of our earnings release.

Total expenses for the quarter were $12.9 million compared to $9.3 million for the second quarter 2010. Economic expenses were $10 million compared to $6.6 million for the second quarter of 2010. Primary drivers of the increase in total GAAP expenses the second quarter of 2011, compared to the second quarter of 2010, were as follows; incentive compensation expense increased by $1.9 million, primarily due to the significant increase in pre-tax income, as well as performance based incentive compensation related to investments and marketing goals.

Salary expense increased by approximately $445,000 due primarily to increased head count from the McCarthy acquisition in November of 2010. Financial advisory expense increased by approximately $163,000 due to growth in sub-advised assets and common trust funds at Westwood Trust. Non-cash restricted stock expense increased by approximately $160,000 due to additional grants to employees in February 2011.

Assets under management were $13.8 billion as of June 30, 2011, compared to $9.7 billion at June 30, 2010. Average assets under management for the quarter were $13.6 billion compared to $10.1 billion for the second quarter 2010. The year-over-year increase in assets was primarily due to market appreciation of assets, the acquisition of McCarthy Group Advisors in November 2010, and asset inflows from new and existing clients, partially offset by the withdrawal of assets by certain clients.

Assets under management in the WHG funds were $1.3 billion at June 30, 2011, compared to $652 million at June 30, 2010. This increase was due to significant net inflows into the funds over the last 12 months, as well as market appreciation.

Today our Board of Directors approved the payment of a quarterly cash dividend of $0.35 per share payable on October 3, 2011, to stockholders of record on September 15, 2011. Our current quarterly dividend of $0.35 per share, or an annual rate of $1.40 per share, results in a dividend yield at yesterday's closing price, of 3.5%.

As I mentioned earlier, we have again prepared a few slides to review with you. They're on our Web site under the webcast and events link.

The first slide includes graphs of our assets under management by channel over the last 5 years, as well as a line graph comparing the growth of our AUM over this time frame, to the value of the S&P 500 index. Over the last 5 years our AUM has increased from $5.4 billion to $13.8 billion, the compound annual growth rate of 21% while the market, as represented by the price level of the S&P 500, has had a compound annual increase of less than 1%.

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 last 5 years. Our asset based fee revenue has grown from $6.4 million in the second quarter of 2006 to $17.8 million in the second quarter of 2011, representing a compound annual growth rate of 23%.

The third slide is a bar graph showing economic earnings, total dividends declared, and the growth in cash and investments on our balance sheet for the years 2006 through 2010, as well as year-to-date totals through the second quarter of 2011. Cash and liquid investments grew from $20 million at year-end 2006, to $47 million at June 30, 2011.

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, we are available.

Operator, do we have any questions?

(Operator Instructions) We have our first question from Mac Banks. Go ahead, your line is live.

Good afternoon, gentlemen.

Hi, Mac. How are you?

Could you just give me an estimate of the expected AUM from those 2 mandates that you highlighted on the call?

The mandate for AllCap was about $150 million.

Okay.

And not sure we know the full amount of the other one.

Okay. And that was --

I just know we won.

Okay. Would you expect those to be funded, do you think, in the next 3 months?

Yes.

Okay. Thank you very much.

(Operator Instructions) We have a question from Bob Mitchell. Go ahead, your line is live.

Hi, good afternoon.

Hi, Bob. How are you?

Great. Just wondering if you can provide us with a little bit of update in terms of the McCarthy Group, in terms of how you think that's integrated over the last 7 or 8 months or so. And then you've hired, obviously, a number of people over the last 12 months. What are your thoughts in terms of continuing to build out the infrastructure of the firm, kind of things on the SG&A level, as well as a professional level?

Sure. Well, you know, as I've said both publicly and anybody that asks me about Omaha, they continue to validate our original thinking, which is they're a great group of people. The city of Omaha is a fantastic city and has a lot of wealth accumulation that has quietly happened over a long period of time, and we think there's great opportunity there.

The integration, I think, has gone pretty smoothly. We're trying to figure out what things make sense to do in Dallas versus what things make sense to do in Omaha. Susan Verne went up and did a -- one of the events we did this spring at the Country Club there in Omaha, and it was very well received. We had a lot of people come out, and the staff in Omaha did a great job of getting some really high-quality clients and prospects out for the event.

So, I would say it's going as well as we could have hoped for. And if I had it to do all over again, I would have liked to find 5 Omahas, so it's been terrific, and they're really, really great people.

In terms of staffing, we certainly continue to grow and we continue to build-out as much of the infrastructure through technology as we can. And we've done a number of projects, including having a full upgrade of our portfolio accounting, we've gone paperless, we've gone to an upgraded e-mail archiving system.

We've done a lot of that, and that expense, for a good portion of that, is behind us. We still have some expense ahead of us in terms of finishing out our Web site and a couple of other things that we're redeveloping, but any chance we can to use technology to our benefit we do.

In terms of new hires, I think you'll probably see another analyst. We continue to look for a Director of Research. We've talked to a number of high-quality candidates, and may have some news there as well. In terms of support staff, we certainly could use another person or two there. But beyond that, I don't see -- I don't see any additional hires.

Great. Thank you.

Does that help your question, Bob?

It does. Thank you.

At this time there are no further questions.

Okay. Well, if you have any other questions, push 1. All right. Well, Mac and Bob, thank you for your questions. And if you have any additional questions for Bill or I, please feel free to call us or check our Web site at Westwoodgroup.com where you can get the filings and information. Have a great day. Thanks for listening.

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