Westwood Holdings Group Inc (WHG) 2011 Q3 法說會逐字稿

Thank you everyone for holding and welcome to the Westwood Holding's third quarter 2010 earnings conference call. Today's conference will begin with a presentation followed by a question-and-answer session. Instructions on that feature will follow later in the program. I would now like to turn the call over to today's host, Ms. Sylvia Fry, Vice President and Chief Compliance Officer. Ms. Fry, your line is now open.

Thank you. Good afternoon, and welcome to our third quarter conference call. I would like to begin by reading a forward-looking statement 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 than 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 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. It is nice to see a meaningful recovery over the past few weeks after such a volatile third quarter.

Westwood performance for the third quarter was mixed, with some products well ahead of benchmarks, while others were in line or slightly behind. Peer comparisons were also mixed, as those portfolios that were more defensively positioned fared the best, while those with any hint of global recovery were penalized in September. However, in the short weeks of October, we are back ahead and well ahead of benchmarks for the quarter and year-to-date.

In the area of marketing, marketing activity has remained positive, with new search activity in several Westwood products. We had further institutional wins in our All-Cap product, as well as our income opportunity products, and a number of new searches that have been identified. Our dividend growth strategy performed very well, rising to the sixth percentile for the quarter, the twelfth percentile year-to-date, and the top quartile over the past 10 years in the Morningstar peer group. And we are especially pleased to participate in our first institutional search for the dividend growth product as we recently submitted an RFP for a non-public -- a non-US public fund.

Marketing activity for Westwood Trust Dallas picked up during the quarter, and the momentum has continued into the fourth quarter. We competed against two other firms, and won a large non-profit foundation and several new private wealth customers that had been in the pipeline for quite some time. Westwood Trust Omaha also had several wins, as well as additional cash flows from existing customers.

We are planning client and prospect events this fall, which have proven to be excellent ways to connect with existing customers and to meet prospective new customers. Towards the end of the third quarter, we introduced the new asset class to Westwood Trust customers, with the addition of a short-duration high-yield common trust fund. This common trust fund is managed by a team that has sub-advised our traditional high-yield funds for the past 14 years. This fund has a generous yield of close to 8% and a higher average quality, but most importantly, the historical volatility has been much lower than a traditional high-yield product. The reception from our Trust customers has been very positive, and we are excited to add this asset class to the Westwood Trust enhanced balance allocation.

In addition to introducing a new product, we've been active in reviewing opportunities on the corporate development front. We continue to look primarily in three areas. Number 1, global equity or fixed income; 2, mutual fund assets; and 3, private wealth. And while we have not executed on any of the opportunities that we have reviewed this year, we have learned a great deal about the operational needs that a potential partner may need, and we've been working to strengthen our foundation. We have a number of IT initiatives underway to enhance our capabilities and allow our platform to accommodate global partners and support a much larger business.

I will take a minute to highlight some of these. Number 1 is a co-location facility. We have been relocating our servers to a co-location facility that has 24/7/365 day redundant power, multistage physical security, and environmental stability. This set-up will allow potential partners to more easily adapt to a dedicated information technology center with on-site monitoring and management. We have moved the majority of our equipment to this facility with the balance of our equipment scheduled to be moved over the next 6 months.

Number 2 is a client-service operating system upgrade, where we are moving to an open-end system that integrates portfolio management, performance analytics, accounting and reporting, client relationship management and marketing. This system will provide greater operational efficiency, enhanced client service, greater speed and accuracy, improved compliance and security with lower risks. We expect to have this rolled out by year end.

Number 3 is a website redevelopment. We engaged a web design firm earlier this year with experience in asset management. We anticipate with the new website, greater visibility, easier navigation and multiple opportunities to contact Westwood or submit questions to Ask Westwood, which will be on the site, and really improve our overall brand clarity. We expect this to be completed by year end also.

Fourth is a Westwood Trust performance module. We engaged a national provider of performance solutions last year to implement a system to handle Westwood Trust client performance cash flow, risk, and allocation information. This project has been completed, and they are currently working on a customer port built to enhance our client statements, as well as an iPad 2 application that will allow our trust officers to access performance information from their iPad 2 tablets.

The fifth is a space renovation and video studio. We recently renovated our office environment as our lease expired. We've enhanced our overall technology and done it in a way that promotes teamwork. As part of this renovation, we created an on-site studio that affords us the ability to appear on television programs such as CNBC or Bloomberg News. We can also produce internal videos for distribution to clients or to conduct video conference calls with clients or partner candidates. A portion of these costs have already been expensed. Some have been expensed ratably as incurred, and the balance will be capitalized over its useful life.

We hope that all of these investments will give us an edge over our competitors in the years ahead and allow us to grow with new products in a global world. I will be around to answer your questions, but I will turn it over now to Bill to discuss our financials.

Thanks, Brian. Good afternoon, everyone. After I review our financial highlights for the quarter, I will read some slides that we have posted on the investor relations section of our website at westwoodgroup.com under the events and webcasts link. We literally did post these slides just a few minutes ago, so you might have to refresh your screen when you look for those.

For the third quarter 2011, our total revenues were $16 million, 19% increase, compared to $13.5 million in the third quarter 2010. Comparing third-quarter revenue in 2011 versus 2010, advisory fees increased by 32% as result of increased average assets under management and revenue contribution from assets acquired in the McCarthy transaction in November 2010. Trustees increased by 22% as a result of increased assets under management.

GAAP operating income for the third quarter 2011 was $5.3 million, a 29% increase, compared to $4.1 million for the third quarter 2010. GAAP net income for the third quarter 2011 was $3.3 million, a 26% increase, compared to $2.6 million for the third quarter 2010. GAAP EPS was $0.46 per diluted share for the third quarter 2011, versus $0.38 for the third quarter 2010. Economic earnings for the third quarter 2011 were $5.9 million, compared to $5 million for the third quarter 2010. Non-GAAP financial measures including economic earnings are defined 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 $10.8 million, compared to $9.4 million for the third quarter 2010. Economic expenses were $8.2 million, compared to $6.9 million for the third quarter 2010. Primary drivers of the increase in total GAAP expenses for the third quarter 2011 compared to 2010 were as follows, incentive compensation expense increased by $515,000, primarily due to a significant increase in pretax income. Salary expense increased by approximately $399,000 due primarily to increased headcount from the McCarthy acquisition in November 2010. Shareholder servicing fees related to the distribution of the WHG fund increased by approximately $110,000 due to growth in fund assets.

Assets under management were $11.7 billion as of September 30, 2011, compared to $10.6 billion at September 30, 2010. Average assets under management for the quarter were $12.8 billion, compared with $10.2 billion for the third quarter 2010. The year-over-year increase in assets was primarily due to the acquisition of the McCarthy Group Advisors in November 2010 and net asset inflows from new and existing clients, partially offset by market [depreciation]. Assets under management in the WHG funds were $1.1 billion at September 30, 2011, compared to $760 million September 30, 2010. This increase is due to significant net inflows into the funds over the last 12 months, partially offset by market depreciation.

Also today, our Board of Directors approved the payment of a quarterly cash dividend of $0.37 per share, an increase from the previous quarterly dividend of $0.35 per share. Our current quarterly dividend of $0.37 per share, or an annual rate of $1.48 per share, results in a dividend yield at yesterday's closing price of 4.1%.

As mentioned earlier, we have prepared a few slides for [you to view]. Again, the slides are available on our website in the investor relations section. 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. You can see the impact of the third quarter market decline in the charts. But over the longer term, you can see that we have grown out at a compound annual growth rate of 15% over the last five years against the backdrop of a down market.

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 five years. Our asset-based fee revenue has grown from $6.5 million in the third quarter 2006 to $16 million in the third quarter 2011, representing a compound annual growth rate of 21%. This graph again illustrates the consistent growth in our asset-based fee revenue against the backdrop of a down market.

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 third quarter 2011. Cash and liquid investments grew from $20 million at year-end 2006 to $51 million at September 30, 2011. That concludes my discussion of our financials, and I'll now turn the call back to Bryan. Thanks, Bill. Great job. Any questions from the audience?

(Operator Instructions) We have a question from Mac Sykes. Your line is now open.

Good afternoon, gentlemen. How are you?

Hello, Mac. How are you?

Great. Just a couple quick questions. The G&A, I know you talked about some build outs you've had. Is this a good run-rate here now? Or is it going to be coming down a little bit?

Is that a good run rate at this point through third quarter, or is the question?

It was about $1 million this quarter. Just curious, was there some special, has there been special technology build out in that, or is this about the normalized rate going forward per quarter?

Well, in looking at all the various projects, a lot of the projects have already been expensed, and you've seen them in the last 2 or 3 quarters as part of the run rate. In terms of what we have ahead of us, I will defer to Bill to give you any specifics.

Yes, I would say G&A-wise, I think that's a reasonable run rate, Mac. The third quarter reflects about two-thirds of the normal, quarterly depreciation for the office build out. But that's not going to be a significant uptick, so I would say that's a reasonable run rate this quarter for G&A.

How much is in the dividend growth strategy right now? And then what is the size of the mandate you're looking at?

There's about $75 million in the strategy now, and we don't disclose the size of the mandate we're looking at. But as I've said in prior calls, anytime I've [said] mandates of significance, I would define that as being over $50 million.

Great. Thank you very much. Appreciate it.

You're welcome.

(Operator Instructions) There are no more questions. 1 just fell in right now. Bob Mitchell, your line is now open.

Good afternoon. If I quickly read your Q that you filed, it looked like you bought some stock back. And I wondered if you could just talk a little bit about that. How would you characterize that stock buyback program? As opportunistic, systematic, or how would you think about it?

I think I would characterize it as both. It is opportunistic from a standpoint that we finally have a program in place now so that we are able to participate in periods of market volatility and buy stock back at attractive prices. As you may know from all of the rules surrounding buybacks, it's difficult for a Company our size to do anything meaningful in a short period of time because the rules are such that you can't be the first [rate]. You can't participate in the last 30 minutes. You can only be a percentage of the volume, on and on and on. So, I view it from a systematic basis as something that will be ongoing and something that we'll continue to do. But, we are going to be as disciplined as we can be in terms of price when we are buying it back.

Okay. And in terms of headcount, you mentioned that was 1 reason that the G&A increased -- just talk about where in the organization you hired people?

Sure. Well as you know, we've grown quite a bit in the last few years.

Right.

When we took on Omaha, that added to the complexity of both our accounting and our HR functions, so we hired a new person in the payroll area, or in the AP area to help us in the accounting department. We also added to the client support area, and we currently have an open position for an analyst. But other than that, I do not see much in the way of increased headcount in the near-term.

Maybe if you could just talk a little bit about the integration of McCarthy? And terms -- from an investment perspective. Just give us an update in terms of how you think you've integrated that acquisition?

It's the first 1 we've ever done, so I'm sure we could have done some things better. But overall, I'm very pleased. If I had an opportunity to do it again, I would absolutely do it. Number 1, the people are fantastic, and the customers are very high-quality. And that's really, as we are sorting through corporate development opportunities, the main thing we look for are really high-quality people and really high-quality customers. And that's what we got.

In terms of how we have integrated them onto our systems, I think we've done a reasonably good job of that. It's an ongoing effort and a lot of -- some of the things that they did, they did really well. Some of the things we do, maybe we did well also. And combining those 2 things just takes a little bit of time. But I'm pleased with where it is. They've had some really nice wins here recently. Some of those wins have not yet funded. But I think we'll see in the year ahead, some nice opportunities to grow the business.

But back to your point on headcount, that is 1 place that we would like to add a person is in the Omaha office to help us expand our marketing and client service. And that is another search that's active. So, to readdress your first question, we are looking for an analyst position here in Dallas, and we're looking for a marketing client service person in Omaha.

Great, thank you.

And then I'd just like to congratulate Rich Jarvis and Michael Wall in Omaha, and C.J. [McDonnell] and Matt Lockridge here in Dallas, which those are the 4 that comprised the dividend growth team. And they've really done a spectacular job in a really volatile market. And we see great opportunities for that product in the years ahead.

We have another question from Mac Sykes. Your line is now open.

Hello, Brian. Just 1 follow-up. Last year, you declared a special dividend. I'm just curious in this market environment and from the acquisitions that you may be looking at, would it be more prudent to be holding higher cash levels, you think, through the end of the year?

Oh I don't think whether we did a special dividend or not had anything to do with the acquisition environment or the cash levels. It was really more of a feeling on the Board's part that it would be more prudent to raise our dividend and get us over the 4% level in a dividend yield ongoing than it would be to pay a special, where we typically don't get a multiple on that. We did an extra dividend last year because, you'll recall, as of mid-December, we had no tax policy. And just before Christmas, we finally extended, if you want to call them the Bush tax cuts for 2 more years. We felt it was prudent when we met in October of last year, to go ahead and pay an extra-special dividend and to do it in calendar year 2010. Because if tax rates had gone up, that would have been the best thing for shareholders. But, we felt as a Board, that the best thing for us was to raise the ongoing dividend and have it be in excess of 4%.

Thank you.

We have no further questions.

Are there any other questions?

There are no further questions.

Okay, well if you have any more questions, feel free at any time to call Bill or myself. Or look to our website and find any of our filings at westwoodgroup.com. Thanks for your time.

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