Westwood Holdings Group Inc (WHG) 2012 Q1 法說會逐字稿

Thank you all for holding, and welcome to the Westwood Holdings Group first quarter 2012 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 first quarter 2012 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 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, 2011, 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 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 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. Well, the stock market rewarded investors with the best first quarter since 1982, and while US economic indicators and investor sentiment improved, the markets remained highly correlated. And even though growth dramatically outperformed value across all cap ranges, most Westwood value products kept pace or exceeded benchmarks during the first quarter. Industry wide, domestic equities continue to experience outflows, although the velocity has slowed recently.

Fixed income and solution-oriented products remain the most popular, and our Income Opportunity Fund has been a big beneficiary of this trend. Assets under management and our income opportunity product now exceed $1.2 billion, which has grown four-fold over the past two years. Historically, the bulk of investor demand and assets came from the private wealth channel and into our mutual fund WHGIX, but we've recently won a number of new institutional separate accounts that will fund in the second quarter. The MLP asset class is experiencing an increasing level of interest, and our MFP product has performed well. We're currently in three active searches and are hopeful that we'll win these mandates. We're also on track to earn a performance fee in the second quarter but of course will not know until June 30 whether that performance holds or what the amount of the fee could be.

Large cap outperformed its benchmark for the quarter but experienced net outflows. The bulk of these outflows were tactical overweights that were rebalanced back to targets by large plan sponsors or where they were simply rebalancing their asset allocation to include additional alternative asset classes. Two things to note about this that were positive. Number one, we did not lose any of these large cap clients, and we remain a valued provider. And secondly, the outflows were from our largest accounts, which by definition have the lowest average fees.

Turning to small cap, we had another great quarter, and it is now a top quartile product over the past 12 months. We are seeing additional interest, and we have ample capacity in the small cap strategy. In the short-duration high-yield fund, it's off to a great start, with over $100 million at Westwood Trust and in our Westwood short-duration high-yield mutual fund. The pipeline for new business includes over $200 million of wins that should fund in the second quarter. Most of those are in income opportunity, but we were also pleased to see a new large cap commingled fund with approximately $80 million in assets. The client is a global manufacturing company 401k plan, and the assets arrived in early April, so they are not reflected in our first quarter assets under management. This is welcome news, as it gives us yet another cost-effective vehicle to deliver our large-cap portfolio to prospective defined contribution clients.

Our family and mutual funds, the Westwood Funds, continues to see strong organic growth with assets up 24% over the past 12 months. As mentioned previously, the biggest leader in terms of fund flows is the Westwood Income Opportunity Fund, which now has over $675 million in assets. Our new Westwood short-duration high-yield fund has surpassed $30 million in assets in only a few short months. It continues to generate interest as new advisors are introduced to the philosophy and strategy. Westwood is on the road today at the Wilmington Trust Conference featuring the short-duration high-yield fund and will also exhibit at the Schwab and Morningstar conferences later this summer.

In the private wealth area, it has been refreshing to see that private wealth investors are again moving money around after having been frozen during most of the recession. For the third quarter in a row, Westwood Trust has gained not only new client assets but also new cash flows from existing clients. Omaha is really hitting stride and also bringing in new accounts. We recently completed a search for a private wealth advisor, and we're very pleased to welcome Doug Gilbert to the Westwood Omaha team. We have scheduled spring events in Dallas and Omaha to meet with existing clients and introduce Westwood Trust to prospective clients in centers of influence.

I'd also like to note something of significance as it relates to Westwood Trust. I read the other day that not a single de novo bank was created in the US in 2011. This is the first time in nearly three decades that the US has had a year with no new bank startups. So it is clear is that the barriers to entry for new banks have increased, with higher regulatory burdens and higher capital requirements. Westwood Trust is a chartered state trust bank that can take in customer assets, provide trust services, and aggregate clients' funds into low-cost commingled funds. The note of this commentary is that we believe the market will place a higher value on clean, well-established banking franchises in the years ahead. Westwood Trust was chartered in 1974 and has an exemplary compliance record.

On the corporate development front, we've discussed with you over the last few years our desire to expand globally. You may have noticed our press release of April 11 announcing the expansion of our investment capabilities with the addition of global and emerging markets equity strategies. Westwood International Advisors will be based in Toronto, initially be led by five people who have worked together for many years. They've developed an impressive track record of successfully managing global and emerging market strategies, and we're thrilled to have them as part of the Westwood team. We're especially pleased to be in Canada, which is recognized as the leader in international finance, and also to be in Toronto, which we believe to be an ideal place for our first international office. While I'm sure you'll have many questions regarding the timing, specific costs, revenue projections, etcetera, for our new Westwood International Advisors subsidiary, we view this as a second quarter event and will address all of your questions in our second quarter conference call in July. We will have some one-time charges, which will be described in detail in our second quarter 10-Q and conference call, but we believe so strongly in the potential growth of this subsidiary that we believe the one-time charges to be well worth the investment in our future.

Building products has been a significant part of our growth over time. In the past five years, we've added six products and more than doubled our assets under management. We've built our research capabilities while increasing revenues, profits, and dividends to shareholders during this five-year period. We intend to do the same with our emerging markets and global platform over the next five years. We have over $30 million in T-bills earning next to nothing on our balance sheet and a history of earning more than a 20% return on invested capital over the past five years.

In our view, a superior use of our cash is to invest in talent and to reinvest in our business. Westwood International Advisors is that investment and represents an exciting new chapter for Westwood. We expect to have more details to share with you in the months ahead. I'll now turn it over to Bill to discuss our financials, and we'll take your questions at the end of the call.

Thanks, Brian. Good afternoon, everyone. As you may have seen, we filed our 10-Q this afternoon, and if you have any questions after reading the 10-Q, feel free to give me a call at my phone number listed on the website. After I review our financial highlights for the quarter, I'll go over some slides with you that we have prepared and posted on the Investor Relations section of our website, westwoodgroup.com under the Events and Webcasts link.

For the first quarter 2012, our total revenues were $17.9 million, compared to $17 million in the first quarter 2011. Comparing first quarter revenue in 2012 versus 2011, Westwood Management posted a 6% increase in advisory fees as a result of increased average assets under management due to market appreciation and inflows from new and existing clients, partially offset by withdrawals by certain clients. Westwood Trust posted a 3% 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 withdrawals. GAAP net income for the first quarter 2012 was $3.8 million, compared to $3.5 million for the first quarter of 2011. GAAP EPS was $0.52 per diluted share for the first quarter, versus $0.50 for the first quarter 2011.

Economic earnings for the first quarter 2012 were $5.8 million, compared to $6.1 million for the first quarter of 2011. Economic EPS was $0.80 per diluted share for the first quarter 2012, compared to $0.85 for the first quarter 2011. The year-over-year decrease in economic earnings was primarily due to increased compensation expense, together with the higher proportion of cash-based compensation expense relative to equity-based compensation, as well as an increase in our effective tax rate. Non-GAAP performance 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 $11.8 million, compared to $11.4 million for the first quarter of 2011. Economic expenses were $9.8 million, compared to $8.9 million for the first quarter 2011. The primary drivers of the increase in total GAAP expenses for the first quarter of 2012 compared to 2011 were as follows. Incentive compensation expense increased by approximately $398,000 due to higher pre-tax income and higher performance-based incentive compensation. Salary expense increased by approximately $287,000 due to increased head count and salary increases for certain employees. Legal expense increased by $148,000, primarily related to the establishment of Westwood International Advisors.

Partially offsetting these increases was a decrease of $518,000 in restricted stock expense. In the first quarter of 2011, we recognized $584,000 of performance-based restricted stock expense, while we will not begin recognizing performance-based stock expense for 2012 until we conclude that it's probable that we will achieve the performance goal for vesting in 2012. Assets under management was $13.9 billion as of March 31, 2012, compared to $13.3 billion at March 31, 2011. The year-over-year increase in assets was due to market appreciation, as well as 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 Westwood Funds was a record $1.5 billion at March 31, 2012, compared to $1.2 billion at March 31, 2011. The increase was due to 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 $0.37 per share payable on July 2 to stockholders of record on June 15. The quarterly dividend of $0.37 per share or an annual rate of $1.48 per share results in a dividend yield at today's closing price of 4%.

As I mentioned earlier, we have prepared a few slides to review with you. The first slide includes graphs of our assets under management by channel over the last five 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 five years, our AUM has increased from $6.1 billion to $13.9 billion, a compound annual growth rate of 18% in a relatively flat market environment. The second slide breaks down the components of our growth in AUM over the last five years between net flows, market appreciation, and acquisition. Over 50% of our asset growth over this time period is due to positive net flows, representing an average organic growth rate of over 9% per year.

The third slide is a bar graph with our quarterly asset base fee revenue and the line graph of the S&P 500 over the last five years. Our asset base fee revenue has grown from $7 million in the first quarter of 2007 to $17.6 million in the first quarter 2012, representing a compound annual growth rate of 20%. This graph illustrates the consistent growth in our asset-based fee revenue against the backdrop of a flat market environment. The fourth 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 2007 through 2011, as well as year-to-date totals for the first quarter of 2012. Cash and liquid investments grew from $27 million at year-end 2007 to $49 million at the end of the first quarter 2012. That concludes my discussion of our financials, and I'll now turn the call back to Brian.

Thanks, Bill. If you have any questions, operator, please let us know.

(Operator Instructions). And we have a question from Mac Sykes. Your line is open.

Good afternoon, gentlemen.

Hi, how are you?

I know -- on this MLP fund, could you just let me know how much is subject to performance fees, how much AUM? And is this an annual performance fee?

It's one client that has a performance fee, and the AUM varies depending on whether they've got flows in or out. But if you're trying to model the performance fee, I think it's a tough thing to model.

Okay. And is it a generic benchmark or something that's internal?

It's the Alerian index.

Okay. Thank you.

And we have no further questions in queue at this time.

Okay. (Operator Instructions). Okay. We want to thank everybody for joining our conference call today, and if you have any follow-up questions, please feel free to call either me or Bill Hardcastle or go to our website, westwoodgroup.com, where we have all of our annual filings. Thank you.

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