Westwood Holdings Group Inc (WHG) 2012 Q2 法說會逐字稿

Thank you all for holding, and welcome to the Westwood Holdings Group second 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 second quarter 2012 earnings 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, 2011 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 would like to turn the call over to Bill Hardcastle, our CFO.

Thanks, Sylvia. Good afternoon everyone. As you may have seen, we filed our 10-Q this afternoon. If you have any questions after reading the 10-Q, feel free to give me the call at the phone number listed on our website. As a backdrop for the discussion of second quarter financials, I would like to point out that second quarter 2012 results include one-time and ongoing expenses related to our newly launched subsidiary, Westwood International Advisors. However, there was no revenue contribution from the Westwood International in the second quarter.

I would also like to highlight several significant items that impacted second quarter 2012 pre-tax income. Performance fees in our MLP strategy of approximately $1.2 million compared to $1.0 million for the second quarter of 2011, a gain of approximately $899,000 related to the sale of 100,000 shares of Teton Advisors, one-time recruiting and legal fees of approximately $1.4 million related to hiring Westwood International team members, amortization of approximately $1.2 million related to Westwood International bonus awards, and ongoing expenses related to Westwood International operations of approximately $1.3 million.

Moving onto revenue for the quarter. For the second quarter 2012, our total revenues were $20.1 million compared to $18.9 million in the second quarter 2011. Comparing second quarter revenue in 2012 versus 2011, asset-based advisory fees declined by 2% as a result of decreased average assets under management due to asset withdrawals by certain clients and market depreciation, partially offset by inflows from new and existing clients. Performance-based advisory fees increased by 19% due to a larger performance fee on our MLP strategy.

Trust fees increased by 8% as a result of increased trust assets under management, primarily due to asset inflows from new and existing clients. GAAP net income for the second quarter 2012 was $2.2 million compared to $3.7 million for the second quarter 2011. GAAP EPS was $0.30 per diluted share versus $0.52 for the second quarter 2011.

Economic earnings for the second quarter 2012 were $5.2 million compared to $6.7 million for the second quarter 2011. Economic EPS was $0.72 per diluted share versus $0.94 for the second quarter 2011. Total expenses for the quarter were $16.3 million compared to $12.9 million for the second quarter 2011. Economic expenses were $13.3 million compared to $10.0 million for the second quarter of 2011. The primary drivers of the increase in total GAAP expenses for the second quarter of 2012 compared to the second quarter 2011 were as follows; one-time recruiting and legal fees related to hiring Westwood International team members of approximately $1.4 million; amortization of approximately $1.2 million related to Westwood International bonus awards; salary expense increased by approximately $590,000, primarily due to the addition of Westwood International employees, as well as other new hires. Partially offsetting these increases was a decrease of $204,000 in incentive compensation.

Assets under management were $13.2 billion as of June 30, 2012, compared to $13.9 billion, at June 30, 2011. The year-over-year decrease in assets was primarily due to asset outflows from certain clients and market depreciation, partially offset by asset inflows from new and existing clients. Assets under management in the Westwood funds were $1.5 billion at June 30, 2012 compared to $1.3 billion at June 30, 2011. This increase was due to net inflows into the funds over the last 12 months.

Also today, our Board of Directors approved the payment of a quarterly cash dividend of $0.37 per share payable on October 1, 2012 to stockholders of record on September 14, 2012. The 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%. That concludes my discussion of our financials, and I'll now turn the call over Brian Casey.

Thanks, Bill, and thanks to all of you for joining our call today. Well, coming off the strongest first quarter stock performance since 1982, it was not surprising that the second quarter spent most of the period in the red, with a relief rally at the end of June. Investors again sold equities, and fund flows continued to favor fixed income, or equity income oriented strategies. This resulted in favorable flows to our income opportunity mutual fund, WHGIX, as well as several new institutional client wins in the income opportunity area.

On the equity side, most Westwood equity products were down more than the market, as we remained underweight in the top performing utilities and consumer staples areas.

But we did have some bright spots, including MLP, which had another great quarter, and once again earned a nice performance fee for the prior year. Thanks to Todd Williams, Matthew Na, Bill Costello, and [Jason Hanya] for their terrific work in this area.

Another bright spot is small cap, which is well ahead of its benchmark, and was just a touch outside of the first quartile year-to-date. Small cap is on the verge of putting together strong back-to-back years, which will help our marketing efforts in the year ahead.

Search activity is centered around income opportunity, with some interest in MLP. We are excited to finally see some momentum from both consultants and plan sponsors for both products. Assets and income opportunity currently exceed $1.5 billion, and we have the capacity to manage more than three times that amount. MLP interest is increasing, and we have some outstanding searches. But it will take more sponsorship from the consultant community to see widespread adoption of MLPs by the plan sponsor community.

While the industry continues to experience outflows from equity funds, we've managed to grow the Westwood funds by over 15% over the past year. The income opportunity fund continues to see most of the daily fund flows, and recently moved to a five star rating at MorningStar, as did our dividend growth fund. We featured the Westwood short duration high-yield fund at the MorningStar conference, and were encouraged by the reception from advisors. This fund was recently approved by one of the big wire houses for their select list and for a model program utilized by their advisors. As this fund gets more history, we are encouraged with its potential in high current yields.

The Westwood trust team has been busy making calls and having some success converting new customers, but unfortunately, volatile months like April and May tend to slow momentum. We are encouraged by the depth of the pipeline, and we remain hopeful that investors will begin moving money again as the market continues to recover.

As Bill noted, we have a lot of expenses associated with the creation of Westwood International advisors. I am very proud of our entire team and all that we have accomplished together in the past few months. We've upgraded our financial, trading, and portfolio accounting systems to accommodate global and emerging market securities. We opened 54 markets, and implemented global and emerging market portfolios for Westwood trust. The team has been working in Dallas, and will begin working in our Toronto office in August.

This quarter marks a tremendous milestone in our history, where we've completed 10 years of history as a public company. And we have a slide presentation that you can access on our website, westwoodgroup.com. If you'll go to the top right hand corner, and click on investor relations, and scroll down to the middle of the page under events and presentations, you can click on the link Q2 2012 Westwood Holdings Group earnings conference call webcast. If you haven't registered before, you'll need to do that quickly. If you have already registered, then that should show up, and you will see the slides on the page.

So, when we set out 10 years ago, we had some key objectives. If you look at the slide presentation here on slide number one, our first and primary objective was to build a firm that transcends a talented founder, Susan Byrne, by creating a world-class research department to support multiple products that produce superior returns for our clients. We said we wanted to manage our Company the way the companies that we would own in our clients portfolios manage theirs.

There were a number of attributes that we thought were important when we were looking at superior companies. One is that they generate strong free cash flow. We like to see employees as owners across all levels of the business. We like companies that are shareholder friendly by sharing their excess cash in the form of dividends or buying stock back. We like to see a stable to improving ROE. We like a meaningful dividend payout. We like strong and improving balance sheets, and we like to see some record from Management of value creation. We said we would like to acquire mutual funds opportunistically, that we would be very selective in the private wealth area, that we would build high-quality businesses where we saw demand, and that we always wanted to support our community with both time and resources.

Then, of course, we want to create shareholder value and perform well versus our peers in the broad market indices. If we go to slide two, and see that we've developed a research department and a structure to support multiple products across the top. It is interesting to look back at 2002 versus today. We had 43 people in 2002. We have 93 people today. Those 43 people were from two countries; these 93 people are from eight countries. We had 7 CFAs. We have 28 CFAs today. We had 8 advanced degrees, and 32 advanced degrees today; 14 investment professionals, and 38 investment professionals.

Perhaps one of the things I most proud of is our retention. More than half of the people that were employed in 2002 are still at Westwood. If we look at those that left, 11 of them left to start a family or retired. Four of them left to accept new positions, and four of them were asked to leave. If we include Omaha in this calculation, nearly two-thirds of the people that were here in 2002 are here today.

If we go to the next strategy, we have created multiple products. The next slide on page four. We have developed a number of additional strategies. If you look at 2002, in the dark blue, we had 7 strategies. We still have all 7 of those today, but we've created 16 additional strategies on the domestic side, and 4 international strategies. They are listed over here on the right in blue for a total of 20.

And then lastly, as part of our objectives, we wanted to create superior performance for our clients. On pages five and six, you can see that the products that we had in 2002, and the alpha generation that we generated for both large-cap, dividend growth, all-cap value, and SMid-value was significant.

And then the newer products we've created since then on page 6, income opportunity, MLP, and small-cap value, have also generated superior performance for our clients.

On page 7, our next objective was to manage our company in a similar way as companies that we would own for our clients would manage theirs. All of those attributes that I mentioned are important when we're looking at businesses.

Some quick comparisons here. ROE is slightly ahead of our peers. Our current yield for WHG is well ahead of our peers. We have a strong dividend payout ratio. We have no debt, have never had any debt, and it is unlikely we will ever have any debt at Westwood. We have a strong insider ownership, with 32% of the Company owned by the folks that work here, versus 9% for the peer median. The peer group, listed below there in the footnote, those are the tickers for all of the companies that we have included in the asset management peer group.

If we go to page 8, and continue along with that. As I said, 32% of the Company is owned by the people that work here or who are Directors of this Company. We have also had some very long-term shareholders, and I would like to thank, first and foremost, the Gabelli Organization, and specifically Mario Gabelli, who has been a shareholder from the very beginning. We appreciate that. Third Avenue Management, Ian Lapey, BlackRock, Vanguard, Dimensional Fund Advisors, and Northern Trust. More than five years Royce and Associates has been a shareholder, and I'd like to thank Whitney George and Lauren Romeo for their support. State Street, of course, and then one that is not on here, that became a shareholder in '08 is Bob Mitchell with Conestoga Capital Advisors. We appreciate you being a shareholder. We appreciate you sticking through good times and bad with us. They have been mostly good. We appreciate your being a shareholder. It means a lot to us.

If we go to the next slide on page 9, we did say we want to grow our dividend, which we have done a nice job of. We started with a dividend of $0.02 back in 2002. That has grown to $0.37 a quarter here in 2012. That's about an 18.5 times multiple from the $0.02 we started with.

But more importantly, if we look on page 10 at the total dividends we have paid, we have paid $12 a share in dividends. So if you think about that, we've paid out more in dividends, $82 million, than our original market cap of $65 million when we went public.

If we look at how that stacks up over time on page 11, we said we would maintain a conservative and growing balance sheet. We started with $15 million in cash and investments. Today we have $52 million. That's a 13% compound annual growth rate. We had no debt. We still have no debt. We've grown our book value or shareholders' equity from $17 a share to $71 a share. That's a 15.7% compound annual growth rate.

On the acquisition side, on page 12, we said we would like to acquire mutual fund assets opportunistically. I honestly thought we would have more opportunities to do that as banks began to get rid of non-core businesses. That has not happened. They have continued to hang on to them, as they haven't been making loans like you would hope they would. But we were able to acquire the Philadelphia fund, which was a small fund. It helped us in the beginning when we were starting the Westwood funds. It was a good opportunity to purchase assets and help out the funds when they were getting started.

We bought McCarthy Group Advisors in the private wealth area. What we've always said there is we want to own businesses that are in attractive, growing markets with limited competition.

Number one, most important thing is that we have a strong cultural alignment of values. We would like to have a private wealth business that has a small number of accounts with higher average balances. We want strong financial operating history, and we want someone who, by partnering with us, will benefit from the efficiencies we've developed over being in the trust business for over 15 years, and from the product depth we have of multiple products. But, most of all, what we got in this transaction is great people. From Art Bertscher and Rich Jarvis on down to everybody that works there, they care about every one of their customers, and they always try to do the right thing.

If we look at the next page over here on page 13, we said we would build high quality businesses where we saw demand. At a time when the mutual fund industry has really peaked, and assets have been going to ETFs and other areas, we still felt like there was room for someone like us to bring high-quality product at institutional quality prices. We've managed to grow a mutual fund business from nothing in 2005 to $1.5 billion. It is now 11% of our total assets. We've got a total of eight different funds, and all of them are doing reasonably well in the marketplace.

If we look at page 14 and talk a little bit about Westwood International Advisors, as we have said for the last couple of years, the consensus view is that global and emerging markets have more of an attractive growth profile for investors than developed markets do. And as a result, plan sponsors, they continue to rebalance their asset allocation models more towards global and emerging market equities. The Westwood International Advisors team has a demonstrated success in this area, and they have been very well received by prospective institutional clients.

We go to the next page, which is page 15. We wanted to be a good steward of our community. We support our community, not just by writing checks, although we did plenty of that, as you can see out here on the outside of these pictures, but more importantly, with our time and our own energy. We have a group that goes down to the soup pot every month and serves lunch to the homeless, and those less fortunate. We have served any 27,300 meals over the years. We also get together as a Company, and we build a house with Habitat for Humanity every year. We've sponsored and helped build seven houses now.

If we look at how we score relative to others, which is what most of you on this call care about, on page 16, and look back at where we were in terms of creating value at revenues, Revenues were right at $20 million when we started. They are over $70 million today. If we go to the next page and look at our market cap, which when we spun out was roughly $65 million. It's $300 million today.

And then we look at, on the next page, slide 18, our market cap history. What we look at versus the S&P, we have had a 15.7% annual growth rate versus the S&P which is 3.9%. So, it's been a pretty good investment relative to the S&P.

And some might say, what about the Russell 2000? If we look at the Russell 2000 on the next slide, which is page 19, we compare very favorably relative to both the S&P and the Russell 2000. Then if we look at our peers over here on slide 20, hats off to Diamond Hill, Epoch, and Virtus. They've certainly knocked it out of the park since they've been public. BlackRock had 361% return, and Westwood at 350%. You know, we feel in pretty good company with BlackRock, Cohen & Steers, all the way down to the Gabelli Organization. They are all terrific companies and very well run. All of them are great peers for us to compare ourselves to as we go forward.

None of this would've been possible without the help of the folks that work here. Your commitment to excellence is what has made this happen. On page 21, these are all of the people that have been here for 10 years or longer. On slide 22, everybody that has been here for 5 years or longer. I want to thank you again for your commitment and all of your hard work. It's terrific to see what we have been able to accomplish.

If we look at the last couple of slides here, and we go to the strategies that we have, this is what it looks like today. We've made it 10 years now. We've made it through the tech bubble. We made it through Sarbanes-Oxley. The financial crisis. All of those experiences leave us better prepared for the next 10 years. Best of all, the expense of creating the infrastructure of a publicly traded company is behind us. All of the products you see on this page, if you look at them in aggregate, they represent more than $100 million in capacity, versus the $13 million and change we have today.

But, interestingly, if you look at this last page, which is our average fee. Over the past five years, our average fee has ticked up nicely from about 46 basis points to 53 basis points today, as our product mix has shifted from legacy business that has low average fees to more capacity constrained products, which have higher average fees. Of course, with the addition of emerging markets, the improved performance of small-cap, the potential for MLP, all of these things should be further wind to our back. We really look forward to the next 10 years, and we are excited about what we will achieve. We are happy to take your questions. If you have a question, operator, I think you press one on your keypad.

That is correct, sir. (Operator Instructions) Our first question comes from Mac Sykes of the Gabelli Company.

Good afternoon, gentlemen. Congratulations on the anniversary, and also on the Westwood International Advisors team. That's terrific.

Thank you, Mac.

If you could walk me through the P&L impact and the cash impact from the addition, that would be very helpful.

The addition of the, what was the last part?

The addition of the Westwood International Advisors team. If you could just walk through the P&L.

Mac, it's Bill Hardcastle. We tried to lay out the impacts of Westwood International in the press release if you've seen it. So, there were a one-time recruiting and legal fees related to hiring of the team of about $1.4 million in the quarter. We also amortized some bonus awards to team members, and that was $1.2 million for the quarter. And then ongoing expenses for Westwood International operations, and that's salaries, bonus accrual, office rent, et cetera, that was about $1.3 million in the quarter.

Mac? He went away. We lost you, Mac. Okay. Operator, he unfortunately got cut off or hung up, didn't like Bill's answer, I don't know. But, if anybody else has any other questions, if you'll press one.

The next question is from Chuck Hendershot.

Follow up on Mac's question. It looks like from the press release about $2.5 million quarterly of drag on your quarterly numbers. Do you have a projection of when you would expect revenue from the organization, and when WIA might go break even?

Thank you, Chuck. I'll let Bill address the drag from the new costs. But certainly in terms of revenue, when we do things like this, we don't budget for immediate revenue. But we do believe that in the space, emerging markets and global, that there is a shortage of good managers, and there is demand from plan sponsors for that asset class. We have done absolutely no marketing at this point, and in fact have had inbound calls from plan sponsors who are interested in talking to us when we are ready to talk to them. So while I certainly can't give you a revenue projection as to when that would happen, we do feel very encouraged by the fact that we have a really strong team with strong historical performance, and a shortage of managers in that space. And then Bill, if you want to answer the second part of his question.

Sure. Just going back through the expenses again, the one-time legal and recruiting fees, obviously those are, like we said, one-time. So those do not continue. The ongoing expenses of $1.3 million in the second quarter, that number will go up as we have a full quarter of salaries, and office lease, and so forth, and as we hire new members to the team. And then the amortization of the bonus awards of $1.2 million, that amortization will continue for a couple, three more years. But at the end of 2013, close to 80% of that amortization will be expensed through the income statement.

We do have Mr. Sykes back. Your line is open.

Sorry. I got cut off. Modern technology, here. Just a quick question on the share count. I was just looking at the difference in the weighted average diluted shares this quarter, and the outstanding that is listed on the Q. I assume that is related to the vesting of the RSAs. I was just wondering if you could go through some of that accounting.

Right. Mac, it's Bill. That is correct. We used the treasury share method of calculating diluted shares. That's how you have to calculate the dilutive impact of unvested awards, and we had that calculation in the 10-Q.

Okay. Thank you.

The next question is from Rebecca Simmons. Your line is open.

They answered all of my questions. Thank you so much.

Thank you.

(Operator Instructions) And we have no additional questions in queue at this time.

Okay. I will wrap it up, and just say that we couldn't be more excited about Westwood International Advisors. The folks have been down here now, for a couple of months. They are everything we had hoped they would be. They are committed, terrific investment professionals, and in many ways, in the last 10 years, every product we have, we have built from scratch. If you think about the risk associated with building a product from scratch, where you have to hire the people, spend the money, build the record, and then, after three years, you get to see if the record is any good, and if the team can work well together, and if you have something that you can market.

This is a team that has been together for a long time. They work incredibly well together. They finish each other's sentences, and they are excited to be part of Westwood. And I think as we begin to get out and tell that story, that we are going to have a lot of terrific reception from the institutional community, and the relationships that we've had with many of those consultants that go back 25 or more years.

Thanks again for your interest today. If you have any follow-up questions, please call Bill or myself. All of our filings and all of our information is on our website at westwoodgroup.com. Thanks again for your time.

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