Westwood Holdings Group Inc (WHG) 2012 Q3 法說會逐字稿

Thank you all for holding and welcome to the Westwood Holdings Group third-quarter 2012 earnings conference call. Today's call will begin with a presentation followed by a Q&A 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 third-quarter conference call. I would like to begin 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, we 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 Brian Casey, our CEO.

Well, thanks, Sylvia and many thanks to all of you for taking the time to listen to our call today. If you have not yet had a chance to review our earnings release or our 10-Q, we were pleased to report record overall assets under management of $14.1 billion and record assets under management for the Westwood Fund of $1.6 billion.

In addition to positive flows into the Westwood Funds, we earned several new clients on the institutional side of our business. We raised our ongoing quarterly dividend and moved the pay date to December 14 to preserve the certainty of current dividend tax rates.

Well, the market surged ahead in the third quarter and the performance for our domestic equity products was mixed. Large-cap underperformed its benchmark, but managed to stay in the top half of the peer group year-to-date. SMidCap and All cap were ahead of their benchmarks and improved their relative performance standing by placing in the top third and top quartile of their respective peer groups for the quarter while small cap was well ahead of the benchmark and just outside of the top quartile year-to-date.

Our income-oriented products also fared well as both the income and MLP products were ahead of their benchmarks. MLP beat the benchmark by over 200 basis points, which is a terrific start to our performance fee measurement period, which ends June 30, 2013 for one of our performance-based clients.

Performance for emerging markets, global equity and global dividend, are off to a strong start and have been particularly well-received by our Westwood Trust clients and the institutional consulting community. All of the specific performance records for Westwood institutional products can be found in the commercially available databases or in Morningstar for our mutual fund products.

Marketing activity has picked up, especially for our income opportunity small-cap and MLP products. We won three new institutional accounts for income and we currently have seven outstanding small cap searches underway. We have done a big marketing push of our MLP product and we have conducted 16 meetings to date. I would say the challenge with MLP is partially to educate the consulting community on the investment merits of the asset class and partially to explain the administrative requirements.

The investment merits are quite clear. MLPs have a low correlation with other asset classes, produce a high current yield and offer a distribution growth profile that is unlike any other asset class. The investment benefits are so compelling that they far outweigh the administrative requirements. After several follow-up meetings, we are beginning to make progress with the consultants and expect a new MLP account to fund early next year.

Westwood International Advisors is off to a terrific start. We have a fully functional office with 11 talented professionals headquartered in Toronto. We have completed the transition of our Westwood Trust portfolios. We now have four global and emerging market co-mingled funds available to our Westwood Trust customers. We also established a partnership with the National Bank of Canada to manage an emerging markets fund for Canadian investors and a pooled fund for their internal customers that is now up and running. In fact, today, National Bank is launching two additional funds, a global equity fund and a global dividend fund, that will be managed by Westwood.

On the institutional side, we had several on-site due diligence meetings with interested plan sponsors and consultants. We expect more progress to report next quarter, but we are very pleased to report total assets under management for Westwood International of $740 million.

The Westwood Funds reached record levels of assets under management with continued positive inflows into the Income Opportunity Fund, which remains a five-star rated fund by Morningstar. This fund has been included in an outsourced CIO program by one of the institutional consulting firms and is growing in popularity with registered investment advisers. We have attended several conferences this year. We have plans to do several more. In fact, if you are attending the Schwab conference next month, please stop by and say hello to Mark Dunbar who will be patiently manning our booth.

Westwood Trust has been busy meeting with existing and prospective clients. I would say that many are nervous about the impending fiscal cliff and they want to talk more about the upcoming election than their investment portfolios. Tonight, we're having a political strategist speak to our clients and we are expecting record attendance. I mention this because it is a great opportunity to connect with our clients and it almost always results in new assets or referrals. The pipeline of new business for private wealth prospects looks better than it has in quite a while and our teams are working hard to convert them to new clients. I will now turn it over to Bill to review our financials and will be available to 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 the phone number listed on our website.

After I review our financial highlights for the quarter, I will 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.

As a backdrop and reminder for the discussion of third-quarter financials, I would like to point out that our newly launched subsidiary, Westwood International Advisors, has only recently commenced operations. Therefore, our third-quarter financials include minimal revenues and significant costs related to Westwood International's operations.

For the third quarter of 2012, Westwood's total revenues were $18.9 million compared to $16 million in the third quarter of 2011. Comparing third-quarter revenue in 2012 versus 2011, advisory fees increased by 9% as a result of increased average assets under management due to market appreciation and asset inflows from new and existing clients, partially offset by the withdrawal of assets by certain clients. Trustees increased by 7% as a result of increased trust assets under management primarily due to asset inflows from new clients.

GAAP net income for the third quarter of 2012 was $2.5 million compared to $3.3 million for the third quarter of 2011. GAAP EPS was $0.34 per diluted share versus $0.46 for the third quarter of 2011. Economic earnings for the third quarter of 2012 were $5.6 million compared to $5.9 million for the third quarter of 2011. Economic EPS was $0.76 per diluted share versus $0.81 for the third quarter of 2011.

Non-GAAP performance measures, including economic earnings and economic expenses, 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 $14.6 million compared to $10.8 million for the third quarter of 2011. Economic expenses were $11.6 million compared to $8.2 million for the third quarter of 2011. The primary drivers of the increase in total GAAP expenses for the third quarter 2012 compared to the third quarter of 2011 were as follows. Amortization of approximately $1.6 million related to multiyear bonus agreements. Salary expense increased by approximately $709,000 primarily due to the addition of Westwood International employees, as well as other new hires. Non-cash restricted stock expense increased by approximately $476,000 due to additional awards in 2012.

Assets under management were $14.1 billion as of September 30, 2012 compared to $11.7 billion at September 30, 2011. The year-over-year increase in assets was primarily due to market appreciation and inflows from new and existing clients, partially offset by withdrawals by certain clients. Assets under management of the Westwood Funds were $1.6 billion at September 30, 2012 compared to $1.1 billion at September 30, 2011. This increase was due to market appreciation and net inflows into the funds. As of September 30, 2012, Westwood International had total assets under management of $740 million comprised of $486 million of external client assets and $254 million in Westwood Trust common trust fund assets.

Also, today, as Brian mentioned, our Board of Directors approved an increase in our quarterly cash dividend to $0.40 per share payable on December 14 to stockholders of record on December 3. This represents an 8% increase over the prior quarterly dividend of $0.37 per share. The new quarterly dividend of $0.40 per share or an annual rate of $1.60 results in a dividend yield at yesterday's closing price of 4.1%.

I would also like to mention we were recently notified by Teton Advisors that they intend to exercise their option to buy the remaining 100,000 shares of their common stock that we own at $9.50 per share. We will recognize a pretax gain of just under $1 million related to the sale in the fourth quarter.

As I mentioned earlier, we have prepared a few slides to review with you and the slides are available on our website. 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 timeframe to the value of the S&P 500 Index. Over the last five years, our AUM has increased from $7.7 billion to $14.1 billion, a compound annual growth rate of 13% and a relatively flat market environment.

The second slide breaks down the components of our growth in AUM over the five-year period between net flows, market appreciation and acquisitions. Roughly half of our asset growth over this time period is due to positive net flows.

The third slide is a bar graph with our quarterly asset-based fee revenue and the line graph of the S&P 500 over the last five years. Our asset-based fee revenues has grown from $8.4 million in the third quarter of 2007 to $18.2 million in the third quarter of 2012. This represents a compound annual growth rate of 17%. The graph illustrates the consistent growth in our asset-based fee revenue again against a backdrop of an essentially flat market environment.

The fourth slide is a line graph that shows our average fee rate over the last five years. This graph illustrates the positive trend and the mix of our assets under management to higher fee assets over this time period.

This concludes my discussion of our financials and I will turn the call back over to Brian.

Thanks, Bill. Great job. If anybody has any questions, please press one on your keypad.

Rebecca Simmons.

Hi, thanks for taking my question.

Hi, Rebecca.

Hi. I just want to know if you could give some color on, and you have done a very good job of adding AUM, and you have seen your revenues benefit from that, but with the increasing cost, could you talk about maybe how we should think about the crossover point of when you start to benefit from these new funds?

Yes, thanks, that is a great question, Rebecca. I would say that when we did this deal, we really never budgeted any specific number. And we have always tried to add talent opportunistically and we have done that. We have 11 people now. We have $740 million -- it is actually a little bit higher than that as of yesterday.

But I would say that the fees associated with this block of assets are going to be higher than the fees that we have for our current business and that it would be somewhere north of $1 billion where the costs would line up with the revenues and you would begin to start to achieve some operating leverage from that point forward.

Okay, great. Thank you. That is all I had.

Great. Thanks for calling.

[Matt Sykes].

Good afternoon, gentlemen. Congratulations on the progress at International; it is terrific. My first question got answered before this; that is terrific. But can you give us a sense of what might be the pipeline or some color to your expectations for growth into the end of the year, excluding the market movement?

For the next 2.5 months?

Yes, if you can, any color on pipeline for that segment, which has been growing rapidly.

Sure. Well, I can give you color on the pipeline. The pipeline is terrific. We have a lot of interest in, of course, the International assets, but, as I said, we have seven small cap searches going on. We have been out extolling the virtues of MLPs, having lots of meetings, talking about the benefits of the asset class, educating both plan sponsors and consultants on why you should own them. And so there is a lot of interest in that area as well.

Our income product is seeing flows almost daily and continued institutional interest. So I would say the pipeline is very full. It is difficult for me to say how much of that will close in the next 2.5 months, but if history is any guide, some of it will close. Our partners at National Bank on the International side are doing a great job of telling the story on the International products and we are seeing daily flows there as well. So I would say the pipeline looks in general looks better than it has in quite a while.

And just qualitatively, given the visibility of this International team, do you think they will be able to boost or you will be able to leverage other marketing efforts with your funds as you market the International products? Do you think that will be -- will there be some kind of leverage there in terms of to the whole platform in your marketing efforts?

I do. In fact, what was really interesting, we have a local, very large Fortune 100 company that has been over here twice to talk about emerging markets. But in the context of doing that and meeting Mark Freeman, our CIO, they expressed interest in the income product and learning more about it. So yes, I do think it is a great way to do some cross-selling and to introduce folks to some of the other things that we do.

I would also say that, on the International side, a lot of the interest is coming from other parts of the world, not just here in the states and that too is, I think, a great opportunity for them to learn more about Westwood overall.

Thank you very much.

Thanks, Matt.

We are currently awaiting our next question.

Okay, if you have any more questions, please press one on your keypad. Great, well, thanks for joining us today. We appreciate your time. Please contact Bill or myself if you have any questions or visit our website at westwoodgroup.com. Have a great afternoon.

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