Westwood Holdings Group, Inc. (WHG) Q3 2012 Earnings Report, Transcript and Summary

Welcome to the Westwood Holdings Group Third Quarter 2012 Earnings Conference Call. Today's call will begin with the 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.

Thank you. Good afternoon and welcome to our third quarter conference call. I'd 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 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 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've not yet had a chance to review our earnings release or our 10-Q, we were pleased to report our record overall assets under management of $14.1 billion and record assets under management for the Westwood Funds 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 markets served ahead in the third quarter and the performance for our domestic equity products was mix, LargeCap underperformed its benchmark, but managed to stay on the top half for the peer group year-to-date. SMidCap and AllCap were ahead of their benchmarks and improved their relative performance standing by placing in the top third and top cortile with their respective peer groups for the quarter, while SmallCap was well ahead of the benchmark and just outside of the top cortile year-to-date. Our income-oriented products also served well, as both the income and MLP products were ahead of their benchmarks. Our MLP beat the benchmark were 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 on 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 SmallCap and MLP products. We won 3 new institutional accounts for income and we currently have 7 outstanding SmallCap searches underway. We've done a big marketing push of our MLP product and we've conducted 16 meetings to date. I'd say the challenge with MLP is partially to educate the consulting community on the investment merit to 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're 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've completed the transition of our Westwood Trust portfolios. We now have 4 global and emerging market commingled funds available to our Westwood Trust customers. We also established a partnership with the National Bank of Canada to manage in emerging markets fund for Canadian investors, and a pool fund for their internal customers that is now up and running. In fact today, National Bank is launching 2 additional funds, a Global Equity Fund and a Global Dividend Fund that will be managed by Westwood. On institutional side, we had several onside due diligence meetings with interested plan sponsors and consultants. We expect more progress to report next quarter, but we're very pleased to report total assets under management for Westwood International of $740 million. The Westwood Funds reached record level of assets under management with continued positive inflows into the income opportunity funds, which remains a 5 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 advisors. We've attended several conferences this year. We have plans to do several more. In fact, if you're 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 perspective clients. I'd say that many are nervous about the impending fiscal cliff and they want to talk more about the upcoming elections than their investment portfolios. Tonight we're having a political strategist speak to our clients and we're expecting record attendance. I mention this because it's 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 client. I'll now turn it over to Bill to review our financials, then we'll 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, the phone number is 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 Relation section of our website, westwoodgroup.com under the Events and Webcast 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 2012, Westwood's total revenues were $18.9 million compared to $16 million in the third quarter 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. Trust fees 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 2012 was $2.5 million compared to $3.3 million for the third quarter 2011. GAAP EPS was $0.34 per diluted share versus $0.46 for the third quarter 2011. Economic earnings for the third quarter 2012 were $5.6 million compared to $5.9 million for the third quarter 2011. Economic EPS was $0.76 per diluted share versus $0.81 for the third quarter 2011. Non-GAAP performance measures, including economic earnings and economic expenses are defined, explained, and reconciled with the most comparable GAAP financial measures, and 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 2011. Economic expenses were $11.6 million compared to $8.2 million for the third quarter 2011. The primary drivers of the increase in total GAAP expenses for the third quarter 2012 compared to the third quarter 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 in 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 of $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%. And I'd also like to mention, we are 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 pre-tax 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 5 years as well as the line graph comparing the growth of our AUM over this timeframe to the value of the S&P 500 index. Over the last 5 years, our AUM has increased from $7.7 billion to $14.1 billion, a compound annual growth rate of 13% at a relatively flat market environment. The second slide breaks down the components of our growth in AUM over the 5-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 base fee revenue and the line graph of the S&P 500 over the last 5 years. Our asset based fee revenue has grown from $8.4 million in the third quarter 2007 to $18.2 million in the third quarter 2012. This represents a compound annual growth rate of 17%. The graph illustrates the consistent growth in our asset based fee revenue, again, against the backdrop of an essentially flat market environment. The fourth slide is a line graph that shows our average fee rate over the last 5 years. This graph illustrates the positive trend in the mix of our assets under management to higher fee assets over this time period. This concludes my discussion of our financials. Now, I'll turn the call back over to Brian.

Thanks, Bill, great job. If anybody has any questions, please press 1 on your keypad.

Our first question comes from Rebecca Simons [ph].

You've done a very good job of having AUM, and you've seen the revenues benefit from that. But with the increase in cost, could you talk about maybe how we should think of the crossover point of when you start to benefit from these new funds?

I would say that when we did this deal, we really never budgeted any specific number. And we've always tried to add talent opportunistically and we've done that. We have 11 people now. We have $740 million. It's actually a little bit higher than that as of yesterday. But I would say that that the fees associated with the stock 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 cost would line up with the revenue, and you'd begin to start to achieve some operating leverage from that point forward.

Our next question comes from Mac Sykes.

My first question got answered before this, that's terrific. But can you give us a sense of what might be the pipeline maybe or some color on 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?

I'll 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 7 SmallCap researches going on. We've 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 what we've shown 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's 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 a job of telling the story on the international products. And we're seeing a daily flows there as well. So I would say the pipeline in general looks better than it has in a quite a while.

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

I do. In fact, it was really interesting. We have a local, a 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's a great way to introduce some cross-selling and to introduce folks to some of the other things that we do. I'd 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.

And we are currently awaiting our next question.

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.