Sylvia Fry - SVP & Chief Compliance Officer
Brian Casey - President & CEO
Mark Wallace - CFO
Westwood Holdings Group, Inc. (WHG) Q1 2013 Earnings Call April 18, 2013 4:30 PM ET
Thank you all for holding and welcome to the Westwood Holdings Group First Quarter 2013 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 2013 earnings conference call. I would like to begin the call by reading the 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, 2012 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 earning, economic earning 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 Mark Wallace our Chief Financial Officer.
I will now turn the call over to Brian Casey, our CEO.
Thanks, Sylvia, and good afternoon everyone. I appreciate you taking time to join our call today. We held our Shareholder Meeting this morning and approved benefit plans for our Canadian employees and additional stock for our employee stock incentive plan. I want to thank all the shareholders for approving these items.
As you know everyone at Westwood owns stock. This creates a unique incentive for our team; very few companies offer stock to their entire organization. This truly sets us apart from the field and creates energy amongst Westwood employees. Our employees have delivered an exceptional level of performance for both clients and shareholders over the past decade. Shareholder endorsement of our stock incentive plans truly empowers our employees to do their best work and helps us attract the best talent as we build and grow the organization in the decade ahead. On behalf of all Westwood employees I thank all of our shareholders for your continued support.
During our Shareholder Meeting this morning we elected five incumbent directors who are committed to serving our shareholders in the year ahead. I would like to take a moment to thank veteran Board Member Tom Davis who has been elected Chairman of a larger public company and did not stand for reelection this year. We wish Tom the best of luck in his new position and acknowledge our gratitude for his service to Westwood Holdings Group over the past nine years.
The US stock market closed at an all time high during the first quarter and we experienced strong absolute performance across the board in our domestic portfolios. Westwood’s performance was largely driven by our security selection reflecting our focus on high quality names with the potential for topline growth.
Small capital is exceptionally strong beating its benchmark by more than 500 basis points. Our new MLP fund at Westwood Trust was up over 20% during the first quarter and we are on-track to earn another seven figure performance fee at the end of the second quarter.
Income opportunity had another outstanding quarter and continues to experience steady inflows on a daily basis. SMidCap and SMidCap Plus performed inline with the benchmark which was the strongest first quarter since 1998. Performance for LargeCap was strong on an absolute basis, but fell behind the benchmark. We have added two new members to the LargeCap team. They are committed to improving results by focusing on companies with positive and sustainable earnings growth. While LargeCap has been a source of fund for plan sponsors over the past decade, we expect that continued outperformance by the U.S. stock market may lead to an increase in U.S. equity exposure by plan sponsors. Any increase in U.S. equity exposure is welcome news for us and should help flows to our domestic equity products.
In global and emerging markets, the WIA team is very excited about the company’s (inaudible) selling. Five team members traveled to five different countries and three different regions and met with over 120 companies. Performance for global and emerging markets was mixed with emerging markets ahead and global equity behind their respective benchmarks. On an absolute basis, the strength of the U.S. dollar combined with the exceptional performance of the U.S. and Japanese stock markets had a negative impact on both emerging market and global portfolios. The WIA team remains focused and continues to look for the most attractive businesses around the globe.
The marketing pipeline for new institutional business is very robust. We have over 2.5 billion of emerging market prospects and we expect 1 billion to fund in emerging markets over the next three to six months.
Our income opportunity, MLP and small cap strategies are seeing increased levels of interest and we intend to capitalize on the strength of their recent performance in the month ahead. Overall our diversified product offerings provide good growth opportunities in asset classes currently in demand including emerging markets and income opportunity as well as in asset classes we expect to be in demand in the near future such as US equities.
Moving on to the Westwood funds, we have witnessed continue growth of our domestic funds with flows in to income opportunity as well as our new US emerging markets fund as well as the Canadian emerging markets and global funds distributed by National Bank. Together these funds accounted for over 90% of our inflows; Westwood income opportunity became our first billion dollar fund and has seen significant daily inflows.
We are in the process of registering other pool funds for non-US citizens and expect to start with a sizable amount of seed capital from new non-US clients. Westwood trust also continues to perform well, strong cash flows from existing customers along with nearly a dozen new client relationships marked a strong first quarter.
Interestingly though positive market returns in 2012 and a strong first quarter of 2013 seem to have reduced investors’ impetus to change managers. We found that high net worth investors are happy about the current market recovery, but continue to have concerns about market altitude, rising taxes and the federal deficit.
Continue demand for yield coupled with some degree of scepticism about the sustainability of the rally, favours managers with an emphasis on fundamental stock picking. The ability to provide increased diversification through investments in income opportunity and the short duration high yields strategies continue to set us apart from our competition. After closing 2012 with the strongest balance sheet to date, we now have an even greater sum of cash and investments with over $53 million and no debt and stockholders equity of more than $75 million.
Our corporate development team continues to evaluate opportunities and new products and strong private wealth markets. Attractive private wealth opportunities are challenging to find, they are slow to develop, but we have proven to be ideal partner to business centers that want to join a company with a strong brand name, liquidity in a publicly traded stock, investment product and research debt and the desire to let private wealth managers do what they do best, which is serve clients and attract new ones.
While, we continuously review our opportunities to expand our company through acquisitions; we remained disciplined with our corporate capital. Westwood will only pursue opportunities that were in the best long term interest of the company and its shareholders. As I stated in last quarters earnings call, we have begun our second date as a public company for the deal of optimism and enthusiasm.
This first quarter’s performance reinforces this optimism and enthusiasm and moves us forward with even greater resolve. We are grateful for the synchronicity of trust occurring between our clients, shareholders and employees and I want to thank all of you for your respective roles in ensuring a solid start to the new decade.
I will now turn the call over to Mark Wallace, our CFO and we will be available for questions at the conclusion of his remarks.
Thanks, Brian and good afternoon everyone. We are please to report solid results this quarter with revenue increasing 13% at $20.1 million compared to $17.9 million in the second quarter of 2012. Asset based advisory fees were up 10% from last year to $15.5 million and trust fees up 21% to $4.2 million. Revenues were driven by the increase in assets under management for a record $15.3 billion. We benefited this quarter with the strength in US equity market, net inflows to our income opportunity, emerging markets and other products partially offset by withdrawals of certain clients.
Longer term transit revenues and asset under management are included in the slides we posted today on the investor relations section of our website. Westwood International contributed $1.5 million to revenues in the first quarter on $2.7 million of related costs. While Westwood International continues to experience steady inflows and strong interest from effective clients, our earnings continue to reflect a significant investment we are making in our Canadian team. Economic EPS of $0.76 were slightly below the $0.80 we reported for the same quarter in 2012 or GAAP EPS was $0.38 per diluted shares versus $0.52 for the first quarter of 2012.
Consolidated GAAP expenses of the first quarter of 2013 were up $3.6 million to $15.4 million compared to the year ago period as a result of the following: amortization of approximately $750,000 related to Westwood International most of your signing bonuses; $600,000 of salary costs related to additional employees in Canada and United States; higher incentive compensation including non-cash performance based restricted stock costs of $742,000; and other non-recurring items. Today our Board of Directors approved a quarterly cash dividend of $0.40 per share payable on July 1, 2013 to shareholders of record on June 14, 2013. The annual rate of $1.66 per share represents a dividend yield of 3.8% year-to-date closing price.
Before I turn the call back over to Brian, let me say I've had an opportunity to meet in person and speak with many of our stockholders over the last month. I want to thank you for your support and look forward to continuing to visit each of you in the future. I will now turn the call back over to Brian.
Thanks Mark, great job. If anybody has any questions please let the operator know.
(Operator Instructions) Our first question comes from [Mac Sykes].
I also appreciate the disclosure on the revs and the cost of the new segment, I appreciate that. My question is assuming the March 31 AUM had been in place at the end of December, what would the attributable revenues and expenses have been?
Can you just repeat the question one more time?
So essentially if we were using the AUM at the end of March to start off the first quarter for International segment, what would the attributable revenues and expenses have been, just trying to understand the profitability run rate at this moment?
It sounds like a math problem I had in fifth grade, and my head is spinning right now. So I'll just try to answer the question by saying that our average fee that we are earning from our global international subsidiary is above our overall average fee which I think is around 56 or 57 basis points. So you can assume that the revenue run rate for the international subsidiary is higher than that of our -- many of our domestic businesses.
The disclosure you saw in the press release indicates what the revenue was and what the expenses were. You may have also picked up in my comments that we have won a $1 billion of business that has not yet funded and it will fund over the next three to six months. The reason I can’t give you a tighter date on that is that these things take a lot longer than any of our domestic products. You have international contracts, you have international custody and you have often times a delay in opening up global and emerging markets. Does that help you?
I guess in the more simple stance at this AUM level, is the organization profitable?
Okay. So I think the way to look at is, if you look at what we reported in the first quarter and if you look at on a normalized basis, so it takes the 2.7, the one way I look at it is, it takes the 2.7 million of cost and you back out what I say are the signing bonus, the amortization of signing bonus costs, we're just a little bit away from breakeven of about 400,000 on the Westwood International operations. So I would say, you know, going in to the second quarter and third quarter depending a little bit on the funding, I would say we're going to be very profitable on a normalized basis reasonably said.
Terrific, thank you. And one another question, you mentioned the performance fee coming up after the quarters in close, but, I mean, should we expect it to be similar to the size the one recorded a year ago, or is it that asset base moved up?
It really depends on what happens in the next few months, so I would caution to do much modelling around performance fee. I would say as of now it's higher than the one we have earned last year or the year before.
(Operator Instructions) And we have no further questions in queue at this time.
Okay. Well, I would like to thank all of our shareholders again for your support, we appreciate it very much. And with Mark now having some additional time, we endeavor to be in touch with you more frequently and we look forward to speaking with you. If you have any further questions, please give us a call or visit our website at westwoodgroup.com. Thanks very much.
That concludes today’s conference. Thank you for your participation. You may now disconnect.
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