Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Pzena Investment Management, Inc. (NYSE:PZN)

Q2 2012 Earnings Conference Call

July 25, 2012 10:00 AM ET


Richard S. Pzena - Chairman, CEO and Co-Chief Investment Officer

Gregory S. Martin - CFO


Ken Worthington – J.P. Morgan

Marc Irizarry – Goldman Sachs Group, Inc.


Good day, ladies and gentlemen, and welcome to the Second Quarter 2012 Pzena Investment Management Earnings Conference Call. My name is Lacy, and I will be your coordinator for today. At this time, all participants are in listen-only mode. We will facilitate a question-and-answer session towards the end of the presentation. (Operator instructions) As a reminder, this conference is being recorded for replay purposes

I’d now like to turn the presentation over to your host for today’s call, Mr. Greg Martin, CFO. Please proceed.

Gregory S. Martin

Thank you very much, Lacy. Good morning and thank you for joining us on the Pzena Investment Management second quarter 2012 earnings call. I’m Greg Martin, Chief Financial Officer. With me today is our Chief Executive Officer and Co-Chief Investment Officer, Rich Pzena.

Our earnings press release contains the financial tables for the periods we will be discussing. If you don’t have a copy, it can be obtained in the Investor Relations section on our website at Replays of this call will be available for the next two week on our website.

As always, we need to reference the standard legal disclaimer before we begin. Statements made in the presentation today may contain forward-looking information about management’s plans, projections, expectations, strategic objectives, business prospects, anticipated financial results and other similar matters. A variety of factors, many of which are beyond the company’s control affect the operations, performance, business strategy and results of the company and can cause actual results and experiences to differ materially from the expectations or objectives expressed in these statements. These factors include but are not limited to the factors described in the company’s reports filed with the SEC, which are available on our website and on the SEC’s website

Investors are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date on which these statements are made. The company does not undertake to update such statements to reflect the impact of circumstances or events that arise after the date these statements were made. Investors should however consult any further disclosures the company may make in the reports filed with the SEC.

In addition, please be advised that because of the prohibitions on selected disclosure, the company as a matter of policy does not disclose material that is not public information on our conference calls. If one of your questions requires the disclosure of material non-public information, we will not be able to respond to it. Thank you.

As always I’ll turn the call over to Rich, but first I’d like to review some of our financial highlights. We reported non-GAAP diluted EPS of $0.07 per share and $4.5 million in non-GAAP diluted net income. Revenues were $18.3 million for the quarter and our operating income was $8.4 million. I’ll discuss our financial results in greater depth in a few minutes.

Let me now turn the call over to Rich, who will discuss our view of the investing environment.

Richard S. Pzena

Thanks, Greg. First, I would like to make a few comments on the investment environment, which has been heavily influenced by macroeconomic events, particularly in Europe, followed by how our firm is reacting to the challenges and opportunities it has created.

Global equity markets were once again buffeted by fear and pessimism, which returned during the second quarter. Investors became re-obsessed with the continuing debt crisis in the Eurozone and on weakening economic data in the U.S. and China. For the third year in a row the slow healing process coming out of the global financial crisis has led to enough uncertainty for investors to continue to seek a questionable safety of over priced government bonds, high dividend yielding and non-cyclical equities.

While this doesn’t make it easy to stay the course as value investors, it does make it ultimately very profitable to do so. The history of value cycles as we’ve noted in the past, is to see great value opportunities created in those periods where economic visibility is the murkiest. The current economic environment is not nearly as frightening as in early 2009, yet the valuations of many cyclical businesses are approaching the levels reached then.

Cyclical industries such as housing, and matured technology businesses are selling at or close to historically low valuations. Financials are selling at relative price to book valuations that put them in close proximity where they were in March 2009. The timing of exactly how this will play out is still uncertain. But one thing is clear to us, significant value is created when investor spears become so great that they’re willing to throw the baby out with the bath water as investor seem to be doing today.

Rather than to come to the fear that is driving under valuation, a true value manager gets excited when value opportunities abound. Today many of our developed market portfolios are amongst the cheapest in our firm’s history. However, one characteristic of value investment – investing especially when investing before the [chaos] per share price improvement is apparent is that it requires time for improvement to be recognized and rewarded in share prices.

We believe we continue to be in the early stages of a value cycle, a cycle which is testing the pain threshold at even the most hardened long-term investors. We remained true to our beliefs. Our conviction is supported by past experience and the rewards that eventually follow such periods of pain.

Timing is impossible to predict of course. All we can do is thoughtfully position our clients portfolios in today’s deepest value opportunities having carefully assess the range of potential outcomes for each company we own and size the positions accordingly. Underpaying for quality franchises is a long-term investors true allies. The sign on our Head Traders desk says it all. Patients equals profits.

I’d now like to offer a few comments on our firm and why we feel we're well positioned for the future. As I have mentioned on previous calls our marketing efforts are now truly global in scope. We have representatives active in North America, Europe, the U.K. the Middle East and the Australia regions identifying opportunities for our long-term deep value approach is an integral part of an institutions portfolio construction.

Keeping in mind that the institutional business flows are lumpy and the sales cycle is long, we feel we've a clear line of sight towards a very attractive set of new business opportunities in several geographies and across several of our strategies. While the second quarter was difficult both in terms of asset flows and performance we’re encouraged by the number and size of the prospect situations we’re in today.

Well I’m not outlining a business bull market for us, it would be a mistake to characterize the second quarter’s data as reflective of a business bear market. In addition as we've described in recent calls, sophisticated institutional investment teams have recognized that many of our competitors have strayed from their value disciplines filling their portfolios with expensive yield oriented holdings while sunning the real value opportunities.

We've seen this scene in the past. And the long-term winners are those who truly stick to their knitting. We’re confident that our discipline will be rewarded both in our investment portfolio and in our business outcomes. Our client service team has been equally active engaging our clients and their investment committees in discussions around the length and power of the value cycles as well as the extraordinary investment opportunities being presented to us today.

In most cases we've found our client base receptive to our message which has also accounts for the patients as a key ingredient to harvesting the long-term rewards of our investment approach. I can also report that our investment team of 22 investment professionals is firmly in place and is aggressively chasing down value opportunities around the globe. We feel particularly advantaged by having a core group of 12 analysts that have worked together for over seven years as a team giving us a tremendous base of institutional knowledge and continuity.

So despite the vicissitudes of this macro driven environment our firm is stable and solid aggressively pursuing opportunities in both the investment and business development arenas. These are the times we’ll remind ourselves that, or as I mentioned earlier patients truly does equal profits.

I’d now like to turn the call over to our CFO, Greg Martin who’ll review our quarterly financial results.

Gregory S. Martin

Thanks, Rich. I’ll start up by discussing our AUM fee rates and revenues. Our average AUM was $13.7 billion during the quarter down 4% from last quarter and down 16% in the second quarter of last year.

We ended the quarter with $13.1 billion of AUM, down 11% from the end of last quarter, which ended at $14.7 billion and down 18% from the end of the second quarter of last year, which ended at $15.9 billion. $1.6 billion decrease from last quarter was a result of $1.1 billion in market depreciation and $0.5 billion in net outflows. The $2.8 billion decline from the second quarter of last year was a result of $1.1 billion in market depreciation and $1.7 billion in net outflows.

At June 30, our AUM consisted of $10.9 billion in institutional accounts and $2.2 billion in retail accounts. Assets in institutional accounts were down 11% during the quarter, due to market depreciation and net outflows. Retail assets were down 12% from last quarter also due to market depreciation and net outflows.

Revenues were $18.3 million for the second quarter of 2012, down 8% from last quarter and down 18% from the second quarter of last year. The decreases from last quarter and from the second quarter of last year were primarily driven by decreases in weighted average AUM and decreases in performance fees recognized.

Our weighted average fee rate was 53.7 basis points for the second quarter of 2012, 55.2 basis points last quarter, and 54.9 basis points for the second quarter of last year. The decrease from last quarter was primarily due to a reduction in performance fees recognized this quarter as compared with last quarter as well as the timing of asset flows. The decrease from the second quarter of 2011 was primarily due to a reduction in performance fees recognized.

Our non-GAAP income statements adjust for the recurring valuation and tax receivable agreement items. I will address the current adjustments at the conclusion of my remarks but for now I will focus on the non-GAAP information.

Looking at operating expenses, our compensation and benefits expense was $8.0 million for the quarter, down 2% from last quarter and down 3% from the second quarter of last year. The decrease from last quarter was primarily due to a reduction in payroll taxes associated with the payment of employee bonuses during the first quarter. The reduction from the second quarter of last year was primarily driven by changes in our discretionary bonus accruals and non-cash compensation.

G&A expenses were $1.9 million for the first quarter of 2012, down 10% from last year and up 12% from last quarter. The decrease from last year was primarily driven by reductions in real estate expenses associated with the sub lease of excess office space in the fourth quarter of last year. The increase from last quarter was primarily due to the timing of expenses and a onetime expense associated with the administration of one of the investment vehicles we manage.

Operating margins were 45.9% this quarter, 50.0% last quarter and 54.0% in the second quarter of last year. Net and outside interest, other income and expense was an expense of $0.1 million this quarter, income of $0.5 million last quarter, an income of $0.2 million in the second quarter of last year. These fluctuations arise generally as a result of the performance of firm investments.

The effective rate for our unincorporated business taxes was 6.6% this quarter, up from 6.1% last quarter and 5.7% in the second quarter of last year. The fluctuations in these effective tax rates are driven by certain expenses that are permanently non-deductible for UBT purposes. We expect this rate to be between 5% and 7% on an ongoing basis.

The allocation to the non-public members of our operating company was approximately 83.7% of the operating company’s net income this quarter, approximately 83.6% last quarter and approximately 84.6% in the second quarter of last year. The variance in these percentages is the result of changes in the ownership interests of the public entity in the operating company.

The effective rate for our corporate income taxes, ex-UBT was 41.9% this quarter, 42.8% last quarter and 42.9% for the second quarter of last year. The decline in our effective tax rate from last quarter and last year is the result of minor prior period adjustments. Our expectations are that our corporate effective rate will generally be between 42% and 43%. As a result, we reported basic and diluted non-GAAP EPS of $0.07 for the second quarter.

Before we turn it over to questions, I’d like to briefly walk through the usual valuation allowance and tax receivable adjustments. In the second quarter of 2012, we recognized adjustments that arose as a result of revised estimates of future taxable income and our ability to utilize the deferred tax asset.

We recognized $0.4 million increase in our valuation allowance and $0.3 million decrease in our liability to our selling and converting shareholders for the quarter. The net effect to these adjustments comprises the difference between our second quarter 2012 non-GAAP and GAAP net income.

On a quarterly basis, we will record adjustments to the valuation allowance and our liability to our selling and converting shareholders as we extend our projections out in the future quarters. The ultimate amount of these adjustments will depend on our estimates of the future taxable income of the operating company and the level of our economic interest in it.

Inclusive of the effect of the valuation allowance and tax receivable agreement amount I just discussed, we reported GAAP basic and diluted EPS of $0.06 for the quarter.

At quarter-end, our financial position remained strong. Our cash balance was $31.9 million at June 31, and we declared a $0.03 per share quarterly dividend last night.

Thank you for joining us, and we now will be happy to take any questions.

Question-and-Answer Session


Thank you. (Operator Instructions) And our first question will come from the line of Ken Worthington with J.P. Morgan. Please proceed.

Ken Worthington - J.P. Morgan

Hi, good morning. Richard, I was hoping you could talk a little bit more about your customers, you mentioned that investors are throwing the baby out with the bath water, I think that’s kind of an industry comment? And then I kind of missed that, you mentioned that the 2Q business prospect seem to be improving, could you kind of connect those two comments? On the business prospects, I know is it RFPs as you’re getting into finals, is it – if you could better clarify, that would be helpful?

Richard S. Pzena

Sure, Ken. The comment that I made about throwing out the baby with the bath water was more oriented towards our portfolio, our investment portfolio than it was towards our business.

We’ve actually seen a fairly steady gross outflow number. So, our net flows deteriorated not because we were fired more frequently, but because the gross inflows slow down versus where they had been.

The question is, is that indicative of anything [sustentative] that we should be worried about or is that just part of the markets paranoia? And I guess I’d look at it and say for the last five years now it’s tough to hire equity managers, it’s tough to hire value managers and it’s even tougher to hire deep value managers because the performance has been so poor in this cycle relative to just going for safety.

And the top value investors, the ones with the best five-year records and recent records are the ones who are focused on high yield and stable earnings and so the way that I’d answer your question is we’re in lots of discussions with lots of people that are sophisticated investors. That level of conversation has been going on now for the last few years, I guess just the while we describe it, we still believe that these flows are very erratic and you can’t draw any conclusions from one or two quarters.

Eventually, if you look – if we’re sitting here a year or so from now and there haven’t been any of the lumpy inflows that we keep expecting then you couldn’t be concerned, but our people that are in the marketplace talking to prospects on a daily basis remain pretty optimistic. So, I don’t know if that helps and gives you some flavor.

Ken Worthington - J.P. Morgan

Yeah, it does. It corrects what I was hearing. And then, on capital management, you were building cash on the balance sheet and I think you talked about a buyback, what are your thoughts around that, kind of where the stock price is today?

Richard S. Pzena

Well, we buyback – it has much stock as we could buyback in the quarter, which isn’t very much because of the light trading volume in our shares and the rules on buying back stock. But we’re anxious to continue that program, and that’s our expectation, we’re not eager to continue to build the cash.

Ken Worthington - J.P. Morgan

Okay. And I’m sorry, I didn’t see it in the release, did you actually say how many shares you bought?

Richard S. Pzena

We did, it was – approximately 28,000 shares.

Ken Worthington - J.P. Morgan

Okay. Okay, great, thank you very much.


(Operator Instructions) And our next question will come from the line of Marc Irizarry with Goldman Sachs. Please proceed.

Marc Irizarry - Goldman Sachs Group, Inc.

Hi, great, thanks. Can you just give a little bit of a perspective on your performance fees, what sort of the outlook is for them, is there some pressure that we should expect on the fee rate going forward given performance or are you sort of rolling on to a set of better numbers?

Richard S. Pzena

No, I’d say that our performance fees, the trailing 12-months was probably about as good as it gets because generally there are three-year performance fee numbers and if you look at our performance record, March of ’09 for the next 12-months we had spectacular performance and since then it’s just been up and down.

So, for me, it’s very consistent with how our deep value cycle has been. So, now our three-year numbers are average and there is not a lot of performance fees associated with average performance.

Marc Irizarry - Goldman Sachs Group, Inc.

Okay. And then Rich, I guess this is a bigger picture question, obviously style drift is, I’d imagine that is still important for your clients to make sure that you’re sticking to your investment netting, when you think about the products that you’ve on a go-forward basis or things that you introduce that maybe with sort of compliment the deep value style in a way without sort of moving too far out, is there anything on the horizon that you could see that could sort of reinvigorate the flow patterns?

Richard S. Pzena

The answer is really, it’s basically no. Whatever we do is going to beat deep value, and so we think about a lot of potential new strategies that we could offer that would meet different needs for different kinds of investors, but they’re all based on a strong belief in deep value and it’s not our intention to switch to try and smooth things out with the growth style or with the relative value style.

We think that our brand and our reputation is to beat deep value investors and we’re willing to bear the cyclical nature of flows that comes with that rather than try to be something that we’re really not.

Marc Irizarry - Goldman Sachs Group, Inc.

Okay. And then just in terms of the cost structure, could you just give us a little bit of understanding on comp versus non-comp expenses, just how much cost flexibility there might be in both of those buckets?

Richard S. Pzena

Yeah, on the non-comps there isn’t a whole lot of flexibility. We’ve been aggressively cutting costs for the last three or four years, and I don’t think there is a whole lot more that we can do.

On the non-comp side, we’re really – we’re not considering anything from the standpoint of staff reductions. So the only thing – the only control that we’ve over that is the amount of bonus that we pay out.

Most of our comp is bonus. And so we’ve the flexibility to adjust our bonuses. We tend to rethink those over the coming months as we get towards the end of the year. And if the markets remain weak, we’ve some flexibility, but I wouldn’t view it as huge amount of flexibility.

Marc Irizarry - Goldman Sachs Group, Inc.

Okay, great. Thanks.


At this time I show that there are no further callers in queue. I’d like to turn the call back to Greg Martin, CFO, for closing remarks.

Gregory S. Martin

Great. Well, thank you all for joining us on our call.


Thank you for your participation in today’s conference. This concludes the presentation. You may all disconnect. Good day everyone.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to All other use is prohibited.


If you have any additional questions about our online transcripts, please contact us at: Thank you!

Source: Pzena Investment Management's CEO Discusses Q2 2012 Results - Earnings Call Transcript
This Transcript
All Transcripts