Thank you all for holding, and welcome to the Westwood Holdings Group second quarter 2008 Earnings Call. Today's call will begin with a presentation, followed by a Q&A session. (Operator Instructions) I would now like to turn the call over to your host for today's call, Ms. Sylvia Fry, Vice President and Chief Compliance Officer. Ms. Fry, you line is now open.
Thank you. Good afternoon and welcome to our call. I will 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, 2007 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 the SEC rules concerning non-GAAP financial measures, the reconciliation of our cash earnings, cash earnings per share and cash expenses to the most comparable GAAP measures is included at the end of our press release issued earlier today.
On our call today, we'll have Brian Casey, our President and Chief Executive Officer, and Bill Hardcastle, our Chief Financial Officer.
I'll now turn the call over to Brian Casey, our Chief Executive Officer.
Thanks, Sylvia, and thanks to everyone for joining our call today. We appreciate you have taken time out during the earnings season to listen to our call. I'll start with some general observations about performance and activity in each area of our business, and then I'll turn it over to Bill Hardcastle, our CFO, who will have more extensive comments on our financial results that were released after the close today. At the conclusion of Bill's formal comments, we'll be happy to take your questions.
As all of you know, the markets were tough again this quarter, but I'm pleased to report that our primary investment products achieved strong outperformance relative to their respective passive benchmarks, and we are in the top quartile of their respective peer groups. And for greater detail on the specific performance of each of our products, you can review the commercially available databases, such as eVestment Alliance or you can look at the WHG funds in Morningstar as a proxy for our net institutional performance.
Marketing activity in the institutional area was as high as we have ever seen, with several new account wins that have not yet funded, but we expect to fund over the balance of the year. We won two large subadvisory assignments that should fund during the third quarter. The first assignment is with Principal Funds, which, as many of you know, is the leader in the 401(k) industry, a member of the Fortune 500, and has offices in 12 countries with over 18 million customers worldwide. And it is truly an honor that we have been selected to work with them as a LargeCap value sub-advisor to one of their seasoned mutual funds.
In addition to the Principal win, we were selected by State Farm Insurance Company as sub-advisor for one of their oldest mutual funds. State Farm as you know is the largest insurer of auto and home in the U.S., with over 77 million customers, and they are making a big push internally to grow their mutual fund business. We competed against several admirable funds to win both of these mandates, and we are very excited to work with both Principal and State Farm.
We also started a new SMid Cap collective fund for one of the largest retailers in the world. This new Fortune 100 client just funded during the third quarter, and we are excited to have the opportunity to work with such an elite company to create an efficient solution for their 401(k) participants. They are making several changes to their platform, and we are to see more visibility and potentially additional flows in the years ahead.
The rest of our traditional institutional business was also very strong. We had several wins that have not yet funded, but that we'll expect the fund over the balance of the year. Notably, a couple of these wins are in the small cap area, which, as you know from listening to prior calls, has been an area of emphasis for Westwood over for the past few years.
The WHG funds continued along the path of success with excellent performance and reached another milestone, as we surpassed $300 million in assets under management. Susan Byrne and our marketing team attended the Morningstar Conference in Chicago last month. We had a very nice reception and Susan was featured as the panelist. We received positive publicity and increased awareness for the WHG funds.
We also made some excellent contacts, and our marketing team continues to follow up on those leads that were generated. Westwood Trust clients invested in our enhanced balance model that includes multiple asset classes, utilizing both Westwood and numerous outside sub-advisors, held up pretty well in the recent market downturn. We are not completely immune to the market pressure. Their accounts were down considerably less than the market industries.
We are also very pleased to announce the addition of Dick Frazar to the Westwood trust team. We’ve been looking for senior level person for a long time, and we are pleased to hire Dick Frazar. He is a respected member of our community and will have the role of new business development and client service. We've also hired additional talented people on the client service area, as well as the investment area, to service and manage our growing list, client list and investor product line.
I would really like to take this opportunity to thank all the members of our marketing and client service teams for an outstanding job over the last few years. They have been filling out our office database information, making calls, putting together presentation books and have truly been Road Warriors. So, a sincere thanks from all of your fellow shareholders.
With regard to Westwood Holdings group, I wanted to mention that we've made an investor presentation on Westwood Holdings group at the Stephens Inc. Spring Conference in New York City last month. The copy of that presentation is available on our website.
And lastly, I would mention that a few people have inquired about the recent increase in volume of WHG, and while we cannot know for sure why the volume has increased, we do know that WHG was added to both the Russell 2000 and the Russell 3000 indexes recently.
I will turn it over to Bill Hardcastle, our CFO, who will discuss our financial results, and than we will be happy take your questions.
Thanks, Brian. As you may have seen, we filed our earnings release and 10-Q this afternoon right after the market closed. 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 this quarter, I will review some slides with you that we have posted on the Investor Relations section of our website at www.westwoodgroup.com under the events and webcast link.
For the second quarter of 2008, our total revenues were $9.7 million, a 21% increase compared to $8 million in the second quarter of 2007. Comparing second quarter revenue in 2008 versus 2007, Westwood management touched the 34% increase in advisory fees, primarily due to net inflows from new and existing clients over the past 12 months, partially offset by market depreciation and the withdrawal of assets by certain clients.
We also recognized the performance, basically in the second quarter of 2008, related to a client that has an annual performance period that ends in June. Westwood Trust produced a 6% increase in trustees, primarily due to inflows from new clients, partially offset by market depreciation.
GAAP operating income for the second quarter of 2008 was $2.6 million, a 16% increase compared to $2.2 million for the second quarter of 2007. GAAP net income for the second quarter of 2008 was $1.7 million, an 18% increase compared to $1.5 million for the second quarter of 2007. GAAP earnings per share was $0.27 per diluted share for the second quarter of 2008, compared to $0.24 for the second quarter of 2007.
Cash earnings, which we define as net income plus non-cash equity-based compensation expense, for the second quarter of 2008, it was $3.7 million, a 30% increase compared to $2.8 million for the second quarter of 2007.
Cash EPS was $0.57 per diluted share for the second quarter of 2008, compared to $0.46 for the second quarter of 2007. These non GAAP financial measures are defined, explained and reconciled with the most comparable GAAP financial measures in tables included at the end of our earnings release, which is available on our website.
Total expenses for the second quarter of 2008 were $7.1 million, a 23% increase compared to $5.7 million for the second quarter of 2007. Cash expenses, which excluded non-cash equity-based compensation expense, grew at a slower rate of 17% to $5.1 million for the second quarter 2008, compared to $4.4 million for the second quarter of 2007.
The primary drivers of the increase in total GAAP expenses for the second quarter of 2008 compared to the second quarter of 2007 were as follows: compensation and benefits cost increased by approximately $1.1 million. The largest components of the increase were non-cash restricted stock expense, salaries and incentive compensation. Non-cash restricted stock expense increased by approximately $580,000, due to additional annual grants in July 2007 and February, 2008.
Beginning in 2008, restricted stock grants were awarded in the first quarter of the year, in order to synchronize the payment of employees' cash incentive bonus awards with the personal tax liability that results from restricted stock vesting. As a result, the second quarter includes the amortization of five years worth of restricted stock grants, while other quarters typically include the amortization of only four years worth of grants.
Salary expense increased by approximately $293,000, due primarily to increased headcount. Incentive compensation expense increased by approximately $146,000 due to higher pretax income, as well as increased headcount. At June 30, 2008 we had 57 fulltime employees, compared to 50 fulltime employees at June 30, 2007.
We recognized the non-cash expense of approximately $470,000 in the second quarter of 2008 and 2007, related to the expected vesting of performance-based restricted stock that was awarded to our Chief Executive Officer and Chief Investment Officer in May, 2006. As we have discussed before, the compensation expense related to these shares cannot be recognized until we conclude that it is probable that the performance goal will be met. In the second quarter of 2008, we concluded that it is probable that we'll meet the 2008 performance goal, and thus we began to recognize the related expense.
We expect to recognize a similar amount in third and forth quarters of 2008 related to the stock grants. There was no expense recognized in the first quarter of 2008 related to these grants. Also contributing to the increase in total expenses are increased sales and marketing costs, due to increased levels of marketing and client service activity, increased financial advisory fees paid to external sub-advisors, due to growth on assets under management, and international equity growth and high yield common trust funds sponsored by Westwood Trust and increased shareholder servicing fees related to the WHG funds.
Assets under management were $7.7 billion as of June 30, 2008, an increase of $900 million or 14%, compared to $6.8 billion as of June 30, 2007. The year-over-year increase was primarily due to net inflows from new and existing clients over the past 12 months, partially offset by market depreciation.
Assets under management at June 30, 2008 rose by 4% sequentially from $7.5 billion at March 31, 2008, primarily due to net inflows in the second quarter. Our year-over-year sequential growth in assets under management during a difficult market for broad equity indexes reflect strong net asset inflows, as well as benchmark leading performance in most of our products that limited the erosion of assets due to market depreciation.
Assets under management and WHG funds grew to $319 million as of June 30, 2008, an increase of 43% compared to $223 million at June 30, 2007, and a 29% sequential increase from $247 million at March 31, 2008. The WHG funds have received over $19 million of net inflows through the first six months of this year. Also, our Board of Directors today approved the payment of a quarterly cash dividend of $0.30 per share, payable on October 1, 2008, to stockholders of record on September 15, 2008.
As I mentioned earlier, we have prepared a few slides that we want to go through to highlight the growth of our business. Slides are available on the Investor Relations section of our website under the web cast and event link. The first slide is a bar graph of quarterly assets under management over the last four plus years. The graph illustrates the solid growth on our assets over this timeframe. From March 31st 2004 to June, 30th 2008, our assets under management have essentially doubled to $7.7 billion, representing a compound annual growth rate of 18%.
The second slide is a line graph that compares the growth of our assets under management over the same time period represented by the blue line, versus the price appreciation of the S&P 500 index, represented by the green line. Both slides have been indexed to 100 as of March 31st 2004. In case you can't see the chart, the ending value for each of these is 114 for the S&P 500 index, and 200 for WHG assets under management, which reflects the 100% growth rate over the time period.
That illustrates that we have achieved this growth on assets without much help from the broad market. Our growth can primarily be attributed to significant asset in flows, as well as a very strong relative performance delivered by our investment teams over this time period.
The third slide is a bar graph with quarterly revenue over the same period. That graph shows the consistent growth that we have experienced over the last few years. Revenue in the second quarter 2008 of $9.7 million was 91% higher than the first quarter 2004 revenue of $5 million. This represents a compound annual growth rate of 17%. The slide also shows the spike in revenue in the fourth quarter 2007, due to the performance based fee we earned last year.
The fourth slide demonstrates how this growth in revenue has resulted in an increased cash generation as well. Cash earnings increased by 166% from the first quarter of 2004 to the second quarter of 2008, representing a compound annual growth rate of 26%.
Again, there is a spike in cash earnings in the fourth quarter of 2007, related to the performance based fee. We believe that the cash earnings is a meaningful metric used to evaluate our business, in addition to GAAP methods. The required reconciliation of cash EPS is included at the end of presentation.
As we have demonstrated, strong cash generation enables a rise in dividend stream. The fifth slide is a bar graph that shows our quarterly dividends since we have been public. As our business has grown over this time period, we have been able to significantly increase the amount of cash we share with our fellow stock holders via our rising dividend stream.
Our current quarterly dividend of $0.30 per share, or an implied annual rate of $1.20 per share, results in a dividend yield, at yesterday's closing price of over 2.3%, which is still well above the average yield of companies in the SNL Asset Manager Index.
That concludes my discussion of our financials. I will turn the call over to Brian.
Thanks, Bill. Great job. Does anybody have any questions? If you do press pound. Operator, do we have any questions.
(Operator Instructions).And we do have a question from [Clayton Ridley]. Your line is open.
Are you all still on schedule for the SMidCap an income opportunity to be ready by Morningstar this December?
Yes, that’s correct. We will complete a three years record in the WHG income opportunity fund and the WHG SMidCap value fund at the end of this year.
Okay. And then the other funds, that is the large cap and the small – the large cap, those are – that is 2009?
Correct, large cap will be spring of 2009 and small cap will be early 2010.
Okay. And just looking in the -- perhaps it is hard to say, to project what you think Morningstar is going to rate you at this point in time?
Yes, I would not want to project how they would rate us, but, given our relative and peer group performance I'd suspect that the rating will be a good one.
Okay. Thank you.
Thank you Mr. Ridley. (Operator Instructions). And for the panel we have no question at present.
Operator, do you have any other questions in the queue?
No, sir. There's a – no questions are coming in at present sir.
Okay, well as always if you have additional questions or follow-up after you have had a chance to review the 10-Q, Bill or I' would be happy to answer them. You can also find all of our filings and additional information on our website at westwoodgroup.com. Thanks again for your time. Good day, we appreciate you.
That completes today's presentation. Thank you for your participation. You may now disconnect.
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