Westwood Holdings Group, Inc. Q1 2009 Earnings Call Transcript

| About: Westwood Holdings (WHG)
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Westwood Holdings Group, Inc. (NYSE:WHG) Q1 2009 Earnings Call Transcript April 21, 2009 4:30 PM ET


Sylvia Fry – VP and Chief Compliance Officer

Brian Casey – President and CEO

Bill Hardcastle – CFO


Patrick Walsh – Oak Street Capital


Thank you all for holding and welcome to the Westwood Holdings Group first quarter 2009 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’d 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.

Sylvia Fry

Thank you. Good afternoon and welcome to our first quarter conference call. I’d like to start 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, 2008 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 the call today we will have Susan Byrne, our Founder and Chief Investment Officer; Brian Casey, our President and Chief Executive Officer; and Bill Hardcastle, our Chief Financial Officer. I will now turn the call over to Brian Casey, our CEO.

Brian Casey

Thanks, Sylvia, and thanks to all of you for taking the time to listen to our call today. I know there is lot of other calls going on. My comments will be brief today as we’ve recently reviewed our updated Investor Relations presentation with many of our shareholders over the last few weeks either in person in New York, in Boston, or via a conference call. If you have not yet had a chance to review our Investor Relations material, it’s available under the Downloads tab of our Investor Relations section on the westwoodgroup.com website. You will also find our other corporate filings there and we would encourage you to take a look.

We held our Annual Shareholder Meeting today in all proposals passed by a wide margin. And I want to thank all of you who voted strongly in favor of our proposals and especially for the ability to grant additional shares to the Westwood employee stock incentive plan. Your ongoing support of our owner employee model, which we believe has proven to be the best way to align the interest of clients, shareholders and employees, is sincerely appreciated.

During perhaps the most difficult period that any of us have ever experienced in the financial markets, we’ve maintained our level of assets under management paid above the industry average dividends and increased the level of cash and securities on our balance sheet. None of this would have been possible without the great work of all of our owner employees. And I want to thank them publicly for all their hard work and their commitment to our clients.

The markets continued to decline through early March and all Westwood value products performed better than the comparable benchmarks. While it’s never exciting to lose less than the market, it is the outcome we could expect with our investment process. Marketing activity remained strong with several new institutional clients earned in the quarter and a couple of very large clients funding during March. Our RFPs are higher than they were in 2008, which was the best marketing year in our history. We continue to host numerous onsite due diligence meetings and have a generous pipeline of search activity.

The WHG Funds experienced consistent and frequent inflows during the first quarter and increased assets under management by 13% in a market that declined almost as much. We continue to see broad interest in our funds and continue to expand our opportunity set by seeking out new platforms where the WHG Funds can be available to participants.

The velocity of change in the private wealth area has slowed across the industry. But I’m particularly pleased to report that while new client growth at Westwood Trust has been slower during this period, we have experienced very little client attrition. This is a testament to the outstanding client service provided by our Westwood Trust professionals and our diversified approach after [ph] the allocation.

As high net worth individuals completed their taxes recently and a bit of confidence reemerged to the marketplace in recent weeks, we have experienced some new client opportunities for Westwood Trust. We are hosting our spring meeting tonight, which often results in additional cash flows from existing clients as well as introductions to new clients.

Before I ask Bill to review our financials, I’d like to comment on how Westwood is positioned to capitalize on the dislocation that’s taking place across our industry. We have always run our business in preparation for a rainy day, whether that is maintaining a level of cash sufficient to pay our team under any circumstances and by maintaining a culture of risk aversion. This would include not putting all of our capital under our own products or borrowing money to buy back stock or make expensive acquisitions.

While we do not know if markets will remain this way for several years, we do know that we will get through it. We also know that a healthy dividend, a growing level of cash on the balance sheet, and stable assets under management are appealing to our clients and to consultants who might recommend us to their clients. While others have cut staff over the last year, we have actually increased our staffing levels to ensure that we were able to maintain a high quality experience for our clients.

While it may be a little too early to tell exactly how plan sponsors will deal with the results they posted over the past year and the ensuing challenges in the years ahead, it is clear that manager roster changes and asset allocation shifts are front burner issues for them. While traditional long-only strategies were a source of funds for most of this decade and domestic equities have been in an underweight status, we’ve heard a number of plan sponsors say that US stocks are as cheap as they have been in decades and warrant consideration for overweight status.

If this discussion materializes into a trend, it bodes well for Westwood, as we have a performance record, the products, and most importantly the capacity to manage a much larger business. If it does not, we will continue to execute our plan and compete for the searches that are always out there.

I’ll be happy to answer any questions that you have at the conclusion of our call. I’ll turn it over to Bill Hardcastle, our CFO, to review our financials.

Bill Hardcastle

Thanks, Brian. Good afternoon, everyone. As you may have seen, we filed our earnings release and 10-Q this afternoon after the market close. 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 under the Events & Webcasts link.

For the first quarter 2009, our total revenues were $8.2 million, a 10% decrease compared to $9.1 million in the first quarter 2008. Comparing first quarter revenue in 2009 versus 2008, Westwood Management posted a 4% decrease in advisory fees due to lower average assets under management. Given the very difficult market we have experienced recently, market depreciation was a primary cause of the decline in assets. However, significant net inflows from new and existing clients over the past 12 months nearly completely offset this market depreciation.

Westwood Trust posted a 12% decrease in trust fees also as a result of lower average assets under management primarily due to market depreciation. Net inflows from new and existing clients offset a significant amount of the market depreciation. GAAP operating income for the quarter was $1.9 million, a 36% decrease compared to $3.0 million for the first quarter of 2008. GAAP net income was $1.2 million, a 37% decrease compared to $2.0 million for the first quarter of 2008.

GAAP EPS was $0.19 per diluted share compared to $0.31 for the first quarter of 2008. Cash earnings, which we define as net income plus non-cash equity-based compensation expense, was $2.9 million, a 14% decrease compared to $3.2 million for the first quarter of 2008. Cash EPS was $0.41 per diluted share compared to $0.50 for the first quarter of 2008.

These non-GAAP financial measures are defined, explained, and reconciled with the most comparable GAAP financial measures, and tables included at the end of our earnings release, which is available on our website.

Total expenses for the quarter were $6.3 million, a 3% increase compared to $6.1 million for the first quarter of 2008. Cash expenses, which exclude non-cash equity-based compensation expense, declined by 2% to $4.8 million compared to $4.9 million for the first quarter of 2008.

The primary drivers of the increase in total GAAP expenses for the first quarter of 2009 compared to the third quarter of 2008 were as follows. Non-cash restricted stock expense increased by approximately $274,000 related to additional annual grants in February 2008 and 2009, as well as the higher stock price to which these shares were granted compared to prior grants.

Salary expense increased by approximately $187,000 due primarily to increased headcount. Expenses related to the WHG Funds increased by approximately $143,000 due to costs related to future opportunities for additional mutual fund assets. These increases were offset by a decrease in incentive compensation of approximately $435,000 due to lower pretax income and a decrease in the financial advisory expense of approximately $112,000 due to lower sub-advised assets at Westwood Trust.

There was no expense recognized in the first quarter of 2009 or 2008 related to prior performance-based restricted stock grants. The compensation expense related to performance-based grants cannot be recognized before we conclude that as probable that the performance goal, which is sent annually by our compensation committee, will be met. The annual non-cash expense related to the vesting of these shares based on the 2006 grant dated fair value would be approximately $1.4 million.

Assets under management were $7.2 billion as of March 31, 2009, a decrease of 4% compared to $7.5 billion as of March 31, 2008 and essentially flat compared to $7.2 billion as of December 31, 2008. We generated organic growth largely offsetting significant market declines as inflows continued to strong pace in the first quarter 2009 after record inflows in 2008.

Assets under management in the WHG Funds grew to $285 million as of March 31, 2009, an increase of 15% compared to $247 million at March 31, 2008 and a 13% sequential increase from $253 million at December 31, 2008. As Brian mentioned, the WHG Funds were able to post higher assets due to strong net inflows in the first quarter. Earlier today, our Board of Directors approved the payment of a quarterly cash dividend of $0.30 per share, payable on July 1, 2009 to stockholders of record on June 15, 2009.

As I mentioned earlier, we have prepared a few slides that we wanted to go through with you. The slides again are available on the Investor Relations section of our website under Webcasts & Events. The first slide include the bar graph with quarterly assets under management over the last five-plus years as well as a line graph that compares the growth of our assets under management over this time period versus the value of the S&P 500 Index. Both values have been indexed to 100 as of March 31, 2004. While our assets under management had risen 85% over this period, the S&P 500 is down 29%.

The second slide is a bar graph with quarterly revenue over the same time period. Revenue in the first quarter of 2009 of $8.2 million was 63% higher than the first quarter 2004 revenue of $5.0 million. This represents a compound annual growth rate of 10%.

The third slide is a bar graph with quarterly cash earnings over the same time period. Cash earnings increased by 97% from the first quarter of 2004 to the first quarter of 2009, representing a compound annual growth rate of 14%. Again, the required reconciliation of cash earnings is included at the end of the slide presentation.

The fourth slide is a bar graph showing annual cash earnings over this time period as well as the growth in cash and investments on our balance sheet. As we have stated many times before, we seek to manage our business conservatively and currently maintain well in excess of one year’s cash expenses on our balance sheet, invested primarily in treasury bills.

The fifth slide is a bar graph that shows our quarterly dividend since we have been public. As the previous slide illustrates, our business generates strong cash flows and we have shared excess cash with shareholders through generous dividend payouts. The dividend declared today maintained an annual dividend rate of $1.20 per share, resulting in a yield of 3% at today’s closing price.

That concludes my discussion of our financials. And I’ll now turn the call back over to Brian.

Brian Casey

Thanks, Bill. Great job. If anybody has any questions –?

Question-and-Answer Session


(Operator instructions) Our first question is from Patrick Walsh. Your line is open.

Patrick Walsh – Oak Street Capital

Hi, guys, how are you doing?

Brian Casey

Good. How are you?

Patrick Walsh – Oak Street Capital

I was wondering in this environment, in the distress in the sector, are you guys look to – are you guys looking at any acquisitions here? And if so, how would you look to fund them?

Brian Casey

Patrick, I’ll tell you that thankfully over the last several years we have not done any acquisitions. Those that did overpaid for them and are still paying for them. Given where we are in the market, there are certainly opportunities that are out there that look attractive. How much time we would spend on that activity? It’s pretty limited because we are pretty busy running our own business.

Patrick Walsh – Oak Street Capital

Would you consider issuing equity if you found the right opportunity?

Brian Casey

What’s that [ph]?

Patrick Walsh – Oak Street Capital

Would you consider issuing equity if you found the right opportunity?

Brian Casey

If we found the right opportunity, we’d certainly look at all forms of acquisition, whether that’s cash. It would have to be something that’s accretive. And in the case of buying asset management firms, the one thing that I’ve always said when asked this question is, it’s very difficult to buy people and impose your culture on them. It would have to be a unique situation. Obviously if we were able to do something in the mutual fund area, that would be something that would be very attractive and accretive to us.

Patrick Walsh – Oak Street Capital

Okay. And could you provide a little detail on the expense of $143,000 that you mentioned in the release for future opportunities? Could you provide a little more detail on what that is?

Brian Casey

I’m not prepared to given any detail. We have got a couple of interesting opportunities that we are working on that are in the mutual fund area, but from a distribution standpoint and from a marketing standpoint.

Patrick Walsh – Oak Street Capital

Okay. And in terms of the stock-based comp, what – is this a good run rate for the year that we saw in the first quarter?

Brian Casey

Well, as I mentioned, there is no expense in the first quarter this year just like there was no expense in the first quarter of last year for performance-based restricted stock. Once we conclude that it’s probable that we will meet the performance hurdle, then we will begin expensing that cost.

Patrick Walsh – Oak Street Capital

Got it. And do you have a guideline of I guess for the end of the year or it’s just impossible to tell them at this point in time?

Brian Casey

No, we don’t give forward guidance. And certainly given where we are in the market, even if we did, it would be awfully difficult to paint a picture of what the rest of the year looks like. All I can say is that our business is as busy as it has ever been. We’ve continued to deliver the performance. As long as I’ve been doing this, results follow performance. So –

Patrick Walsh – Oak Street Capital

And what strategies have you seen the fund flow is coming to in the first quarter? And do you expect those strategies to – either one that most likely receive inflows during the remainder of the year?

Brian Casey

Well, the great news is that we are seeing looks across our entire product line. We are seeing them in large-caps, mid-cap, small cap, and all cap. And we’ve actually even seen some in the income area recently. So it’s been very broad based. There is a lot of interest. The consultants tell us that doing business with a firm that has a stable business model that consistently delivers performance and one that has an ethical foundation is acutely attractive to their clients.

Patrick Walsh – Oak Street Capital

Okay, great. That’s it. Thanks, guys.

Brian Casey

Thank you, Patrick.


Thank you. (Operator instructions) And I don’t have any more questions in queue.

Brian Casey

Are there any more questions?


No, I don’t have any more questions in queue.

Brian Casey

Okay, very good. Well, if you have any questions and you want to follow up with either Bill or me, please do so, or you can go to our website westwoodgroup.com to find any of our information. Thanks again for taking time to listen to the call. Have a great day.


That does conclude today’s conference. Thank you for your participation. Everybody may disconnect.

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