Jul 19, 2012
Operator
Welcome to the Westwood Holdings Group Second Quarter 2012 Earnings Conference Call. Today's call will begin with the presentation followed by a question-and-answer session.
Instructions on that feature will be given later in the program.
Operator
I would now like to turn the call over to your host for today's call, Sylvia Fry, Vice President and Chief Compliance Officer.
Sylvia Fry
Thank you. Good afternoon.
Welcome to our second quarter 2012 earnings conference call. I'd like to start by reading our forward-looking statements disclaimer.
Sylvia Fry
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.
Sylvia Fry
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.
Sylvia Fry
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.
Sylvia Fry
On the call today, we will have Brian Casey, our President and Chief Executive Officer; and Bill Hardcastle, our Chief Financial Officer.
Sylvia Fry
I'd like to turn the call over to Bill Hardcastle, our CFO.
William Hardcastle
Thanks, Sylvia. Good afternoon, everyone.
As you may have seen, we filed our 10-Q this afternoon. If you have any questions after reading the 10-Q, feel free to give me a call at the phone number is listed on our website.
William Hardcastle
As a background for the discussion of second quarter financials, I would like to point out that second quarter 2012 results include onetime and ongoing expenses related to our newly launched subsidiary, Westwood International Advisors. However, there is no revenue contribution from Westwood International in the second quarter.
William Hardcastle
I would also like to highlight several significant items that impacted second quarter 2012 pretax income. Performance fees in our MLP strategy of approximately $1.2 million compared to $1.0 million for the second quarter of 2011.
A gain of approximately $899,000 related to the sale of 100,000 shares of Teton Advisors.
William Hardcastle
Onetime recruiting and legal fees of approximately $1.4 million related to hiring Westwood International team members. Amortization of approximately $1.2 million related to Westwood International bonus awards.
And ongoing expenses related to Westwood International operations of approximately $1.3 million.
William Hardcastle
Moving on to revenue for the quarter. For the second quarter 2012, our total revenues were $20.1 million compared to $18.9 million in the second quarter 2011.
Comparing second quarter revenue in 2012 versus 2011, asset-based advisory fees declined by 2% as a result of decreased average assets under management due to asset withdrawals by certain clients and market depreciation, partially offset by inflows from new and existing clients.
William Hardcastle
Performance-based advisory fees increased by 19% due to a larger performance fee on our MLP strategy. Trust fees increased by 8% as a result of increased trust assets under management, primarily due to asset inflows from new and existing clients.
William Hardcastle
GAAP net income for the second quarter 2012 was $2.2 million compared to $3.7 million for the second quarter 2011. GAAP EPS was $0.30 per diluted share versus $0.52 for the second quarter 2011.
Economic earnings for the second quarter 2012 were $5.2 million compared to $6.7 million for the second quarter 2011. Economic EPS was $0.72 per diluted share versus $0.94 for the second quarter 2011.
William Hardcastle
Total expenses for the quarter were $16.3 million compared to $12.9 million for the second quarter of 2011. Economic expenses were $13.3 million compared to $10.0 million for the second quarter 2011.
The primary drivers of the increase and total GAAP expenses for the second quarter of 2012 compared to second quarter 2011 were as follows
onetime recruiting and legal fees related to hiring Westwood International team members of approximately $1.4 million; amortization of approximately $1.2 million related to Westwood International bonus awards; salary expense increased by approximately $590,000 primarily due to the addition of Westwood International employees as well as other new hires; partially offsetting these increases was a decrease of $204,000 in incentive compensation.
The primary drivers of the increase and total GAAP expenses for the second quarter of 2012 compared to second quarter 2011 were as follows
Assets under management were $13.2 billion as of June 30, 2012, compared to $13.9 billion at June 30, 2011. The year-over-year decrease in assets was primarily due to asset outflows from certain clients and market depreciation, partially offset by asset inflows from new and existing clients.
The primary drivers of the increase and total GAAP expenses for the second quarter of 2012 compared to second quarter 2011 were as follows
Assets under management in the Westwood Funds were $1.5 billion at June 30, 2012, compared to $1.3 billion at June 30, 2011. This increase was due to net inflows into the funds over the last 12 months.
The primary drivers of the increase and total GAAP expenses for the second quarter of 2012 compared to second quarter 2011 were as follows
Also today, our Board of Directors approved the payment of the quarterly cash dividend of $0.37 per share, payable on October 1, 2012, to stockholders of record on September 14, 2012. The quarterly dividend of $0.37 per share or an annual rate of $1.48 per share results in a dividend yield at yesterday's closing price of 4%.
The primary drivers of the increase and total GAAP expenses for the second quarter of 2012 compared to second quarter 2011 were as follows
That concludes my discussion of our financials. And I'll now turn the call over to Brian Casey.
Brian Casey
Thanks, Bill, and thanks to all of you for joining our call today. We're coming off the strongest first quarter stock performance since 1982.
It was not surprising that the second quarter spend most of the period in the red with the relief rally at the end of June. And investors again sold equities and fund flows continued to favor fixed income or equity income-oriented strategies.
This resulted in favorable flows to our Income Opportunity Mutual Fund, WHGIX, as well as several new institutional client wins in the income opportunity area.
Brian Casey
On the equity side, most Westwood equity products were down more than the market, as we remained underway, the top performing utilities and consumer staples areas. But we did have some bright spots, including MLP, which had another great quarter and once again earned a nice performance fee for the prior year.
Thanks to Todd Williams, Matthew Na, Bill Costello, and Jay Singhania for their terrific work in this area.
Brian Casey
Another bright spot is SmallCap, which is well ahead of its benchmark and was just a touch outside of the first quartile year-to-date. SmallCap is on the verge of putting together strong back-to-back years, which will help our marketing efforts in the year ahead.
Brian Casey
Search activity is centered around income opportunity with some interest in MLP. We're excited that it finally see some momentum from both consultants and plan sponsors for both products.
Brian Casey
Assets and income opportunity currently exceed $1.5 billion and we have the capacity to manage more than 3x that amount. MLP interest is increasing and we have some outstanding searches, but it will take more sponsorship from the consultant community to see widespread adoption of MLPs by the plan sponsor community.
Brian Casey
While the industry continues to experience outflows from equity funds, we've managed to grow the Westwood Funds by over 15% over the past year. The Income Opportunity Fund continues to see most of the daily fund flows and recently moved to a 5-star rating at Morningstar, as did our Dividend Growth Fund.
Brian Casey
We featured the Westwood Short Duration High Yield Fund at the Morningstar conference and we're encouraged by the reception from advisors. This fund was recently approved by one of the big wire houses for their select list and for a model program utilized by their advisors.
As this fund gets more history, we're encouraged with its potential and high current yield.
Brian Casey
The Westwood Trust team has been busy making calls and having some success converting new customers, but unfortunately, but also months like April and May tend to slow momentum. We're encouraged by the depth of the pipeline and we remain hopeful that investors will begin moving money again, as the market continues to recover.
Brian Casey
As Bill noted, we had a lot of expenses associated with the creation of Westwood International Advisors. I am very proud of our entire team and all that we've accomplished together in the past few months.
Brian Casey
We've upgraded our financial, trading and portfolio accounting systems to accommodate global and emerging market securities. We opened 54 markets and implemented global and emerging market portfolios for Westwood Trust.
The team has been working in Dallas and will begin working in our Toronto office in August.
Brian Casey
This quarter marks a tremendous milestone in our history, where we've completed 10 years of history as a public company. And we have a slide presentation that you can access on our website, westwoodgroup.com.
Brian Casey
If you'll go the top right-hand corner and click on Investor Relations, and scroll down to the middle of the page under Events & Presentations, you can click on the link Q2 2012 Westwood Holdings Group earnings conference call webcast. And if you haven't registered before, you'll need to that quickly.
And if you've already registered then that should show up and you'll see the slides on the page.
Brian Casey
So we said out 10 years ago, we had some key objectives. And if you'll look at the slide presentation here on Slide #1, our first and primary objective was to build a firm that transcends a talented founder, Susan Byrne, by creating a world-class research department to support multiple products that produce superior returns for our clients.
Brian Casey
We said we wanted to manage our company, the way the companies that we would own in our clients' portfolios manage theirs. And that there were a number of attributes that we thought were important, when we were looking at superior companies.
Brian Casey
One is that they generate strong free cash flow. We'd like to see employees as owners across all levels of the business.
We like companies that are shareholder friendly by sharing their excess cash in the form of dividends or buying stock back. We like to see a stabled or improving ROE.
We like a meaningful dividend payout. We like strong and improving balance sheet.
And we like to see some record for management of value creation.
Brian Casey
We said we would like to acquire mutual funds opportunistically, that we'd be very selective in the private wealth area. That we'd build high-quality businesses where we saw demand and that we always wanted to support our community with both time and resources.
And then of course, we want to create shareholder value and perform well versus our peers in the broad-market indices.
Brian Casey
If we go to Slide 2, and see that we've developed a research department and a structure to support multiple products across the top. And it's interesting to look back at 2002 versus today.
We had 43 people in 2002. We have 93 people today.
Those 43 people were from 2 countries, these 93 people are from 8 countries. It was 7 CFAs.
We have 28 CFAs today. We had 8 advanced degrees and 32 advanced degrees today.
14 investment professionals and 38 investment professionals.
Brian Casey
Perhaps, one of the things we are most proud of is our retention. More than half of the people that were employed in 2002 are still at Westwood.
And if we look at those that left, 11 of them left to start a family or retired, and 4 of them left to accept new positions and 4 of them were asked to leave. If we include Omaha in this calculation, nearly 2/3 of the people that were here in 2002 are here today.
Brian Casey
If we go to the next strategy, we have created multiple products, the next slide, on Page 4. We have developed a number of additional strategies.
If you look in 2002, in the dark blue there, we had 7 strategies. We still have all 7 of those today.
But we've created 16 additional strategies on the domestic side and 4 international strategies. They're listed over here on the right in blue for a total of 20.
Brian Casey
And then lastly, as part of our objectives, we wanted to create superior performance for our clients. So on Pages 5 and 6, you can see the products that we had in 2002 in the alpha generation that we generated for both, LargeCap, Dividend Growth, AllCap Value and SMid Value was significant.
And then the newer products we've created since then on Page 6, Income Opportunity, MLP and SmallCap Value have also generated superior performance for our clients.
Brian Casey
On Page 7, our next objective was to manage our company in a similar way as companies that we would own for our clients, who manage theirs. All of those attributes that I mentioned are important when we're looking at businesses.
Brian Casey
Some quick comparisons here, ROE is slightly ahead of our peers. Our current yield for WHG is well ahead of our peers.
We have a strong dividend payout ratio. We have no debt and have never had any debt, and it's unlikely we'll ever have any debt at Westwood.
We have a strong insider ownership with 32% of the company owned by the folks who work here versus 9% for the peer median.
Brian Casey
The peer group listed below, they're in the footnote. Those are the tickers for all of the companies that we have included in the asset management peer group.
Brian Casey
If we go to Page 8 and continue along with, as I said 32% of the company is owned by the people that work here or who are directors of this company. We have also had some very long-term shareholders.
And I'd like to thank first and foremost the Gabelli organization, and specifically Mario Gabelli, who has been a shareholder from the very beginning, and we appreciate that.
Brian Casey
Third Avenue Management, Ian Lapey; BlackRock, Vanguard, Dimensional Fund Advisors and Northern Trust. More than 5 years Royce & Associates has been a shareholder.
And I'd like to thank Whitney George and Lauren Romeo for their support. State Street of course.
Brian Casey
And then one that's not on here that became a shareholder in OA is Bob Mitchell with Conestoga Capital Advisors. We appreciate you being a shareholder and appreciate you sticking through good times and bad with us, they've been mostly good.
And we appreciate you being a shareholder, it means a lot to us.
Brian Casey
If we go to next slide on Page 9, we did say we want to grow our dividend, which we've done a nice job of. We started with dividend of $0.02 back in 2002, that's grown to $0.37 a quarter here in 2012.
That's about an 18.5x multiple from the $0.02 we started with.
Brian Casey
But more importantly if we look on Page 10 at the total dividends we've paid, we've paid $12 a share in dividends. So if you think about that we've paid out more in dividends $82 million than our original market cap of $65 million when we went public.
Brian Casey
If we look at how that stacks up over time on Page 11, we said we'd maintain a conservative and growing balance sheet. We started with $15 million in cash and investment.
Today we have $52 million. It's a 13% compound annual growth rate.
We had no debt. We still have no debt.
We've grown our book value or shareholders equity from $17 a share to $71 a share. It's a 15.7% compound annual growth rate.
Brian Casey
On the acquisition side on Page 12, we said we would like to acquire mutual fund assets opportunistically. I honestly thought we have more opportunities to do that, as banks began to get rid of non-core businesses, that hasn't happened.
They've continued to hang on to them, as they have been making loans like you would hope they would.
Brian Casey
But we were able to acquire the Philadelphia Fund, which was a small fund. It helped us in the beginning, when we were starting the Westwood Funds.
It was a good opportunity to purchase assets and help out the funds when they were getting started. We've bought McCarthy Group Advisors in the private wealth area.
But we've always said there as we want to own businesses that are in attractive growing markets with limited competition.
Brian Casey
Number one, most important thing is that we have a strong cultural alignment of values. We'd like to have a private wealth business that has a small number of accounts with higher average balances.
We want strong financial operating history. And we want someone who by partnering with us will benefit from the efficiencies we've developed over being in the trust business for over 15 years and from the product depth we have of multiple products.
Brian Casey
But most of all, what we got in this transaction is great people, from Art Burtscher and Rich Jarvis on down to everybody that works here. They care about every one of their customers and they always try to do the right thing.
Brian Casey
If we look at the next page over here on Page 13, we said we'd build high-quality business where we saw demand. At a time when the mutual fund industry has really peaked and assets have been going to ETFs and other areas, we still felt like there was room for someone like us to bring high-quality products at institutional-quality prices.
Brian Casey
We've managed to grow a mutual fund business from nothing in 2005 to $1.5 billion. It's now 11% of our total assets.
We've got a total of 8 different funds and all of them are doing reasonably well in the marketplace.
Brian Casey
If we look at Page 14, and talk little bit about Westwood International Advisors, as we've said for the last couple of years, the consensus view is that global and emerging markets have more of an attractive growth profile for investors than developed markets do. And as a result, plan sponsors they continue to re-balance their asset allocation models more towards global and emerging market equities.
The Westwood International Advisors team has a demonstrated success in this area. And they've been very well received by perspective institutional clients.
Brian Casey
If we go to the next page, which is Page 15, we wanted to be a good steward of our community and support our community with not just by writing checks. Although we did plenty of that as you can see out here in the outside of these pictures, but more importantly with our time and our own energy.
Brian Casey
We have a group that goes down to The Stewpot every month and serves lunch to the homeless and those less fortunate. We've served 27,300 meals over the years.
We also get together as a company and we build a house with Habitat for Humanity every year. And we've sponsored and help build 7 houses now.
Brian Casey
If we look at how we score relative to others, which is what most of you on this call care about. On Page 16, you can look back at where we were in terms of creating value at revenues.
Revenues were, I guess, right at $20 million when we started. They're over $70 million today.
Brian Casey
If we go to the next page and look at our market cap, which when we spun out was roughly $65 million, it's $300 million today. And then we look at on the next page, Slide 18, our market cap history, and what we look at versus the S&P, we've had a 15.7% annual growth rate versus the S&P which is 3.9%.
So it's been a pretty good investment relative to the S&P.
Brian Casey
And some might say, what about the Russell 2000. If we look at the Russell 2000, on the next slide, which is Page 19, we compare very favorably relative to both the S&P and the Russell 2000.
And if we look at our peers over here on Slide 20, hats off to Diamond Hill, Epoch and Virtus, they've certainly knocked it out of the park since they've been public.
Brian Casey
BlackRock at 361% return and Westwood at 350%. We feel in pretty good company with BlackRock, Cohen & Steers all the way down to the Gabelli organization.
They're all terrific companies and very well run. And all of them are great peers for us to compare ourselves to as we go forward.
Brian Casey
None of this would have been possible without the help of the folks that work here. Your commitment to excellence is what has made this happen.
On Page 21, these are all the people that have been here for 10 years or longer and on Slide 22, everybody that's been here for 5 years or longer. And I want to thank you again for your commitment and for all your hard work.
It's terrific to see what we've been able to accomplish.
Brian Casey
If we look at the last couple of slides here and we go to the strategies that we have, now this is what it looks like today. We've made it 10 years now.
We've made it through the tech bubble. We've made it through Sarbanes-Oxley, the financial crisis.
And all of those experiences leave us better prepared for the next 10 years.
Brian Casey
And best of all, the expense of creating the infrastructure with publicly traded companies behind us. All the products you see on this page, if you look at them in aggregate, they represent more than a $100 million in capacity versus the 13-and-change we have today.
Brian Casey
But interestingly, if you look at this last page, which is our average fee over the past 5 years, our average fee has ticked up nicely from about 46 basis points to 53 basis points today. As our product mix has shifted from legacy business that has low average fees to more capacity constrained products, which have higher average fees.
Brian Casey
And of course, with the addition of emerging markets, the improved performance of SmallCap, the potential for MLP, all these things should be further wind to our back. And we really look forward to the next 10 years.
And we're excited about what we will achieve.
Brian Casey
We're happy to take your questions.
Operator
[Operator Instructions] And our first question comes from Mac Sykes of the Gabelli & Company.
Macrae Sykes
If you could just walk me through the P&L impacts and the cash impacts from the addition of the -- that would be very helpful.
Brian Casey
The addition of the -- what was the last part?
Macrae Sykes
The addition of the Westwood International Advisors team. If you could just walk through the P&L?
William Hardcastle
Mac, it's Bill Hardcastle. We tried to kind of lay out the impacts of Westwood International in the press release, if you've seen it.
So there were onetime recruiting and legal fees related to hiring of the team of about $1.4 million in the quarter. We also amortized some bonus awards to team members and that was $1.2 million for the quarter.
And then ongoing expenses for Westwood International operations and that's salaries, bonus accrual, office rent, et cetera, that was about $1.3 million in the quarter.
Operator
Our next question is from Chuck Hendershot.
Charles Hendershot
I had a follow-up on Mac's question. It looks like from the press release about $2.5 million of quarterly drag on your quarterly numbers.
Do you have a projection of when you would expect revenues from the organization and when WIA might go breakeven?
Brian Casey
I'll let Bill address the drags on the new cost. But certainly in terms of revenue, when we do things like this, we don't budget for immediate revenue.
But we do believe that in the space emerging markets and global that there is a shortage of good managers and there is demand from plan sponsors for that asset class. And we have done absolutely no marketing at this point.
And in fact, have had inbound calls from plan sponsors, who are interested in talking to us when we are ready to talk to them. So while I certainly can't give you a revenue projection as to when that would happen.
We do feel very encouraged by the fact that we have a really strong team with strong historical performance and a shortage of managers in that space. And then, Bill, if you want to answer the second part of his question.
William Hardcastle
Sure, I guess, kind of just going back through the expenses again. The onetime legal and recruiting fees, obviously, those were just like we said, onetime.
So those do not continue. The ongoing expenses of $1.3 million in the second quarter, that number will go up as we have a full quarter of salaries, and office lease and so forth, and as we hired new members to the team.
And then the amortization of the bonus awards of $1.2 million, that amortization will continue for 3 more years. But at the end of 2013, close to 80% of that amortization will be expensed through the income statement.
Operator
And we do have Mr. Sykes back.
Macrae Sykes
Just a quick question on the share count. I was just looking for difference in the weighted average diluted shares this quarter and the outstanding that's listed in the Q.
I was just wondering, if you could just go through some of that accounting?
William Hardcastle
That's correct. We use the treasury share method of calculating diluted shares, and so you have to calculate the dilutive impact of unvested awards and we have that calculation in the 10-Q.
Operator
[Operator Instructions] And we have no additional questions in queue at this time.
Brian Casey
Well, I'll wrap it up and just say that we couldn't be more excited about Westwood International Advisors. And the folks who've been down here now for a couple of months, they are everything we'd hope they would be.
They are committed, terrific investment professionals.
Brian Casey
And in many ways, in the last 10 years every product we have, we've built from scratch. And if you think about the risk associated with building a product from scratch where you have to hire the people, spend the money, build the record.
And then after 3 years you get to see if the record is any good, and if the team can work well together and if you have something that you can market.
Brian Casey
This is a team that's been together for a long time. They work incredibly well together.
They finish each other sentences and they are excited to be part of Westwood. And I think as we begin to get out and tell that story that we're going to have a lot of terrific reception from the institutional community and the relationships that we've had with many of those consultants that go back 25 or more years.
Brian Casey
Thanks again for your interest today. If you have any follow-up questions, please call Bill or myself.
All of our filings and all of our information is on our website at westwoodgroup.com. Thanks again for your time.
Operator
That concludes today's conference. Thank you for your participation.
You may now disconnect.