Pzena Investment Management, Inc. (



Q3 2011 Earnings Conference Call

October 26, 2011 10:00 AM ET


Gregory Martin – CFO and Treasurer

Rich Pzena – CEO and Co-Chief Investment Officer


Alex Blostein – Goldman Sachs

Larry Hedden – Keefe, Bruyette & Woods

Ken Worthington – JPMorgan



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Good morning. My name is Chelsea and I will be your conference operator today. At this time, I would like to welcome everyone to the Pzena third quarter 2011 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. (Operator instructions). Thank you. Mr. Martin, you may begin your conference.

Gregory Martin

Thank you very much, Chelsea. Good morning and thank you for joining us on the Pzena Investment Management third quarter 2011 earnings call. I am 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 www.pzena.com. Replay of this call will be available for the next 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 www.sec.gov. Investors are cautioned not to place undue reliance on forward-looking statements which speak only as of the date on which the 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 that company may make and 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 their conference calls. If one of your questions require the disclosure of material non-public information, you will not be able to respond to it. Thank you.

I will turn the call over to Rich shortly, but first I would like to review some of our financial highlights. We reported non-GAAP EPS of $0.08 per share and $5.3 million in non-GAAP diluted net income. Revenues were $20.0 million for the quarter and our operating income was $10.3 million. Our cash balance was $36.9 million at quarter-end, and we declared a $0.03 per share of quarterly dividend last night.

I will discuss our financial results in greater depth in a few minutes. Let me first turn the call over to Rich, who will discuss our view of the investing environment and how we are positioned relative to it.

Rich Pzena

Thanks Greg. Fears over Eurozone sovereign debt and potential contagion drove financial markets lower globally during the quarter. Equities posted double-digit declines in virtually all regions of the world, with the MSCI world developed market index losing 16.6% and the MSCI emerging markets index down by 22.6% during the quarter, measured in U.S. dollars. Correlations of returns have also spiked as the Financial Times noted in their September 22


article titled, ‘Risk-on Risk-off back with a bang’ where they discussed the extremely high correlation between equities and in particular U.S. stocks.

The International Monetary Fund compounded investors’ macro fears when they reduced their 2012 world GDP growth estimates from 4.5% to 4%, despite the fact that this is still well in excess of the 30-year average growth rate of 3.4%. Investors are tethered to the saga of the European sovereign debt crisis, producing gut-wrenching market gyrations. The threat of Greek, Spain, Italy default, European bank recapitalizations and financial contagion have driven fear and uncertainty to the extreme and cost investors globally to move and mass away from equities, highly correlated moves in Wall Street. Expecting the worst, investors have particularly penalized cyclical or high beta stocks, driving valuation spread between those and stable, i.e., low beta stocks to almost unprecedented levels.

On this basis alone, one could conclude that it is an awful time to reposition to low beta stocks as they are expensive compared to their cyclical counterparts. Even more importantly, we believe there is significant value opportunity in today’s beaten down sectors. Overtime, managements have demonstrated the ability to adapt and overcome the obstacles in front of them and to restore profitability in the wake of significant macroeconomic disruptions.

Corporations today are well-positioned to deal with near-term shocks should they arise, having deleveraged their balance sheets and realigned cost structures following the 2008 to 2009 recession. So, rather than concluding that equities and cyclical stocks in particular are in trouble, in many cases, we see a different picture, one of resilience, adaptability and solid financial footing, we see opportunity.

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