Pzena Investment Management, Inc. (PZN)

Q2 2010 Earnings Conference Call

July 28, 2010 10:00 AM ET


Greg Martin – CFO

Rich Pzena – CEO and Co-Chief Investment Officer


Alex Blostein – Goldman Sachs

Larry Hedden – Keefe, Bruyette & Woods

Ken Worthington – JPMorgan

Campbell Anthony – Macquarie



Good morning. My name is (Mary) and I will be your conference operator today. At this time, I would like to welcome everyone to the Pzena Second Quarter 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. I would now like to turn the call over to Mr. Greg Martin. Sir, you may begin.

Greg Martin

Thank you very much. Good morning I’m Greg Martin, Chief Financial Officer of Pzena Investment Management. And I’d like to take this opportunity to welcome you all and thank you for joining us on our second quarter 2010 earnings conference call. With me on the call is our Chief Executive Officer and Co-Chief Investment Officer, Rich Pzena.

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

Before we begin, I would like to reference the standard legal disclaimer. Statements made in the presentation today may contain forward-looking information about management 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 at www.sec.gov. Investors are cautioned not to place undue reliance on forward-looking statements which speaks only as 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 are raised after the dates these statements were made. Investors should however, consult any further disclosures the company made in the report filed with the SEC.

In addition please be advised that because of the prohibitions on selective disclosures, 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 requires the disclosure of material non-public information we will not be able to respond to it.

Thank you. For the second quarter of 2010 we reported revenues of $19.4 million, operating income of $10 million, non-GAAP diluted net income of $5.0 million and non-GAAP diluted net income per share of $0.08. During the quarter we repaid remainder of our outstanding senior subordinated notes leaving us debt free. We also declared a quarterly dividend of $0.03 per share.

I’ll review our financial results in greater detail in a few minutes. First, I’d like to turn the call over to Rich Pzena, who will discuss our view of the investing environment and how we’re positioned relative to it.

Rich Pzena

Thanks Greg. Looking at the first half of 2010, one would think the world must be on some strange kind of emotional roller coaster. As we move through the second quarter, fear took over from greed again. Investors around the world became obsessed by headlines of European debt and currency crisis, economic slowdown and new financial regulations.

All of these fears led to a broad decline in world equity markets as witness by a 12.7% decline in the MSCI world index and a flight from risk assets. The real question though is do these fears have any real impact on the long-term profitability of commercial business enterprises or are they simply a giant price discount that investor should pounce on.

I’m sure you can guess our view. The one constant fact that seems to be perennially ignored by investors is that companies are run by people and the people react to changing economic situations. If there is inflation, they manage for inflation, if there is economic slowdown, they manage for economic slowdown. And although unanticipated changes in economic factors can cause an earnings dislocation, it is rare that fully anticipated changes will cause a problem.

The current economic sluggishness has been widely and universally anticipated. Accordingly, companies are prepared. Operating margins and earnings are at or near record levels despite revenues which are significantly below recent peaks. Corporate leverage is below normal with many companies cash-rich and valuations are compelling.

History tells us that companies can manage through almost any economic situation as long as they don’t have too much financial leverage and funding risk. Over the course of the last 50 years, the return on equity for the S&P 500 has fluctuated around a very flat trend line. Companies have averaged a 13.5% ROE during economic booms and economic buffs, during high inflation and low inflation, during high tax environments and low tax environments, during high interest rates and low interest rates.

There is certainly no reason to believe that they won’t do it again. So the increase in volatility from this uncertainty has once again created a compelling opportunity for the value investor. As is usually the case, this opportunity is coming exactly on most investment committees and boards are demanding that the portfolios they oversee be structured to avoid another 2008.

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