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W.P. Stewart & Company Ltd.
Conference Call Notes

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By BigChiefFool
April 29, 2004

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Just got finished listening to the conference call, so I thought I'd paste my notes in case anyone here doesn't have time to listen. It was only about 37 minutes long (it wasn't cut short...there just weren't any more questions). I tried to get everything down, but I'm sure I missed some things, so take it with a grain of salt. I also posted this on the Liquid Lounge board, where I know a few people follow the company.

John Russell:
Thanks for coming, blah...review Q1 results. Press release issued earlier this morning, available at website.

(blah...disclaimer...blah)

In Q1, diluted earnings were $0.31per share, above the consensus estimates, and our highest in over a year. Expenses were up 9% year-over-year, but margins have improved. Our investment performance was positive in the quarter. AUM above $8.5 billion, roughly even with AUM at end of 2003, and up 16% YOY. Offsetting positive development is fact that net flows were negative in the quarter. (more on this later)

Harry:
Let's Go over the numbers. Through Q1, the WP Stewart composite was up 1.8% post-fee, next to 1.7% for the S&P 500. It is up 24.5% (post-fee) over the last year, comp to 35.?% in S&P 500. Over the last 3 and 5 years, it's slightly above the S&P. Over the last 10 years, it fared approximately 1% a year greater than the S&P.

We introduced 5 new companies into our portfolio this quarter. We're enthused about what we own. Earnings power could increase over 15% annually for next 2 years, partially reflecting better economy and partially b/c of our good investments. We think our companies' growth and earnings will outpace the American economy in general.

Our portfolio has a PE of 23, reasonable in context of the economy and what we own.

We lagged the S&P for a while, which isn't uncommon given the stage of the economic recovery and given that we did much better in bear market than the economy as a whole did (smaller mountain to climb). We think we're well positioned going forward.

John:
AUM discussion. In Q1, net flows were -$139 million. Compares with -$187 million last quarter and -$89 million in Q1 of 2003. We're disappointed, but the negative outflows are mainly a result of individual accounts who haven't been with us for long enough to enjoy our long-term benefits. Accounts closed that opened in 1999 or later were responsible for 75% of the negative net flows in the quarter. For the most part, these clients only have memories of the 3-year bear market, and were probably influenced by our underperformance in 99-03. These people didn't accept or understand the significance of our approach, which is often not in synch with market. They also apparently didn't find comfort in our long-term results history. We experienced an outflow of $10 million from existing accounts. This is typical as clients pay fees, taxes, and so forth. Overall, we had $69 million in new accounts, but $215 million in closures. We remain confident in our philosophy and approach, and try to educate our clients about our long-term view and the advantages of our philosophy.

There have been 26 rolling 5-year periods in our history. We've outperformed the S&P 500 in every one except 2 on a pre-fee basis and 4 on a post-fee basis. For 21 of the 26 periods we've return in excess of 15% compounded (pre-fee). The most recent 3 and 5 year periods were below historical returns (not surprisingly), but above the market. We may need to better educate our clients about our approach, but see no need to change our investment approach.

We've decided that cultivating "one-off" new accounts wasn't likely to lead to sizable positive flows, especially in light of the withdrawals in existing accounts, which leads to disappearance of AUM. We've expanded our efforts to develop distribution alliances, and are confident of the eventual success of these efforts, but it's unlikely that they will have significant impact for several quarters. Our vulnerability to outflows to new clients will diminish assuming our investment performance continues to be strong.

Rocco:
Earnings $0.31, compared to $0.23 in Q1 of 2003. Cash earnings $0.35 compared to $0.27 in 2003. Pretax margin 43.5%, comp to 38.3%. Avg. fee was 1.21%, comp to 1.22%. Revs increased 19.4% to 35.5 million, fees increased 10.7%, reflecting higher AUM billings. Commissions were $9.4 million, which is 59% higher than last year. Trading volume was significantly higher, reflecting 5 new companies added to most ports. Interest and other rev decreased $0.2 million.
Operating expenses increased 9.3% over this time last year, primarily due to fees paid to outside marketers (due to higher AUM), commissions (higher trading), marketing expenses, and increased employee benefits (higher profits). We expect 2004 compensation to be 24% of adjusted operating profits.

Tax rate 10%.

Cash balances were $41 million

Bond positions $8.4 million (AAA and AA securities w/3-4 years duration)
Shareholders equity $116 million.
Usual $0.30 dividend paid tomorrow.

John:
Business development not as strong as we'd anticipated, but we're focused on reversing AUM trends. We'll keep striving for above average performance with below average risk.

Questions!
Color on pricing...fee was flat, but we're hearing about pressure on pricing in industry...are you seeing this? I don't believe we're feeling any substantial pressure on fee structure. The changes in our average fees reflect a change in the mix of accounts (large accounts get a fee break). In general, b/c of our performance and other stuff, I don't see any pressure.

Details on some of direct accounts closed....you talked about partnerships and improved distribution...more details? Not sure what you're looking for re: closed accounts. 75%+ of shortfall were accounts opened in beginning of bear market. We continue to see high retention rates and loyalty from long-term clients. Included in withdrawals were 2 fairly significant newer quasi-institutional accounts. One was 36 million bucks that was with us for less than a year (!), which isn't our typical client. Moving to 2nd part of question, we recognize value and need for developing strategic alliances to get broad-based distribution of our product. We have a number of ongoing discussions, but none at a stage where details and names can be disclosed. We're working with intl banks and major financial services institutions internationally in an effort to conclude some of these arrangements.

Commissions....will normalize somewhat going forward? Probably our best Q since March 01, the 48 we had then was a bit high, the 22 we had earlier was a little low. Hard to predict an annual rate, we have trouble budgeting it. 3 things drive our port management: fundamentals, valuation, and alternatives (new names for ports). In last year, we've emphasized new names. As markets pulled back, we've been able to pick off some good names well off their highs. We've added a lot of growth without sacrificing quality along the way.

Distribution...as you focus on alliances, will you change what you have been doing (marketing wise??) (seminars, etc)? Not at all. I think we've enjoyed sig. success w/regional seminars and other marketing efforts. the message we're trying to deliver today is that while one-off clients will continue to be important to us, we recognize that, to move the needle substantially in area of +AUM, we'll have to add emphasis on distributors. We've made good effort thus far, but need to go above and beyond those efforts. Seminars are good (4 in Q1, 17 more coming in US) way of building relationships.

In regard to alliances, will there be any shift in pricing? We don't anticipate any significant change.

Ok, so similar to solicitor relationship? Net result to us (in terms of yields) would be similar to a solicitor arrangement.

Talk about new positions in terms of % of turnover Our average turnover has been 35-45% over time. Bear in mind new names drove higher level of activity, but we also used our fundamental work and valuation work to redeploy funds within existing position. We'll see how it averages out over year, but we don't expect to change 5+ names a quarter.

Flow discussion...last Q, 66% of outflows from accounts less than 5 years old, 75% this time. What % of AUM are less than 5 years of age (in terms of client base)? Don't have precisely, don't want to give offhand answer. As of Dec 31, something in excess of 75% of assets were over 5 years old, so probably 80% have been with us for over 5 years.

Is there a way to quantify top 5 or 10 accounts in terms of % of AUM? Our top 10 accounts (maybe as many as 20) have been w/us for over 5 years. (They didn't answer the question and the analyst didn't re-pose it. Don't think they were avoiding it, just don't think they understood it)

Will you have below average commission volumes going forward? It's all a function of our evaluation process and what we see...can't predict. It'll come down to fundamentals, valuation, and the alternatives available. Every port has a cap of 20 names, but these names may not be the same for each manager. That doesn't mean that the 5 new names was a 25% turnover. It's a long way from that!

No change in pricing w/new alliances and distributions, but will there be a change in margins? Until we can discuss the specifics of our situations and arrangements we can't answer that, but we don't anticipate entering into distribution models in a way that would have a material negative impact in our margins. Think of it as a symbiotic marketer set-up. Line items on financials might change, but shouldn't have a significant impact on margins.

Thanks for participating, we look forward to speaking with you next quarter, blah blah blah!


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