Silvercrest Asset Management Group Inc (SAMG) 2015 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Silvercrest Asset Management Group's Q1 2015 earnings call. At this time, all participant lines are in a listen-only mode to reduce background noise but later we will be holding a question-and-answer session and instructions will follow at that time. (Operator Instructions). This conference is being recorded.

Before we begin, let me remind you that during today's call Silvercrest will make forward-looking statements pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact including statements regarding future events and developments and Silvercrest's future performance as well as management's current expectations, beliefs, plans, estimates or projections relating to the future are forward-looking statements. These forward-looking statements are only predictions based on current expectations and projections about future events. These forward-looking statements are subject to a number of risks and uncertainties and there are important factors that could cause actual results, level of activity, performance or achievements to differ materially from the statements made.

Among these factors are fluctuations in quarterly and annual results, incurrence of net losses, adverse effects of management focusing on implementation of a growth strategy, failure to develop and maintain the Silvercrest brand and other factors disclosed in the Company's filings with the SEC including those factors listed under the caption entitled risk factors in the Company's annual report on Form 10-K for the year ended December 31, 2014 filed with the SEC.

In some cases, these statements can be identified by forward-looking words such as believe, expect, anticipate, plan, estimate, likely, may, will, could, continue, project, predict, goal, the negative or plural of these words and other similar expressions.

These forward-looking statements are predictions based on the Silvercrest's current expectations and its projections about future events. All forward-looking statements made on this call are made as of the date hereof and Silvercrest assumes no obligation to update these forward-looking statements.

I would now like to turn the call over to your speaker for today, Rick Hough, CEO of Silvercrest Asset Management. You have the floor, sir.

Thank you very much and welcome everyone to our first-quarter 2015 earnings call.

Silvercrest had positive net assets for the first quarter ended March 31, along with increased revenue. Our first quarter represented our seventh straight quarter of positive organic growth generated by new ultra-high-net-worth and institutional business and our firm's relationships increased to 543 as of the end of the quarter, March 31, 2015 from 538 as of December 31, 2014.

Also during the quarter we announced a definitive agreement to acquire the assets of Jamison, Eaton & Wood, a New Jersey-based registered investment advisor that advises on nearly $1 billion in total assets primarily on behalf of high-net-worth families. Jamison also advises on sizable non-advisory asset for institutions. This acquisition is expected to close during the second quarter of this year and is the first acquisition since Silvercrest went public in 2013.

Our total assets under management increased to $18.2 billion as of March 31, 2015 from $17.9 billion as of the end of the fourth quarter last year and from $16.2 billion as of the end of the first quarter of 2014. Of that, total discretionary assets under management grew to $11.8 billion as of March 31, 2015 from $11.6 billion as of the end of the fourth quarter 2014. We are pleased with our continued execution of the firm's strategy including organic growth and a new announced acquisition and increased visibility of the firm's brand.

On May 4, 2015, our Board of Directors also declared a quarterly dividend of $0.12 per share of Class A common stock. We will be paying that dividend on or about June 19, 2015 to our shareholders as of the close of business on June 12, 2015.

With that I will turn it over to Scott Gerard, our CFO, to discuss the quarter's financials and then we will open the line for questions. Thanks very much.

Thanks, Rick. As I'm sure you read in the release for the first quarter, discretionary AUM as of March 31, 2015 was $11.8 billion and total AUM as of the end of the first quarter this year was $18.2 billion.

Revenue for the quarter was $17.4 million and reported consolidated net income for the quarter was $2.8 million. Revenue for the first quarter of $17.4 million represented approximately a 4% increase over revenue of $16.7 million for the same period last year. This increase was primarily driven by growth in management and advisory fees as a result of increased AUM.

Expenses for the first quarter this year were $13.3 million representing approximately a 3% increase from expenses of $12.9 million for the first quarter last year. This increase was primarily attributable to increases in general and administrative expense of $0.3 million and what drove the increase in G&A was primarily an increase in professional fees.

Reported consolidated net income was $2.8 million for the quarter as compared to $2.2 million in the same period last year. Reported net income attributable to Silvercrest or to Class A shareholders for the first quarter of this year was $1.4 million or $0.18 per basic and diluted Class A share.

Adjusted EBITDA, which again we define as EBITDA without giving effect to equity-based compensation expense and nonrecurring items, was approximately $5 million or 28.5% of revenue for the first quarter this year and that compared to $5 million or 29.8% of revenue for the same period last year.

Adjusted net income, which we define as net income without giving effect to nonrecurring items and income tax expense assuming a corporate rate of 40%, was $2.6 million for the quarter or $0.21 per adjusted basic and diluted share. Adjusted earnings per share is equal to adjusted net income divided by the actual Class A and Class B shares outstanding as of the end of the reporting period for basic adjusted EPS. And to the extent dilutive, we add unvested deferred equity units and performance used to the total shares outstanding to compute diluted adjusted EPS.

Looking at the balance sheet, total assets were $85.4 million as of March 31, 2015. That compared to $99.7 million as of the end of last year. Cash and cash equivalents were $18.6 million at the end of the first quarter this year and that compared to $30.8 million at December 31, 2014.

Notes payable was $4.0 million at both March 31, 2015 and the end of last year. Total stockholders' equity was $43.1 million at March 31, 2015.

That concludes my remarks. I will just briefly turn it back over to Rick and then we will go into Q&A.

Thanks, Scott. We will open up for questions, if you would queue yourself up.

(Operator Instructions). Steven Schwartz, Raymond James & Associates.

Good morning, guys. Just a couple of quickies for me. First, Scott, it looked as if maybe fee rate was down both from the fourth quarter and the first quarter. Can you confirm that and maybe talk about what it might be due to?

If you take a look at really focusing on the advisory fees revenue line and if you compare that to discretionary AUM, our effective fee rate was actually up a bit from the end of last year but it's down compared to the prior year. A couple of reasons for that. It is typically a mix of AUM. It is also the last year we only had about a month of fees related to our Richmond operation. This year they are in for the full quarter. So a combination of mix in that drove the effective fee rate down. But that is really the focus is looking at investment advisory fees revenue only and then discretionary AUM for the drivers.

All right. And then a couple for Rick. I know I harp on this every quarter but tax and family office services, Rick?

Yes, there is nothing more to add.

Than in any other quarter? (multiple speakers)

All of my prior comments about that business coming off over time that we have long discussed, it is going back 2013.

And it is just going to keep on going and going and going. It was the one partner, right who left?

A couple. Yes, significant family with that. It won't keep that going and going. I actually thought it was all pretty much out by the end of last year but there is still a bit of residual. Scott may -- .

Yes, we had a couple of residual fee adjustments in the first quarter but that should level off at this point.

So let's hope next quarter you don't ask me that question, Stephen.

I hope not too. And then just maybe outlook on what is going on institutionally.

Sure. Institutional is quite interesting. As you know last quarter I had mentioned the size of the pipeline which was quite significant. I think it was the first time I had mentioned the pipeline. If I'm able to do so I will. I can tell you that our current next six month pipeline, actionable pipeline, looks to be about $1.4 billion. Obviously you don't know when and how that comes in and at what rate but we have done pretty well in terms of our wins. That would be number one.

No, that is great, thank you.

Secondly, with regards to the institutional business, we started a focus mid last year, as you know, on subadvisory assets and not just single strategy mandates. We like the idea of subadvisory assets because they have the potential to grow once we have gotten them. And in fact there was a $45 million contribution to the Aston Silvercrest Asset Management Fund, small cap fund, last quarter and so that fund is getting to a nice size. The fact that $45 million came in from an institution proves that it is of a size that is marketable. So we are happy with that.

There is still a bit of rebalancing that we are seeing due to the strength of our equity capabilities. That is a trend that we have seen since the third quarter of last year, that continues. At a very low, mild basis but it is a bit of a drag as we win new business.

Most of the searches we are seeing are replacements searches, not new assets. But I would say that the overall advertise search environment is a bit more robust in Q1 than it was the previous quarter. And I think that we are going to see some good subadvisory possibilities in the second half of this year if not the second quarter. There has been some publicity out there related to Silvercrest which supports our prior statements that our institutional pipeline is robust in particular the subadvisory space.

All right. Thank you, guys.

Michael Kim, Sandler O'Neill.

First, Rick, as always, can you just give us a sense of the flow breakdown between the high-net-worth and institutional sides of the business this past quarter? And then any incremental color into the slowdown in new client assets this quarter, just relative to more recent run rates?

Sure. So let me start with the institution. The positive net flow for the quarter was $71 million so net meaning that includes new wins, the rebalancing withdrawals, etc. That was about $71 million for the quarter and we had market appreciation on just the institutional business of about $100 million. So the addition to discretionary AUM was $171 million in the first quarter.

In terms of the overall flows, obviously anything else I mention is going to be high net worth. Overall flows, we had new client accounts and assets of around $49.4 million (sic - see press release) and we had closed accounts of only $3 million, which is very low.

If you go back in history certainly as a public company, it has been historically low interestingly. If you go back prior years you will see a bigger number than that each quarter.

And we had net cash flow in and out of the firm from existing client accounts. That can include a new client of course after it has been opened and after the initial slug of money comes in. But that was $52.6 million. You roll that up and you have got something on the order of $99 million, $100 million in new discretionary assets that came in firmwide.

The mix of flows was very interesting and it is not something we normally give a granular view on. But this was an interesting quarter because we had a couple of very meaningful contributions from existing clients that pushed our number positive. In particular, we had from just two clients alone close to $170 million in flows that came in.

So we loved seeing kind of the continued confidence in the firm. In addition to the fact that a couple of our clients are really doing quite well for themselves in terms of their entrepreneurial and business activity.

Nothing significant on any of the outflows with regards to lost relationships. As you see our relationships over the fourth quarter, increased.

In terms of it being a little lower than some recent quarters, yes. On the other hand, we have grown seven straight quarters and as I have stated in prior calls, this is a very lumpy business especially on the high-net-worth side. And frankly I don't remember a string of this many quarters in quite some time where they have all been positive. So on that basis, the fact it is positive and not down and continues a positive trend we are very happy.

We are seeing a robust pipeline, as I mentioned on the institutional side, so you are going to have timing effects if we continue to execute that business the way we have been. And on the high-net-worth side similarly, healthy pipeline to what we have seen in the past. And so I don't attribute the change to anything. You are just going to see variability in the numbers and from time to time you are going to see negative numbers.

My next statement doesn't foreshadow the second quarter at all but I should point out that the second quarter is a quarter that we see outflows related to tax payments. And with an up market as we have had, certainly people will have capital gains and you will see some cash coming out. Some years that is a negative quarter because you just don't have enough new business to overcome that drag. Other years we have had a positive quarter.

If I recall last year second quarter 2014, I think we had kind of a net inflow number of only $37 million and that is because we had a good business development quarter of I think around $200 million. But we saw about $147 million flow out mostly related to the taxes. I consider that a very good second quarter 2014 even though it is a low net gain.

I don't know what is going to happen for the second quarter. Like I said my comments are not to suggest we are going to go negative but the second quarter is a more difficult quarter compared to others.

Got it. That is helpful. Just to clarify on the $1.4 billion number you referenced, is that business that you could potentially win over the next six months or are those mandates that you have actually already won that have just yet to fund?

Those are actionable pipelines which is to say searches that we consider ones that we have the opportunity to win and that are reasonable for us to attempt to garner. It is not to say we booked anything or won anything.

So it is not a pie in the sky pipeline where we just happen to know the searches that fit Silvercrest. They are actually opportunities that we are going to try to actively seek with our investment team.

Got it. Understood. Okay. And then maybe just a couple for Scott. Just coming back to the management fee yield on discretionary AUM, was there any impact this quarter related to what looks like some losses on the private account side?

Not anything meaningful, no. No. I think again it is really just a mix of the assets and if you specifically look at the Richmond business, we have a full quarter's worth of their revenue. And this year versus last year it was only for a month, so really didn't move the needle at all last year.

I think we did talk about that in our fourth-quarter call, maybe in the third quarter, the fact that they had an existing client base that they were able to attract to Silvercrest and a couple of fee arrangements just by the nature of those relationships that were lower than Silvercrest's. So nothing changed in terms of our ability to maintain the fees that we have charged our clients nor has this number changed because of new clients coming on at different fee rates.

Obviously when you get a big slug of money that goes into fixed income, that is going to lower it on average. There were some substantial fixed income monies coming in but I don't think that is what moved the needle. I actually think it was the very significant assets that have come into Richmond.

And so we are perfectly happy with that because I think any new mandates going forward will maintain our historic rate. That is a historic anomaly that has kind of permanently reset the number just a bit but it doesn't show a firmwide fee compression issue.

The fact that we opened that office a year ago that it is fully staffed and that it is profitable -- remember, our biggest expense is comp. So we are running that business at a similar margin to the rest of Silvercrest is positive. You are just looking at a data artifact here, not any fee-related issue with the business.

Got it. Okay. And then just prospectively with Jamison coming on board, any material impact in sort of the fee rate, just given that dynamic?

We don't have all the consents in yet. As you know under the SEC regulations, we must have a client consent to sign their contracts to Silvercrest. That is what we are acquiring with the assets of that corporation. And once that process is complete, you need a minimum of 45 days and of course we tried to reach clients multiple times.

That's coming in very well. We are still on track to close this quarter as we announced. How that mix comes out is what is going to determine the answer to your question. However, that business in terms of a fee basis is right around ours. It may even be a tad closer to 60 instead of our -- I think on a GAAP basis ours is around 57 right now for discretionary assets. I expect it to be right around there. So no, I don't expect a change. They have primarily a separately managed account business that is mostly high net worth.

Understood. Okay.

There is one piece to that firm that is a bit different which is that they have a large advisory relationship. It is somewhat akin to a consulting relationship where they advise on a nondiscretionary basis to a state pension fund and treasurer's office. And it is a large, it is a large relationship for them but those assets are nondiscretionary and are such that they do not account for them in their accounting work.

We don't know how we are going to account for those assets because we don't want to pile in a very unusual relationship into our nondiscretionary assets. So you are not going to see anything change on the discretionary side and we are going to do what we can to maintain a consistent historical reporting for Silvercrest as related to our nondiscretionary assets.

Got it. And then just one last one, thanks for taking all of my questions here.

Michael, take all the time you want, I think you are the guy right now.

All right. Just any updates on the plans to grant equity awards and how that could potentially impact the outlook for comp expense and margins going forward?

Sure, I'm glad you asked because if you hadn't I would have brought it up as I did at the end of our last call. As you well know, there are over 1 million shares that we could possibly grant to people here for recognition of building the business as well as retention and incentives to continue growing it. We would intend the awards to vest or be given out in such a way that clearly they would benefit should the Company grow.

We haven't given any out in two years. So as I have mentioned before, we would expect frontloading. I shouldn't say frontloading but giving more of the full [award] than if we had metered it in over time. We wanted to prove ourselves as a growing public company before just ushering a lot of stock out the door after the transaction.

And so we are working on how we balance rewarding the people here appropriately for what has been a very good period in Silvercrest growth and a nice pipeline looking forward as well as the interest of ourselves as shareholders. After all we would get diluted by this just as the public shareholders will and the effect on earnings.

I am not going to give guidance in this call on what that might look like. However, currently we are running a cash compensation ratio of about 55% as you know, right around there. And that is sort of what we target for this business in order to maintain the EBITDA margins we have delivered to date and in some quarters even increased.

The comp ratios, once we do these awards, might look closer to 60% of all income. That would include benefits, cash and stock incentive. So that should give you some ballpark of kind of what we are looking at.

Okay. So would you expect to do something the back half of the year? Just trying to get a sense of timing?

Honestly, as I said in the first quarter, I want to do them very soon and that really just matters with regards to us getting through the paperwork, legally and final approval from the Board and compensation committee. So, no, I'm still targeting first half.

Got you. Okay.

So we've only got six weeks and I don't know if we can do it but that is what I am gunning for.

Okay, thanks for taking all of my questions.

Michael anticipated my conclusion to the call. As I did last quarter, I spoke about the fact that the firm has executed on its four-part growth strategy that we laid out two years ago.

We have been executing on three parts of that plan all along and with the $1 billion AUM acquisition of Jamison, that is the fourth leg of the stool. Obviously we will absorb that and then continue to focus on the four key parts of our growth strategy, brand enhancement, institutional growth, continued growth in the high-net-worth business, and acquisition work.

With that said, if there is anyone else with a final question I will just hang on here for just a moment before we conclude the call.

(Operator Instructions). Michael Kim.

Michael, you didn?t have enough time, so we welcome you back.

Yes, just a sense -- maybe got a bit of time. Just one follow-up.

Now that you sort of announced the Jamison deal, would you expect to maybe take a bit of a pause on the M&A front as you focus on digesting that transaction? And then with Jamison, it seems like you strengthened your presence in the greater New York market so just wondering if you could comment on your plans or timeline as it relates to kind of continuing to expand your geographic footprint into other markets?

Sure, I'm glad you asked that. You are correct about it expanding our visibility in the New York market in particular in the ultra-high-net-worth New Jersey market, one of the wealthiest states per capita in the country. Our office is located in the heart of that wealth.

One reason for accomplishing this deal ahead of others is the fact that it is very close to us and is something that makes it a bit more digestible instead of doing it in the Midwest or across the country. Obviously, we have done other acquisitions before, most of them have been in New York, one in Boston. And this is as a public company now for two years, it just feels comfortable to be able to do it closer to home.

It is also a result of timing. Not everything is planned. And as I mentioned most of last year, we are in more discussions with a number of firms or visited with firms than we had been in probably the previous few years combined. Those conversations continue and given that you don't know what the timing could possibly be and who falls out and stays in, I can't really tell you whether we're going to take a pause or not.

We have been deliberate about executing and taking our time. We are going to continue to do that and I will say if we feel like we can't digest this well, we will put something on hold if it were far enough along to actually consummate a deal. But where we are now, even with fairly significant conversations that we continue to have, it is anyone's guess on when we may have to reach that decision.

One nice thing about Jamison is the compatibility of the business and its partners in a whole host of levels, which makes this acquisition a fairly easy one to digest. And that is another reason yet again why we look so closely at culture.

I'm not going to take a pause in terms of my activity in looking for potential partners, especially not at a time when the market looks pretty good. As I have said before, the prices we are seeing are not such that give us pause and yet they are at a level that I think are encouraging to people who may be interesting to joining forces to Silvercrest.

So now is the time for us to really investigate those and see what else we can potentially get done. But you are right, implicit in your question is whether you are going to do it prudently and we are very mindful of that.

Got it. And then just as it relates to the large advisory relationship. I know you talked about still trying to think about how you are going to weave that into reporting. But from an economic standpoint, any sense of kind of the size or the materiality of that business coming over?

Well, it?s a meaningful -- so they have, I think we announced ? actually, let me ask Scott. Have we announced their revenue?

We have not.

Okay. I think Michael, you and Stephen and others have kind of put out some analysis of what you think Jamison's revenue is based on your educated history in the business. And I will just say it is a meaningful part of that revenue and our deal is structured such that what we end up closing on when we (technical difficulty) is based on the actual revenue that consents to a deal. So the price we ultimately pay despite the nominal price of $12 million announced will in part depend on that business and others.

I think you were asking however about materiality of AUM and the AUM there is nondiscretionary. And let's just put it this way, it is much larger than Silvercrest's current nondiscretionary assets.

So for us just to roll it in there and it is a different kind of business would dilute our overall fee basis for total assets if someone were just to look at the top line of the Company. And obviously that doesn't serve us or our shareholders well, so we are going to avoid reporting it that way.

As it is with our nondiscretionary assets related to family office services and other advisory work that we do on institutions, I worry sometimes even that we split it out that the headline number is what people look at very briefly and may get the wrong impression about the business. Because as you know -- and this will be true of the new institution relationship that comes over from Jamison -- the size of those assets are unrelated to the revenue. Most of the revenue is project and based on work, not based on AUM. So that is why I don't want to just add it in and dilute our numbers. It is very misleading.

Right, Mike, that will be subject to us conferring with outside counsel and our advisors as to what the requirement will be with respect to reporting those assets.

What you will see is $1 billion or thereabouts in discretionary AUM which is what drives most of their revenue as it does for us.

Understood. Okay. Thanks again.

(Operator Instructions). That looks like all the questions that we have in the queue at this time, so I would like to turn the call back over to management for closing remarks.

Great, thanks. I don't have any closing remarks. I provided most of them in my questions. Thank you, Michael, for prompting me on some issues I did want to cover and Steve as well.

I appreciate everyone joining us for the first-quarter review 2015, look forward to our next and also look forward to giving everybody an update on the closing of our acquisition I hope this quarter. Thanks very much.

Ladies and gentlemen, thank you again for your participation in today's conference. This now concludes the program and you may all disconnect your telephone lines. Everyone have a great day.