Silvercrest Asset Management Group Inc (SAMG) 2015 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Silvercrest Asset Management Group Inc. 3Q earnings call. (Operator Instructions). As a reminder, this conference may be recorded.

Before we begin let me remind you that during today's call Silvercrest will make forward-looking statements pursuant to the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995. All statements other than the 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. There are important factors that could cause actual results, level of activity, performance or achievements to differ materially from these 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 titled 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 projections based on 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 Richard Hough, Chairman and CEO. Mr. Hough, please go ahead.

Thank you for joining us for our third-quarter 2015 call. The third quarter was a volatile period for the stock market, as you all are aware, resulting in a decrease in discretionary assets under management for the quarter ended September 30 to $11.8 billion from the $12.6 billion as of June 30, 2015. Year-over-year our discretionary assets increased $0.7 billion, up from $11.1 billion as of September 30, 2014.

After eight quarters of positive organic growth at the Firm, our net client asset flows were flat for the quarter primarily due to institutional rebalancing and despite adding new high net worth relationships. Asset values, therefore our discretionary assets under management, have rebounded with the market's recovery since the third quarter's end.

Importantly during this period, Silvercrest proprietary value equity strategies increased their relative outperformance compared with their benchmarks during the quarter. And each of our Firm's six strategies has now outperformed its benchmark for nearly all periods as well as since inception. Our outperformance bodes well for future organic growth, both institutionally and with high net worth families.

The integration of Jamison, Eaton & Wood, which we had announced in the last quarter's call, has proceeded smoothly and the combination has performed in line with our Firm's projections.

On November 2, 2015, the Company's Board of Directors declared a quarterly dividend of $0.12 per share of Class A common stock. The dividend will be paid out on or about December 18, 2015, to shareholders of record as of the close of business on December 11, 2015.

With those introductory remarks I will turn it over to our CFO, Scott Gerard, for financial commentary and then we will take your questions. Thanks.

Thanks, Rick. So last night in our release that was issued after the market closed for the third quarter discretionary AUM as of September 30, 2015 was $11.8 billion and total AUM as of September 30, of this year was $17.6 billion. Revenue for the quarter was approximately $20 million and reported consolidated net income for the quarter was $2.8 million.

So, looking in a bit more detail on the quarter, year-over-year revenue for the third quarter of this year was $20 million representing approximately a 12% increase over revenue of $17.8 million for the same period last year. This increase was driven primarily by growth in our management and advisory fees as a result of increased AUM. Expenses for the third quarter of this year were $15.7 million which represented approximately an 18% increase from expenses of $13.3 million for the same period last year.

This increase was primarily attributable to both increasing compensation and benefit expense of approximately $1.6 million and general and administrative expenses was up about $0.7 million. The increasing comp in benefits expense was primarily because of an increase to the accrual for partner incentive payments, in addition to higher equity-based compensation expense primarily as a result of restricted stock unit grants that were made this past August.

General and administrative expenses increased primarily because of increased investment research costs in addition to increased amortization expense related to intangibles associated with the Jamison acquisition.

Reported consolidated net income was $2.8 million for the quarter as compared to $2.9 million for the same period last year. Reported net income attributable to Silvercrest or the Class A shareholders for the third quarter of this year was $1.3 million or $0.17 per basic and diluted Class A share.

Adjusted EBITDA, which we define as EBITDA without giving effect to equity-based compensation expense and nonrecurring items, was approximately $5.8 million or 28.8% of revenue for the third quarter this year compared to $5.3 million or 29.7% 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 $2.7 million for the quarter or $0.21 per adjusted basic share and $0.20 per adjusted 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 per basic adjusted EPS. And to the extent dilutive we add unvested deferred equity units, restricted stock units and performance units to the total shares outstanding to compute diluted adjusted EPS.

Looking at the nine months ended September 30, this year compared to last year, revenue for the nine months was $55.9 million representing approximately an 8% increase over revenue of $51.8 million for the same period last year. Again, this was primarily driven by growth in our management and advisory fees as a result of increased AUM.

Expenses for the nine months ended September 30, of this year were $42.9 million which represented about a 9% increase from expenses of $39.2 million for the same period last year. This increase was primarily attributable to increases in comp and benefits expense of $2.3 million and G&A expenses increased by about $1.4 million.

Comp and benefits expense increased primarily because of the accrual for partner incentive payments. G&A increased year-over-year for the nine months because of increased professional fees and investment research costs in addition to, again, increased amortization expense related to the Jamison deal.

Reported consolidated net income was $8.9 million for the nine months ended September 30 this year. That compared to $8 million for the same period last year. And reported net income attributable to Silvercrest over to Class A shareholders for the nine months ended September 30, this year was $4.5 million or $0.57 per basic and diluted Class A share.

Adjusted EBITDA for the nine months ended September this year was approximately $16.1 million or 28.8% of revenue versus $15.4 million or 29.7% of revenue for the same period last year.

Adjusted net income was approximately $8.1 million for the nine months ended September 30, this year or $0.64 per adjusted basic share and $0.60 per adjusted diluted share.

Quickly looking at the balance sheet, total assets were $101.9 million as of September 30, 2015. That compared to $99.7 million as of year-end last year. Cash and cash equivalents were $26.1 million at September 30, that compared to $30.8 million at year end last year.

Notes payable was $5.2 million at September 30 and $4.1 million at December 31, last year. As of September 30, 2015 total stockholders' equity was $45.6 million. That concludes my remarks. Now we will turn it over for Q&A.

(Operator Instructions). Steven Schwartz, Raymond James.

First a quickie numbers question for Scott. For modeling purposes, Scott, equity-based compensation $497,000, that is going to be higher in the fourth quarter?

That is correct because the grants were made on August 6. You are right.

Just making sure about that. And then for Rick, maybe you could talk about pipeline a little bit. It sounded like it was very good at the end of the second quarter and then the markets fell apart in the third quarter. If you could update on how that went and how that is currently looking.

Absolutely. During the third quarter we saw the pipeline for new business, both on the institution as well as on the high net worth side, shrink dramatically. And not surprisingly those in the pipeline were much slower to act at least on the high net worth side.

Often in market volatility if people aren't making mistakes by shifting their assets around a lot, which you see more in the retail markets, they are going to be a lot slower to make decisions figuring better the devil they know and why make a decision when everything is up in the air. So, very steep fall off.

Interestingly, since the end of the third quarter, which is really just to say the past month, the institutional pipeline doubled from where it was. So, with the market rebound that we saw in October, a very unusual October, we saw both the high net worth and the institutional pipelines fill substantially back up.

And then Rick, on the institutional side, that has been driven by your small cap product which has had great returns for a number of times. But given the numbers that you are posting on all of your strategies, in your discussions with institutions within this pipeline has that begun to expand out of small cap?

It is. Our institutional team is talking about some of the other products with institutions. I think you can appreciate that in order to be successful they really have to be very focused on particular products and getting currency in the marketplace.

And since the institutional marketing effort is a few years old now, fairly recent for us, most of that effort was focused on getting some great traction in small cap, which we now have in is starting to build on itself. We have also added to the team. So, it is possible going forward that we will see more searches involving Smid Cap for example or focused value which really has excellent returns or even equity income.

But given the capacity in small cap, given that is where a lot of the demand is in for the searches, especially for active managers, that is where we are going to continue to put most of our focus. Obviously we are introducing the other places to the marketplace, but we have to pick our battles and that is the winning one right now.

Okay. All right, guys. Thank you.

(Operator Instructions). Michael Kim, Sandler O'Neill.

First, Rick, can you maybe just flesh out a bit more the flow trends for the quarter across the high net worth and the institutional sides of the business, just in terms of some of the underlying drivers and the mix by channel? And then more specifically -- I know last quarter was a bit skewed by the sub advisory wins, but any color into the sequential slowdown in new accounts during the third quarter? Was it just really a function of sort of the market volatility that you alluded to?

I think it really was. I mean it is interesting. As I have said before and I'm going to say every call, the flows for the ultrahigh net worth business are extraordinarily lumpy and I think it was quite unusual that we grew as strongly as we did on the high net worth side in such a consistent way.

Obviously we want to achieve the kind of growth we have in the past couple of years, but the eight quarters of consecutive high net worth organic growth, especially through second quarter periods which is when tax payments are made, was really quite strong in our history.

Third quarter is one of the more lumpy quarters in general just historically. It covers the summer months. And sometimes it seems like that means families have time when they are together and aren't quite as harried to make decisions. Other times it seems like they are busy having fun and hard to reach. So, I don't know what to say about either quarter let alone any quarter, just to be clear.

The pipeline really was just the amount of activity of course in RFPs or family overtures that we were getting really dried up in the third quarter. I don't have any insight other than I think it just makes people nervous and they are not going to act during those circumstances.

The flows were very balanced. What we saw on the institutional side was a fair bit of rebalancing. As Steven mentioned in his question, our relative outperformance by all of our strategies picked up quite a bit. They just look superb in every absolute performance period. I think the only product that did not beat its benchmark was only the five-year number for our large cap. Otherwise every single strategy handily beat the benchmarks of the one, three, five, seven and since inception.

So, when you perform that well, unfortunately it is a high-class problem, sometimes you have people rebalancing. But it kind of balanced off the high net worth side. We definitely won new relationships, a few relationships in the third quarter and families added money. Four families alone added $100 million for example.

So, those aren't big numbers on our total base, but, as I have always stressed, the relationships are what are important. We didn't lose substantial relationships, we gained some. So, our very high retention rate stands strong and people clearly were still able to commit money despite some of the rebalancing on the other side.

So there were small numbers, not even -- if I looked at the total numbers in terms of new accounts, close accounts, cash flow in and out none of those categories reached $100 million. I think one reached $60 million. So it really was truly flat, nothing of note to mention.

Got it. That is helpful. And then maybe just to kind of follow up on the core high net worth side of the business, you mentioned ongoing new wins and it seems like performance and service and continuing to build out sort of distribution capabilities. But just wondering how you might be thinking about other initiatives or potentially growing the PM base to maybe drive a further step up in market share?

Let me talk about -- it is really kind of a two-point question, because the first just really drives to organic growth, the lumpy side of the business. And on that we just have to keep doing what we have been doing. We are clearly delivering it on the investment side and I think the relative performance that we have delivered on behalf of our clients bodes well for the future on that side.

It also, by the way, is a good testament to our value bias in terms of how we manage high net worth accounts. They tend to be less volatile to preserve capital. As you know, better during periods of volatility, which is what often drives our outperformance. And allows people to have more security in their assets. And I think that, in addition to the high level service we provide, is an important piece of why we have such high client retention.

And I think it is also a period like this that really shows the distinguishing characteristic of a firm like ours versus many of the other pure asset managers who are much more linked to the retail markets and institutional sentiment, where they not only in the marketplace saw asset values fall off at the market, but they also saw significant outflows as sentiment changed. And that may have reversed for them in October as it has for us. But the key to us was that those flows were stable.

The organic side here is performance and service, it has never changed. It is that simple. On the inorganic side, which is the second part of your question alluded to, we continue the conversations that we have initiated with any number of firms. As you know, the cultural piece is among the most important for us in order to assure long-term success.

I think the Jamison deal that helped us expand to New Jersey and our high net worth relationship is a good example of that. It is not an enterprise risking move. It was contributive and accretive to the Firm and that integration is going really smoothly. We are clearly looking for the next one.

I have told my partners, I think I've mentioned it in previous calls perhaps in the second quarter, but I view the inorganic growth strategy, hiring new PMs and acquisitions to be more of a driver of growth or as much a driver as the organic story that we have the past couple of years. So going forward for the next couple it is likely to be as much an inorganic story is any. Those conversations are pretty robust in any number of geographies. It is just going to matter when we can find the right fit.

I think I also mentioned in the second quarter, in this business at least, price expectations are very important. And at the end of the day I have to make wise use of capital. I've turned away deals where I felt they were too rich and people were looking for too much and you never know when that may happen. It can happen at the end of the deal. And so it is just something we are going to be really prudent about. But when we do something it is going to be worth noting for sure.

Got it. Okay. And then maybe just one for Scott to follow up on compensation. Just curious how we should be thinking sort of at a high level about the potential level and timing of further equity grants as we look out to next year and beyond, particularly within the context of margins?

Yes, back in August we made quite a substantial grant so there is no imminent plan to make a grant of that level. There could be a smaller amount forthcoming in the future. That is something that we are evaluating internally, but as of now the August grants, those certainly were made.

One thing we have said, Michael, this is Rick, is that we had sat on those incentive shares for a couple of years. No one had ever received them and we felt, given the execution of our business plan, my partners deserved to be recognized for that and further pull them into business via shares.

We gave out what we thought we could absorb in the P&L and I think we are prudent about it, especially at the stock price at the time. We are going to be very careful about how that changes our moves, our comp. As you know, we target something around a 55% cash comp. And I think these shares move it closer to 60% in total comp and that is a figure we keep a close eye on. I want to assure all of our shareholders of that. Our partners are just as interested in it as our public shareholders.

Got it. Okay, thanks for taking my questions.

(Operator Instructions). I'm showing no further questions at this time. I will now turn the call back to Richard Hough, Chairman and CEO for closing remarks.

Thank you very much. I will make one concluding remark echoing the opening comments and reflecting a bit on Steven and Michael's combined questions. And that is while flows were flat I am quite pleased during the third quarter with how our relationships were retained and our relative performance increased which can only help the Firm and I think is a testament to how this business is a fair bit different than many of the other large asset management firms.

I think I also want everyone aware that, not surprisingly, given the change in the markets in October, who knows if they can continue, much of the actual asset decline was reversed and that also had the effect of reversing what we saw in terms of decreasing pipelines.

What that means for a business like this is really potentially having to look through the fourth quarter at what we would be doing over the next six months to a year because this volatility is sort of like the mouse and the snake. It has got to work its way through because obviously we are coming into fourth quarter on a lower revenue basis than we otherwise would have despite the good health of the business.

So with that I want to thank everybody for joining us and bid you a good weekend. Thanks very much.

Ladies and gentlemen, this does conclude today's program. You may all disconnect. Everybody have a wonderful day.