Silvercrest Asset Management Group Inc (SAMG) 2015 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Silvercrest Asset Management Group, Inc. Q4 webcast.

(Operator Instructions)

As a reminder, this call 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. These important factors that could cause actual results, level of activity, performance or achievements to differ materially from 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, 2015 filed with the SEC.

In some cases, these statements can be identified by forward-looking statements words such as believe, expect, anticipate, plan, estimate, likely, may, will, could, continue, project, predict, goal, the negative and/or plural of these words and other similar expressions. These forward-looking statements are predictions based on Silvercrest's current expectations and its projections about future events. All forward-looking statements made on this call are made as of this date hereof, and Silvercrest assumes no obligation to update these forward-looking statements.

I would now like to turn the call over to Rick Hough.

Thank you very much and welcome to our call for the fourth quarter of 2015. During the quarter, Silvercrest benefited from improved market conditions and asset values. We increased top-line revenue, and we now have a growing pipeline of new business opportunities and continued outperformance of our proprietary value equity capabilities.

Silvercrest increased discretionary assets under management by nearly $300 million or $0.3 billion, ending the quarter with $12.1 billion, up from $11.8 billion as of September 30, 2015. For the calendar year 2015, new client discretionary assets increased by $900 million but were offset by $400 million in market depreciation. Total assets under management now stand at $18.1 billion, up from $17.9 billion in December 2014 despite some more difficult market conditions that led to $700 million in market depreciation during the year.

Our top-line revenue increased 8.2% for the calendar year ended December 2015 versus the year ended 2014 from $69.5 million in 2014 to $75.1 million in 2015. This was due to organic growth, increased institutional business and our successful acquisition of Jameson, Eaton & Wood, which has performed in line with our projections. Top-line revenue was up 8.5% for the fourth quarter of 2015 versus the fourth quarter of 2014.

Most importantly during the quarter, especially after a more difficult market in the third quarter, our new business pipeline has rebuilt since that market turmoil, reflecting the maturity of our marketing efforts. In addition, Silvercrest's proprietary value equity strategies have maintained their relative outperformance compared with each of their benchmarks, and each of the 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 institutional and with high net worth families. In addition, as with the Jameson, Eaton & Wood acquisition in 2015, with the opening of a new office in Richmond, Virginia which is now profitable in 2014, we remain focused on finding selective and prudent acquisitions in the space, and we believe our firm has built one of the premier brands in the fast-growing RIA business focused on high net worth families as well as select institutions.

As we go through the financials with Scott Gerard, I very much look forward to answering your questions. Scott?

Thanks, Rick. Revenue for the fourth quarter was $19.2 million, and reported consolidated net income for the quarter was $2.2 million.

Just as a reminder, especially when looking at our 10-K which covers from a P&L standpoint 2013 through 2015, results and operations and cash flows for the year ended December 31, 2013 include those results of operations in cash flows of our accounting predecessors, Silvercrest LP. Commencing with third quarter of 2013, we began reporting earnings attributable to Silvercrest Asset Management Group, Inc., which represents our Class A shareholders. Again commencing with the third quarter of 2013, we began reflecting partner incentive payment accruals as compensation expense because historically they were recorded as distributions when paid.

So looking at the fourth quarter, again $19.2 million of revenue representing approximately a 9% increase over revenue of $17.7 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 fourth quarter were $15.3 million, representing approximately a 2% increase from expenses of $14.9 million for the same period last year. And this increase was primarily attributable to increases in comp and benefits of about $0.2 million and G&A of $0.1 million, relatively nominal. Compensation and benefits expense increased primarily because of higher equity-based comp expense as a result of the granting of restricted stock units that were made in August 2015 in addition to increased salary expense as a result of both merit-based increases and increased headcount, which also includes the effect of adding on personnel from Jameson, and this is partially offset by a decrease in the overall accrual for bonuses.

G&A, that increased primarily because of increased investment research costs, increased amortization expense related to intangibles as part of the Jameson acquisition, and we had increased sub advisory and referral fees. This was partially offset by a couple of changes to the fair value of the estimated earn-out payment liabilities related to both Milbank and the Jameson acquisitions.

Our reported consolidated net income was $2.2 million for the quarter as compared to $2.7 million in the same period of the prior year. Reported net income attributable to Silvercrest or to Class A shareholders for Q4 2015 was $0.9 million or $0.11 per basic and diluted Class A share.

Adjusted EBITDA, which we define as EBITDA without giving effect to equity-based comp and other nonrecurring items, was approximately $5.8 million or 30% of revenue for the fourth quarter of last year. This compared to $5.8 million or 32.5% of revenue for the fourth quarter of 2014.

Adjusted net income, which we define as net income without giving effect to nonrecurring items and assuming a corporate tax rate of 40%, was $2.5 million for the fourth quarter of 2015 or $0.20 per adjusted basic share and $0.19 per adjusted diluted share. Adjusted EPS again is taking adjusted net income divided by actual Class A and Class B shares outstanding as of the end of the reporting period for basic adjusted EPS, and again to the extent dilutive, we add unvested deferred equity units and restricted stock units to the total shares outstanding to compute diluted adjusted EPS.

Looking at the full year, revenue for 2015 again was $75.1 million. That represented approximately an 8% increase over revenue of $69.5 million for the same period last year. This was also driven by growth in management and advisory fees related to increased AUM.

Our expenses for the year were $58.2 million. That represented approximately a 7% increase from expenses of $54.2 million for 2014. This was primarily attributable to increased comp and benefits of about $2.6 million and increased G&A of $1.5 million. Comp and benefits expense again was up as result of salaries and benefits due to merit increases, increased headcount including the effect of adding on the Jameson acquisition. Bonus expense increased and equity-based comp expense increased as we discussed earlier.

G&A was up as a result of increased professional fees, and investment research costs were higher as a result of lower soft dollar credits. So that rounds out G&A. And then finally is the increased amortization of intangibles related to Jameson.

So for the year, reported consolidated net income was $11.1 million. That compared to $10.7 million in 2014. Our reported net income attributable to the Class A shareholders for 2015 was $5.3 million or $0.68 per basic and diluted Class A share.

Adjusted EBITDA for 2015 was $21.9 million or 29.1% of revenue, and this compared to $21.1 million or 30.4% of revenue for 2014. Adjusted net income for 2015 was $10.7 million or $0.84 per adjusted basic share and $0.78 per adjusted diluted share.

Looking at the balance sheet, our total assets as of 12/31/15 were $108.2 million compared to $99.7 million a year earlier. Cash and cash equivalents were $31.6 million at the end of 2015. That compared to $30.8 million in the prior year, and our notes payable was $4.5 million as of the end of 2015 compared to the prior year, which was $4.1 million. And total Class A stockholders' equity at the end of 2015 was $45.8 million. That concludes my remarks. I will turn it over to Rick, and we will go into Q&A.

Thanks very much, Scott. We are now ready to take questions.

(Operator Instructions)

Steven Schwartz, Raymond James.

A few for you here. First, I think these will all be for Scott. The effective fee rate in the quarter looked like it was high. I know that investment advisory fees are based off of quarterly beginning AUM, but the numbers still looked high to me. Just wondering if there's anything there?

No. Nothing unusual that would have affected the fee rate differently.

Scott, does Jamison have something to do that? I have in my notes in the third quarter that you cited Jamison for pop-up in there. Would that still be running through? Maybe that's it?

It wouldn't be anything meaningful. There's nothing specific that I can think of that would have driven the fee rate up.

Okay. On the comp, it was low in the quarter. Just to make sure, this was mostly caused by reversal of bonus accruals?

Yes. Right. Our cash compensation ratio for the year came out to about 54.5% for the full year. So yes, you saw as we typically would have adjustments in the fourth quarter, so you saw a bit of a reversal there.

Steven, this is Rick. Just a bit of education for those who haven't tuned into all of our earnings calls or that familiar with the Company, we manage the Company toward a total 55% cash-and-benefits ratio.

Obviously we don't hit that every year. We've been lucky the past three years or so to be very close to it or right on top of it. We just happened to come under it this year.

Part of that is due to the growth in the course of the year and compensation not keeping up with that growth. And given that we manage to 55%, we very well could have -- and accrue for, very well could've distributed that out to everybody.

But we decided since some years we go a bit over that in the years where we grow and can come under, we will do that, even if we are managing to a slightly higher cap. So it may be a short-term effect, but we felt it was prudent not to just spend the money because we had the ability to do so.

One more for Scott. SG&A. You noted a number of reasons why it was high. It was high relative to revenue as well in the quarter. Fourth quarter, just wondering about seasonality there.

As in the past, in the fourth quarter, we typically have -- you have certain year-end related expenses, travel to clients in order to round out the year and also talk about some tax planning for the following year. In addition, other client-related expenses, but furthermore, our audit fees are recorded based on the amount of effort put forth by the audit firm. In 2015 the fourth quarter, we did a lot more interim work than we had in the prior year, so that has basically the effect of recording, front loading a little bit more of our audit expense, although most of the audit expense will turn up in the first quarter of the year because that's where the bulk of your partner involvement and reporting goes on.

You have the effect year over year of Jamison in there in addition to we've had a couple of trends in SG&A with lower soft-dollar credits turning into hard dollar expense. And like I said, the Jamison activity would create a variance year over year.

Thank you.

(Operator Instructions)

Michael Kim, Sandler O'Neill.

First, Rick, as always, can you maybe just flesh out the flow trends for the quarter across the high net worth and institutional sides of the business? And then it also looks like you saw a bit of a step up in closed accounts during the quarter. Did that relate to maybe some private accounts? Just any color there would be helpful as well.

Sure. Basically it was flat for the quarter overall. Amongst that, however, we increased our institutional business by a good $87 million or thereabouts in the fourth quarter.

We were happy to do that in particular -- I'm sorry, $80 million -- because our pipeline as I had mentioned in our third-quarter call had substantially decreased amidst the market turmoil of August during the third quarter last year. In addition, many value managers were turning in pretty poor performances last year, which we will get to in a minute about the institutional pipeline if you're interested.

There was also a lower amount of rebalancing in institutional accounts. You may have recalled there were two or three quarters last year given our strong performance where we were winning new business but also seeing some significant outflows due to longer-term institutional clients rebalancing after our performance.

We didn't lose them as investors, they just were redeploying cash elsewhere. We saw the trend decrease during the quarter. It was a good trend.

We did lose a pretty significant family in the quarter. We won't go into it much further than that. It does happen. We also won a couple of significant families in the quarter, just not quite at the same level. That pipeline has also increased a bit from our last quarterly call.

Overall, if it weren't for market depreciation, we had a pretty decent organic growth year. And in combination with Jamison on top of -- a little bit -- probably $0.25 billion in organic growth, we took out the -- if you took out the market movements in the course of the year, we came very close to growing at the pace that we've talked about in terms of what can be expected from the firm.

Institutional assets are now just over 18% of discretionary assets under management, and that's a real testament to that strategy of building that business. And the execution of our team there, that is up from 15% of discretionary assets in 2014. We've made some very nice progress.

That's helpful. On the investment side, clearly your relative performance remains very strong.

Yes.

Just curious to maybe get your take on where you think we are in the value cycle. It seems like we may be reaching somewhat of an inflection point from a performance standpoint. So just wondering to what extent you might be seeing a step up in institutional demand from early adopters, if you will.

I'm not going to comment on where I think we are in the cycle, right? I could be off by a whole year or more.

However, we did learn once the year was finished up that several value firms had, had very difficult performance for 2015, and that's driving a replacement cycle for institutions who want to be exposed to value regardless of where they think we are in the cycle. And that placement cycle I think should last through midyear.

So even though some of the searches in our pipeline in the fourth quarter have been decided and we won those that you saw, our current pipeline has substantially grown. In fact, it's tripled from our last earning call, which is a very substantial change.

And we like our opportunity to benefit given our relative outperformance not just against benchmarks, but in particular against other value managers regardless of where we are in the cycle. I'm quite optimistic about the organic growth in that piece of the business.

Maybe just one or two for Scott. First, at a high level, just curious to get your thoughts on the trajectory for margins going forward.

I know there's a fair amount of leverage in the model, particularly as the institutional business scales. But on the flip side, you've had some compression more recently tied to the non-cash charges related to the equity grants. So I'm just wondering how that balance might play out going forward.

I think that the current margin, while the institutional portion of AUM has been steadily increasing, I think it's got to get to even higher levels before you would see a significant margin change as a result of that. But on the flip side, with the RSU grants as you mentioned, which obviously wouldn't affect our EBITDA margin but just overall, those are equity grants. So we are locked in at the fair value that was recorded back in August, so that's not going -- to the extent you don't have forfeitures, that's going to stay steady throughout the four-year investing period.

Just to get ahead of your question in terms of what we're targeting, at that time, we were targeting no more than about 60% of revenue including equity grants at the time we made those grants if you put it all together. That was the first time we'd ever made anything of the sort in the history of the firm let alone as a public company.

I don't foresee significant future equity grants until we undertake some more meaningful growth. We had accomplished some very key strategic objectives and wanted to incent and reward our employees at that time when we felt it was prudence. It was close to two years after going public.

With shares that have been set aside, we were I think prudent at the time that we chose to do it as well as keeping in mind an overall compensation level commensurate with the business. But since we've done it and it was a meaningful amount, I think we'll be holding off for a while until we grow earnings, because that is a hit on earnings, clearly.

Okay. To follow up on those comments, I appreciate you taking all of my questions. The comp ratio you mentioned previously maybe tracking closer to 60%, is there a bit of a change in that thinking more recently?

That's including the incentive equity awards or other equity grants. And so there's not a change in that thinking.

So you would still expect that to trend higher, I think it was sort of 58% in the fourth quarter.

Scott?

Right. There's two different metrics we're talking. As far as our recurring cash compensation ratio, that relates to the 55% that we've discussed that we would strive to manage to.

It turned out in the fourth quarter of 2015, we had a partial reversal, right? So for the full year of 2015, that ended up being at 54.5%. Where we're discussing more toward the upper 50%s or the low 60%s, that our all in compensation ratio, which includes the effect of equity-based compensation expense.

If you're asking whether I expect that 58%, if it includes the incentive comp, I'm not clear that it does, but if it does, if you're asking if that's going to trend up to 61% or 62% over time, no. That is not my plan.

I'm still targeting around 60%, and if we're at 58%, I'm not planning to push it to 60%. I think we have to -- those are very significant grants we made to people here.

I think we need to now execute our strategy further again just as we did in the couple years before those grants. So I don't see anything imminent.

That's helpful. Thanks for taking my questions.

(Operator Instructions)

There no further questions. At this time, I would like to turn the call back over to Rick Hough for any closing remarks.

Thank you very much and thanks for joining us to review the fourth quarter as well as the year of 2015. Just want to emphasize as we began the call that with the change in the market during the third quarter, I have requested that investors look through the fourth quarter. In our view, the fourth quarter came out better than we had expected, and we are pleased especially in comparison to other institutional asset managers or high net worth institutions with how well we performed through that quarter as well as in 2015.

The key to our strategy in this year is of course going to be continued organic growth in the high net worth business and building out the professionals working with that group. It's going to be additional institutional business, which I'm quite optimistic about given what I am seeing in terms of demand for our various equity strategies.

And finally, with the brand that we have built and maintained and its visibility and the quality of the organization that we've established, I believe that we will be able to make some more prudent acquisitions to benefit shareholders and our clients with new capabilities over the course of the next year or so. We've always been careful about how we integrate those acquisitions and selective about who were going to work with so as not to disrupt the good culture we have here and the business that we built. But I feel like our firm is very well positioned to benefit from trends in the industry going forward.

Thank you very much for your time. I look forward to speaking to everyone at our next call. Thanks.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone, have a great day.