Silvercrest Asset Management Group Inc (SAMG) 2017 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Silvercrest Asset Management Group Second Quarter 2017 Earnings Conference Call. (Operator Instructions) As a reminder, 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 the 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 and 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 statements made.

Among these factors are fluctuations in quarterly and annual results, incurrence of net losses, adverse effects of management focusing on implementation of growth strategy, failure to develop and maintain the Silvercrest brand or 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, 2016, 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 Silvercrest's current expectations and its projections of future events.

All forward-looking statements made on this call are made as of the date hereof, and Silvercrest's assumes no obligation to update these forward-looking statements.

I would now like to introduce your host for today's conference, Mr. Rick Hough, Chairman and CEO. Sir, you may begin.

Thank you very much, and welcome to Silvercrest's Second Quarter 2017 Earnings Call. The firm added to its history of organic growth this quarter by obtaining a $180 million in newly committed client assets from both our institutional investors as well as families during the second quarter. We're extraordinarily proud of Silvercrest's history of strong organic growth at a time when many asset management firms and active managers, in particular, have struggled to attract and maintain assets under management.

The second quarter represents the firm's 16th straight quarter of positive or breakeven asset flows and 13 have been positive since our initial public offering in 2013. The firm's organic growth, combined with our investment performance, increased Silvercrest's discretionary assets under management by $370 million during the second quarter to reach a total of $14.7 billion as of June 30, representing a year-over-year increase in discretionary assets of 17% and a new high in discretionary assets at the firm.

Our total assets under management as of June 30, increased to $19.9 billion. We ascribe our success to our team-oriented entrepreneurial culture, which has continued to deliver excellent returns and superior client service. Our equity strategies continue a long history of good performance against relative benchmarks and our asset management peers. And we maintain our optimism about growing our high-quality institutional relationships, especially as we begin to introduce new capabilities to the marketplace.

We've achieved our growth while maintaining or increasing our adjusted EBITDA margins while investing in the business. We've made investments in the next-generation of talent at Silvercrest. We've funded new growth initiatives. We've also made technological investments to better serve and attract our family wealth clients.

Finally, Silvercrest continues to evaluate selective and prudent acquisitions to complement our organic growth, our capabilities and the professional talent at the firm. We believe our growth culture and market visibility and position with a high-value brand makes Silvercrest a highly desirable firm for the right partners.

All of us are proud of the firm we've built, and we continue to improve our operations on behalf of all clients and shareholders.

I'll now turn it over to Scott Gerard, our CFO, to discuss the financials, and then we'll take questions.

Thanks, Rick. So we've disclosed in our earnings release for the second quarter, discretionary AUM as of June 30, 2017, was $14.7 billion. And total AUM as of the same date was $19.9 billion. Revenue for the quarter was $22.1 million, and reported consolidated net income for the quarter was $3.6 million.

Looking further into the second quarter, again, revenue was approximately $22 million that represented a 14% increase over revenue of $19.3 million for the same period last year. This increase is driven primarily by growth in our management and advisory fees as a result of increased AUM.

Expenses for the second quarter were $16.9 million, which represented approximately a 7% increase from expenses of $15.8 million for the same period last year. This increase is primarily attributable to increases in compensation and benefits expense of $1.2 million.

So looking at comp and benefits, these increased primarily because of an increase in the accrual for bonuses and increased salary expense as a result in merit-based increase and certain new hires.

General and administrative expenses for the quarter basically remained flat at $3.9 million when comparing to last year. We experienced decreases to our general and administrative expenses primarily as a result of lower investment research costs mainly due to a reduction in accrued soft dollar-related research, expenses in addition to lower sub-advisory and referral fees.

Our reported consolidated net income was $3.6 million for the quarter, that compared to $2.1 million in the same period last year. Reported net income attributable to Silvercrest or to Class A shareholders for the second quarter of this year was $1.9 million or $0.23 per basic and diluted Class A share.

Looking at adjusted EBITDA, which we define as EBITDA without giving effect to equity-based compensation expense and noncore, nonrecurring items, that was approximately $6.8 million or 30.7% of revenue for the second quarter of this year, that compared to $5.4 million or 28% of revenue for the same period last year.

Adjusted net income, again, which we define as net income without giving effect to noncore, nonrecurring items and assuming an income tax rate of 40%, which is the blended corporate rate, we're assuming. That was approximately $3.2 million for the quarter or $0.24 per adjusted basic share and $0.23 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, that's for basic adjusted earnings per share. And to the extent dilutive, we add unvested restricted stock units to the total shares outstanding in order to compute adjusted diluted earnings per share.

Looking at the first half of the year, revenue was $44 million. That represented approximately a 14% increase over revenue of $38.6 million for the same period last year. Similar to the quarter, this increase was driven by management and advisory fees as we experienced an increase in AUM.

Expenses for the first half were $34.1 million, representing approximately an 8% increase over the expenses of $31.5 million for the same period last year. These increases were attributable to increased comp of $2.9 million that was partially offset by decreases to G&A of about $0.2 million.

And again, comp and benefits went up as a result of an increase in the accrual for bonuses and salary -- increased salary expenses as a result of merit-based increases and new hires.

G&A decreased, again, primarily because of lower investment research costs related to the reduction of our soft dollar research accrual. And we also, for the first half of the year, had lower sub-advisory and referral fees. Professional fees were a bit higher for the first half of the year that was related, as we had mentioned in the first quarter, to a documentation-related project.

Reported consolidated net income for the first half of the year was $6.9 million, that compared to $4.6 million last year. Reported net income attributable to Silvercrest or, again, to Class A shareholders for the first half was $3.5 million or $0.44 per basic and diluted Class A share.

Adjusted EBITDA for the first half was, approximately, $13.3 million or 30.1% of revenue for the first half, that compared to $10.7 million or 27.6% of revenue for the same period last year.

Lastly, on the P&L adjusted net income. For the first half of the year, it was $6.2 million or $0.47 per adjusted basic share and $0.45 per adjusted diluted share.

Quickly looking at the balance sheet, our total assets as of June 30 of this year were, approximately, $101.6 million, that compared to $112.3 million as of the end of last year. Cash and cash equivalents were approximately $30 million at June 30, that compared to cash of $37.5 million at the end of last year. Notes payable at June 30 was approximately $1.7 million, and that compared to $2.5 million as of the end of last year.

Lastly, total Class A stockholders' equity as of June 30, 2017, was approximately $49.1 million.

That concludes my comments, and I'll just quickly turn it back over to Rick, and we'll go into Q&A.

Thank you, Scott. We're prepared to take questions at this time. Thanks very much.

(Operator Instructions) Our first question comes from the line of Andrew Disdier of Sandler O'Neill.

So first, if you don't mind, I know we've hit this pretty much every call. But again, I would like to talk about regulation and DOL, specifically. Any update as far as client feedback, client curiosity or concern with the regulation? And who knows if it comes into play or not? But any color there is appreciated.

Yes, the DOL issues are not a factor for our firm. So it's not something we focus closely on. There are many other regulatory issues as a result of Dodd–Frank and other initiatives that have been undertaken over the past several years and which definitely added significant compliance costs and burdens to the business. One very small thing was the custody rule by the SEC where certain assets of the firm are deemed to be in our custody even though we use third party custodians. And there's an audit every year of those assets. It's a major hassle for us and our clients and adds zero value. I have to say, the regulatory environment seems to have -- or at least, the promulgation of regulations has slowed over the past several months. I'm on the board of the Investment Adviser Association, and we have had constructive discussions with both Congress as well as the SEC. And I feel like we're in a bit of a pause that has served us well. But the major costs were incurred, they haven't gone away, it's hard to roll things back. But at least on the DOL side, that's really a nonfactor.

Great, thanks for the color. Another strategy question is on the competitive landscape. Whether it'd be, A, winning clients from either other firms or just new clients? And then, B, just wondering about how you're thinking about kind of organic versus acquisitive build out, just given what seems like a very active RIA environment right now?

Sure. So I'll take the first one, which has to do with the -- with securing new clients for the business. Almost by definition, nearly every one of our clients is coming from another wealth management firm, whether that's a bulge bracket bank or wire house or other independent RIAs. It's not usual that we are there at the moment that liquidity is created for a newly wealthy family. It happens, and certainly there are families that join us who continue to have businesses that increase their wealth. We feel great about our ability to continue growing organically. It's usually extraordinarily lumpy, very, very hard to predict. It requires a lot of time and it's not a thing we measure with the pipeline like we do with the institutional business. The organic flows in the high net worth side have been quite strong for our business over sustained period of time. As we've mentioned at the beginning of the call, our organic flows have been -- positive in 13 out of 16 quarters. A lot of that is the additive value of the institutional business we've grown, but the high-net-worth business is always been there as it was again this past quarter. It's been unusually consistent and we hope to maintain that. But again, it's normally lumpy and there's a leak in the bottom of the bucket as people live their lives and pay taxes. In fact, the second quarter, as you know, is often one with a negative outflow because of the need for families to pay taxes. It's just that we have enough positive inflows this quarter to overcome anything that was going out for those tax expenses. Vis-à-vis our competitors, you'd be hard to find many of the firms with the amount of resources that we can provide to an individual family and client. Whether that's through our family office services, which 19 of our 20 largest clients use. And I daresay, if you go down the list of our clients by size, that is extraordinarily important to the value add at the firm. In fact, the run rate revenue on that business has been growing meaningfully. I think it's up a good 20% over year-over-year. It's only about a little less than 10% of total revenue at the firm but very important revenue. Combine that with the dedicated Investment Policy & Strategy Group, the risk management work we do, the kind of reporting that we do through that group as well as family office services and combined with very sophisticated investment professionals who are not merely relationship managers at this firm. And I think our chances are fabulous up against anyone in the marketplace. And we've got a brand now at a size firm that is clearly visible, which gives us yet another advantage. So -- in that landscape, I'm very, very pleased. And I think we'll just benefit as we continue to grow as an organization. To your question on organic versus acquisitions, if you go back over Silvercrest's now 15-year history, we've done an acquisition every 2 to 3 years or so. The last acquisition we did was 2 years ago, in the summer of 2015. Silvercrest has never been a roll-up story. We've been a much more opportunistic and strategic story about building capabilities as well as talent, and we're not going to do a deal merely to grow because one is to be done. We're going to be very selective about how we enter a new city or what bolt on to one of our existing infrastructures. We're in any number of conversations and always have been, we're highly selective. The first thing we want to do is do no harm. And in particular, that means to the special culture that we have here to work together. We don't feel a need to reach for growth, and we're going to deploy capital very carefully on behalf of our shareholders. There has been an increase, as you alluded to, to the M&A environment over the past year. There have been many, many deals. But if you look at them, a significant number are at the smaller end of the AUM and revenue marketplace. It's not where we're necessarily going to get much of a boost, unless it's a very easy bolt-on in New York or Boston or Richmond or New Jersey. And secondly, you've got to go through an awful lot of those firms to find the quality firm that we would want to combine with. As you go up in size in firms, it gets quite skinny in terms of the number of firms to look for. And we know almost all of them, we have excellent bankers working on our behalf. We will have our opportunity and we have them all the time. It's just a matter of finding the right fit at the right time at the right price. And a lot of the bigger ones are looking a bit pricy is right now, at least, to me.

Yes, that's fair. Thank you for the color. And that's kind of what I was alluding to is that -- and the answer to the question is sought on pricing, but now it makes sense just given the demand dynamics. Okay, next going on to something from the press release. Maybe I'm reading in a little bit too much into the text, and you mentioned it within your prepared remarks. But notice the rhetoric around the proprietary equity performance and the introduction of new capabilities to market. So am I reading into this too much? Or are you indeed planning for something new that we kind of haven't been exposed to on the equity side of the business?

Yes, no. I'm alluding to something very specific, so I might as well make it explicit. I just don't know exactly what's going to fall first. So I painted it with a broad-brush in my remarks. If you look at the history of our institutional business, our strategy has been to block and tackle that which we know we can execute well and execute quickly. We're very focused here when we start a new strategy. And the firm's strategy was to launch small-cap where we had a real talent, great performance and a equity capability that was highly desirable in the institutional marketplace. So most of our efforts were around small-cap, both the institutional separately managed accounts as well as mutual funds that we sub-advised on behalf of AMG. That effort, as you know, was extremely successful. And we have closed the small-cap capability to most other institutional investors. It's opened in a couple of select circumstances, but largely that's closed. And knowing where we were going with the institutional business about 2 years ago, we launched an effort to get more sub-advisory business, an ongoing effort. So that's point number one. Because those are expanding pools of capital that are related to a single award or mandate, like a -- just for example, an insurance fund or another pooled asset vehicle on behalf of retirement accounts. Secondly, our equity capabilities are created out of the same body of research, they have the same strict methodology, they're very high quality, they seek to preserve capital and we are merely introducing capabilities that we've had here since the beginning of Silvercrest, in particular, SMid-cap and equity income. And both of those capabilities are much less constrained in terms of the assets they can take. SMid is a way for many institutions, consultants and other investors on the institutional side to take advantage of something like our small-cap capability by going a bit higher up in the market-cap space. Equity income has extraordinarily good performance and is completely unconstrained with regards to the volume of assets that we can manage. So basically, we've just moved our efforts in that direction. We are in searches for both of those. And I'm also very pleased to mention that the strategies both at SMid and equity income have been approved by the global investment community at Morgan Stanley. You may recall, it is through Morgan Stanley that we receive many of our small-cap assets, those through consultants on the Graystone side as well as in their UMA platform. So we're quite optimistic looking forward about bringing those products more to the fore in the marketplace and aggressively presenting them to institutions, that's point number one. Point number two is that we've been investing in talent here. I've mentioned in previous calls that what we seek to do is create a group of intellectual capital whether it's like our equity capability or one of our fixed-income capabilities, like our high-yield municipal fund, which is used by other RIAs and investors, or around our Investment Policy & Strategy Group. And we have an initiative that we're very close to making some announcements about involving that particular group. So I'll leave that a little bit more vague until we have more to say. But you've noticed, as have others, we've made investments in the business and they're all around creating future growth opportunities along those lines.

Great. That's great to hear and congrats on the progress. So I guess, one dynamic that I noticed during the quarter, the fee rate dipped a touch lower quarter-over-quarter, it's hovering very comfortably above the all-time low. But let's just hoping you could probably -- you could elaborate on the dynamic?

Well, first of all, yes, I did see that you noted that. I'm not sure what you're using as the denominator in order to come up with that. If you know -- as you know, we have the discretionary, we have the total, there's -- whether you're using average AUM, whether you're using Q1 ending AUM or our Q2 AUM. All of them are going to move that number around. And when you're talking about a number that moves by a couple percent here and there, I'm not sure it's relevant. I will say that as we gain assets and if you're -- if the -- both the average AUM and quarter-ending AUM are going to understate the fee basis because the revenue is collected a quarter before. So you have to -- I think anyone looking at the numbers has to be aware of that. Secondly, as we get new mandates and grow assets, very often, it comes into cash, and it can be in cash for a prolonged period of time; that's going to affect our fee rate. If it's a very large institution, that's going to affect our fee rate. It's just because they have different pricing and better pricing unless it's a very, very large family. I happen to know that during the second quarter, there was -- there are some assets that were moving into cash. In particular, contributions by existing clients. And that's just going to have a very different fee rate and always has. The important take away here is, I think, it's noise. As you've noticed, it fluctuates. And I can tell you that as we get new mandates and see new clients, whether it's on the institutional side or the high net worth side, we have been able to stick to our compensation schedules. We've talked in the past about how we have not had great fee compression pressures like many other managers. I think there's two reasons: one, we've always had an extremely compelling value since the day we opened our doors, enhanced with the number of services we're providing our clients. And you combine those two things and we were already kind of priced extraordinarily well for what we do. So any new mandates, I'm not seeing a change. What you're seeing is really either how AUMs measure or you're just happening to see what the flow of particular assets are. But for any given asset class, we have the same pricing we always had and we haven't seen a change in that.

Understood, appreciate the color. And I guess, last one, kind of focusing on expenses and then maybe one more after that -- kind of circling back. But first, on the expenses. Some other asset managers out there have been talking about increasing their spending and have noted that in their expense guidance. I know you've mentioned in your remarks that you've continuously been investing in the business, but wondering if there's any -- there are any plans in the future to kind of continue to reinvest at a more elevated clip than normal.

I'm going to answer that first and let Scott add anything if he thinks I've missed something. Number one, we haven't gone through significant periods of pause in terms of reinvestment in our business. It is a bit cyclical. Look, technology ages, you have to make a new investment, we've been through that. We had some expenses related to upgrading our phone systems and data. There have been regulatory increases. But on the positive side for example, there were the need for us to pay real hard dollars for research that was a very big change in expenses. We overestimated what that would really be and we've had to call some of that back, so that declined. We've been in this office space for 15 years. We've got a new 10-year lease. We had the money to do work here and build it out as part of our new lease arrangement. So that's not going to affect the expense side to the extent we're able to stay within the balance of what we've been given as part of our new lease arrangement. But there are going to be associated expenses. Technology is something we're going to always have to continually reinvest in. I don't see a new level of expenses that's extraordinarily different than what we've seen in the past. Instead, it will just kind of cycle on and will average out where we've been in EBITDA. I've long said that if we're much above 30%, that's probably on the high side that we're probably not quite investing enough in the business at that time. And on the low end, when we are really investing heavily, as you've seen, we go down to even 24% EBITDA margins. You flatten it out when you're in the mid- to high-20s over a sustained period of time, which is where I think we're targeting the business and where I think it'll stay. That's how we look at it. I also think that a lot of the investments we've made isn't just stuff that totally depreciates a lot of the expenses we've been making and things to enhance our growth initiatives and, obviously, that sort of benefit of our shareholders. But I don't expect a warning from us at some new high level of spending that we're going to be moving into. I think it's going to be very similar to the cyclical nature of what we've been doing throughout our history. Scott, is there anything to add to that?

Yes. The one thing I'll add in, Andrew, as you know, in your research for the second quarter preview, because our new lease kicks in on October 1 of this year, the rent expense will be higher. Again, we've been in the space for 15 years. The market obviously changes. So that will represent, as you noted in the research and we've discussed, an increase in rent expense during the fourth quarter. But other than that, the -- some of the expenses in our business are variable in nature and things change your -- again, going back to research cost and whether rapidly use soft dollar credits or have to run the cash expense through the P&L. There's going to be some lumpiness to that. But we've been able to do a good job of managing the cost structure of the firm.

Well, thanks. I appreciate the opportunity to go on at length because the summary to this stuff doesn't quite capture it. Do we have any other questions?

(Operator Instructions) We do have another question from the line of Steve Lipper of Royce.

Just had two questions for you. One was I think that there's about $200 million in net discretionary cash flow, and I take it from your remarks and understanding the calendar bases, that was probably all from institutional not from high net worth. I'm wondering if you can confirm and let me know where or which strategies you were seeing that growth in.

Yes. It actually -- no, it was pretty balanced. It was about $180 million in net organic flows. More precisely, absolute new relationships or clients represented about $111 million. Of that $111 million, something on the order of $69 million, $70 million were from institutions. So the remaining $40-or-so million was from high net worth individuals. In terms of the net cash flow in and out from existing clients, there was about $70 million there that contribute to your $180 million. Of that $70 million, I would say, something around the order of $50 million was institutional, the other $20 million net add was from existing clients. That's actually quite strong on the high net worth side because the high net worth side unlike institutions pays taxes. So we see a lot of -- that's the net number. We also see a lot of outflows from high net worth clients at this time of the year. So pretty balanced. And we haven't had a lopsided quarter over the past few years. At times, it's tilted a little towards the institutional, but it's been pretty balanced.

So I'll just play it back minute. So $180 million net organic with around $110 million from new client money, $50 million from institutional and $20 million from more money from existing clients?

So I'll just go through it one more time. $180 million, total. Round up of $111 million from new client accounts. $70 million net new from existing clients. Out of the $111 million new client accounts, $69 million were from new institutions. Of the $70 million net inflows from existing clients, $50 million was from institutions.

I got it. Great, thanks for doing that.

So $109 million of the total flow was from institutions. Right about $71 million was from high net worth of the $180 million.

And of the institutional, do you -- can you give me color on the -- on your strategies?

I don't have the breakout strictly in front of me; I can try to get into it. Small-cap still looks like that was the bulk of it. You should also be aware that there were -- although, we netted the amount I told you in inflows, $40 million went out of small-cap during the quarter. The past few quarters, we have had -- we haven't lost clients, we've had institutions rebalancing due to our very high performance in small-cap. It's a very high-class problem. Obviously, it leads to potential new mandates down the road because we're going to place very high-end consultants' list. But the past year plus we've been kind of fighting an outflow due to outperformance. And that was certainly the case this quarter as well. But it looks to me like small-cap, primarily in the second quarter.

Okay, great. So then just shifting gears around sort of capital allocation prioritization and the dividends. What -- coming hopefully close to being sometime in the near future less than a 50% payout. Have you said anything in terms of once you get below 50%, you're going to look to maintain that and grow it with the profits? Or what sort of expectation or thinking can you share with us?

So the board is always assessing prudent use of capital. We have been very conservative with our cash, admittedly, and part of the reason is how we may want to use that in an acquisition at the right moment. We want to remain opportunistic because that can make, all of a sudden, a significant difference. That said, the board is looking at our dividend policy. I'll leave it at that.

All right? I mean to say anymore is to announce something. The board is looking at it. We take it very seriously.

Okay. All right, yes, I appreciate that. I didn't think we had touched on that before, so I thought I'd try to...

No, I appreciate the question. I think it should be evident as well that there's a buildup of cash at the C Corp level that you can see in our financials.

We apparently have no questions at this time. I would like to turn the call back over to Mr. Rick Hough for the closing remarks.

Great. Well thank you, everybody. Appreciate the opportunity to go on at some length about our business, about which we remain very optimistic and excited. When you combine our excellent performance, institutional-quality portfolios, intellectual capital at the firm that we continue to monetize. We've been able to deliver very strong and consistent organic growth. Obviously, the good markets have been beneficial to the firm. We can't take that for granted either. But we look forward to continuing to execute on the strategy that we've elucidated in our materials as well as during these calls. And I welcome any dialogue with investors at any other time, willing to meet and talk about the business and why we're excited about our future. Thank you very much.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Everybody, have a great day.