Silvercrest Asset Management Group Inc (SAMG) 2018 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Silvercrest Asset Management Group Inc. First Quarter Financial Results 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 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 statements from the statements made. Among these factors are fluctuations in quarterly and annual results, incurrence of net losses, adverse effects of management focus 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 the Form 10-K for the year ended December 31, 2017, 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 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.

Thank you very much, and welcome to our first quarter 2018 results for Silvercrest Asset Management Group.

Silvercrest experienced a successful first quarter against a backdrop of more turbulent markets, experiencing net new organic growth before our first quarter of 2018 with $189 million in additional client assets to manage. The first quarter represents the firm's 10th straight quarter of net organic growth, excluding market influence and marked the 19th quarter of breakeven or better asset flows to the firm.

Silvercrest ended the quarter with $21.5 billion in total assets under management, which is an increase of $200 million over the fourth quarter 2017. Discretionary assets, however, declined to $15.9 billion from $16 billion due to more volatile markets in the first quarter. Our discretionary assets have grown 11% year-over-year as of quarter-end.

Silvercrest continues to invest in the next generation of high-quality talent, and we have funded new growth initiatives. Silvercrest firmly believes that reinvestment in our business and in our clients will create the longest-term value for our shareholders by continuing our record of growth. We're prepared to use our excess capital to grow the business with new strategic initiatives and intellectual capital, such as our previously announced Outsourced Chief Investment Officer business. Our professionals have real skin in the game at Silvercrest with regards to investment performance and our best-in-class value strategies as well as our successful approach to active management, which differentiates our firm against an industry backdrop of cheap beta and cookie-cutter asset allocations. We expect our performance to support more opportunity in the institutional marketplace as well as providing a compelling and competitive offering to high net worth clients and prospects. We're finding new traction with our SMid-cap value capability, which has now been introduced to the marketplace, and we remain enthusiastic about institutional search opportunities. We now have nearly $4 billion in institutional client assets committed to the firm.

While the current M&A environment is competitive and expensive, Silvercrest continues to evaluate selective and prudent acquisitions with culturally compatible firms to complement our organic growth, investment capabilities and professional talent, including the possibility to expand in new geographies.

With that, I'll turn it over to Scott Gerard to discuss the firm's financials and then we'll take questions. Thank you.

Thanks, Rick. As disclosed in our earnings release for the first quarter, discretionary AUM as of March 31, 2018, was $15.9 billion and total AUM as of March 31 of this year was $21.5 billion. Revenue for the quarter was $24.3 million, and reported consolidated net income for the quarter was $4.1 million. And the revenue for the first quarter of $24.3 million represented approximately an 11% increase over revenue of approximately $22 million for the same period last year. This increase was driven primarily by growth in management and advisory fees as a result of increased AUM.

Expenses for the quarter were $19 million, which represented approximately an 11% increase from expenses of $17.2 million for the same period last year. The increase in expenses was primarily driven by increases in comp of $1.2 million and G&A of $0.6 million.

Comp and benefits increased primarily because of an increase in the accrual for bonuses and increased salary expenses resulting in merit-based increases. The increase in general and administrative expenses during the first quarter compared to the same period last year was primarily due to increases in occupancy and related costs as a result of our new lease in New York City taking effect this past October 2017.

Also, we experienced increases in subadvisory and referral fees related to increased sub-advised revenue, portfolio and systems expense increase in addition to telephone cost. These were partially offset by a decrease in depreciation and amortization.

Reported consolidated net income was $4.1 million for the quarter. This compared to $3.3 million for the first quarter of 2017. Reported net income attributable to Silvercrest or the Class A shareholders for the first quarter of 2018 was approximately $2.2 million or $0.27 per basic and diluted Class A share.

Adjusted EBITDA, which we define as EBITDA without giving effect to equity-based compensation expense and noncore, nonrecurring items, was approximately $6.9 million or 28.5% of revenue for the quarter, and this compared to $6.5 million or 29.6% of revenue versus the same period last year.

Adjusted net income, which we define as net income without giving effect to noncore and nonrecurring items and assuming an income tax expense rate at the corporate level of 26% for periods beginning January 1 of this year as a result of the Tax Cuts and Jobs Act, and this amount was approximately $4.1 million for the quarter or $0.31 per adjusted basic share and $0.30 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 for basic adjusted EPS. And to the extent diluted, we had unvested restricted stock units to the total shares outstanding to compute diluted adjusted earnings per share.

Taking a quick look at the balance sheet. Total assets as of March 31 were approximately $100.1 million, and this compared to $117.4 million as of December 31 last year.

Cash and cash equivalents were approximately $35.4 million at March 31. This compared to $53.8 million at December 31 last year. And both at the end of the first quarter of this year and the end of last year, notes payables was proximally $0.7 million.

Lastly, total Class A stockholders' equity was approximately $50.8 million at March 31.

That concludes my marks. I'll turn it over to Rick, and we'll take Q&A.

Thanks very much, Scott. We're taking questions now about our first quarter and the company in general. Thanks.

(Operator Instructions) And our first question is from Andrew Disdier from Sandler O'Neill.

So first, it sounds like there is good traction with the SMid-cap value product. So would you just be able to talk about the types of opportunities that you're seeing with the new product?

Sure. Yes. So in the first quarter, we had UMA accounts of $27 million flow into the SMid-cap category. That has only recently been placed on a platform, and that platform was a very significant part of the growth in our small-cap strategy. So the fact we're on it now with SMid-cap, it gives a new option for an institution and their investors who really like Silvercrest and our performance to start allocating to that by just moving up the market cap a bit. So we're excited about having that and about the flows that we're starting to see there. Secondly, like our focused value in large-cap as well as equity income, we're bringing the SMid-cap to the institutional marketplace to consultants, and we're seeing movement there. We are in several SMid searches as we continue to promote that strategy.

Great. And then, I guess, to the larger value space. So anecdotally, from what we're hearing, there could be some poking around by institutions, consultants really looking for value-oriented products. So I guess, aside from -- it sounds like pretty strong update with SMid, could you talk a little bit about the other products as well?

Yes, absolutely. Right, so absolutely. So given our small-cap performance, combined, I should say, with the excellent client service that everyone on the equity team provides our clients, has given Silvercrest a really great reputation in the marketplace. We've delivered precisely what we've told institutions we would. And so that puts us in good stead, obviously, for selective searches. As I've mentioned before, at Silvercrest, we have large-cap, we have small-cap, we have SMid-cap, we have equity income, we have a focused value, we have a multi-cap that's more high net worth noninstitutional. And so institutionally now, we've got the small. Of course, that's largely closed, as we mentioned. SMid-cap, large-cap, focused value and equity income, and we have a particular focus right now on SMid-cap just because that is a constrained place in the marketplace. But obviously, we're bringing them all out there. In general, the advertised search environment, that is our [plan-sponsor] announced possibility, remains slow in the long-only equity space in general. And I would say, in the value equity space, in particular, yes, I'm hearing people say that value is going to have its day again when we get to more normalized markets, interest rates, et cetera, that should prove well for value. In particular, value managers, as you well know, have struggled. We're very proud that we've delivered very good performance, given the general environment for value. So I think as it picks up, which I would expect, but I'm no market prognosticator, that we will see more opportunities there and in addition, we will be in a very good position to benefit because of our strong track record through a difficult period for value managers, in general. On that note, however, I mentioned that the advertised search environment is a bit slow, in the long-only space. But our current pipeline is moderately strong at Silvercrest, which is to say, kind of our actionable 6-month pipeline, which we look at as the -- as a pool of opportunities for insight-only RFPs, where we think we're a semifinalist or a finalist candidate with the search. So yes, while the advertised space is slowing, we've definitely seen a pickup in invite-only activity for value strategies. So a bit of a mixed story. But I will tell you, our pipeline has picked up about 50% from the end of the year to this -- to the end of this quarter.

Got it. And then, I guess, to the pipeline, that's specific to the equity products, correct? Or is that incorporating the OCIO too?

No, that's separate from the OCIO. That was strictly -- since your question was about our institutional equity possibilities and flows, that was strictly about the opportunity set for our value equity strategies.

Got it. Just wanted to be clear. And I guess on that point though, OCIO, just curious about any progression on the newer initiative?

Yes. We don't have any new wins to announce. As we've said before, it's going to take us a bit of time to get traction in the marketplace after we introduce the product and build our team just as when we created the institutional push for our value equity strategy starting in 2008. It took some time for the consultants and others, really, to get to know us in the marketplace and pick up steam. We're getting a very good reception. We have a nice pipeline. We've built a great team. But there's nothing yet to announce. We're in several searches, and we're working hard. It should be noted that the group, which is responsible for the OCIO initiative, did secure a new institutional client in Japan for aspects of the work that they do and would do on behalf of institutions in the United States. The uptick that you saw in nondiscretionary assets under management somewhere around that $300 million or $250 million was that Japanese institution. So the knowledge base and capabilities that we have here is definitely getting recognized. That's not strictly an OCIO mandate, but it is a mandate that supports that team and provides yet another institution to put on our list using our capabilities. So we're as excited forever, we're just going to have to be patient until we get really well known in the marketplace and get some wins.

Understood, understood. And then, I guess, from a broader backdrop, on the regulatory front, would you be able to provide any color on some of your takeaways from the SEC's proposal or standards of conduct?

So I am on the board of the Investment Adviser Association, which is the industry group representing RIAs. And I'm pretty involved in the regulatory environment in terms of what's happening in Washington. I, myself, lobby and was involved, for example, in beating back the changes to the first-in, first-out rules last fall, which would've just have been terrible for our business and in particular, for our business versus broker dealers, and we were successful on that. In general, the regulatory environment has improved dramatically for RIAs. And the SEC has shifted its focus, I think, in the right directions. They're doing a better job of screening and providing a hierarchy of risk and who to examine and how to examine them. It's, I have to say, much to our relief, an improved situation, and I don't see that changing. A few years ago, we were in a discussion in Washington about precisely how to regulate advisers and in particular, broker-dealers. And there was an attempt by broker-dealers to redefine what it meant to be a fiduciary and to bring RIAs into FINRA, the self-regulatory organization for broker-dealers. That did not go through and was dropped, because they -- it was very hard to square the circle of how you can be someone who is effectively compensated for sales or for doing -- providing product to clients but without a strict fiduciary standard, whereas in the IRA, we live by a strict fiduciary standard. I have my hopes that, that's not going to change. I'm not seeing a wellspring of support to water down the fiduciary standard. Brokers have a particular role in the world. I think it's actually a good one. And I think how they are regulated and what they are doing to be compensated should be kept pure. And we shouldn't further blur the lines between fiduciaries and broker-dealers by changing the standard, because it can only be watered down.

(Operator Instructions) At this time, I'm showing no further questions. I would like to turn the call back over to Richard Hough, CEO, for closing marks.

Great. Thank you very much, and thanks for joining us on the first quarter call of 2018. I'd like to make concluding remarks, especially if I don't have questions, I get at it. And I think it's important for investors to take stock of where the company has come over the past forward 4.5 years. I'll talk more about that this summer when we hit the fifth anniversary of this company going public and the progress we've made and what we've built. But very important to the success that we've had and the likelihood of us being able to replicate the nice growth that we've had has been the culture we've built at the firm. A lot of companies give lip service to culture. They are marketing points to try to sell the business to clients. And I have to say here, it's a verb. It's something everyone lives, and it's a very tightly knit group that spent extraordinarily loyal to the company and have worked very hard on our behalf. There's an article that was published in the New York Times in the first quarter. If you haven't seen it, you should check it out. It's about Silvercrest. It's linked on the front page of our website under the News section and gets a little look into the culture that we're building at the firm and the kind of camaraderie that we have among our people about working hard on the business. And most of these calls are spent going through the numbers and how we progress. Those are super important, but there are people behind those numbers and if we lose our heads with regards to culture, the numbers will suffer. So we're really proud of what we've done on that front. My second comment, which you'll see in the annual letter, which I hope you check out, has to do with the fact that we definitely will be making new investments on behalf of investors to grow the firm. It's time that we start adding more portfolio management teams, potentially intellectual capital with regards to new strategy to complement the high net worth business. Of course, we've already announced the OCIO initiative and as we have grown our capital base and achieved very low levels of debt, it's time to deploy it on behalf of shareholders to further grow the company. And so I'm really grateful for our shareholders' support of the initiatives that we've taken and understanding of a company of our size what we have to do to continue growing the company in an extraordinarily competitive marketplace. So thank you, because that is a contribution to our success as well, and I look forward to updating everyone in the next quarter. Thanks very much.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect.