Silvercrest Asset Management Group Inc (SAMG) 2022 Q1 法說會逐字稿

Good morning, and welcome to the Silvercrest Asset Management Group Inc. First Quarter 2022 Earnings Conference. (Operator Instructions) Please note, this event is being recorded.

Before we begin, let me remind you that today's call contains certain statements made regarding our future performance and our forward-looking statements. They are based on current expectations and projections, which are subject to a number of risks and uncertainties, and many factors could cause actual results to differ materially from these statements made.

Those factors are disclosed in our filings with the SEC under the caption Risk Factors. For all such factors looking statements, we claim the protections provided by the Litigations Reform Act of 1995.

All forward-looking statements made on this call or made of the date hereof and Silvercrest assumes no obligation to update them.

I would like to turn the conference over to Mr. Rick Hough, Chairman and CEO of Silvercrest. Please go ahead, sir.

Thank you. Good morning, and thanks for joining us for the first quarter of 2022 results call. We concluded this quarter with the celebration of our 20th anniversary in business. We actually opened the first day of the second quarter in 2002. Despite the volatile economic conditions and markets, we're pleased with Silvercrest's continued stable progress over time.

Our tenure has proven that the firm has the professional resources, ability and strategy to execute through difficult periods to build a sustainable and enduring business.

Silvercrest's discretionary assets under management, or AUM, which drives revenue, increased to $23.8 billion from the first quarter of 2021, which was a year-over-year increase of 8.7%, primarily due to the volatile equity markets during the first quarter of 2022.

Silvercrest's discretionary AUM declined by 5.2% from December 31, 2021, which also led to a quarterly decline in revenue and adjusted EBITDA. Along with the continued progress in growing AUM year-over-year, the firm's revenue increased 7.3% from Q1 2021, with a $33.5 million in revenue for the quarter ended March 31, 2022.

The firm's quarterly adjusted EBITDA was approximately $10.3 million or an annualized adjusted EBITDA run rate of $41 million and grew year-over-year by 6.2%.

Adjusted diluted earnings per share increased 7.1% year-over-year to $0.45 per adjusted diluted share, and the firm's first quarter 2022 adjusted EBITDA margin was 30.6%, which is a consistently high number for Silvercrest.

Silvercrest high net worth business grew its relationships during the first quarter, and we are pleased with incoming opportunities. Our net flows were muted as compared with historical norms. Silvercrest's institutional equity new business was solid during the first quarter, and our opportunities remain excellent across Silvercrest suite of proprietary equity capabilities.

Our sub-advisory relationships continued to add assets during the first quarter of 2022. Market volatility and uncertainty have created long-term opportunities that typically benefit the high quality of Silvercrest's capabilities.

We have a lot of accomplish to continue building the premier wealth and asset management boutique in the nation, and we embrace those challenges that come with change.

On May 3, the company's Board of Directors declared a quarterly dividend of $0.17 per share of Class A common stock, and the dividend will be paid on or about June 17 to shareholders of record as of the close of business on June 10.

With that, I'll turn it over to you, Scott, for the financials, and then we'll take questions. Thanks.

Thanks, Rick. Again, as disclosed in our earnings release for the first quarter, discretionary AUM as of March 31 of this year was $23.8 billion, and total AUM as of March 31 of this year was $31.2 billion. Revenue for the quarter was $33.5 million, and reported consolidated net income for the quarter was $12.4 million.

Revenue for the first quarter was approximately $33.5 million, representing approximately a 7% increase over revenue of approximately $31.2 million for the same period last year. This increase is driven primarily by market appreciation and net client inflows in discretionary AUM.

Expenses for the first quarter were $18.1 million, representing approximately a 29% decrease from expenses of $25.5 million for the same period last year. This decrease is primarily attributable to a decrease in G&A expenses of $8.5 million, partially offset by an increase in compensation expense of [$1 million.]

Compensation and benefits expense increased by $1 million, or approximately 6%, to $18.7 million for the first quarter this year from $17.6 million for the 3 months ended March 31 of last year.

The increase is primarily attributable to an increase in the accrual for bonuses and benefits expense and salaries expense, primarily as a result of merit-based increases and newly hired staff, partially offset by a decrease in equity-based compensation expense due to a decrease in the number of unvested restricted stock units and unvested nonqualified stock options outstanding.

General and administrative expenses decreased by $8.5 million to negative $0.6 million for the 3 months ended March 31 of this year from $7.9 million for the 3 months ended March 31, 2021.

This was primarily attributable to decreases in the fair value adjustment to the contingent consideration related to the Cortina Acquisition of $8.8 million and occupancy and related costs, partially offset by increases in travel and entertainment expense, portfolio and systems expense and sub-advisory and referral fee expense.

Reported consolidated net income was $12.4 million for the quarter as compared to $4.3 million in the same period last year. Reported net income attributable to Silvercrest or the Class A shareholders for the first quarter of this year was approximately $7.6 million or $0.77 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 $10.3 million or 30.6% of revenue for the quarter, compared to $9.7 million or 30.9% of revenue for the same period last year.

Adjusted net income, which we define as net income with effect to noncore and nonrecurring items and income tax expense assuming a corporate rate of 26%, was approximately $6.7 million for the quarter or $0.46 and $0.45 per adjusted basic and diluted earnings per share, respectively.

Adjusted earnings per share is equal to adjusted net income divided by the actual Class A and Class B shares outstanding as of the end of the reporting period for basic adjusted EPS. And to the extent dilutive, we had unvested restricted stock units and nonqualified stock options to the total shares outstanding to compute diluted adjusted EPS.

Quickly looking at the balance sheet, total assets were approximately $197.9 million as of March 31 of this year, compared to $229.3 million as of the end of 2021. Cash and cash equivalents were approximately $57 million at March 31 of this year, compared to $85.7 million at the end of 2021.

Total borrowings as of March 31 of this year were $8.1 million, and total Class A stockholders' equity was approximately $86.3 million at March 31 of this year.

That concludes my remarks. I'll turn it over to Rick for Q&A.

Thanks very much, Scott. We're welcoming questions at this time. Thanks.

(Operator Instructions)

And the first question will come from Sumeet Mody with Piper Sandler.

I wanted to start with your thoughts maybe around what you're seeing from your wealth management and institutional clients to evolve kind of first 4 months of the year. We didn't see a material shift outflows in the quarter, which was nice. But any update around what you're seeing around demand for certain strategies, particularly growth?

And are there any areas you think Silvercrest does particularly well during these types of more prolonged downturn, maybe contrasted against what we saw in the beginning of the pandemic in 2020?

Sure. So I'll try to keep my remarks a bit short only because it's a bit open-ended question. So you can follow up, if you want, I appreciate it. Kind of two questions there. In terms of what we're seeing with regards to flows, number one, that you see, they're pretty muted, which is the word I used in my introduction.

It was considering the volatility and the fact that we're headed into tax season. It was a pretty good quarter, actually. But the flows overall, as you saw, were muted. This quarter was basically entirely driven by the markets. I would point out that the existing net flows for the quarter were just about $163 million out of the firm, a very small number compared to our base.

However, it kind of hides a surprisingly strong inflow from some new clients. We had a good quarter $1 billion of inflows into our institutional business. We had a fair bit of new flows into our high net worth business.

And just to give you an idea, just to get a bit of detail here, while it was negative $162 million -- again, just kind of a very small rounding error when it comes to our AUM that left the firm, there were only 5 clients that were effectively responsible for close to $400 million of net outflows this quarter, rebalancing some preparation for taxes, a few other things.

So the muted overall flows, in terms of history, was kind of hiding some really good news underneath the hood. We grew our number of relationships as well. So I'm pretty pleased with all that, especially given the volatility in the markets.

In terms of demand and our capabilities, on the institutional side, that's just going to be very client specific, in terms of what pieces of their asset allocations they're looking to fill. I can't say, there's been some significant shift in the marketplace over this short period of time.

The performance in our growth equity strategies has been very, very good and continues to be despite, I think, the very well-publicized volatility, in particular, on the growth side of the market, no matter where you're looking.

It's clearly in a bear market in certain sectors or areas. It's been on the decline for a good year, and our team has done extremely well. So that's going to help us, clearly, as we try to grow that business.

The value side had some relative performance challenges, but as you noted in your note recently, our performance remains quite strong, and it is in periods of like this that we often pick up a lot of good relative performance. It is in periods like this that we serve our clients extremely well, whether that's on the institution or high net worth side.

They are hiring us to be a really steady hand on the tiller and to guide them through volatility like this. And this firm, over 20 years, has been through significant periods of volatility and not to mention the global financial crisis.

And it's really when we have the opportunity to shine and where our stable focus on high-quality portfolios and the fundamental attributes of the businesses we invest in, really shine.

In other ways, I think this firm can benefit because we may be seeing a conclusion to the kind of easy money that has led to a tremendous amount of speculative kind of investing, where, frankly, the market and the number of asset classes kind of look like a casino.

And people chasing the latest shiny object, putting an end to that and hopefully, not abruptly because that can have other economic consequences. But putting an end of that point, frankly, is going to be very constructive for firms like ours, whether you're talking about our investment capabilities or frankly, you're talking about the ability of this firm to make use of capital in a competitive way and at a high return on equity for our shareholders.

So to -- I wanted to be shorter in this comment, but it was just -- it's kind of a big question. I have to address different aspects of it. So if you want to follow up on anything, that's a very general comment about how I see things.

No, I appreciate that. That's what I was looking for. So just wanted to shift over to index inclusion. Is that something you guys are focused on sort of in the future here? Are you thinking about any maybe structural elements you can address like dual share class that help you get included in future indices? Or is that not something that we are suppose to talk about?

Yes. Sumeet, it's not something I'm focused on. I think I've been really clear. My job is to execute a long-term strategy and continually, organically growing this business. And frankly, I don't get too caught up in giving a lot of mechanics to [massage] either the stock or where we look in terms of indexes and the rest.

It looks like we'll be in the index, according to the estimates, which is great. We've been in it before, it would be good to be back. What really happened and what you saw -- it connects to my last comment.

You saw a lot of companies that had 0 revenue, stacks, very speculative investments that were running way up in valuation with nothing to show for it, that were all put in the index and what you saw fall out where a lot of small companies, especially financials.

We've seen a reversion. We've seen a rotation towards value, which -- the biggest component of which is financial. We've seen a rotation towards companies with real cash flow, healthy balance sheets, which, of course, we're one of.

And we've seen a deflation of those more speculative investments. We're going to come back in on our own merits. So no, we're not doing anything. But obviously, it's a good thing to go back into the index.

Okay. Great. And then just last one for me here. Just Cortina, obviously, has been performing really well since that deal has closed. And it's been a great contributor.

Just wondering, how conversations are going with potential M&A targets today? Can you talk about how pricing looks for the opportunity you're engaging with that maybe you think fit well with Silvercrest?

And then kind of secondly, how those private valuations are being impacted today? Is it similar to what we're seeing on the public side? Or is it not?

Yes. You would think that there would be a connection between very large markets that are mark-to-market on a regular basis and what's happening in the private markets. It's a little too soon to say that I'm seeing an effect.

However, I think it's notable that it looks like that there are some significant players on the private side, who look to be shopping some of their assets, which I didn't expect. Looks to be.

And if that's the case that since there are some players in the market, who think that what they're holding now look a bit expensive, right? Obviously, there's a buyer for every seller. So someone else thinks it doesn't, but I think it's too early to see where that's going to go.

We have been in discussions. And I will say that in the first quarter, the things looked -- despite the underlying volatility of the quarter and a lot of it started happening closer to the end of the quarter, but things still look expensive.

And so honestly, this volatility, that's one of the things I was alluding to, may lead to that. I think it's healthy. I think there's just been a ton of fuel leading to speculation, and we have not had a sustained downturn or increase of interest rates. Whenever we've hit these bumps in the road, that have really tested that and pushed it. Maybe this is a time where that will happen. So stay tuned.

That is an aspect where I think some of disciplined with their capital and looking to the hiring accretive to shareholders could benefit, if it is sustained. And of course, I would include this firm [among them].

Number two, with regards to asset management acquisitions, I think I've said before, certainly in other forms, we're not really on the hunt for other institutional capabilities or asset management firms.

The Cortina people were really special with a capability that we strongly desire, but we're not seeking to do every possible strategy. We want to do the core strategies extremely well. We have been at this point.

Our job now is to organically grow the capabilities we have. That is job #1. It's not looking to grow this company with more capabilities at this time. So any M&A is going to most likely be strategic in the high net worth space in key cities or client bases that are -- and cultures that are compatible with this firm.

Next question will come from Sandy Mehta with Evaluate Research.

Can you give us an update on the OCIO asset's AUM? And also, I was wondering if you have a number for your actionable pipeline.

Yes. Sandy, thanks. The OCIO has come down in AUM entirely as a result of market. So it's just under $1 billion right now or about $1 billion. No news there other than market exposure as you would expect and seen with regards to this quarter. That's the news really.

In terms of the pipeline for that business, it remains nice and strong. It's close to $600 million, and that's a nice conservative number. I think we're going to do quite well over the next quarter.

One thing to keep in mind, I think, is that the volatility in the markets really highlights for fiduciaries, that is Board members running investment committees, what kind of guidance and help they really need to navigate. When everything is running up in the environment that we've had for a sustained period of time, it makes the job look easy.

So this is another reason to kind of welcome this disruption that we're seeing right now. It's why in my opening comments I referred to the fact that the uncertainty creates long-term opportunities that typically benefit the high quality of this firm. It's specifically -- because it is now when people start to realize maybe they need more help than they otherwise would have thought.

And that really affects the dynamics, I would say, in an investment committee sitting on the Board of an endowment or foundation. So I'm quite optimistic about what we're going to do with that pipeline in the conversations we're having.

On the institutional equity side, the pipeline is a little smaller. I think I reported close to $1.8 billion last quarter, maybe just's in shy of that. And we're right around $1.6 billion on the actual pipeline. And for those who don't tune in regularly, that pipeline is invite-only RFPs, semifinals and finals.

So it's a very strong concrete pipeline that we can measure with confidence, and it has a pretty high realization rate. We win a significant portion of the pipeline. And the pipeline coming down from $1.8 billion to $1.6 billion is a good example of that. It's largely because we have wins.

So during the quarter, as I said, underlying this kind of muted net flows, frankly very good with regards to closed accounts -- at the closing [count] this quarter were excellent. It was very small. And underlying that was some significant inflows since the institutional business. So the pipeline just reflects that. It remains very strong. And I am very happy about it.

Okay. And Silvercrest stock is up 25% year-to-date, while the (inaudible) was down nearly 20. Any updated thoughts on the buyback? And I mean, are you still -- I mean, at least in my view, the stock is still very undervalued. What are your thoughts currently on the buyback?

Look, we're strongly in favor of buying back our company. As I've said, it's been difficult, primarily because of volume limitations. We have not revealed or talked about what our pricing strategy is around our stock. We're just going to let our results speak for themselves.

It's really nice to see investors realize the value in this company, and part of this has to do with the rotation towards companies that are so stable, able to deliver over the long term, have strong cash flows, a conservative balance sheet, et cetera.

And given the M&A market and what I had to say about it earlier and it's relative expense and cost, if we were to engage in some of the prices that are in the marketplace, just don't think it's a good use of capital.

So we're going to buy back what I think is the best firm in our business, which is Silvercrest. But I have nothing more to say about the relative price versus the market or our fundamentals.

And one last question. You mentioned the growth strategies did remarkably well, even in this down market. So we have very strong numbers in up and down markets.

Can you talk specifically about what flows you're seeing in that? And the underlying stocks tend to have [lots of] liquidity to use growth stocks versus, say, value stock. So is there potential for more flows there or actually a new product? Anything specifically on Cortina, please?

Sure. So on the product side, we are incubating multi-cap growth and large-cap growth, and those are important asset classes for our high net worth group. We have a super talented team. We have and will expand the intellectual capital in Milwaukee to support those capabilities.

But the flagship products there, opportunity and small cap growth, with a strong relative performance that you referenced, that just have a tremendous opportunity, they should really stick out compared to what's happening in small cap technology, in other small cap issues.

I mentioned, obviously, technology, in particular, because of the great volatility there. And the pipeline there is pretty strong. It's part of the total institutional pipeline that I gave you.

I usually don't break it out. I'm happy to do so right now. I think that's close to $400 million. And for a very niche products and capabilities, I think that's good. I think one thing we have to get over is for the marketplace to be more aware of those capabilities. We're constantly in touch with consultants and working to introduce that for the long term.

I also think that given the volatility in technology and small cap issues, there are a lot of institutional investors and others amidst what's going on right now that have a bit of a wait-and-see attitude only because they may be a bit shy of the asset class, given what's occurred and what's happening to the other capital in their asset class.

But I think this is going to shake out really well in our favor behind a pretty good pipeline.

Your next question will come from Christopher Marinac with Janney Montgomery Scott.

Can you just remind us on sort of the lag of revenues as you go quarter-to-quarter? And do you see anything shifting on the EBITDA margin as a result of that?

So I'm not sure what you mean by the lag of revenues because most of our revenue is built quarterly in advance. The stub period revenue or things that we might do in [arrears] at the end of the quarter are due to new flows into the business.

So that's the major lag I can think of. Most of it is these quarterly advance, which is nice. It gives everyone a lot of visibility into what's going to happen and helps us manage the business. You can respond in the second, if I didn't address your question.

With regards to EBITDA, this is -- as I noted in my introductory remarks, being over 30% of EBITDA is still pretty historically high to the firm on just a normally -- normal quarter basis, that is to say a quarter that doesn't have performance fees, which we crystallized at the end of the year. It can always bump you up significantly as we did last year.

As said this before, I'll say it again, we want to invest in the business. We want to hire new intellectual capital to -- and [portfolio] managers to organically grow the business. When I do that, there is a lag towards new revenue. That's the other form of [live] you get as people build businesses at this firm, and that can hit EBITDA.

We have made those hires over the past 2, 3, 4 years. It's just that we've been able to grow faster than we've been making the investments, which is great. We're going to continue to try to do that.

It may become more apparent when I do those hires and spend that capital in growing this business organically on EBITDA during volatile markets, but it hasn't come to pass yet. But I think you can expect us not to be consistently this high. I've said that repeatedly. It's just nice that we are.

The other lag that's possible, and again, please respond after I'm done, it flows into our growth strategies in Milwaukee. The billing there does tend to be more in arrears . It's just smaller compared to the size of the entire firm.

Right. And Chris, also with great performance in Milwaukee, the -- certainly, the hope and expectation is that we will end up with additional flows. But again, those type of flows will lag performance and challenging to predict when those may come in.

All right. Great. No, I think you've addressed my revenue question. From the standpoint of some of the global dislocations, do you think you'll see some benefit from that as future quarters play out? I know, Rick, you touched on that a little bit in your earlier remarks.

Yes, I do. So some of it is -- one part is just the fundamental strength of this firm, not just its people, culture, intellectual capital, but how we manage this business. So that's number one.

Number two, just to go back to some of my earlier comments. People in this kind of disruption recognize they may need help. It doesn't look so easy to do it yourself anymore. And that's even heightened for people who are fiduciaries on investment committees. But look, large families have the same issue. We're going to benefit from that.

Third, the way we manage money, benefits from this kind of market. We're going to stand out. We have picked up some really good relative performance in this market.

Fourth, it may not be the disruption you mean. However, the capital is global and the U.S. dollar, the U.S. markets, U.S. economy still stands out, even in difficult times. Even if we go into a recession, we're going to be the cleanest shirt in the very laundry basket.

And I can tell you, we are seeing opportunities in Europe that I have not seen in some time. We have significant -- very significant European relationships already. We have sub-advisory relationships that are quite strong, and we're seeing really good regular inflows that are only picking up and that was happening during the pandemic when we couldn't even go to Europe.

But some of these other disruptions, whether you're talking about economy or if you're talking about a war, we're seeing more and more interest from foreign capital interested in the U.S. and interested in the kind of work that firms like ours do. So that is an opportunity. It's something that's real that I'm seeing and I'm optimistic about.

The next question will come from Chris Sakai with Singular Research.

Can you talk about new hires and how that's looking in the volatile market?

So I'm always looking for great talent. The challenge there is, someone who's going to fit into this great culture, is going to have the right way to manage money that fits with our philosophy, the ability to bring assets and clients. I mean at the end of the day, that's our business and has a long-term perspective, in terms of a place of work.

And we've been really successful at doing that when we do as well as building the next generation here. We've made meaningful investments in people to bring up the next generation. We're working very hard on our third generation. Not surprisingly, given our 20th anniversary that I just mentioned in my opening remarks, it's really important for the firm and the sustainability of our strategy. It's hard to do.

And we want the people we hired to succeed before we do fight off too much. And so we did a fair bit of hiring, going into the pandemic, and we've done a bit during. Those folks are doing really well, but it's -- this business takes a long time to succeed.

And it takes a long time. There's a long apprenticeship to building up your next generation, many of whom have become partners in recent years. Becoming more aggressive on hiring and what we might be able to do with hiring because as I mentioned earlier of the expense in the M&A market.

But the kind of people I'm hiring are fiduciaries. They're not -- they don't tend to be brokers, which is a very different market, very different kind of business from ours. And so it's going to be very deliberate as we do that, but I have not made significant high-level hires in recent months.

But I am on the lookout. And that has some to do with my comments that I made about our EBITDA margin, which I've made regularly over the past few years. As I mentioned earlier, we've just been able to grow faster than the expense of the compensation.

Great. Okay. And then can you talk about your dividend and when -- or would you see an increase there?

Well, I've never given any future guidance of any kind, really, other than to give color around our pipelines and how we feel about the environment of the business generally in the context of our [four-pronged] strategy, which we talked about a fair bit. So I'm not going to speculate on that.

I will say that just to state our basic policy, we think it's very important to return capital to shareholders on a very regular basis and on a meaningful basis, given the size of the company in the markets. We want to reward shareholders on a regular basis for holding this stock and return capital in that form, amongst other things that we're doing.

So it's an important component. The yield is an important component, that distribution. And we have a policy, if we can afford to do so, of increasing it on a regular basis, which if you look at the [industry] at this firm, we have done on a very regular basis. It has been an important part of the compounding return to our shareholders, and we continue to believe that.

We do not have a yield target, per se. It's more about making sure that we are doing it at a meaningful level. You can interpret that as you wish. And that we have the cash both in the C corp and from the business to sustain whatever dividend we put in place for a prolonged period of time despite market disruptions.

We want to avoid cutting it if we can. And we're in a very solid position to sustain where we are. But that said, the company is doing really well, and we have increased it on a regular basis. So we'll see what happens in future quarters. But that's about as much as I can say about it.

Yes. And Chris, just for your reference, we last increased the dividend in the latter part of last year. Just to remind you of that.

(Operator Instructions) This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Rick Hough for any closing remarks. Please go ahead, sir.

Great. Thank you so much for joining us for our first quarter results. Really appreciate the good questions this morning. As I mentioned, despite volatile markets and global news and the economy, I'm very pleased with where we stand as a company. Our progress looks good. The opportunities are strong.

I just want to reiterate, it's environments like this where Silvercrest can shine. We may have to take a step back or two, that's normal in this business. I don't view the past quarter as a step back, that's just -- you're just looking at the market. This is normal stuff.

Whatever it may be economically in the markets, this firm is well poised to continue executing our strategy on behalf of our clients as well as shareholders. And it's frankly something that has some side benefits that we welcome over the long term. So thanks very much for tuning in and look forward to talking to you next quarter. Thanks.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.