Silvercrest Asset Management Group Inc.
Q1 2016 Earnings Call Transcript

Published: 10 May 2016

[Operator:]

Good day, ladies and gentlemen and welcome to the Silvercrest Asset Management Group Incorporated First Quarter Webcast. At this time, all participants are in a listen only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference is being recorded. Before we begin, let me remind you that during today's Silvercrest conference call 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 performances, 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 they are important factors that could cause actual results, level of activity, performance or achievements to differ materially other than the statements made. Among these factors are fluctuations in quarterly and annual results, incurrence of net losses, adverse effects of management focusing on implementation of our 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 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. I would now like to turn the conference over Rick Hough, Chairman and CEO. Sir, please begin.

[Richard Hough:]

Thank you very much and thank you for joining us for the first quarter call 2016. It was a difficult period for investing in the first quarter as you well know, yet Silvercrest increased its discretionary assets under management. And we also increased our year-over-year topline and EBITDA growth while maintaining a solid pipeline of new business opportunities. In addition, Silvercrest's investment capabilities continued outperformance across the board, supporting many of our business development efforts. Our topline revenue for the firm increased 10.5% for the quarter ended March 2016 versus March 2015 from $17.4 million to $19.3 million due to organic growth increased an institutional business, and our successful acquisition of Jameson, Eaton & Wood. Our discretionary assets under management, which are primarily responsible for the firm's revenue, increased from $11.8 billion to $12.2 billion over the same year-over-year period from March 2015 to March 2016. The discretionary assets under management increased by $100 million during the first quarter of 2016. As discussed last quarter, our business opportunities reflect the maturity of our marketing efforts and investments in the business, and we continue to believe that our outperformance bodes well for future organic growth, both institutionally and with high net worth families that we see. The firm has ongoing potential acquisition opportunities and we believe that, with one of the best premier brands in the fast-growing RIA business, organic growth will continue to be supported by selective acquisitions as it has been in the past. With that, I will turn it over to Scott Gerard for discussion of our financials before we take questions. Thank you.

[Scott Gerard:]

Thanks Rick. As disclosed in our earnings release for the first quarter, discretionary AUM as of March 31, 2016, was $12.2 billion, and total AUM as of March 31, 2016, was $17 billion. Revenue for the quarter was $19.3 million and reported consolidated net income for the quarter was $2.5 million. Revenue for the first quarter was $19.3 million, representing approximately an 11% increase of revenue of $17.4 million for the same period of last year. This increase was driven primarily by growth in our management and advisory fees as a result of increased AUM. Expenses for the first quarter were $15.6 million, representing approximately an 18% increase from expense of $13.3 million for the same period last year. This increase was primarily attributable to increase in compensation and benefits expense of $1.7 million and general and administrative expenses of $0.7. Compensation and benefits expense increased primarily because of higher equity based compensation expense as a result of the restricted stock unit grants that were made in August of 2015. Increased salary expense as a result of both merit-based increases and increased headcount, due to the Jamison acquisition and an increased in the accrual for bonuses. General and administrative expenses increased primarily because of increased investment research costs, increased amortization expense related to intangibles as part of the Jamison acquisition and increase sub-advisory and referral fees. Reported consolidated net income was $2.5 million for the quarter as compared to $2.8 million in the same period of the prior year. Reported net income attributable to Silvercrest or the Class A shareholders for the first quarter of 2016 was $1.3 million or $0.16 per basic and diluted Class A share. Adjusted EBITDA which we define as EBITDA without giving effect to equity based compensation expense and non-recurring items was approximately $5.3 million or 27.3% of revenue for the quarter compared to $5 million or 28.5% of revenue for the same period last year. Adjusted net income, which we define as net income without giving effect to non-recurring items and income tax expense assuming a corporate rate of 40% was $2.3 million for the quarter or $0.18 per adjusted basic share and $0.17 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 dilutive we add unvested deferred equity units and restricted stock units and performance units to the total shares outstanding to compute diluted adjusted EPS. Looking at the balance sheet, total assets were approximately $94 million as of March 31, 2016 compared to $108.2 million as of December 31, 2015. Cash and cash equivalents were $19.1 million at the end of the first quarter that compare to $31.6 million at the end of last year. Notes payable was approximately $4.5 million at both March 31, 2016 and at the end of last year. Total Class A stockholders equity was $46.3 million at March 31, 2016. That concludes my remarks. And I'll briefly turn it back over to Rick before Q&A.

[Richard Hough:]

Thanks very much, Scott. We are prepared for questions. So I look forward to speaking with you.

[Operator:]

[Operator Instructions] Our first question will come from the line of Michael Kim from Sandler O'Neill. Your line is open.

[Michael Kim:]

Hello, good morning. First, Rick, just any incremental color on the slow trends this quarter across the high net worth and the institutional sides of the business, particularly as it relates to the step up in outflows from existing accounts? I know you typically see some seasonal outflows in the second quarter, so just wondering what some of the underlying drivers may have been this past quarter.

[Richard Hough:]

Right. So, there were a couple of closed accounts and related outflows, some of the outflows include, what was closed due to deaths. We had a couple of key clients die and trust and estate stuff gets split up. We don't always capture all of those assets as you might expect. We still kept assets for other aspects of those families, so that was one piece of it. The second is the outflows for tax payments and you'll see some in the second quarter. I would think it just depending on the circumstances those flows can come in the first quarter and they can come in the second I know some of it definitely came in the first this year and there have been past second quarter as I think one example may have been the second quarter of 2013. I don't have it in front of me, but if I recall that may have actually been positive, not negative. Second quarter of 2014 was highly negative as was 2015. I expect that to moderate a bit off of those for the second quarter of this year. So I don't think the outflows given the deaths, were that unusual, certainly it's not due to losing clients or performance issues on that front and I think some of it was tax getting ahead of the second quarter. If you want to look at history, it's best to look at the first and second quarter together to get a trend on that. With regards to inflows, the institutional business did quite well. It was fairly anemic on the high net worth side. We have a decent pipeline on the high net worth side. But you know one never knows when that will fall unlike an RFP for an institution where there's a deadline and they are choosing a manager but as we had suspected in our pipelines had grown back up with possible business opportunities in both the institutional and high net worth business. The institutional side of the business definitely delivered, we garnered four new institutions during the quarter and some meaningful assets.

[Michael Kim:]

Got it. That's helpful. And then just to follow up on investment performance, obviously the track records remain really strong across all six of your proprietary equity strategies. Just wondering how you may be thinking about more fully leveraging those track records, particularly as you further penetrate the institutional channel?

[Richard Hough:]

Sure. So a couple of things of note. One is, we really like not just the performance we've delivered, which has been highly consistent and disciplined over time and is largely responsible, of course, for growth in the institutional business, but this kind of a market that we've been talking about over the past year really, last year was not easy for asset managers and certainly the first quarter wasn't either. We’re extremely proud to have navigated that well on behalf of our clients and unlike many firms that saw a lot of redemptions and outflows that were more sensitive to retail markets unlike Silvercrest, we did not see that as a result of difficult markets. Instead what we saw was a number of value firms stubbed their toes and to the extent we were able to outperform, I definitely think it provided some win to our back and increased institutional interest in Silvercrest. To your specific question, small cap is really driven as you know the institutional business at Silvercrest, it continues to do so. However, given the strong performance across the board Smid Cap is something that we are talking institutions about. Equity income has been extraordinarily strong. We were talking here amongst ourselves and the partners at Silvercrest about the fact that our equity income strategy has a 10-year history that if we were to net out fees would be. One of the very top performing strategies in the entire country that has an interest. In a potential low return environment looking forward, dividends and other means to enhance return as a component of total return are going to become more important so we like some of the opportunities there. We have a MLP strategy that has obviously, had some downdrafts in that market as it has across the board. However, our relative performance has been excellent. I think that could have some interest going forward. So you know of the six – there is also a concentrated portfolio. That could have interest going forward. So as we've expanded we made investment in additional marketing in that area. That is paid off; the UMA accounts that follow our strategies have increased. The mutual fund that we subadvised has increased and is now the size that. It's more marketable and there have been changes at the fund manager level that we like and we think helps with potential. So there are lots of arrows in that quiver. Aside from small cap and. I think we're going to see a pretty good year in institutional management as I said in our last conference call.

[Michael Kim:]

Got it. Okay and maybe one for Scott. So it looks like you called out some telephone system software and compliance-related costs last quarter. So just wondering if you expect those to recur as we look out into the second quarter and beyond, and any incremental color around some of those costs?

[Scott Gerard:]

Yes. As far as the telephone cost, that’s related to an implementation that we are currently undergoing, so, you know, there could be some residual cost in the second quarter. That potentially will phase out because that's an implementation.

[Michael Kim:]

Okay. And then sort of the other software compliance costs, don't expect those to recur either?

[Scott Gerard:]

Yes. That we had a mock compliance audit. That was a one-time cost, so that's finished.

[Richard Hough:]

This is Rick. The firm hasn't been examined by the SEC since 2006. We are not a priority for the SEC given our public company status and some other attributes that allows us to pass through the SEC screens without coming under undue scrutiny. With that amount of time between examinations we thought it prudent on behalf of the business to examine ourselves independently as closely as possible should we face an exam.

[Michael Kim:]

Got it. Okay. Thanks for taking my questions.

[Scott Gerard:]

Sure.

[Operator:]

[Operator Instructions] Our next question will come from the line of Steven Schwartz from Raymond James. Your line is open.

[Steven Schwartz:]

Hey, good morning everybody.

[Richard Hough:]

Good morning, Steve.

[Steven Schwartz:]

Hi, Rick. I got just a few. First, maybe Scott, you could address fee rate that was up in the fourth quarter, down in the first quarter, really the difference between my estimate and your results. I'm just wondering if anything was going on there that you could identify.

[Scott Gerard:]

Really, as we had previously discussed is mix. There's a bit of a mix, but not anything that's long-term recurring or changes in the business. So some of the – based on mix of AUM and events that transpired during the quarter with respect to clients you may have some periodic impacts, but as far as long-term or strategically, we haven't changed any of our pricing standards or how we structure proposals with prospective clients or existing ones for that matter.

[Richard Hough:]

On that point, this is Rick. I would point out that across the industry there's been less interest in fund and fund management, so we are getting less in that area that we used to in the past and of course we are growing institution business and we've had some larger accounts coming in. They are not getting better pricing than as compared with the past, but that mix does change the total fee base just a bit. In terms of the total price people are paying per AUM if you were to look at the incoming business, I don't think we have changed or moved much at all. We were already highly competitive so we are not facing the kind of fee compression you're seeing in some other places.

[Steven Schwartz:]

Okay, great. And then, Rick, could you address what this Cappiccille does for you. I think I pronounced that right.

[Richard Hough:]

Sure. Mr. Cappiccille is a tax accountant. He does planning and preparation. As you know our family office services do that as well. I assume you brought up his name because we disclosed that we acquired his firm at the end of last year.

[Steven Schwartz:]

Yes.

[Richard Hough:]

We did that for a couple of reasons. It was a very small deal compared to the overall company, as you know. One, he and his staff are extraordinarily talented and we wanted to continue building that piece of the business. Mr. Cappiccille worked with many of the partners here at Silvercrest as well as with people on existing family office team in the past. He himself had been at DLJ Asset Management, as you know many of our partners came from DLJ Asset Management. In addition, he is looking for a transition of his business over time, which means a good home and transition for his clients, and many of his clients work with Silvercrest already, so there was an overlap there. So it was a means of together, getting some additional expertise. He's in New Jersey so that gives us expertise as well in our New Jersey office and allows us to effect a transition for him, but more importantly for our mutual clients.

[Steven Schwartz:]

Okay. How many people on that team?

[Richard Hough:]

Three.

[Steven Schwartz:]

Three people. Okay. And then one last one, realizing that you hardly make any money on it, discretionary AUM came down in the quarter?

[Richard Hough:]

Discretionary AUM…

[Steven Schwartz:]

Non-discretionary, non-discretionary excuse me.

[Richard Hough:]

Yes. Non-discretionary came down. It had very little revenue impact. Came down for two reasons. There's some very large blocks of stock that came down in the quarter that moved it down, and there was a client that changed how they do due diligence. That brought it down. It's a rounding arrow with regards to revenue. So big number, but really doesn't affect things at the firm.

[Steven Schwartz:]

Right. I realized that. Okay, thank you guys.

[Scott Gerard:]

Sure. End of Q&A

[Operator:]

Thank you. At this time, I’m showing no further questions. I would like to turn the call back over to Rick Hough, Chairman and CEO for any closing remarks.

[Richard Hough:]

Thank you very much. Thanks for joining us for our first quarter conference call. As I highlighted at the beginning of the call and I hope explained in the question period, while the investing market was a difficult one in the first quarter and we have seen a nice rebound in the second, I believe that our business pipeline and acquisition opportunities for the rest of the year look promising as we have discussed in the past and indeed on the institutional side given the outperformance of our equity products, we are seeing that come to fruition. We hope do enhance that over the course of the year either with an acquisition or some more meaningful institutional business. The high net worth side as we have always talked is unpredictable and lumpy, but that business opportunity pipeline also remains robust for the firm as compared with the third quarter of last year. It started to rebuild during the fourth quarter and into the first quarter as we have discussed before. Thank you very much. I appreciate you joining us.

[Operator:]

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