Silvercrest Asset Management Group Inc.
Q1 2017 Earnings Call Transcript

Published: 5 May 2017

[Operator:]

Good day, ladies and gentlemen and welcome to the Silvercrest Asset Management Group's First Quarter 2017 Conference Call. At this time, all participants are in a listen-only-mode and later we will conduct a question-and-answer session and instructions to follow at that time. As a reminder, today's call is being recorded. Before we begin, let me remind you that during today's call, Silvercrest will make forward-looking statements pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical facts, including statements regarding future events and developments, and Silvercrest's future performance, as well as the 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 and achievements to differ materially than the statements made. Among these factors are fluctuations in quarterly and annual results, incurrence of net losses, adverse effects with management focusing on implementation of our growth strategy, future to development and maintain 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, 2016 filed with the SEC. In some cases, these statements may 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 hand the call over to Rick Hough, Chairman and CEO. Sir, you may begin.

[Rick Hough:]

Thank you very much and welcome to our first quarter 2017 investor call. Silvercrest has begun 2017 by continuing our history of very strong organic growth by adding $230 million in new assets, primarily this time from ultra-high net worth families. The first quarter of 2017 was one of the strongest quarters for new commitments we've had over the past few years. The beneficial market conditions in the first quarter combined with that organic growth increased our discretionary assets under management by approximately $537 million during the first quarter to reach a total of $14.3 billion as of March 31, representing a 17% increase in discretionary assets in the management since the first quarter of 2016 and also represents a new high for discretionary assets at the firm. Importantly, we've achieved this growth while maintaining the fee basis for assets under management which falls industry trend and the firm also has maintained its adjusted EBITDA margins while continuing to invest in the business for future growth and to better-serve our clients. Silvercrest's proprietary value equity strategies have continued to perform well and we maintain our optimism about growing our high quality institutional relationships in contrast to many competitors who actively manage assets on behalf of their clients. Finally and importantly, Silvercrest and our partners celebrated 15 years as an independent firm. We are extraordinarily proud of the legacy we're building, we're grateful for the long trust placed in our firm by our clients and we are as excited about our firm's future growth as at any point in the firm's history. Scott, if you could cover the financials and then following that, we'll take investor questions.

[Scott Gerard:]

Great. Thanks, Rick. Again, as disclosed in our earnings release for the first quarter, discretionary AUM as of March 31, 2017 was $14.3 billion and total AUM as of March 31, 2017 was $19.3 billion. Revenue for the quarter was $22 million and reported consolidated net income for the quarter was $3.3 million. So comparing first quarter of this year to a year ago, revenue again for the quarter was approximately $22 million, representing approximately a 14% increase over revenue of $19.3 million for the same period last year. This increase was driven primarily by growth in our management and advisory fees as a result of increased AUM. Expenses for the first quarter were $17.2 million, representing approximately a 10% increase from expenses of $15.6 million for the same period last year and this increase is primarily attributable to increases in compensation and benefit expense of $1.6 million. Comp and benefits increased primarily because of an increase in the approval for bonuses in addition to increased salary expense related to merit-based increases and higher equity-based compensation expense as a result of a small number of restricted stock unit grants that were made in May of 2016. General and administrative expenses for the quarter basically remained flat at $4.1 million compared to the first quarter of last year. We had decreases to our G&A as a result of lower investment research cost and this is mainly due to a reduction in accrued soft dollar related research. We also had lower sub advisory and referral fees, decreases in our telephone and communications expense and client reimbursements. Professional fees were a bit higher than prior year due to a documentation-related project that we completed. Looking at reported consolidated net income, it was $3.3 million for the quarter. This compares to $2.5 million in the same period last year. Reported net income attributable to Silvercrest or the Class A shareholders for the first quarter of 2017 was $1.7 million or $0.21 per basic and diluted Class A share. Adjusted EBITDA which we define as the EBITDA without giving effect to equity-based compensation expense and non-core non-recurring items was approximately $6.5 million or 29.6% of revenue for the quarter compared to $5.3 million or 27.3% of revenue for the same period last year. Adjusted net income which we defined as net income without giving effect to non-core and non-recurring items and income tax expense assuming a corporate rate of 40% was approximately $3 million for the quarter or $0.23 per adjusted basic share and $0.22 per adjusted diluted share. Adjusted earnings per share again 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 have unvested restricted stock units to the total of shares outstanding in order to compute diluted adjusted earnings per share. Taking a quick look at the balance sheet, our total assets were approximately $95.4 million as of March 31, 2017 and this compared to $112.3 million as of December 31, 2016. Cash and cash equivalents were approximately $22.7 million at the end of the first quarter of this year. This compared to $37.5 million at the end of last year, that being December 31. Notes payable was approximately $2.4 million at the end of the first quarter of this year and this compared to $2.5 million at the end of last year. As of March 31, 2017, total Class A stockholders equity was approximately $48.2 million. That concludes my remarks. I'll now turn it over to Rick and then we'll have Q&A.

[Rick Hough:]

Great. Thank you very much, Scott. We're open for questions now about our quarter and the firm.

[Operator:]

Thank you. [Operator Instructions] The first question comes from the line of Andrew Disdier of Sandler O’Neill. Your line is open.

[Andrew Disdier:]

Hey. Good morning, gentlemen.

[Rick Hough:]

Good morning.

[Scott Gerard:]

Good morning.

[Andrew Disdier:]

Good morning. First, could you guys start a little bit about the pipeline? As you mentioned during the quarter, a lot of ultra-high net worth families making the contributions, but wondering about the institutional base as well as further potential for ultra-high net worth families?

[Rick Hough:]

Well, there's always a good potential, given the infrastructure we've now built in the firm and a number of portfolio managers we have with the capacity to take on high net worth families. Our flows are always combination of course of not just new clients, but additional contributions from our existing client base. It's a mix of those two and one thing we're very pleased about this quarter is that the net contributions from families was quite strong from existing. As you could imagine, people who have need their wealth and are living comfortably or have inherited it have a leak in the bucket. Those are representing a steady outflow from the firm. You're always siding that a bit in this business. And the first quarter was an unusually good one in that respect. We don't usually remark on the pipeline for families because it's a much lumpier business that doesn't quite build the same way with the same visibility. I would just say that the conditions that support growth in our business are as good as they've ever been and the firm's visibility from a brand perspective and the size of our infrastructure is such that we feel good about continuing to grow the high net worth business over a sustained period of time, but it's never something we can look at quarter-to-quarter, or even though exactly what the year is going to look like based on pipelines. I'll just color it as we're positive about the business. In terms of the institutional business, as I mentioned last quarter, the overall search environment was pretty low and it remains pretty low during the first quarter. It is obviously not been something that has greatly affected us because we continue to do pretty well and we have also sought out additional sub-advisory relationships rather than invite-only RPs or single-mandate type searches to the extent we continue to put our institutional capabilities on the platforms for distribution with other institutional managers and/or are sub-adivising to pools of assets that can grow. We feel quite positive about that business. But it is a little lower pipeline than we're used to seeing, but plenty large enough for us to execute our strategy.

[Andrew Disdier:]

Got it. And on first quarter's ultra-high net worth family contributions. I know you mentioned that there were a decent amount of commitments essentially that gained wild share. I guess if you could seed [ph] out the new customers or the new clients versus existing clients, it could be helpful.

[Rick Hough:]

Yes. I don't usually break it out. It's too volatile. It is probably a little bit more weighted towards existing clients, to give you a little color, but it's highly volatile and it represented several new clients including - if I put all the post together - some new institutional clients. In fact this quarter, we saw probably a slight negative net outflow of the institutional business despite getting meaningful new institutional mandates because of our strong performance. I've mentioned the past probably three or four quarters that our strong performance has led to some rebalancing which ironically means that the better we've done, it means that we've lost some assets as institutions rebalance away from our strong performance. But we did get new clients and we're very pleased about it. On the high net worth side, it was kind of split, but definitely some new clients there. It's just too volatile for me to get into numbers on behalf of the firm.

[Andrew Disdier:]

No, it's fair enough directionally and [indiscernible] it helps. But on the flip side and you just spoke about it a little bit, the rebalancing.

[Rick Hough:]

Yes.

[Andrew Disdier:]

As you mentioned on the prior quarter's call, how much visibility do you have in I guess the outflow pipeline if you will and did any of the rebalancing come through fruition or has it been pushed back a bit?

[Rick Hough:]

Some of it came to fruition. As I mentioned in the fourth quarter, we expected some. It's been a trend. As long as we have very strong performances, always going to be some. That definitely came to fruition in the first quarter. I have no visibility to the future. I would rather have much stronger performance and have some outflows than the opposite problem. It's a really high class problem.

[Andrew Disdier:]

Without a doubt. Scott, just on equity comp. How are you thinking about that going forward? I think at the end of the quarter, there were about 690,000 shares remaining on the grant?

[Rick Hough:]

Yes. We are at fences currently. It's that we're about almost halfway through the vesting period of the grants that we made back in August 2015. At this point in time, there's no definitive plan as far as granting the units that we still have available. As we said in the past, equity owners share, the equity based comp, especially as a public company is certainly part of our philosophy, but we're going to be very diligent about how we grant those and when we do. That basically is the position we're at right now.

[Andrew Disdier:]

Understood. And a couple more questions. With regards to [indiscernible] and the trust ownerships. There were a few moves made recently, I understand it's a sensitive subject, but to the extent possible, would you be able to provide any color on the shifts as far as just ownership vehicles?

[Rick Hough:]

No, I'm not going to speak to the decisions that any shareholder makes with regards to our stock. I'll make one comment only because it is the role as a founder of the company and that is as expected shortly after the IPO and just that, in 2014, a significant portion of Silvercrest stock was sold as expected to diversifying his estate. And there are other estate realities involved in the trust that they've been dealing with, but I am not going to comment at any investor.

[Andrew Disdier:]

No. Fair enough. I wasn't looking for anything situationally.

[Rick Hough:]

Yes, okay.

[Andrew Disdier:]

And then the last question here is the new board member with Mr. Dunn, I've noticed his history is primarily in executive comp and employee compensation.

[Rick Hough:]

Right.

[Andrew Disdier:]

Will we expect to see any changes in compensation techniques or levels going forward as a result?

[Rick Hough:]

I can't speak for what he may advocate as a board member and a new board member. He's very familiar with the company. As you know from his history, Mr. Dunn is one of the most esteemed and expert people in compensation for financial services. The reality is that [indiscernible] has served with the board for five years, did a great job for us and was head of the compensation committee and is reaching retirement age. We're very grateful for his service and Mr. Doug [ph] was a very high-level expert type person to put into specifically the comparable, but the intention was not to change any formulas of the company in doing so at this time.

[Andrew Disdier:]

Fantastic. Gentlemen, thanks for taking the questions there.

[Scott Gerard:]

Sure, thank you.

[Rick Hough:]

Thanks, Andrew.

[Operator:]

Thank you. [Operator Instructions] I'm showing no further questions at this time. I'd like to turn the call back over to Mr. Rick Hough for any closing remarks.

[Rick Hough:]

Great. Thank you very much. Thank you for joining us for the first quarter call. As I mentioned, we're very excited about our future. I think the feeling at our firm in general amongst all the partners and our staff is that we have a great opportunity to continue the historical growth that we have over the 15-year history of this company. We're enormously proud of what we built. It's a wonderful culture, a place to work. We love working with our clients and that gives us great optimism about what we can achieve toward executing the strategy that we've outlined to investors over the past few years. We're at a point in the business' evolution where the contributions from the institutional business, the intellectual capital we have on other parts of the firm like family, office services and the continued growth of the high net worth business are really supporting the independent model that we've built. We really look forward to continuing this trend over the next foreseeable future - not just on behalf of our investors and what we're doing as a firm, but behalf of our clients because as we grow, we build its talent, which we certainly did last year and it thankfully grew through the investments we made. It's just going to be a great benefit to anybody involved in the firm. What we said today at an all-time high in discretionary assets really gives us a lot of tools to make those investments on the upper clients and growth on behalf of investors. So thanks again for joining us, we very much appreciate it and I look forward to speaking to everyone in another quarter. Thanks very much.

[Operator:]

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.