Silvercrest Asset Management Group Inc. (SAMG) Q4 2018 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Silvercrest Asset Management Group Incorporated Fourth Quarter and Full Year 2018 Earnings Conference Call. [Operator Instructions] As a reminder, this conference 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 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 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 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, 2018, 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. In addition, certain non-GAAP financial measures will be referenced on this call. A reconciliation of such non-GAAP financial measures to the most directly comparable GAAP financial measures is available on our website, ir.silvercrestgroup.com. I would now like to introduce your host for today's conference, Rick Hough, Chairman and CEO of Silvercrest. Sir, you may begin.

Good morning, and welcome to our 2018 results for Silvercrest Asset Management Group as well as the fourth quarter. Silvercrest completed 2018 with record calendar year revenue. The firm achieved an 8% increase in 2018 year-over-year to $98.7 million. Net income and adjusted net income grew $12.5 million to $17.4 million and $13.1 million to $17.9 million respectively. And Silvercrest maintained its adjusted EBITDA margin of 30% for the full year 2018 as compared with 30.5% for full year 2017, despite the firm making investments in new initiatives. While Silvercrest experienced organic growth for most of 2018, including net new asset flows the fourth quarter of 2018 was difficult, experiencing both negative flows as well as market declines during a volatile quarter for the markets. After achieving a new high, $16.6 billion in discretionary assets under management to end the third quarter, the firm ended the fourth quarter and year end with $14.2 billion of discretionary assets under management and $19 billion in total assets under management. In 2019 January, Silvercrest announced the acquisition of a new institutional quality international equity strategy, and we expect the capability to benefit both our high net-worth client base and resonate with institutional investors. We've completed our business integration and are bringing this strategy to market. During 2018, the firm also made investments to grow its institutional asset management, the outsourced CIO initiative and family office businesses. Silvercrest firmly believes that reinvestment in our business and in our clients will create the longest -- long-term value for shareholders. We remain prepared to use our capital for additional strategic initiatives, the hiring of intellectual capital and potential acquisitions, including new asset management capabilities. While the current M&A environment remains expensive, Silvercrest continues to actively evaluate selective and prudent acquisitions with culturally compatible firms to complement our organic growth, investment capabilities and professional talent, including the potential to expand into new geographies. As previously announced on February 14, 2019, Silvercrest raised its quarterly dividend to $0.15 per share of Class A common stock from $0.14 per share of common stock, representing a 7% increase in the dividends. With that, I'll turn it over to Scott Gerard, who will present the financials and then we'll have a discussion and take questions.

Great. Thanks Rick. So as disclosed in our earnings release for the fourth quarter, discretionary AUM, as of December 31, 2018, was $14.2 billion and total AUM as of the same date was $19 billion. Revenue for the quarter was $24.8 million and reported consolidated net income for the quarter was $5.2 million. Looking further into the fourth quarter, again revenue of approximately $24.8 million, representing approximately a 2% increase over revenue of approximately $24.5 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 average management fees, partially offset by decrease in performance fees. Expenses for the fourth quarter were $19.6 million, which represented approximately 1% increase from expenses of $19.3 million for the same period last year. This increase is primarily attributable to increases in G&A expenses of approximately $0.6 million, partially offset by a decrease in compensation expense of $0.3 million. Comp and benefits expense increased primarily, because of a decrease in the accrual for bonuses, partially offset by increased salary expense as a result of merit-based increases and newly hired staff throughout the year. The increase in G&A expenses during the fourth quarter, compared to the same period last year was primarily due to increases in occupancy-related costs, as a result of not only our new lease taking effect in New York, but some additional leases for our offices outside New York State. And professional fees increased partially as a result of audit fees related to the requirements of Section 404 of the Sarbanes-Oxley Act, and an increase in recruiting costs related to our newly hired staff. Reported consolidated net income was $5.2 million for the quarter and this compared to $1.9 million in the same period last year. Reported net income attributable to Silvercrest or to Class A shareholders for fourth quarter 2018 was approximately $2.9 million or $0.35 per basic and diluted Class A share. Adjusted EBITDA, which we define as EBITDA without giving effect to equity-based compensation expense and non-core, non-recurring items, was approximately $8.6 million or 34.6% of revenue for the quarter compared to $7.6 million or 31% of revenue for the same period in the prior year. Adjusted net income, which we define as net income without giving effect to non-core and non-recurring items, and income tax expense, assuming a corporate rate of 26% for the period beginning on January 1, 2018, as a result of the Tax Cuts & Jobs Act, was approximately $5.3 million for the quarter, or $0.40 per adjusted basic earnings per share and $0.39 for adjusted diluted earnings per share. Again 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 earnings per share. And to the extent dilutive, we add unvested restricted stock units to the total shares outstanding to compute diluted adjusted earnings per share. Looking at the full year, revenue for 2018 was $98.7 million, representing approximately an 8% increase over revenue of $91.4 million for the same period last year. This increase again was primarily driven by growth in management and advisory fees. Looking at expenses for the year, they totaled $77.5 million, representing approximately a 9% increase from expenses of $71 million for the same period last year. This increase was driven primarily by comp and benefits expense of $3.8 million, and increased G&A of approximately $2.7 million. Our compensation went up as a result of an increase in the accrual for bonuses, and looking year-over-year on a full year basis and also increased salary expense as a result of merit-based increases and newly hired staff. Looking at the increase in G&A expenses that was primarily due to our lease extension in New York, and we also had increased expenses related to certain advisory and referral fees, due to increase of advice fee revenue, recruiting costs related to newly hired staff and increases in professional fees partially as a result of audit fees related to the implementation of changes related to the Tax Cuts and Jobs Act, and also because of the Section 404 for audit related to Sarbanes-Oxley. We also experienced some increases in portfolio and systems expense due to an increase in accrued soft dollar related research costs. These increases were partially offset by a decrease in depreciation and amortization. For the full year, reported consolidated net income was $17.4 million. This compared to $12.5 million last year. Reported net income attributable to Silvercrest for the year ended 2018 was $9.6 million or $1.16 per basic and diluted class A share. Adjusted EBITDA was $29.6 million for the year or 30% of revenue. And this compared to $27.9 million or 30.5% of revenue for 2017. Adjusted net income was $17.9 million or a $1.33 per adjusted basic earnings per share, and $1.30 for adjusted diluted earnings per share. Quickly looking at the balance sheet, total assets at 12/31/18 were approximately $133.4 million. This compared to $117.4 million as at the end of 2017. Cash and cash equivalents were approximately $69.3 million at the end of 2018 and this compared to $53.8 million at the end of 2017. Notes payable was zero at the end of 2018 and was 0.7 million at the end of 2017. Lastly total Class-A stockholders' equity was approximately $56 million at the end of 2018. So that concludes my remarks, I’ll turn it over to Rick, and we’ll have Q&A.

Great, thank you very much, Scott. At this time we'll take questions. Thank you.

[Operator Instructions] Our first question comes from Sumeet Mody with Sandler O’Neil. Your line is open.

Hey, good morning guys. How are you?

Good morning, Sumeet. How are you?

Good, good. Just a few from me. So $400 million of net outflows, tough environment in the fourth quarter, not really much of a surprise, especially seeing some of the peers report but can you give us an update on how things have been progressing on the organic growth side. And secondarily, maybe the pipeline since year end, and how much of that, that kind of come back now that we have got a couple months of more cooperative equity markets relative to December of the fourth quarter?

Sure. Yeah, fourth quarter was certainly challenging for anyone in the business and I am generally pleased with how we did relative to peers. Of course, you just want to see absolute growth for your own company and not worry too much about what everyone else is doing. In terms of the flows for the quarter, it was a tough one. We had some outflows in the institutional business. Some of that was rebalancing not necessarily lost accounts. We've continue to have pretty good performance on 3, 5, 7 year and since inception, struggled a little bit in small cap in the fourth quarter, which was disappointing. But overall, it's held up quite well. The institutional outflows were about $134 million, $135 million and the net lost accounts and/or outflows was somewhere in the range of $300 million for high net-worth. We did lose a significant client, doesn't happen to us very often, but it did in the fourth quarter. So that's just that general background behind the flows. In terms of how it's looking in terms of a pipeline, consultant activity on the institutional side, definitely slowed down in the fourth quarter. I think it was sluggish in large part due to the volatility, as well as the kind of overall macro political environment, concerned about what might spreads to the United States from overseas, a slowing in earnings and what have you. It's just and we see this on the high net-worth side as well. Rocky markets have people slowdown and take stock and not be particularly active. That said, in the small cap areas, the pipeline itself of a potential activity didn't really change much from the third quarter or prior. We did see the six month kind of actionable pipeline of opportunities that would be invite only RFPs, semi-finalists or finalist candidates in other areas slowed down quite a bit. The good news is, as you surmised to ask, we're seeing it pick up in the first quarter in terms of activity, and we're not seeing quite the same amount of anxiety. Obviously a lot of that has to do with the markets coming back. I think the market took almost $2 billion out of our discretionary assets, $1.9 billion in the fourth quarter, so that really hurt. But on the other hand, we've probably, at least in our institutional portfolios recouped another $400 million or so during the first quarter. So things are trending in the right direction, but it's definitely slow. I think, I hit every point you asked about. You had four or five different things, so if I didn't, please let me know, I'll address it.

No, that was great. Thanks for that color. I guess just moving to the product side, I just wanted to see if we get an update on maybe the Smith [ph], those new large cap income and focus value products. Maybe what's kind of the demand been like after those -- after that volatility has kind of picked up in the last few months? Have you been seeing any shift in the demand, and any clients' focus more on value at this point, any color that would be helpful?

Yes. So I can't speak to value per se, because I don't have growth, and I don't have visibility of a shift between one to the other. So the actionable pipeline did decrease. However, in prior quarters when I talked about our other strategies, I may have had some of them in searches but not all, but currently we have several Smith searches. We continue to promote that strategy. And we remain in large cap which of course, has not been the case historically. Equity income as well as focus value are all in progress. So it's nice now to have effectively five strategies, that are all in the marketplace for the firm, whereas even earlier last year, prior years, you would have only had a couple. So we're very active there. And I think it bears pointing out that we have very strong performance across the board over 3, 5, 7 years in those strategies. And so I think as we have more normalized markets with volatility, you're going to see a second look at active management. We're strong believers in it. We've added value in it for years and we're optimistic about what we can do with those strategies as a result.

Great thanks. And then one on the fee rate decline in the quarter, was it mostly just kind of a mix shift or it's a level we should get more kind of comfortable, what's going for, is there any pricing pressure from clients? Just wanted to get your thoughts around that decline?

Yes, I think that was just asset shift in the quarter. It was up over the year. That said, we are seeing a little more pressure than we have in from clients. We have not for a long period of time, and we have been able to maintain our fees. I think we deliver extraordinarily good value for what we charge our clients versus peers. But that said, a 10 year run of passive strategies, and I think in the marketplace, a real discounting of the value of asset allocation and the guidance of a steady hand, at least on that a high net-worth side is giving us a little more pressure. It's -- especially when people get nervous in rocky markets. It's not a huge trend here at the firm but I'm seeing a little more of it to be honest. It's not reflected in any numbers you're seeing. So that's just a general comment. And I don't necessarily expect it to. But, I think we have to be honest about the marketplace we all face.

Okay, great. Thanks. And then, I guess, bigger picture question regarding the inorganic growth, and then capital returns, I saw the dividend increased a penny, happy increase from last year, but still an increase. But just wondering, is there a specific reasoning on the size, there, just being conservative, trying to keep more capital and play for potential M&A. And then I guess the second part as I just want to get a feel for how you're thinking about acquisitions in general, is there room to get kind of more aggressive on the size or velocity in growth from that side of the overall strategy, I guess, what's the appetite for M&A growing that discretionary line [ph].

Okay, so I'm going to tackle these in order. First about the dividend, then about M&A, the use of capital, acquisitions in general and how I want to move the needle. So first of all the policy we have, we think it's important, especially at our size to have a good strong dividend in the stock. We're having really good cash flow. And this -- it's more than enough to do all of the above, in the sense of M&A, giving a nice healthy dividend to our investors as well as other potential uses of that capital. We can support this dividend for a substantial period of time, even in quite severe market downturns, number one. Number two, we will continually increase it at a modest rate, as long as it doesn't get out sized on a yield basis compared to the price on our security. But it does beg the question, why not do other things with the capital? As you well know, and many of our investors do, we have no debt, very strong cash flow and a lot of cash on the balance sheet. If we're a much larger company during certain times of weakness in our stock price, especially when it was touching some of its low as last year, I think it would have been close to a no brainer to buy back our stock and accrete earnings on behalf of shareholders because it's a good investment, from a financial engineering perspective and earnings per share perspective. I have been fairly reluctant to do so for a couple reasons. Number one, at our size and kind of touching a $200 million company, I think the investment of our capital on behalf of growing the company accretive is much more important than purely accreting earnings, as attractive as I think that is, and even the right thing to do at certain times from a capital allocation perspective. Secondly, in talking to shareholders, I am concerned about liquidity issues in the stock and allowing certain institutional investors, who specialize in micro and small caps to hold our security and remain invested in it. I have an ongoing dialogue and there are many different opinions on this with our investors. But I think that's something to take seriously. Third, and to your point about M&A, aside from the new international strategy, which is yet another one we're going to bring to market, which will benefit our clients, the last acquisition we did was five years ago, and the one that we did in January is really more about the strategy, as you put it, it's not necessarily a financial needle mover, will be over time when we build that strategy and build it up to market. But the M&A environment, at least on the high net-worth side has been very expensive and I am not going to do deals that are not going to be accretive to our shareholders, growing earnings per share or have unacceptable risks for that accretion or slight accretion. And until pricing gets a lot more realistic and makes sense for Silvercrest, I'm going to hold on to capital and wait for the right deal. That said, I do see opportunities for M&A in the asset management business where there may be complementary strategies like international for example, that can move the needle and can make a real difference not only in being competitive on a fee basis with our high net-worth clients but as well to have strategies that are highly desirable in the institutional marketplace where we have really high quality close relationships with our consultants. And I want to show our shareholders that we can grow earnings per share by doing significant deals that enhance our cash flow and earnings per share which is going to be my test. I think it can be done. You just have to wait for the right opportunity at the right time. At a certain point yeah, I'm going to get a little impatient and our shareholders might as well, and if I really feel I don't have something to do, stock buybacks and other things are certainly possible. But over the past couple of years, we have had any number of discussions and opportunities where it would be very valuable to have that cash in the unlevered balance sheet. Of course, you know, there's an implied multiple, something like 20x when I use debt just because of low interest rates. And it would have been a shame, however, for us to have bought back significant stock, hurt the liquidity and then not have it for the deal that's right there and we've come close. I have not been shy about talking about the fact that we're always in discussions and having conversations with companies. We were very active on the M&A front. It just hasn't happened for us yet. I am not afraid of doing something that is not only accretive but significant for the company. But when you take those chances, you have to make sure it's absolutely right. I'm not going to feel pressured to do something for the sake of doing it. Another place that we’ll be looking, in addition to asset management, obviously, we have the high net-worth conversations. Those are just difficult ones for a whole host of reasons. And they're going to be a little bit slower than other parts of the marketplace I think for the time being, but firms in the OCIO business are now maturing to a point where some of them are in the marketplace. And that would be another spot for me to be looking to enhance our OCIO initiatives and have significant assets under management that puts you in the game with meaningful relationships. So I think that covers most of the ground you were getting at if you want some more color or you have a comment on that I'm happy to address it.

Okay, great. No, that was really helpful. Just maybe just one quick follow up is, just wanted to drill maybe a little bit more in on that deal show [ph] kind of new International equity strategy you guys brought on and closed, is that kind of focused on more of the high net-worth side and how much opportunity do you see on institutional and how much, you know, maybe a little color on how much it kind of moves the deal for you guys.

Yeah, so on the high net-worth side, a strategy like that does not necessarily move the needle in terms of the high net-worth side. We're fiduciaries, we're conflict free, we're competing with open architecture firms that have no proprietary capabilities. And so we do not upsell our clients or put product in front of them for the sake of increasing revenue. We would really harm that business. What it does do is give an internal capability that's very high quality, which our high net-worth clients can use and forego using outside managers to the extent they would like to use our propriety capabilities like our value in house. And that effectively cuts the fee rate that our high net-worth audience is experiencing overall for the management of their wealth. And that is what has allowed us to maintain our fees and be highly competitive about firms that have to charge their clients and then have their clients pay a second fee for outside asset management. To the extent that we can manage things in a very high quality institutional type product on their behalf as fiduciaries means that we're going to remain highly competitive behind that workspace and there aren't a lot of firms with the intellectual capital to do that. So that's really the strategic play for us when we bring in asset management. It's not necessarily to increase fees on our clients. Rather, it becomes much more attractive in the marketplace when we talk to a family to attract new high net-worth families and family offices and it gives us a competitive advantage. The needle mover in terms of revenues, I mean that's attractive from an organic growth perspective, but on a revenue perspective with leverage, it's going to our consultants and bringing that capability to the institutional marketplace. The team has a small cap institutional quality international strategy. It's valued highly compatible what the firm does, small cap is a really desirable space to be. The team is known in the marketplace and we believe with our brand, the kind of relationships we have that we can succeed in that space the way we have with our own small cap value strategy at the firm. We'd love to see a few billion dollars in that -- in the next few years. They have to perform. As you know, when you launch any strategy into the marketplace, the consultants want to become familiar with it and get to know it over time. So I don't necessarily expect to see really significant flows in 2019. This is about building for the future. But we will get some and this is just a terrific team in terms of how they fit with us culturally, which is in a service oriented people business without the intellectual capital so critical both for the environment we as professionals want to be in, but in terms of the consistency of what we're presenting to the marketplace.

Okay, great. Well, I think I'm going to leave it there. But thanks for taking my questions.

Yes, it's nice to talk to you. Thanks for your time and the good questions. Gave me a chance to chat for a while, which I enjoy, I'm passionate about the business.

Thank you. [Operator Instructions] At this time, I'm not showing any further questions. So I'd now like to turn the call back over to Mr. Rick Hough for any closing remarks.

Well, that was a longer commentary than usual for me, given the nature of some pretty darn good questions. I really appreciate all of our investors as well as my partners and colleagues for supporting this company and our growth initiatives. I very much look forward to talking about our first quarter results after a very difficult fourth quarter of 2018. Thank you very much. We'll talk soon.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program and you may all disconnect. Everyone have a great day.