Silvercrest Asset Management Group Inc. (SAMG) Q4 2021 Earnings Report, Transcript and Summary

Good morning, and welcome to the Silvercrest Asset Management Group Incorporated Q4 and Year-End 2021 Earnings Conference Call. All participants will be in listen-only mode . Please note today’s event is being recorded. Before we begin, let me remind you that today's call will contain certain made statements regarding our future performance, they are forward-looking statements. They are based on current expectations and projections, which are subject to a number of risks and uncertainties and many factors that could cause actual results to differ materially from the statements that are made. Those factors are disclosed in our filings with the SEC under the caption “Risk Factors”. For all such forward-looking statements, we claim the protections provided by the Litigation Reform Act of 1995. All forward-looking statements made on this call are made as of the date hereof, and Silvercrest assumes no obligation to update them. I would now like to turn the conference call over to Rick Hough, Chairman and CEO of Silvercrest. Please go ahead.

Thank you very much. We are pleased to report another strong quarter and year of financial results for Silvercrest with new high earnings marks. The firm's discretionary assets under management which drive our revenue increased by $2.6 billion or 11.6% during the fourth quarter of 2021 to $25.1 billion as of December 31, 2021. For the full year, discretionary AUM increased by $4.5 billion or 21.8% to $25.1 billion as of the end of the year. The firm's total AUM concluded the quarter and the year at $32.3 billion that was up 16.2% and 4.2% for the year and during the fourth quarter respectively. Those increases were driven by both strong markets as well as our net organic flows into the business. Silvercrest also concluded our quarter with $33.8 million in revenue and quarterly adjusted EBITDA of $13 million. We delivered 2021 revenue of $131.6 million and adjusted EBITDA of $43.4 million representing year-over-year increases of 21.9% and 43.4%, respectively. Our adjusted diluted earnings per share increased by 47.7% during 2021 to $1.89 per adjusted diluted share, and the firm's adjusted EBITDA margin was 33% for 2021 as compared with 28% for 2020. Silvercrest maintained strong relative performance across all of its investment capabilities. As a result, our new business opportunities remain robust for our new high net worth, institutional and OCIO businesses. Also during the fourth quarter Silvercrest repurchased approximately 6000 shares of Class A common stock for approximately $94,000 pursuant to a previously announced share repurchase program at the end of July last year. Scott, if you could start going through the financials that would be great, and then we'll follow up with questions. Thanks.

Great, thanks Rick. So it's disclosed in our earnings release for the fourth quarter. Discretionary AUM as of the end of 2021 was $25.1 billion and total AUM as the year ended 2021 was $32.3 billion. Revenue for the fourth quarter was $33.8 million and report a consolidated net income for the quarter was $8.6 million. Revenue for the fourth quarter was approximately $33.8 million; this represented approximately a 19% increase over revenue of approximately $28.4 million for the same period last year. This increase was driven primarily by market appreciation and net client inflows in discretionary AUM. Expenses for the fourth quarter were $24.5 million, representing approximately a 2% decrease from expenses of $25.1 million for the same period last year. This decrease was primarily attributable to decreases in compensation expense, and general and administrative expenses of $0.5 million and $0.1 million respectively. Compensation expense decreased by $0.5 million or approximately 3% to $17.7 million for the three months ended December 31, 2021 from $18.2 million for fourth quarter of 2020. The decrease was primarily attributable to decreases in the accrual for bonuses and benefits expense partially offset by increases in salary expense as a result of merit based increases and newly hired staff and equity based compensation expense due to an increase in the number of unvested restricted stock units and unvested non-qualified stock options outstanding. General and administrative expenses decreased by $0.1 million or approximately 1% to $6.8 million for the fourth quarter 2021 from $6.9 million for Q4 2020. This was primarily attributable to decreases in the fair value adjustments to the contingent consideration related to the Cortina and Neosho acquisitions of $0.8 million occupancy and related costs partially offset by increases in portfolio and systems expense and travel and entertainment expense. Reported consolidated net income was $8.6 million for the quarter as compared to $3.5 million in 2020. Reported net income attributable to Silvercrest or the Class A shareholders for the fourth quarter of 2021 was approximately $5.1 million or $0.53 for 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 $13 million, or 38.5% of revenue for the fourth quarter 2021 compared to $7.3 million, or 25.7% of revenue for the fourth quarter 2020. Adjusted net income, which we define as net income without giving effect to non-core, non-recurring items, and income tax expense assuming a corporate rate of 26% was approximately $8.6 million for the fourth quarter of 2021 or $0.59 and $0.58 per adjusted basic and adjusted diluted earnings per share respectively. Adjusted EPS 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 restricted stock units and non-qualified stock options to the total shares outstanding to compute diluted adjusted earnings per share. Looking at the full year, revenue for all of 2021 was approximately $131.6 million, which represented approximately a 22% increase over revenue of $108 million for 2020. This increase again was driven primarily by market appreciation and net client inflows in discretionary AUM. Expenses for 2021 were $101.1 million. This was an 18% increase from expenses of $85.7 million for 2020. This increase is primarily attributable to increases in compensation and benefits expense of $10.2 billion and general and administrative expenses of $5.2 million. Compensation expense increased by $10.2 billion or approximately 16% to $72.6 million for 2021, from $62.4 million for 2020. The increase was primarily attributable to increases in the accrual for bonuses, salaries and benefits expense, primarily as a result of merit based increases and newly hired staff and equity based compensation expense due to an increase in the number of unvested restricted stock units and unvested non-qualified stock options outstanding. General and administrative expenses increased by $5.2 million, or approximately 22% to $28.5 million for 2021 from $23.3 million for 2020. This was primarily attributable to increases in the fair value of contingent consideration related to the Cortina acquisition of $4.6 million, and portfolio and systems expense partially offset by a decrease of $0.3 million in the fair value or contingent consideration related to the Neosho acquisition and lower occupancy and related costs. Reported consolidated net income was $24.9 million for 2021 as compared to $17.5 million for 2020. Reported net income attributable to Silvercrest or to Class A shareholders for 2021 was approximately $14.7 million or $1.52 per basic and diluted Class A share. Adjusted EBITDA was approximately $43.4 million or 33% of revenue for 2021 compared to $30.3 million or 20.1% of revenue for 2020. Adjusted net income was approximately $28.1 million for 2021 or $1.95 and $1.89 for adjusted basic and diluted EPS respectively. Quickly looking at the balance sheet, total assets were approximately $229.3 million as of December 31 2021, compared to $213.8 million as of year-end 2020. Cash and cash equivalents at the end of 2021 were approximately $85.7 million and this compared to $62.5 million at the end of 2020. Total borrowings as of the end of 2021 were $9 million. And lastly total Class A stockholders equity was approximately $80.4 million at the end of 2021. That concludes my remarks. I'll turn it over to Rick for Q&A.

Thanks, Scott. We're now ready for some questions at this time.

Ladies and gentlemen, we will now begin the question-and-answer session . Our first question today comes from Sumeet Mody from Piper Sandler. Please go ahead with your question.

Thanks. Good morning, Rick. Good morning, Scott. Congrats on the quarter. Just wanted to start with a question regarding the discretionary AUM inflows from existing clients in the quarter, can you break down that $684 million kind of in net cash inflows for us? And what drove that activity in the quarter there and maybe talk about expectations around tax season this year? How you expect that to impact the flows in the first or second quarter?

Sure. So with regards to the fourth quarter, it was pretty balanced between our different segments of the business, both institutional and high net worth. We had some new institutional mandates that either started funding or were funded in the fourth quarter, and we had some nice high net worth in flows. So fairly balanced overall with a tilt for both the year and that quarter towards overall towards high net worth. Certainly, if you look at the complete and total year, I would say it was tilted towards high net worth versus the institutional business, which is nice to see that kind of balance. With regards to upcoming taxes, of course, we often see outflows depending on what kind of gains have been realized with strong markets, it's a little hard for us to predict it's very lumpy. We didn't see as much as I would have expected necessarily last year, that well may mean that we have meaningful outflows for taxes in this year. I don't know that. But we've had a sustained period of good markets, meaningful capital gains, and income for people. Also keep in mind, people playing quarterly estimated taxes have some outflows also in September, but it is a double tax period. And I would, I would suggest that there could be some meaningful outflows this year.

Okay, great. That's helpful. Thanks. Just kind of following up on that on the strong flows in the quarter I know is balanced. But on the institutional side, can you maybe update us on the actual pipeline today? I know you guys ended last quarter at $1.8 billion, but just wondering if you could talk about the progress there, given that kind of…

Yes, sure. So yes, that's right. I think it was just about $1.77 billion last time I updated you. Currently it stands at $176 billion. Keep in mind, that doesn't mean a lack of progress, the fact that it's the same; it means that we've refilled the pipeline after we've made some wins, right. So some of those things, we actually came in the door organically recently. So the pipeline remains very strong and stable. That's a good thing because this is a highly actionable pipeline. Its finals, semi-finals or invite only, where we feel we have a strong chance of winning a mandate. So you're seeing it stayed the same, because we won mandates. And I expect that going forward. In particular, it should be noted, I think you may have in your research note yesterday that we had strong investment returns across all of our capabilities. And our long term track record as well as a result remains very strong. So that bodes well for that institutional business. It also bodes well for the high net worth clients. This firm is an investment firm. It's an asset management company. 70% of the business may be wealth, but you've got to deliver to your clients. At the end of the day, these traditional clients keep us really honest there. The high net worth can go anywhere. It's a business with very low barrier to entry. And so the strong performance across the board is extremely helpful in both businesses.

Okay, great. And then just one last one, I could sneak in here on the cash comp ratio, it kind of came in a little bit below our expectations for the quarter and year. I think 53.6% for the year that was over 300 basis points below 2020, kind of below that previous expected run rate of around 55%. So just wondering if you could update us on expectations for this year, you'd expect to cruise something maybe in the range of 2021 levels or kind of all else equal should we kind of expect a reversion back to that 55% range.

Right. So I would look towards revision and may not be 55. But that is what we model ourselves. We've long said, that's a general target for the company. Some years we go a bit over as we did last year, partly due to markets of 2020. That decline that affected year revenue later. The firm has consistently made sure to not eat the economics in total, when we do grow the company beyond what it takes to support the personnel here. And we just had a super strong year, and we're able to move well ahead of what we really need to pay and comp. So that's we're going to do that as we have in the past. The other thing I would point out is that I have consistently said, we will continue to make investments in the business, which primarily means personnel, people who grow the business, we did that. And we have been doing that. I have projected hitting EBITDA a little harder than I have. And we did do that, which we've just been able to grow faster than the cost of expanding our opportunities. Obviously, that's something we also hope to do. So I think you've got a reasonable target there. I do think it would not be reasonable to think that we're going to run 53.6% over the next calendar year. Some years, we give a little, some years we get a little and this was a big give a little. So I hope that helps if there any more questions around that happy to have to talk further.

Great. Thanks for taking my questions.

Our next question comes from Chris Sakai from Singular Research. Please go ahead with your question.

Good morning. Just a question, I guess heading into 2022, what's your view on acquisitions?

It's the same that I've had the past head for pieces years, honestly. We have plenty of opportunities. We are very particular about the kind of cultures we're going to bring into this firm, and the reasons for bringing together a business. We are not going to engage in pure financial engineering. We have to do deals that we think will have long term accretive value to the firm and to our shareholders. And that's been very hard to do in this current market. We want to see synergies with our company. We want to see cultural compatibility. We want to have a clearer understanding of how we're going to grow that business into the future. All of those things in order to continue with the strong organic growth of this company are very important. And it's been very challenging to find that in this current marketplace. We are talking to companies all the time and continue to do so. And when the opportunity is right, just as it was with our great Milwaukee colleagues, when we acquired Cortina in 2019 we will we will jump on the opportunity.

Okay, great. And then could you comment on I guess, the amount of hiring as far as portfolio managers go in the fourth quarter?

We did no hiring in the fourth quarter of new portfolio managers. The hiring I referred to that could have potentially affected the percentage of revenue paid in compensation, as well as its effect on of course our EBITDA margin was a reference to hiring we've done over the past few years. We continue to look and we'll do more. We've just been able to grow faster than those investments.

Okay, great. Well, thanks.

You're welcome.

And our next question comes from Arnold from who is a private investor. Please go ahead with your question.

Good morning. And thank you for taking my questions. You just mentioned potential acquisitions. Are there asset categories that you have you feel you need or would like to expand your overall portfolio and then as a quick follow up, you mentioned you'd like them to be long term, accretive how much dilution or earnings per share impact are you willing to take over a one or two year period? Thanks.

On your first question, the firm is a hybrid model. We're not a pure open architecture. firm like many of our wealth management RIA competitors which is to say, they are choosing outside managers for their clients. We have both that model, which is entirely what our OCIO business is based on. It's also used in order to complete a total asset allocation on behalf of our clients. And then of course, we have the internal capabilities that we deliver across both the value and growth spectrum at the firm. We're an asset management firm, as our name says Silvercrest asset management, the fact that we are delivering institutional quality asset management to our high net worth clients is extremely important, and is a differentiator for the firm. So I appreciate the question about what else we may be looking for. Honestly, at this time, I think we've got a pretty full suite of capabilities that we need to do. We're not going to pretend to try to do everything well. Internally, we have fixed income, both taxable immunities. We have high yield fixed income. We have value equity across the market cap spectrum. We have growth now, with our Milwaukee colleagues, which was a long term objective for this firm. And we just found just the right high quality group, we have international, and we we've got plenty of capacity in those capabilities, and they fulfill the main asset allocation buckets that were concerned about. There's a lot of other potential capabilities out there, but we're not going to go off in a whole lot of different branches. So it's unlikely we look for more asset management capabilities. I think if we find the right acquisitions, it's going to be on the high net worth side at this time. With regards to an earnings per share hit, I look to make our deal fairly accretive in a fairly short period of time. As you saw with our Milwaukee deal, it was accretive right away. If you looked at the last couple of wealth management deals we did they were accretive within a couple of years. And it really depends on the nature of the company, what we see in terms of its total value. I would hesitate to give you a specific number around that earnings hit. I think, I think there are too many moving parts for me to directly target that in a comment.

I applaud you for using earnouts for at least a portion of the compensation of companies you acquire. I had another question. You had a modest increase in net ads. But what caught my eye is you had about 6 billion of departures. Is there a common thread on the assets that left you?

You're looking at gross flows, which is a confusing, confusing metric, that the SEC has us report ever since we went public. Those flows could merely be the changing of assets within the firm, we did not have 6 billion leave the firm that is a gross number. It could just be a switch from one equity strategy to another or fixed income to equity or what have you. What matters is the net flows, which was nicely positive for 2021 and for the fourth quarter. I know that's confusing. We do have a table that provides the net flow information in the 10-K.

Thank you. And then my final question relates to share repurchases. Do you have orders, does the board have a policy of attempting to use share repurchases to offset option creep?

We announced a share repurchase program last year that was in part and only in part to offset some dilution. We don't have a firm policy on that. Obviously, it's a tool in the toolbox that we're happy to use. It's been a bit frustrating I'll admit, spending that the share repurchase program that we announced due to volume constraints, we'll be looking at that. Obviously given the results of last year and where we are positioned with the company we continue to have a robust cash flow and to build cash either for strategic purposes or another use, including our dividend which remains high. It should be pointed out that despite acquisitions other potential dilution, that this firm has accreted adjusted diluted earnings per share. That is to say after any dilution 21.3% on a CAGR basis over the past five years. That's a five year CAGR. 21.3% over the past seven years. It's been 12% compounded, so we're aware of that we care a lot about it and we're going to make use of that cash either to accrete or shareholders appropriately when we don't see opportunities to return in dividends or to do an acquisition.

Thank you. Keep performing well. Thanks.

Thank you.

Our next question comes from Christopher Marinac from Janney Montgomery Scott. Please go ahead with your question.

Hey, thanks. Good morning. Rick, I may have missed it earlier in the call. The longer term goal on the EBITDA margin is that changing at all, just given the success you experienced in 2021?

It's not really changing. I think, I think you're going to have times where we have spurts of growth, either due to the market organic growth on the organic growth last year was on a net basis, one of the best we've had in the past nine. I just, we have to continually reinvest in the business as I said. It's a people business. We have to reward people for success, which we do. And it's just; it's just running ahead of my plants, which is a great thing. We -- I think a very well-run wealth management business can hit the high 20s and EBITDA on a very consistent basis. If you get if you get performance fees, which we do, we don't budget for those that was a nice number for that in 2021, that's going to bump up your, your EBITDA margin. Again, all things being equal, we can't depend on that. So you would have a slightly lower EBITDA margin, slightly lower if those fees were not to appear, for example in 2022. The other thing to keep in mind is that we also have funds we weren't spending due to the pandemic, right in G&A. And we actually want that to go up, because that means that investment and getting out there and getting new business. So my views have not changed a lot. They've changed a little, because obviously, I have to hit either a little bit harder than I would have said a year or two years ago to bring that down even further.

Sounds good. And I presume that the expense is probably normalized to some extent, to your point for this year.

Yes, I think that's right.

Okay. And then can you also just update us on the outsourced OCIO business and just sort of your progress? I know you've accomplished a lot the last 12, 18 months, just curious over the next chapter.

Yes, I appreciate that. As you know, and just to remind everyone, we had a goal for, for a billion dollars as of the end of 2021. We hit that goal in the third quarter, which is great. Their performance, which is really based on their selection of outside managers, and the asset allocation remained very strong in and of itself. It compares extremely well and the OCIO indices that have been built. And so we remain well above a billion. The pipeline for the OCIO business let me see here. It's, it's over 600 million. And again, that's a meaningful pipeline like it is for the rest of our institutional business. So I have a very positive outlook as I have going into 2022. With that pipeline, and having achieved that goal of getting over a billion dollars, it makes us a credible entrants in the market entrants in the market.

Great, then last question, for me, Rick, is just the volatility. We've seen the last, four to six weeks, just going back to the history, how do you typically navigate those environments? Does that create any near term noise for you?

Oh, it creates a little near term noise as it does for anyone. One, there are a couple of virtues of this particular business, one in just the way that we run the business, which is with a very long term stable view, that's very prudent, which is how we manage the business. It's also how we manage our client’s portfolios. We are not tactical. We don't get caught up in the noise of the markets. We have done historically extremely well through periods of noise, whether that was the global financial crisis, the disruptions from Asia periodically that we had in the third and fourth quarters or some previous years that the downturn in the Coronavirus market of 2019. Gosh, it's hard to believe it was -- and in the current disruption of the markets whether that's a fixation on inflation, interest rates or what's happening in Europe. Historically our portfolios are long term vision, our high quality emphasis of how we're selecting securities and what we're looking to do, is understood well by the clients. And there's a really steady hand on the tiller here at the firm. So generally we do well. And in fact, we often do on a relative basis extremely well. Any, any decline in in markets and AUM obviously it's going to hit our revenue as it does any other firm. It's the biggest element in our revenue, right and something we can't control. It's why we're conservative with our management and careful with leverage as well as a business, which I think a lot of people who sign up. The final thing is we billed quarterly in advance at the end of the quarter. So we can also see intra quarter noise, it really doesn't affect revenue unless it gets crystallized at the end of a quarter, really four days of the year matter for us. That also smooth’s out some volatility. And then finally, of course, we have room to breathe given, given what we're really we are reporting today. So it really doesn't concern me. I look out three to five years and I feel very optimistic about the business.

Great. Thanks for taking the time to walk through that. I appreciate it. Thanks for all the feedback this morning.

You're really welcome.

And ladies and gentlemen, with that we'll be concluding today's question-and-answer session. I'd like to turn the conference call back over to Rick Hough for any closing remarks.

Thanks. I really don't have much of a closing of event to say. I appreciate you joining us. It was a great 2021 and as well as fourth quarter, really look forward to making additional strides in the business this year. I am deeply appreciative to all of our shareholders and for the great questions this morning. Thanks very much.

Ladies and gentlemen with that we’ll conclude today's conference call. We do thank you for attending today's presentation. You may not disconnect your line.