Q1 2020 Earnings Call

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Good morning, and welcome to the silvercrest Asset Management Group Inc. First quarter 2020 earnings conference call all participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist be pressing the star key followed by zero after today's presentation. There will be an opportunity to ask questions. Please note this event 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 Chef statements other than statements of historical fact, including statements regarding future events and developments and silvercrest future performance as well as Management's current expectations beliefs plans birth.

estimates or projections related

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 the statements made among these factors are fluctuations in quarterly and annual results concurrence of net losses adverse effects of management focusing on implementation of a growth strategy failure to age up and maintain the Silver Krust brand and other factors disclosed in the company's filings with the SEC including these factors listed under the caption and titled risk factors in the company's annual report on form 10-K for the year ended December 31st, 2019 and quarterly report on form 10-q for the 3 months ended March 31st, 2020 filed with the SEC and some cake

These statements can be identified by forward-looking words such as believe expect anticipate plan estimate. Likely May will continue reject predict. Give or plural of these words and other similar Expressions. These forward-looking statements are predictions based on silvercrest current expectations and its projections about future. That's all forward-looking statements made on. This call are made as of the date hereof and Silver Krust assumes no obligation to update these forward-looking statements. I would now like to turn the conference over to Rick Huff chef and CEO of Silver Krust, please go ahead. Thank you and thank you for joining us this morning for the first quarter of 2020 results for silvercrest Asset Management Group silvercrest entered the first quarter of 2020 prior to the ongoing Corona virus pandemic and Market dislocations with successful execution of its business strategy complete integration wage.

It's New Growth Equity strategies organic growth and it's outsourced Chief investment officer, otherwise known as a business and a new high-end assets under management representing a full recovery from the market loads of late 2018 in the midst of the unprecedented economic disruption of the viral pandemic silvercrest concluded the first quarter of 2020 with 20.6 billion assets under management, a year-over-year decrease of 2 billion from the first quarter of 2019 much greater Market depreciation of 2.2 billion over that time was mostly off by client inflows of two billion over the same. Our Revenue net income adjusted net income and adjusted ebitda margins and GAP and adjusted earnings-per-share each increase substantial year-over-year.

Supercuts is always maintained a high-quality balance sheet and substantial cash reserves both to preserve flexibility for new growth opportunities and to whether Market volatility inherent in the business due to severe error Corrections or genus events such as the current pandemic

silver

Recorded thirty two point eight million in cash and cash equivalents as of March 31st and carries a manageable level of debt a 15.3 million as of March 31st, 2020 Silver Crest currently pay generous quarterly dividend of $0.16 or an annual dividend of $0.64 per class A shares of common stock The Firm anticipates that it can support the current dividend for a sustained period of time even while continuing to invest in the business. I'm pleased to report that during the first quarter of 2020 The Firm seamlessly transitioned its entire business to operate remotely The Firm prepared for disaster recovery and business continuity silvercrest critical technology infrastructure was already cloud-based and operating remotely prior to this crisis Silver Krust was unusually well prepared. Our firm was founded in the wake of the tech bubble crash and post nine-eleven. Our partners have a long-term vision and we experience the global financial crisis as a relatively young firm flourishing after wage.

our firm's Partners have the fortitude to guide our clients with mature steady hands while the current pandemic has caused Great suffering it also represents an opportunity to solidify our relationships and Thursday the value of our organization and its capabilities the first quarter of 20/20 Experience net-positive organic flows which includes $163 million a new client account so procrastination maintained a proven ability over time to continue attracting net positive asset flows despite industry-wide Trends and active management and we remain proud of our ability to continue growing the business even during difficult environments last quarter we announce that our first Ocio clients had provided half of Silver Crest new client account growth that business continues to develop new opportunities we are proud of growing a business from scratch and we expect continued to successed the current economic environment is stressful in the market represents a step backward for our business as with many others potentially slowing New Birth

Activity, nonetheless silvercrest have successfully made Investments and will continue to make investments in new high Network portfolio management professionals marketing and institutional-quality Equity jack cheese and pursuing its new initiative regardless of the environment Silver Krust will continue to opportunistically seek to effectively deploy Capital to enhance and complement its organic growth on April 28th, 2020. The company's board of directors declared a quarterly dividend of $0.16 per share of class a common stock and the dividend will be paid on or about June 19th 2018 to shareholders of record as of the close of business on June 12th with that I will hand it over to Scott to go over our financials before we take questions. Thank you Scott. Great. Thanks. God has disclosed in our earnings release for the first quarter discretionary a u m as in March 31st, 2020 with 14.9 billion and total wage.

2020 was 24

Six billion revenue for the quarter was 28.4 million and reported Consolidated. Net income for the quarter was 9.7 million delving further into the quarter. Again. Revenue was off approximately 28.4 million which represented approximately a 26% increase over revenue of 22.6 million for the same period last year wage increase was driven primarily by increased net client Flows In discretionary assets under management, including one point seven billion in assets under management acquired on July 1st, 2019 in connection with the Cortina acquisition partially offset by market appreciation revenue for the quarter ended March 31st, 2020 related to the Cortina Aqueduct was approximately 2.9 Million totally he went decreased from December 31st, 2019 to March 31st, 2020 primarily because of Market declines resulting from the covid-19.

18 pandemic most of our revenues building Advance based on closing Market values from the last day of the previous calendar quarter first quarter 2020. Revenue was primarily based on Thursday December 31st, 2019 Market values expenses for the quarter were 15.8 million representing approximately a 15% decrease from expenses of 18.6 billion for the same period last year this decrease was primarily attributable to a decrease in general and administrative expenses of 5.2 million and an increase in compensation an benefits expense of 2.4 million compensation increased primarily as a result of merit-based increases and newly hired staff including the addition of fourteen staff and an increase in New York room for bonuses partially offset by a decrease in equity-based compensation expense due to a decrease in the number of unvested restricted stock units the Dead.

In general and administrative expenses for the quarter of this year was primarily attributable to a six-million-dollar decrease in the fair value of contingent consideration related to the core teenage position partially offset by increased in professional fees due to increases in acquisition-related fees resulting from the Cortina deal depreciation amortization expense wage it mainly to amortization of intangible assets related to Cortina and to the renovation of our office space in New York City occupancy and related expenses and increasing the fair value of contingent consideration related to the captives l e acquisition reported Consolidated net income was 9.7 million for the quarter as compared to three million in a c. Last year reported that income attributable to silvercrest or to class A shareholders for the first quarter 2020 was approximately 5.5 billion or 15 wage.

cents per basic and diluted

Class A share adjusted ebitda, which we defined is Eva. Without giving effect equity-based compensation expense and non core and non-core and non-recurring items, which is approximately 8.2 million or 29% of revenue for the quarter compared to 5.8 million or 25.5% of revenue for the same period in the prior year adjusted net income which we defined as net income without giving effect to non-core non-recurring items and income tax expense assuming a corporate rate of 26% was approximately 5.1 million for the quarter or 36 cents per adjusted basic and diluted earnings per share adjusted earnings-per-share is equal to adjusted net income divided by the actual class in class B shares outstanding as of the end of the reporting. For basic adjusted EPs and to the extent dilutive. We had unvested restricted stock units and non-qualified stock options.

Did the total shares outstanding to compute diluted adjusted EPS looking quickly at the balance sheet total assets were approximately 189.2 million x March 13th, 2020 compared to 214.2 million as of December 31st, 2019 cash and cash equivalents were approximately 32.8 million and March 31st of this year compared to fifty two point eight million at the end of last year total borrowings as of March 31st of this year. We're 15.3 million total Class A stockholders Equity wage accidentally 69.8 million as of March 31st of this year that concludes my remarks. I'll now turn over to Rick for a Q&A.

thanks very much appreciate that Scott we can help with in the line for discussion and questions thank you

we will now begin the question-and-answer session to ask a question you may press * then 1 on your touchtone phone if you are using a speaker phone please pick up your handset before pressing the keys off to withdraw your question please press * then two at this time we will pause momentarily to assemble our roster

And our first question comes from of Piper Sandler, please go ahead.

Thanks. Good morning. Rick morning Scott. I hope you guys are doing well. And healthy morning. Just wanted to touch on this last quarter. We touched on this last quarter few days in the month. I wanted to get an update on the m&a environment. If conversation or your strategies changed at all over the course of the last couple of months, you know, things have certainly ramped-up say at least through volatility perspective that conversation.

So, you know m&a is is something that we periodically engaged in selectively and carefully I can't say we've changed the strategy because we are continually reaching out to peers and businesses that may be of interest to silvercrest or interested in Silver Crest on an ongoing basis. Our Outreach is probably ramped up a walk-in only in the sense that I think it's really important to be in close touch with peer firms and institutions understand what they're going through how they see the environment how it's affecting their business office says we're very open with sharing ideas about the business and have great relationships with the leaders of a lot of other firms and we've just made sure that we stayed close and have continued to Foster those relationships. I think the environment obviously will be changed for the amount of m&a often in these environments when you're talking about Boutique businesses.

Uh, those who may have been in March.

Decide to leave and wait for a recovery and asset values and revenues but there are others who are looking at longer-term strategic options. And this may help realign the market with the reality of volatility that occurs on a more frequent basis than I think people are willing to acknowledge. We have the tech bubble twenty years ago. We had the global financial crisis ten years ago. And now we have this prices. Do you go back in time? It's not unusual to have pretty major suck at least every ten years and certainly there are intermediate periods of sell-offs and uh, as you know from these calls, it's long been my view that many businesses were overvalued on the basis of their annuities and there was a tremendous amount of Leverage flying into the market to to prop up valuations. And now that we have a lot of dry powder very birth.

The balance sheet and that there may be a realignment or a modification evaluations. You know, I I feel optimistic about the environment at some point going forward. Usually it takes time for things to settle and open up. But at least on the m&a front, I I kind of welcome the the potential shake out.

No, thanks. I think that just trying to get the fee rate on the discretionary side. It looks like it came down to 258.7 basis points in the quarter cup lowest expense for QA team, but kind of still within that range 58 to 60. I just wondering if it was kind of affected by institutional mandates in the quarter versus high net-worth and and how you feel that rates going to be in the in the years fifty-eight to sixty still an okay bogey.

You have to know Kay Bogi. I don't think we've been as high as sixty four years. I think this came up in our last conference call depends what you're looking at. Are you looking at beginning. A dead end up. Or average AUM and if you're looking at average, it's kind of a fictional number because we don't bill on average over the quarter and the the new business phone now is that occurred at least during the first quarter were more high-net-worth than institutional. We had new institutional business. But of course large family relationships, uh can get institutional like pricing our our basis points of not really moved around at all over the past fifteen years. They may come down a basis pointer or or or so, but it's been it's been in that ballpark for a very long time.

Got it. Thanks. And then I guess one on appreciate the commentary of you guys still planning to invest in high net-worth professionals marketing, you know marketing the equity strategies pursuing the Ocio initiative, you know all good things in this environment, but you know, are there any verticals that you are not involved in at the moment? I kind of wish you weren't in this in this environment and it may be that you lean into this year and go the presence and take advantage of any opportunities that you guys are thinking about.

No.

No, I think you know one thing that we have done pretty well as an organization have picked our strategic priorities and then successfully execute those before going on to too many other Banks and the strategies that we have chosen are all highly compatible with our high Network business. They all work together to reinforce each other. So our Equity business office, which we started, of course in value equity and have now expanded with the growth Equity capabilities is a very important used to the high-net-worth audience and the fact we have institutional clients home of of thesis that what we are delivering to our client base are institutional-quality Equity capabilities the same goes now for the initiative. It was born out of the page actual Capital. We've created in our investment policy and strategy Group which serves to select managers build asset allocations do risk management and otherwise dead.

Or the high-net-worth business, which is led by our portfolio managers. I'll remind you our portfolio managers are not just relationship managers. They are investors in Boston, right and have a dual role of handling relationships in the Investments as well as bringing a new business which they have done effectively over the years again, the business is proof of Jesus from institutions that what we're delivering from an investment policy perspective is of institutional-quality and we have family office services as you well know. We also have a faith business advisory capability as part of that and you know, we're going to be really careful about the kind of business as we would go into two further diversify what we're doing it has to be compatible has to be part of a single story and it has to be something that we feel we have the bandwidth and ability to execute successfully now that we have grows akwid.

International value additional value strategies in the marketplace and a no CIO business to support as well as hiring new portfolio managers. That's a lot of wood to chop and change the potential success. So I don't see it as necessarily going into new verticals and field we've we've achieved some further success in those those initiatives that already exists.

Got it. Yeah the next time and then I would have by the way just adding new portfolio managers or you know, doing em and two different ways in a significant in its own in its own right as each person brings in new business and contributes to the whole and requires management other other work.

I got it. Thank you. I guess just turning to the flow picture a couple of questions there. But you know look like you had you know, really solid organic growth in the quarter relatively speaking and definitely needs to be especially compared to the backdrop of 18. Just wanted to get the color around the makeup of those new clients and I saw the last quarter of the business may have about half the contribution off, but just wanted to get an update on on the quarter and then and then on the Ocio initiative as well. Yeah. So so the first part was institutional r o c i o sorry.

the first part was the just in general the

The the new business and that new business reporter kind of what was the make up of the with new business in the quarter was a pretty pretty decent new business quarter. We had we had even a positive net flows when you looked at existing clients, although um, I should point out that because of the corona pandemic taxes as you well know we're moved into July so, you know, there may be cash that was not raised in the first and second quarters, which we normally see in order to pay off.

Taxes earlier in the year, we'll we'll could potentially happen in the in the third quarter as you well know there's there's always a headwind for taxes in a business or other expenses. And so we just don't know how that's going to shake out in flows, but that's normal for the course. I just think it's worth pointing out that it's it may be a bit delayed this year and it's not always a hit to our uh to our flows each year. It just depends but there have been meaningful capital gains in recent years that have meant outflows, but with with new age business, I guess it was about $163 million. It was really tilted towards the high Network business in that first quarter one of the nice things about how we've Diversified the business over the past few years. It's we're not reliant on on one single engine of growth which we had been for a very long time. We did have new institutional business come in the door.

We also had some rebalancing, uh as well or performance has held up quite well over time as you noted in your note and off and wouldn't say there was only maybe twenty-five million in absolute new accounts that were greater flow than that into institutional. But app absolute new club was about $25 million. The the balance was high-net-worth the Ocio business. I don't think had much in the first quarter. But as I noted at the end of our last call is pipeline remains very strong and I'm optimistic that it will continue to be a a meaningful contributor and the second third fourth quarters.

Okay, great. And then I guess just touching off of the the pipeline. I mean, can you give us an update there on on this next month actionable how that looks today? I know you spoke last quarter about that off around three three point six billion, but you know, how do you you guys today? So as you know the last time they updated everyone on the edge of the 6-month actionable pipeline which were quite conservative about assessing. It's it's either we're we're invited or we're going to finals for a for a mandate and thumb the the pipeline was just about historic highs the last time we spoke on the institutional side. I think I'm going to hold off a talking about pipelines so much is kind of on hold right now in business. We're continuing to be very active. We're close to the Consultants. Um, we have had as many conversations.

and we expect our

Share of new business, but I think it'd be a bit imprudent to give a hard pipeline. There have been times on these calls. When I I've been very Frank that the pipelines dried up or really slow down or as I did last quarter talked about how large it was. I'd rather not characterize it because it's just it's just uncertain. It just feels like a lot of things are are waiting for more clarity in the macroeconomic environment. They're also has been nearly unprecedented consolidation among the Consultants which are responsible for a lot of our institutional Equity flows. And we're very busy hold of eating those relationships and getting to know either new organizations or navigating the organizations have as they've changed that the conversations are very positive. Our performance is done very well over reasonable time periods. And so I feel very good about it dead.

But and I certainly don't want to be misunderstood is saying that the pipeline is dried up or there's an issue. There's not I just don't want to characterize it because I do think the new business development is being stretched out a bit more over time.

Okay. Yeah, that's understandable. But little more I should say I didn't that was on the institutional Equity set on the business a little more confident in saying that that the pipeline is as I characterized it last time robust and uh it marches to a little different beat than the the pure institutional Equity business and thought I'd remain short-term optimistic on that.

got it right and then just wanted to give it over to the capital returns I know your preferred method is historically been the dividend you know it's great to see you guys can easily maintain an even grow that off while still investing in an environment like this but you know just wanted to find out a little bit more about purchases I saw you guys you know put out that twenty-five one last month I just wanted to see what your kind of philosophy was around that and if you guys actually were purchased anything in this quarter

The the Tempe five one I believe was for my own personal purchases of stock. It's not right the largest. Yeah, it's the largest piece of my life savings and wealth and from time to time. I I like to personally invest in the business. I wish I had more quite honestly and I you know, I I don't have a a plan that's regularly being executed. I could very well purchase more some point. I have done so periodically as you've seen in the filings Thursday, we Savor supporting the the high dividend as a means of returning Capital to investors. I think we've had discussions before about the issues of buying back our Stone know what that could do to our float and when I was asked about this year and half or even two years ago, let me just say I'm really really glad I have the cash I do on our balance sheet.

That we have a low level.

Average at least short-term that would not have been a good use of capital and we are now in a premier position with regards to how we look compared to many others in the industry. I would I would argue. Yes our dividend can be supported for a very sustained period of time even at the current market levels even at the marks levels. So we also offer good about that. I've also talked about as we invest in the business. You've seen our ebitda margins creep up over the years, you know, they they were in the kind of high mid-20s 25 26 27. It may have been somewhere around twenty six or seven with the public and it's it's come up as high as Thirty or 31% and most recent calls come down just a bit. But I've also said that as we invest in the business, I could be pushing it down to the mid mid 20s or even 24% Just think it's prudent to do that. We're not dead.

Running a static business here. Otherwise, it would be a declining annuity. I usually don't get into forward-looking comments. But you know, it's it's it should be noted with that. Of course, we build close to the market lows at the end of March as you know, we're reporting as of March 31st, which often drives our second-quarter results. So, we look good year-over-year, especially considering that we had to climb out of the hole from the fourth quarter of 2018. I'm very pleased with the results. I'm pleased with new business development team, but you know this we're going to see some challenges we tend to lag in terms of our results compared to other companies as a result, but this is going to be a very healthy cash flow generating business that continues to grow. I hope that helps

Yeah, that was that was that helpful. I just wanted to have one last clean up question if I could here for for maybe Scott, but you know, obviously with the market impact in the quarter being what time was you know should maybe pressure revenues in the second quarter at you know, at least I can order but just wanted to get an idea of how may be that impact compensation and and the ratio you guys are accruing to and off if you're still kind of comfortable like it kind of ties into what you were talking about on the market there, but just want to get an update like a

Yeah, we're you know, you know just for the first quarter that we we accrued to a 55% recurring cash compensation ratio, and you know, you know our plan is to do our best to try and continue to manage toward that you know, as in Prior years are veneers where June where we've come in under that 419 we came in just ugh a tiny bit over that. So we're going to continue to look to you know manage that certainly there's a variable a proportion, uh, you know, implied in that ratio with our incentive comp pool. So, um, you know, that's yeah that'll move along, you know with Revenue so, you know that's off position on that.

Great. Thanks for taking my question guys.

Thanks. You're welcome. If you would like to ask a question, please press * then 1 and our next question comes from San Jose research, please go ahead.

Yes, good morning. Congratulations on the strong growth in EPs and revenues in the quarter. Despite all the market turmoil. My question is along the lines of our free cash flow. So, you know structurally your company you've had much higher free cash flow versus EPS in the last four years. It's been more than double precache was in office double reported EPS. Is that a trend that you see continuing is that's the trend that you saw continuing strong free cash versus EPS in q1 and should we expect that for this month here regardless of whatever level the EPS turns out to be but, you know strong free-cash-flow Visa Vie that

I'll let Scott take that first Sandy and then I'll I'll follow up with some more General comments on on our growth and expectation.

Yes, Andy, how you doing? You know keep in mind that when you're looking at our business when you're looking at EPS or you know, or adjusted diluted EPS wage, which we focus on, you know, there are several items that you know create disparity there. If you think about over the past years the results of the 14 acquisition, you know, we had you know layer onto a meaningful amount of additional amortization expense. We've had a you know portion of our compensation structure has been equity-based compensation expense, you know, we had a large grant that was made back in 2015, which fully amortized back in August of 2019 so long you've got you know items such as that that will continue to affect your adjusted diluted EPS, but are necessarily, you know factors when it comes

to generation of cash flow

with regards to the cash flow generation and earning, you know as proud as we are as the performance in these environments and and after the fourth quarter of 2018, which you know in in retrospect doesn't look like much but it was really created a difficult environment for asset managers and you know Revenue agent cash flow in the business going into 2019. That was a meaningful Decline. And so the when you see a year over a year numbers, you're you're we're comparing to a first quarter of 2019 that was fully depressed as a result of that that disrupted Market in 2018 and a full recovery to the end of last year which set the stage for our q1 2012.

results and plus

One of the larger or largest acquisition in the in the firm's history and look well, we'll take it wherever we can get it and that's that's part of the business mix off but I think it's hard to expect on a ongoing short-term, you know annual basis the kind of year of a year increases that we saw at least from that quarter to this quarter. I think it has to be averaged out over other Market events and activity. Look I'm I'm optimistic. We can continue growing the company and growing free-cash-flow wage earnings as a result. We try to do deals and build the business in a in a fashion that's creative pretty quickly and and not hurt our earnings-per-share. Um, I think he talked about the growth drivers of the firm that all looked like they're in good shape to continue doing that. But I think, you know going from a market low revenue and cash-flow.

Generation to a fully recovered Market plus an acquisition, you know may skew things a bit to the to the high side at least on a year-over-year basis.

Okay, and one last question April the markets rebounded very strongly. So I presumed that you've seen a sharp Rebound in your home. The month is complete. Can we ask you if you if you are willing to give an April end, um number or or should be presumed that you know, your your business is also grown with the markets. I think you should resume our business as recovered with the market. The the market lows were I believe towards the latter part of March and and started increasing a bit by the time we build based on asset under management as of March 31st to give an April number for business that is not retail oriented with sponsored mutual funds or other flows like that and that also yep.

Effectively four times a year, I think could be misleading. There's a lot of potential activity between where we sit now at the very beginning and when we actually bill which would be June 30th values, you know, so with with another two entire months of this quarter to go before we even met I think we could muddy The Waters by getting into monthly or at this time, but you can presume that at least the equity part of our portfolio has increased generally in line with the market.

Great. Thank you very much. You're welcome. Thank you. Thank you.

Includes our question-and-answer session. I would like to turn the conference back over to Rick Huff for any closing remarks. Thank you. Thank you for joining us for our first quarter of 2020 results, please the different initiatives that the company whether that's in the high-net-worth growth initiatives to hire new portfolio managers, or to continue growing the business with our existing portfolio management team have done an excellent job or our institutional Equity business or the business The Firm did a very good job recovering from the fourth quarter of 2018 and is proved that it can organically grow the business in any number of different ways, and we're optimistic about even in this environment our ability to continue doing so thank you for joining us and I look forward to speaking with you next quarter.

The conference is now concluded. Thank you for attending today's presentation and you may now disconnect.