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Silvercrest Asset Management Group Inc. (NASDAQ:SAMG)

Q3 2013 Results Earnings Call

November 14, 2013 8:30 AM ET

Executives

Moffett Cochran - Chairman and CEO

Scott Gerard - Chief Financial Officer

Rick Hough - President and COO

Analysts

Michael Kim - Sandler O'Neill

Steven Schwartz - Raymond James

Operator

Good day, ladies and gentlemen. And welcome to the Silvercrest Third Quarter Earnings and Investor Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. (Operator Instructions)

As a reminder, this conference call is being recorded. I would now like to introduce your host for today’s conference, Moffett Cochran. You may begin.

Moffett Cochran

Thank you. We had strong growth in assets under management for the 12 months ended September 30, 2013. In addition, we have experienced strong revenue growth in three months period ending September 30.

At September 30 assets under management has risen to $14.6 billion from $13.9 billion as of June 30. We are very pleased with these results and in conjunction with this we are announcing that the amount of our initial dividend will be $0.12 per share payable on December 19th to shareholders of record on December 5th.

And with that, I will turn it over to Scott Gerard, our CFO.

Scott Gerard

Thanks Moffett. As -- I am sure you’ve read our earnings release for the third quarter, again AUM as of September 30th was $14.6 billion, revenue for the quarter was $14.7 million and reported consolidated net income for the quarter was $2.2 million.

Please keep in mind that the results of operations and cash flows for the nine months includes six months of operations and related cash flows from our accounting predecessor, Silvercrest L.P.

You should also be noted that commencing with the third quarter, we’ve began reporting earnings attributable to Silvercrest Asset Management Group Inc. which represents the Class A shareholders.

Furthermore, in the third quarter, we also began reflecting partner incentive payment accrual as compensation expense. Historically, these incentive payments were recorded as distributions when paid, so the effect of that is, is that when look at GAAP P&L year-over-year as a disparity because of the difference in treatment for partner incentive payments.

For -- in discussion of the third quarter, revenue for the third quarter was $14.7 million, representing approximately a 16% increase over revenue of $12.8 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 third quarter were $11.5 million, representing approximately a 48% increase over expenses of $7.8 million for the same period last year. This increase was primarily attributable to increases in compensation and benefits expense of $3.6 million and to a much lesser extent general and administrative expenses.

Again the increase in compensation and benefits expenses directly were made to the new accounting treatment of partner incentive payments which again are being expensed, currently and historically were treated as distributions in equity. Also salary and benefits expense increased by approximately $400,000 in the quarter compared to last year as a result of merit increases and increased headcount.

Reported consolidated net income was $2.2 million for the quarter as compared to $4.7 million in the same period last year. Reported net income attributable to Silvercrest for the Class A shareholders for the third quarter this year was $734,000 or $0.14 per basic and diluted Class A share.

Adjusted EBITDA, which we define as EBITDA without giving effect to equity base compensation expense and non-recurring items, but inclusive of the effect of partner incentive payments really specifically on historical basis was $4.3 million or 29.1% of revenue for the quarter, compared to $3.8 million or 29.7% of revenue for the same period last year.

Adjusted net income, which we defined as net income without giving effect to non-recurring items, but inclusive of the effective partner incentive payments and income tax expense, assuming a corporate rate of 40% with $1.9 million for the quarter or $0.16 per adjusted basic and diluted share.

Adjusted earnings per share basically takes 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 deferred equity units and performance units to the total shares outstanding to compute diluted adjusted earnings per share.

Looking at year-to-date results through September, revenue for the nine months ended September 30th was $42.9 million, representing approximately a 14% increase over revenue of $37.6 million for the same period last year. This increase was also driven primarily by growth in our management and advisory fees due to increased AUM.

Expenses for the nine months ended September 30th was $28.1 million, representing approximately a 24% increase over expenses of $22.6 million for the same period last year. Again compensation and benefits expense increase of $5.1 million was the driver and for the same reason as I previously discussed, compensation and benefits expense has gone up primarily because of the treatment of partner incentive payments.

In addition, as we discussed last quarter, they were approximately $750,000 of special bonuses paid to non-principal employees upon the completion of our IPO and equity-based compensation expenses also increased by approximately $300,000 year-over-year as a result of an increase in the fair value of deferred equity units.

General and administrative expenses increased during the nine months as compared to the last year, primarily because in a prior year, we had taken a reversal of a lease abandonment liability, which had the effect of reducing occupancy expense in 2012, the effect of that was about $700,000.

And partially offsetting some of the other increases were reductions in professional fees, specifically compared to the third quarter of last year, because of certain IPO expenses that we need to expense upon, withdrawing our registration statement in November of last year.

Reported net income was $13.2 million for the nine months ended September 30th as compared to $14.1 million in the same period last year. Reported net income for the nine months ended September 30, ’12, again does not include the effect of expensing partner incentive payments.

Reported net income attributable to Silvercrest or to Class A shareholders for the nine months ended September 30, 2013 was $11.7 million or $1.31 per basis EPS and $1.34 and a $1.31 per diluted.

For the nine months ended September 30th, the weighted average shares outstanding, includes the affect of weighted average units on a converted basis as of the time of our IPO in addition to weighted average of the Class A shares for three months, so it’s somewhat of a hybrid presentation and eventually, we’ll not be comparable going forward as our prior periods or post IPO.

Adjusted EBITDA was $12.8 million, or 29.9% of revenue for the nine months ended September 30, 2013 compared to $10.6 million or 28.2% of revenue for the same period last year. Adjusted net income was $5.8 million for the nine months ended this year, or $0.49 per basic share and $0.47 per diluted share.

With respect to our statement of financial conditions, total assets were $77.9 million as of September 30th, compared to $52.5 million as of December 31st last year. Cash on hand is $25.1 million as of September 30th, as compared to $13.4 million as of the end of last year.

Our notes payable risen $9.7 million as of September 30th, in the prior year the same that was $3.3 million. And as of September 30th the balance on our revolving credit facility which is reported as borrowings. This is with Citi National Bank was $5 million as we made a $2 million principal payment at the end of September.

Again, we completed our IPO on July 2nd issuing little bit south of $4.8 million Class A shares, which began trading on June 27th of this year. The net proceeds from the IPO were $47.9 million, a portion of those proceeds were used to purchase Class B units from Partners that sold on the offering that was about little bit north of $3.5 million units and the cost of that was $35.4 million.

Furthermore, in July 12th, we sold an additional approximately 719,000 shares of Class A, stock at a price -- at the IPO price of $11 per share and this is pursuant to the underwrites exercising their -- their over lobbing option which we granted to them.

The net proceeds related to the exercise of that option was approximately $7.4 million. So, following this additional issuance and currently Class A shares outstanding totaled little bit north of $5.5 million. Stockholders equity was $34.3 million as of September 30th.

And that concludes my remarks and we’ll now open up the call for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question comes from the line of Michael Kim of Sandler O'Neill. Your line is now open.

Michael Kim - Sandler O'Neill

Hey, guys. Good morning. First, can you maybe just talk a bit about sort of breakout of the flows between the high net worth and institutional sides of the business for the quarter? And then any color on maybe the number of new high net worth relationships that may have been added and where some of the institutional fundings hit, if that was the case?

Rick Hough

Sure, Michael. This is Rick Hough. How are you this morning?

Michael Kim - Sandler O'Neill

Good, Rick.

Rick Hough

We had a new accounts open totaling approximately $250 million in the quarter. Historically, that is a very good quarter for Silvercrest. It compares very favorably with our better quarters of 2012 and all the way back to Q2 2011, which was one of our best quarters in the history of Silvercrest. So it was a good quarter for new relationships.

Of that total, approximately $82 million with some expected additional flows came in from institutional accounts, so that pipeline did prove to be good for us. That was approximately for new relationships.

In addition, we saw some nice new inflows into the mutual fund that we sub-advised for Aston and the pipeline for institutional business remains robust and we continue to see the firm going or being invited to participate in consultant searches that at a high level.

With regards to high net worth that represented about $188 million in new relationships. One very new significant relationship that we put it amongst one of our larger relationships was one during the quarter.

As we’ve discussed before the nature of that business is extremely lumpy. This was a relationship that we've been working on for years actually and finally came to fruition in the third quarter.

In terms of total relationships, to answer that question, we in terms of the way, we measure it, we moved from 428 relationships from the second quarter to 439 relationships during the third quarter.

And as we’ve discussed before, flows have meaning over a long period of time but relationships in that respect are just as, it’s now more important because of the very high retention rates that we have.

You didn't ask about closed accounts but it was in a loss relationship but there was an account closed for $5.6 million. That relationship, that account represented a very small piece of much larger relationship. And we had outflows for normal reasons not due to loss relationships that were approximately $84 million, well within the normal range of outflows.

Michael Kim - Sandler O'Neill

Got i. That’s helpful. And then second, any thoughts on risk appetites more broadly, I think, I saw a survey recently that seem to indicate high net worth investors are planning to start shifting allocations in favor of equities in the near-term. So just curious to get your thoughts on that front and then how you think any changes in allocation trends, could potentially impact the trajectory of your flows or maybe your blended fee rates, understanding that you are typically running some of these model portfolios?

Rick Hough

Right. So, to start with your last point, we do have pretty broadly diversified model asset allocations and so any movement that we are doing as a firm, are really at the margin. We are not making big tactically moves and to the extent that we are running balanced accounts with established fee agreements with our clients, movement between equity and fixed income has a very marginal effect.

It's incredibly stable over the history of Silvercrest in terms of our revenue for equities, our revenues for fixed income over -- for the firm's total revenue even through the crisis. Silvercrest has been reallocating and trying to encourage clients to move into equities since very shortly after the crisis, in fact in the spring of 2009 not all clients did that, but that's been our posture.

With the rising equity markets, I think it’s fair to say there has been greater interest in equity that's what investors tend to do but their risk appetite does seem to expand as they see other people making money. And so perhaps at the margin, there has been a slight move but I can't say it’s anything that stands out on the page or it’s going to drive our revenue in any significant way.

It is interesting that a couple of prospects I met with recently, do have a focused interest on equity more so in the past, especially given the extremely low yields in fixed income and the outperformance of fixed income over the past three years.

Michael Kim - Sandler O'Neill

Okay. And then maybe just a couple quick ones for Scott. First any lumpy or sort of outsized cost that may have hit the G&A line this quarter or is just sort of a good post IPO run rate with, maybe….

Scott Gerard

Yes, we had a couple of -- on with respect to reported line some recruiting related costs that are necessarily going to get hit every quarter. As we recruits additional portfolio managers, so little bit of bad hit but as far as the effect of public company related cost that built in to there and that’s -- that will certainly be on a recurring basis but our G&A this quarter was little bit south of $100,000 which we made it to recruiting efforts.

Michael Kim - Sandler O'Neill

Okay. And then just finally any color on, sort of, the outlook for performance fees as we look into the fourth quarter?

Scott Gerard

Yes, I mean -- any of our performance fees crystallize on an annual basis. And so we only record those once they have been crystallized, much better idea obviously year end as to what those look like at this point.

Michael Kim - Sandler O'Neill

Okay. Thanks for taking my questions.

Moffett Cochran

Sure. No problem.

Operator

Thank you. (Operator Instructions) Our next question comes from the line of Steven Schwartz of Raymond James.

Moffett Cochran

Good morning, Steven.

Operator

Your line is now open.

Steven Schwartz - Raymond James

Yeah. Thanks.

Moffett Cochran

Hey, Steve.

Steven Schwartz - Raymond James

Kind of a follow-up on the performance fee question is just on your performance in general. Looking at the one year numbers that you had for the various strategies it were very, very positive. They were lagging a little when you reported the second quarter number. So hoping for a little deeper dive, did you have a very good quarter or did a very poor quarter slope off, maybe you can give some insight into that.

Moffett Cochran

It was a good quarter. We also had a quarter slope off, but our equity capabilities have been doing quite strongly and picked up substantial ground since our road show, reviewing first quarter results. Since you ask the question along with performance fees, I will remind you that our separately managed accounts, managed internally especially with regards to equity where we have a very substantial amount of discretionary assets, do not have performance fees.

Nonetheless, the continued outperformance of those strategies over one, three, five and seven years and since inception remains extremely strong and has a lot to do with continued institutional interest in our products. Because we spotlighted it, I would like to take a moment to highlight that on the one year numbers, because we were lagging in some areas in the one year numbers when we talked about this as of the first quarter.

Our large cap value is up over the Russell 1000 value by 130 basis points small cap over the Russell 2000 value by 460 basis points on a one-year basis, that is a particular interest to institutions.

We’re lagging by 120 on Smid Cap, Multi Cap is ahead of its benchmark by 170, Equity Income by 160 and Focus Value by 560 basis points on a one-year basis. With the exception of that Smid Cap lagging on one year, all strategies are ahead of their benchmarks substantially on one year, three year, five year, seven years since inception.

Steven Schwartz - Raymond James

On a subject to the institutions, CalPERS, anything new there?

Moffett Cochran

No, nothing to report there.

Steven Schwartz - Raymond James

Okay. And then just moving on topic of graphic expansion, what if anything is going on in Los Angeles, has any progress been made there or in any other geographies?

Moffett Cochran

We’ve hired the portfolio system there. We are continuing to work on marketing that office. We’re continually in discussions with potential firms and other geographies.

Steven Schwartz - Raymond James

Have other -- you started with one portfolio manager, have any others been added or just the assistant?

Moffett Cochran

No, just the assistant, we’re starting with one and we’ll ramp up from there. We have had discussions with others.

Steven Schwartz - Raymond James

Okay. Great. Thanks -- thanks a lot. That’s all.

Operator

(Operator Instruction) I’m showing no further question at this time. I’d like to hand the call back over to management for any closing remarks.

Moffett Cochran

Well, it was a very good quarter. We’re very pleased with the results and we look forward to see you again in three months. Thank you.

Scott Gerard

Thank you.

Rick Hough

Thank you.

Operator

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude today’s program. You may all disconnect. Have a great day everyone.

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