Silvercrest Asset Management Group Inc. (NASDAQ:SAMG) Q4 2022 Earnings Call Transcript

Silvercrest Asset Management Group Inc. (NASDAQ:SAMG) Q4 2022 Earnings Call Transcript March 3, 2023

Operator: Good morning, and welcome to the Silvercrest Asset Management Group, Inc. Fourth Quarter and Full Year 2022 Earnings Conference Call. All participants will be in listen-only mode. After today’s presentation, there will be an opportunity to ask questions. Please also note, this event is being recorded. Before we begin, let me remind you that during today’s call, certain statements made regarding our future performance 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 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 over to Mr. Rick Hough, Chairman and CEO of Silvercrest. Please begin.

Richard Hough: Good morning and thanks for joining us for the fourth quarter of 2022 and year-end 2022 results. Silvercrest finished a volatile fourth quarter in calendar year 2022 with total assets in our management of $28.9 billion and discretionary AUM of $20.9 billion. Total AUM declined at 10.5% during the calendar year 2022. Discretionary AUM, which primarily drives our revenue, declined 16.7% during the year 2022. Revenue consequently fell 15.7% and 6.4% for the fourth quarter and full year 2022, respectively compared with 2021. This decline in revenue significantly affected our adjusted EBITDA and adjusted diluted earnings per share. Adjusted EBITDA declined to $4.4 million and $32 million for the fourth quarter and full year 2022, respectively from 2021.

Our adjusted diluted earnings per share also declined to $0.15 and $1.35 for the fourth quarter and full year 2022, respectively. Our adjusted EBITDA margin for the fourth quarter and full year 2022 was 15.6% and 26%, respectively while down from the firm’s 33% adjusted EBITDA margin for the year-end of 2021. Silvercrest adjusted EBITDA margin remains historically healthy for the company, especially in light of the declining markets last year. The volatile market conditions of 2022 relaxed during the fourth quarter of the year, and as a result, 2022 year-end discretionary AUM increased by $1.5 billion or 7.7% over the third quarter to $20.9 billion. Silvercrest also gained $220 million in new relationship is during the fourth quarter, which is one of our better new relationship development quarters over the past couple of years.

We’ve stated that market volatility and uncertainty create long-term opportunities that have typically benefited the high quality of Silvercrest capabilities, and Silvercrest suite of asset management capabilities and maintain their solid relative performance. Our pipeline of new business opportunities also increased during the quarter. And finally, the firm’s outsource Chief Investment Officer initiative now manages AUM of $1.45 billion. Silvercrest repurchased approximately 190,000 shares of Class A common stock for approximately $3.5 million during the fourth quarter. Those conclude my preliminary remarks. We’ll turn it over to Scott Gerard, our CFO, and then we will take questions. Thank you.

Scott Gerard: Great. Thanks Rick. As disclosed in our earnings release for the fourth quarter, discretionary AUM as of December 31st, 2022 was $20.9 billion, and total AUM as of the end of 2022 was $28.9 billion. Revenue for the quarter was $28.5 million and reported consolidated net income for the quarter was $3.3 million. Looking further into the fourth quarter of 2022, again, revenue is approximately $28.5 million and this represented approximately a 16% decrease over revenue of $33.8 million for the same period last year. This decrease was driven primarily by market depreciation and net client outflows in discretionary AUM. Expenses for the fourth quarter were $24.4 million, representing less than a 1% decrease from expenses of $24.5 million for the same period last year.

This decrease was primarily attributable to a decrease in general and administrative expenses of $1.2 million, and this was partially offset by an increase in compensation and benefits expense of $1 million. Compensation and benefits increase by $1 million or approximately 6% to $18.7 million for the fourth quarter of 2022 from $17.7 million for the same period last year. The increase was primarily attributable to an increase in the accrual for bonuses and salaries and benefits expense, primarily as a result of merit-based increases and newly hired staff. General and administrative expenses decreased by $1.2 million to $5.7 million for the fourth quarter of 2022 from $6.8 million for the same period in 2021. This was primarily attributable to a decrease in the adjustment to the fair value of contingent consideration related to the Cortina acquisition of $1.9 million, partially offset by an increase in travel and entertainment expenses and professional fees.

Reported consolidated net income was $3.3 million for a quarter. This compared to $8.6 million in the same period last year. Reported net income attributable to Silvercrest or the Class A shareholders for the fourth quarter of 2022 was approximately $2.1 million or $0.22 per basic and diluted Class A share. Adjusted EBITDA, which we defined as EBITDA without giving effect to equity based compensation expense and non-core, non-recurring items, was approximately $4.4 million or 15.6% of revenue for the quarter compared to $13 million or 38.5% 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 $2.2 million for the quarter or $0.16 and $0.15 per adjusted basic and diluted EPS, 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 diluted, we add unvested restricted stock units and non-qualified stock options to the total shares outstanding to compute diluted adjusted EPS. Looking at the full year, revenue for 2022 was approximately $123.2 million, representing approximately a 6% decrease over revenue of $131.6 million for the same period last year. This decrease was driven primarily by market depreciation, partially offset by net client inflows in discretionary AUM. Expenses for 2022 were $84.7 million, representing approximately a 16% decrease from expenses of $101.1 billion for the same period last year.

This decrease was primarily attributable to decreases in compensation expense, and general and administrative expenses of $1 million and $15.5 million, respectively. The compensation and benefits decrease was approximately 1% to $71.6 million for the year compared to $72.6 million for the same period last year. The decrease was primarily attributable to decreases in the accrual for bonuses and equity-based compensation expense due to a decrease in the number of unvested restricted stock units and unvested non-qualified stock options outstanding, partially offset by an increase in salaries and benefits expense primarily as a result of merit-based increases in newly hired staff. General and administrative expenses decreased by $15.5 million or approximately 54% to $13 million for 2022 from $28.5 million for the same period in the prior year.

This was primarily attributable to decreases in the fair value of contingent consideration related to the Cortina acquisition of $17.5 million. Occupancy and related costs and trade errors partially offset by increases in travel and entertainment expense, professional fees and portfolio and systems expense. Reported consolidated net income for the year was $30.8 million compared to $24.9 million in the same period in the prior year. Reported net income attributable to Silvercrest for the year ended December 31st, 2022 was approximately $18.8 million, or $1.92 per basic and diluted Class A share. Adjusted EBITDA was approximately $32 million or 26% of revenue for 2022 compared to $43.4 million or 33% of revenue for 2021. Adjusted net income was approximately $19.7 million for 2022 or $1.40 and $1.35 per basic adjusted and diluted EPS, respectively.

Quickly looking at the balance sheet. Total assets at the end of 2022 were approximately $212.7 million compared to $229.3 million as of the end of 2021. At the end of 2022, cash and cash equivalents were approximately $77.4 million compared to $85.7 million at the end of 2021. Total borrowings as of the end of 2022 were $6.3 million and total Class A stockholders’ equity was approximately $84.6 million at the end of 2022. That concludes my financial remarks. I’ll now turn it over to Rick for Q&A.

Richard Hough: Great. Thanks Scott. We’re now available for questions about the fourth quarter in the year.

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Q&A Session

Operator: Thank you. We will now begin the question-and-answer session. The first question comes from Sumeet Moody — excuse me — Mody with Piper Sandler. Please go ahead.

Sumeet Mody: Thanks. Good morning, guys.

Richard Hough: Good morning.

Sumeet Mody: Just wanted to start — good morning. So, just wanted to start with the institutional pipeline specifically OCIO, I know the last quarter you mentioned you were around $700 million in the pipe and AUM was below $1 billion. And now that you’re at 1.45 on AUM, just wanted to see what the update there was on the OCIO pipeline. And then, if you could also just secondly touch on the international distribution effort, how that’s progressing and how you view that opportunity over the next couple of years.

Richard Hough: Sure. So, we’ll start with the OCIO. Obviously, that’s a really nice pickup for us. Some of that effect is going to be the increase that we saw in the fourth quarter in the markets. I think the S&P was up on the order of 7%, which helps. But we also have one new business into the OCIO platform. So, a meaningful part of that includes those wins, which is great. As I’ve said before, getting over the billion dollar threshold was really important for us being a player in the market. We were right up against it, as you know, before the market declined in 2022. And I have projected that this will be a few to several billion dollar business for the firm. So, I feel really good that we’re almost at $1.5 billion, not quite there.

Just a couple more wins. The pipeline is for that capability is looking really solid. It has picked up as well. And I think it’s on the order of $700 million, just under that, probably $690 million or something, something like that. That has increased as well. So, we feel good about the business opportunities there. I might as well get ahead of the general pipeline question since I usually get asked it, but the total pipeline for all of our capabilities on the institutional side of the business, including OCIO, is $1.65 billion now, and that is up from $1.43 billion at the end of the third quarter. Your second question had to do with international value. That pipeline has increased. It’s small. Yeah. But most importantly, the performance in that capability has picked up very nicely and the current environment, they are definitely a value oriented strategy.

And so, the risk off and the volatility and kind of return to fundamentals in some parts of the market has definitely helped their strategy. So, that’s great. And we’ve also seen some more allocations internally from our wealth clients into that strategy.

Sumeet Mody: Thanks so much for that. It’s helpful.

Richard Hough: Sure.

Sumeet Mody: And then, just kind of round out the institutional growth strategy overall, on the value and growth sides, it seems like the focus is organic growth, maybe some small team list outs. I know from a product perspective you talked about being comfortable where you are today, but are there any regions across the U.S. you find most interesting today that maybe you haven’t penetrated into yet? Or is it kind of more just scaling within where you’re at?

Richard Hough: Yeah. So, with regards to the overall institutional strategy, I’m very happy with where we are. We’ve got plenty of capacity to build in both value and growth. The growth performance with our Milwaukee professionals has absolutely been outstanding through this environment. Their relative outperformance is really great. And for the kind of performance that they can deliver, it’s really nice to see them hold value in a down market. And their pipeline has grown commensurately with that. The value equity pipeline also remains strong. And so, I expect good things there, but we’re really focused on building those strategies. We’ve got the main pieces that we need as an asset management company for now. I am not — look, necessarily looking for other lift outs or strategies to enhance the institutional business at this time.