Earnings Call Transcript - SAMG Q4 2022

Operator, 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, CEO

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's 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 relationships 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's capabilities, and Silvercrest's suite of asset management capabilities maintain their solid relative performance. Our pipeline of new business opportunities also increased during the quarter. And finally, the firm's outsourced 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 concluded my preliminary remarks. We'll turn it over to Scott Gerard, our CFO, and then we will take questions. Thank you.

Scott Gerard, CFO

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 increased 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 the 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 million 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 were partially offset by increases in travel and entertainment expenses, professional fees, and portfolio and systems expenses. 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, CEO

Great. Thanks, Scott. We're now available for questions about the fourth quarter and the year.

Operator, Operator

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

Sumeet Mody, Analyst

Thanks. Good morning, guys.

Richard Hough, CEO

Good morning.

Sumeet Mody, Analyst

I wanted to start by discussing the institutional pipeline, specifically OCIO. Last quarter, you mentioned you had about $700 million in the pipeline and AUM was below $1 billion. Now that you're at $1.45 billion in AUM, could you provide an update on the OCIO pipeline? Additionally, could you touch on the progress of the international distribution effort and how you see that opportunity evolving over the next couple of years?

Richard Hough, CEO

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 project 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 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 along those lines. 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, Analyst

Thanks so much for that. It's helpful.

Richard Hough, CEO

Sure.

Sumeet Mody, Analyst

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 lift-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, CEO

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 necessarily looking for other lift-outs or strategies to enhance the institutional business at this time. With the change in the interest rate environment, there's possibility. We look at more credit that has been of less interest to many clients and allocators as you might expect, given the low interest rates. And there's more and more attention being paid to different types of credit strategy, whether that's distressed or other capabilities even more so than what we were seeing in private equity only a few years ago. So, there may be an opportunity there, but I can't say I'm aggressively looking or trying to add that. We've got enough to try to build here as it is. Regionally, the institutional business isn't something that I'm focused on. The reason we went to Milwaukee was because it was a great strategy. It was a great team and a great growth strategy. It had nothing to do per se with the region. It's nice to be in the Midwest. We work well with Midwesterners. It was a great cultural fit. But that's just a circumstance of them being really excellent. They could have been in another city entirely. Geography is much more important for us when we think about the high-net-worth business. And I'm, as you know, always looking for opportunities to find the right partners in different regions of the country.

Sumeet Mody, Analyst

Great. Thanks. And then maybe just one last question for Scott. Regarding the G&A costs, I understand you operated at just under $6 million per quarter on average in 2021, possibly slightly more in 2022, reflecting a 10% growth rate year-over-year. Is that a reasonable growth rate you expect for 2023? What factors should we consider for G&A this year?

Scott Gerard, CFO

One notable point is related to travel and entertainment expenses, which have begun to normalize. During the pandemic, these expenses in 2021 and well into 2022 were below historical levels. We are also experiencing inflation with other fees, such as professional services and research that we utilize. Despite our efforts to negotiate either built-in increases in our agreements or tackle the price hikes that various services are implementing, we strive to keep those costs at a reasonable level. This essentially summarizes the situation you've observed in G&A and what I anticipate will continue moving forward.

Sumeet Mody, Analyst

Great. Thanks for taking my questions, guys.

Richard Hough, CEO

Sure.

Scott Gerard, CFO

Sure. Thank you.

Operator, Operator

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

Christopher Marinac, Analyst

Hey, good morning. Scott and Rick, can you talk about the EBITDA margin and kind of what's realistic in this environment? I know there's some noise and unique factors in Q4, but just thinking going forwards kind of how you see the business unfolding there.

Richard Hough, CEO

Yeah. Thanks, Chris. I'll start, but Scott may be able to fill in some detail. First of all, where we sit in the fourth quarter, and I think you may have noted this in your note this morning at what are we, 26% to 27% EBITDA for the fourth quarter is actually right in line with historical EBITDA for the company, if you go prior to some of our recent growth spurts. So, we feel really good about that, considering the year. And compared to some peers, even looks quite good. As I said, a year ago 2021, when we were hitting 32%, 33% EBITDA, that was really kind of historically high. In part, that was driven by performance fees, which we saw in multiple years leading up to that. Obviously, last year was not a good year for performance fees. So, you're kind of looking at the true business. So, it's quite sustainable and will only look better as the markets recover. There's another important point here, which I talked about in several calls, which is that we would be making investments in personnel and the strategy, intellectual capital to grow the company. We've done that. It was hidden a bit in our EBITDA margins because we were growing. So, we were growing faster than we were even making those investments. Well, with the decline in markets, they've become a little more obvious. They're paying off, but that sort of investment takes a long time to payoff in a business like ours, especially on the high-net-worth side. We were also recognizing high performers and different strategies with increased compensation due to performance. A good example would be the growth team in Milwaukee, I just mentioned. That's going to hit your EBITDA margin a little bit. It's money we're very happy to pay. So, I view this as a very sustainable level. I view it as a good level. It's in line with history. It's very good compared to the competitors. And if we get performance fees or you see growth from some of those investments, I see increases from there. Anything to add to that, Scott?

Scott Gerard, CFO

The only thing I'll add is that in the fourth quarter, we adjust our compensation pools based on the full-year results. This is why you might notice unusual EBITDA margin levels during this time. Last year, our adjusted EBITDA margin in the fourth quarter was 38.5%, and this year it was just over 15%. This reflects the investments made in new staff, which takes time to develop their business, especially in a year when revenue and market levels were lower. So, it's not uncommon for Silvercrest to experience some fluctuations in EBITDA during the fourth quarter.

Richard Hough, CEO

I believe we’re on the same page. It's an important point. I would add that regarding compensation, which constitutes the majority of our expenses, the performance fees can contribute to the upside, as we saw in the last quarter of 2021, which negatively impacted us in 2022. We're currently accruing about 55% of revenue for compensation, and we went significantly below that due to the strong performance in 2021. In 2022, we exceeded that percentage. If we average these figures and consider the long-term trends of the business, even just looking at yearly data rather than quarterly data, we are maintaining around 55% or slightly lower, consistent with our historical performance. Concerning the EBITDA margin, although we achieved 38% in the fourth quarter last year and around 15% this year, when we average those numbers, we arrive at about 27% or 26.5%, which aligns with our expectations. Thus, it’s essential to be cautious about the periods we're comparing.

Christopher Marinac, Analyst

No, that's all very helpful. I appreciate that. And then could you just continue a little bit down on the sort of the revenue side at the core from sort of the basis points you can charge. I know some of this gets influenced by mix as you continue to be successful in other parts of the business. But is there any additional pressure on fees in general compared to how you've managed this year-to-year?

Richard Hough, CEO

No, I think it's more of a mix. As the institutional business has grown and accelerated, including the OCIO, which has seen a significant increase, you're going to encounter lower fees on discretionary assets. However, that business has considerably more leverage. So, when looking at the fee structure, you might overlook the enhanced EBITDA margin that comes with these gains. The high-net-worth side of the business has remained quite stable in terms of fees. I've previously mentioned that the largest high-net-worth clients typically request institutional pricing along with full service and have aggressively negotiated fees for years at the highest levels; they don't differ much from the institutional business. Therefore, as we've attracted more of these large families, that has slightly reduced the fee structure as well. While this is a favorable issue, it also enhances the firm's reputation by associating with such wealth. On the institutional side, I would say we've been facing the same pressure on fees as we have over the past decade, with no significant changes in either direction. There is certainly variability depending on how people allocate funds and the timing of cash flows, but I don't see any notable trends or changes across the firm that would indicate a shift; overall, it has been quite stable.

Christopher Marinac, Analyst

Understood. Thank you very much for that background. I appreciate it.

Richard Hough, CEO

Yeah. You're welcome. Thanks, Chris.

Operator, Operator

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

Chris Sakai, Analyst

Yes. Hi. Good morning.

Richard Hough, CEO

Good morning.

Chris Sakai, Analyst

Can you talk about the acquisition environment? How are you seeing valuations out there?

Richard Hough, CEO

Valuations have certainly decreased somewhat. I've noticed a few trends. The higher interest rate environment has affected those who needed to refinance debt and have heavily leveraged balance sheets, unlike Silvercrest, limiting their ability to engage in high pricing within the industry for some subpar businesses. The elevated interest rates are presenting challenges. I observe greater caution in evaluating deals, with increased focus on how much assets under management are included with the deal and forecasting that, along with more emphasis on earnouts. So, the tightening of deal conditions can also be seen as a form of price reduction. Indeed, prices are coming down a bit. Additionally, there are some players who were previously quite active but are now stepping back from the market, which might indicate future trends. The total number of deals has definitely dropped significantly as well. That’s about all I can provide; I haven’t seen much else.

Chris Sakai, Analyst

Okay. Thanks for that. And then, can you talk about what were the main drivers for client outflows this quarter?

Richard Hough, CEO

There are always normal expenses in life, and we do see some constant outflows in this business. A portion of these outflows is related to pension funds that may be closing down, leading to a slow drip of funds. Some of it also stems from the typical expenses associated with high-net-worth living. In this line of work, we often experience a pattern of making progress but then facing setbacks. Earlier this year, particularly in the second and third quarters, we observed significant outflows mainly due to taxes, which were driven by certain events. This quarter, the outflows were relatively moderate and balanced, showing minor fluctuations. On a closed account basis, our numbers were quite low, marking one of the lowest years for closed accounts since 2017 and 2014. We performed well in maintaining accounts and relationships, representing one of our best years in the last five. Additionally, we had a strong quarter for new business relationships, securing $220 million, which was our best performance for new relationships last year. Compared to previous years, particularly 2017, 2018, and 2019, this quarter stood out, even if we saw some net outflows. When excluding acquired assets from 2019 due to the Cortina merger, 2022 actually surpassed those years in terms of new relationships. Overall, I believe we’ve done quite well, especially considering the current environment.

Chris Sakai, Analyst

Okay. Thanks. Thanks for the answers.

Richard Hough, CEO

You're welcome.

Operator, Operator

The next question comes from Timothy Call with VTAG Capital Management Corporation. Please go ahead.

Timothy Call, Analyst

Your balance sheet is very clean, with your cash and receivables nearly equal to your total liabilities. Additionally, your cash is more than ten times the amount you have drawn from your credit line, so I was curious why your net interest income isn't positive. I would have anticipated that compared to the rising net interest expense.

Scott Gerard, CFO

Yeah. I mean, we do have some of our cash invested to get some yield on it. We don't typically tie up our cash too long when we have strategic initiatives and uses for the cash. We also do receive some meaningful, what I would call, income credits from our bank which helps reduce any banking fees that we need for our transactions. But strategically, that is definitely something that we look at and we weigh based on our strategic needs for our cash.

Timothy Call, Analyst

Maybe putting half the cash in the money market would make you that interest composite.

Scott Gerard, CFO

Yeah. Thank you.

Timothy Call, Analyst

It looks great. There is a good balance sheet. Can you comment on the factors that influence your decision-making regarding stock buybacks?

Richard Hough, CEO

I've mentioned this before and I appreciate the question. We're primarily balancing the discussions happening in the marketplace and the potential need for significant cash against our desire to acquire one of the highest quality asset managers, which happens to be us. The timing of such opportunities is unpredictable. A great example is our acquisition in 2019 when we partnered with Cortina; that took a good amount of time for us to establish a relationship with the team we wanted to join because the cultural fit is crucial. We are very cautious during those discussions. That merger was the largest in our history and required a substantial amount of cash for us to proceed. Therefore, maintaining some liquidity is a significant consideration for us. Additionally, buying back stock isn't always straightforward. We've made considerable efforts last year, and as we've disclosed in our recent filing, we still have more to achieve. I believe we have another $5 million available, Scott?

Scott Gerard, CFO

Yeah. About $5.7 million.

Richard Hough, CEO

$5.7 million or so in potential buybacks. And as everyone knows, we've been transparent about it. We've been active in the market. As we work through that we will, again, reassess what we might do on that front for the reasons I stated.

Timothy Call, Analyst

Thank you.

Richard Hough, CEO

You are welcome.

Scott Gerard, CFO

Thank you.

Operator, Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Rick Hough for any closing remarks.

Richard Hough, CEO

Great. Thanks so much for joining us for both the fourth quarter and year-end 2022 results. It's nice to have a little reprieve in the fourth quarter and continuing on the first quarter this year. I feel quite good about the margins and control of expenses that we were able to maintain throughout 2022, while we also returned very good performance and built our pipelines. Notable was progress in our OCIO business, as I mentioned, and the opportunities we have elsewhere. It was a nice reversal to see and I think really important to keep into context what we've been able to do year-over-year, calendar year over calendar year, not just quarter-to-quarter or a distorted quarter compared to another quarter. Feel free to reach out to us at any time. Look forward to talking to you at the end of next quarter. Thanks so much for joining us.

Operator, Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.