Silvercrest Asset Management Group Inc.

Good morning and welcome to the Silvercrest Asset Management Group Incorporated Second Quarter 2021 Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by 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, 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 projections 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 obligations to update them. I would now like to turn the conference over to Rick Huff, Chairman and CEO of Silvercrest. Please go ahead.

Thanks very much. Good morning, everyone. Silvercrest is pleased to report strong results for the second quarter of 2021. The firm's discretionary assets under management, which drives revenue, increased 4.6% during the quarter to reach $22.9 billion. which represents a new high and a year-over-year increase of 32.4%. The firm's total AUM grew to 31 billion. Silvercrest concluded the quarter with 33.1 million in revenue, and the firm's adjusted EBITDA for the second quarter was 10.4 million, or a year-over-year increase of 56.7%. Adjusted diluted earnings per share for the second quarter increased 66.7% year-over-year to 45 cents per adjusted diluted earnings per share. Silvercrest's new business opportunities continue to grow thanks to a strong investment culture and results for high net worth and institutional clients alike. On July 28th, the company's board of directors approved a share repurchase program authorizing the company to repurchase up to $15 million of the company's outstanding Class A common stock. Also on July 28th, The company's board of directors approved an increase of approximately 6% of the company's quarterly dividend from $0.16 per share of Class A common stock to $0.17 per share. The upcoming dividend of $0.17 per share of common stock represents an annual yield of approximately 4.5% based on the closing price of the company's common stock on July 27th. The dividend will be paid on or about September 17th to shareholders of record as of close of business on September 10th. Those conclude my introductory remarks, so I'll turn it over to our CFO, Scott Gerard, to go through the financials, and then we'll take questions. Thanks, Rick.

As disclosed in our earnings release for the second quarter, discretionary AUM as of June 30th was $22.9 billion, and total AUM as of the end of the second quarter was $31 billion. Revenue for the quarter? was 33.1 million, and reported consolidated net income for the quarter was 5.7 million. Looking further into the second quarter, again, revenue was approximately 33.1 million. This represented a 38 percent increase over revenue of approximately 24 million for the same period last year. This increase was driven primarily by market appreciation, partially offset by net client outflows in discretionary AUM. Expenses for the second quarter were $25.8 million, and this represented approximately a 14 percent increase from expenses of $22.7 million for the same period last year. This increase was primarily attributable to an increase in compensation and benefits expense of $5.1 million, partially offset by a decrease in G&A expenses of $2 million. Comp and benefits increased by 5.1 million or approximately 38% to 18.5 million for the second quarter, from 13.4 million for the three months ended June 30th last year. Increase was primarily attributable to increases in the accrual for bonuses, salaries and benefits expense, primarily as a result of merit-based increases and newly hired staff, and equity-based compensation expense due to an increase in the number of unvested restricted stock units and unvested non-qualified stock options outstanding. General and administrative expenses decreased by 2 million, or approximately 22 percent, to 7.3 million for the second quarter, from 9.3 million for the second quarter last year. This was primarily attributable to decreases in the fair value of contingent consideration related to the Cortina acquisition of 2.2 million, and portfolio and systems expense, partially offset by increases in sub-advisory and referral fees, occupancy and related expenses, and travel and entertainment expense. Reported consolidated net income was 5.7 million for the quarter, as compared to 0.8 million in the same period last year. Reported net income attributable to Silvercrest or to Class A shareholders for the second quarter was approximately 3.3 million, or 35 cents per basic and diluted Class A share. Adjusted EBITDA, which we define as EBITDA without giving effect to equity-based compensation expense and non-core and non-recurring items, was approximately 10.4 million, or 31.5 percent of revenue for the second quarter, compared to 6.7 million, or 27.7 percent of revenue for the same period last year. Adjusted net income, which we define as net income without giving effect to non-core and non-recurring items, and income tax expense, assuming a corporate rate of 26%, was approximately $6.7 million for the quarter, or $0.46 and $0.45 per adjusted basic and diluted earnings per share, respectively. Adjusted earnings per share is equal to adjusted net income divided by the actual Class A and Class B shares outstanding as of the end of the reporting period for basic adjusted EPS. And to the extent dilutive, we add unvested restricted stock units and non-qualified stock options to the total shares outstanding to compute diluted adjusted EPS. Looking at the first half of the year, revenue was approximately $64.3 million. representing approximately a 23 percent increase over revenue of $52.4 million for the first half last year. This increase was driven primarily by market appreciation, partially offset by net client outflows in discretionary AUM. Expenses for the first half were $51.3 million, representing approximately a 34 percent increase from expenses of $38.4 million for the first half last year. This increase was primarily attributable to increases in competent benefits, expense of $7.1 million, and G&A expenses of $5.8 million. Compensation increased by $7.1 million, or approximately 24 percent, to $36.1 million for the first half this year, from $29.1 million for the first half last year. The increase, again, was primarily attributable to increases in the accrual for bonuses Salaries and benefits expenses result in merit-based increases and newly hired staff and equity-based compensation expense due to an increase in the number of unvested restricted stock units and uninvested non-qualified stock options. General and administrative expenses increased by $5.8 billion or approximately 63% to $15.2 million for the first half this year from $9.3 million for the first half last year. This was primarily attributable to increases in the fair value of contingent consideration related to the Cortina acquisition of $6.1 million, occupancy and related costs, professional fees, and insurance expense, partially offset by decreases in travel and entertainment expense, portfolio and systems expense, depreciation and amortization, and office expense. The reported consolidated net income was $10 million for the first half as compared to 10.5 million for the first half last year. Reported net income attributable to Silvercrest, or to Class A shareholders, for the first half of this year was approximately 5.9 million, or 61 cents per basic and diluted Class A share. Adjusted EBITDA was approximately 20.1 million, or 31.2% of revenue for the first half, compared to 14.9 million, or 28.4 percent of revenue for the same period last year. Adjusted net income was approximately 12.9 million for the first half, or 89 cents and 87 cents for adjusted basic and diluted earnings per share, respectively. Looking quickly at the balance sheet, as of June 30th of this year, total assets were approximately 202.8 million, compared to 213.8 million as of the end of last year. Cash and cash equivalents were approximately $53.6 million at June 30th compared to $62.5 million at the end of last year. Total borrowings as of June 30th were $10.8 million. Lastly, total Class A stockholders' equity was approximately $73.7 million at June 30th. That concludes my remarks. I'll turn it over to Rick for a Q&A.

Thanks very much, Scott. We'll take questions regarding the company at this time.

We will now begin the question and answer session. To ask a question, you may press star, then 1 on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then 2. At this time, we'll pause momentarily to assemble our roster. Our first question comes from Sumit Modi from Piper Sandler. Please go ahead.

Thanks. Good morning, Rick and Scott. Just wanted to start on the repurchase authorization. How are you guys thinking about the pace of buybacks going forward? Should we think about it from a buyback payout ratio range that you're targeting or any color that would be helpful?

So the $15 million that we announced is somewhere in the ballpark, I believe, of 10% of the outstanding Class A shares. So that was kind of the ballpark in terms of size. In terms of the action that we will take in timeline, no, we have not determined that. We view our stock at compelling value. Obviously, we wouldn't do this otherwise. And so it remains to be seen. Look, markets also go through weaknesses, and we want to make the best accretive purchases possible on behalf of shareholders. But the short answer is no, we don't have a defined timeline. It's open-ended, and we will assess it as we go along here.

Okay. Okay. I just had a couple on the discretionary AUM in the quarter. If you could just kind of clarify a little bit on the new client account number, a little bit lower of a quarter than we've seen in a while. Can you talk about the drivers around that number?

Yeah. I think some of it was a little bit quieter with regards to the institutional business, the high net worth business. also did a little bit better when you look at net flows, by the way, overall. That number, I don't know what to say about it, really. There's really no color other than sometimes when accounts are opened, additional add-on funds end up in our net flows because you only count the amount that is put into a new relationship when the account is open. Any follow-on AUM, of course, is going to be a net positive flow So it could just be a function of that. It was just a little quieter in general, I would say, in particular in the institutional business.

Okay. And then similarly on the kind of net cash inflow and outflow line, I know seasonality is a big factor there with the tax-related outflows.

Right.

It was a little bit lighter, but I assume that's mostly just a pull forward from first quarter or –

Yeah, and some of that is possibly tax. Tax may actually be bigger next year. Most of the negative was driven by rebalancing in the institutional business. We were close to being pretty nicely positive, if not totally positive on the high net worth side. the tax was not as big a drag as it would normally be. It was rebalancing. We continue to have very strong performance across our equity capabilities, and I would say it's more a function of that.

Okay. And then just one last one before I hop back in the queue. Just on the fee rate, it seems like it's kind of steadily creeped lower over the last year. Can you talk about sort of the driver there? Is it just kind of a matter of winning larger mandates over time and How do you expect that to sort of trend going forward, considering the growth of the high net worth channel too?

Sure. We talked about this last quarter. Our discretionary fee basis for accounts really hasn't creeped around at all. It's been within a basis point or two for basically 18, 19 years. It may just be a function of stub period revenue that's driving that in your calculations. We don't see any compelling trends one way or the other. at all. The larger mandates in institutional business, as we've discussed, as we grow OCIO, or we get very large families, which we've gotten larger over the time, is going to drive fee bases down as we win business. But it's done that. So I'm not sure we're seeing anything other than either asset allocation or vagaries of sub-period revenue.

Okay. Thank you. The next question comes from Sandy Mehta from Evaluate Research. Please go ahead.

Yes, good morning. Congratulations on the strong result, and I was also very happy, pleased to see the buyback announcement and the dividend increase. Could you comment a little bit on the pipeline that you're seeing right now in terms of actionable pipeline and any further updates on OCIO?

Sure. So as you may recall, the pipeline that we measure really, really froze up last year and had dramatically reduced. It's rebuilt. The total pipeline for our value strategies, growth strategies, international OCIO is at $1.7 billion. Remember, those are very high-quality, actionable pipeline opportunities. So that's looking quite strong and we have what I would consider a lot of other kind of close to actionable activity that's not in that pipeline yet that could well be added in future months. In addition, I expect that the OCIO business will have some results once we get past Labor Day and those boards are meeting. I don't really necessarily expect a lot of action on the current mandates that we're competing for during the month of August. So we'll be looking out to September, October for more of those opportunities. But it's quite strong and performance remains strong, which is good. As I mentioned earlier, the bigger issue in that business has been, recently has been rebalancing after growth. It's just the nature of the business. It's a high class problem. With regards to OCIO, Depending how you measure it, according to the metric that we used to use, it's about $980 million now, so that you have an apples-to-apples comparison, so it continues to grow towards that billion-dollar benchmark. There are some nontraditional OCIO accounts in there, and if we started to measure on that basis, it'd be closer to $700 million. Not a step backwards for the business, just a way of... looking at the kind of institutions that are in the OCIO model. So I may switch to one in the future just as a heads up so that you have an apples to apples comparison. But the pipeline and the action around that business is very strong, is how I would characterize it. So I remain very optimistic. On the high net worth side, we don't keep a traditional pipeline. It doesn't really work the same way as the institutional business. Results have been strong, so that's a great tailwind. We have capacity with new portfolio managers. And as I mentioned, it was actually a pretty good quarter for high net worth in the second quarter this year.

And then the buyback and the dividend, does that also reflect your feeling in terms of acquisitions or the possibility of acquisitions? Do you see less opportunity there and perhaps that also factors into your dividend and buyback decision?

Yeah, sure. The available uses of cash, the biggest would be acquisition. And while I was always looking at the best use of how to allocate our capital for a return to shareholders back in very late 2000s, 18 and in through 19, of course, I knew that we had the possibility for use of substantial amount of cash with regards to bringing on board our great colleagues in Milwaukee. We're always having conversations, but I have said consistently that we're not seeking to do acquisitions just to get larger. There has to be a very compelling strategic reason and hopefully two or three strategic reasons for an acquisition, especially in the wealth management side. At the core, this is a very, very strong wealth management business, always has been. It's the bulk of our discretionary assets. We care very deeply about the kind of culture that a potential partner and or their clients would be working in, and vice versa, what we're bringing into our culture. And at the current prices that we have seen and the kind of roll-ups that have been occurring in this business, It's been hard to find compelling opportunities that tick all of those boxes so that we're building a really strong, long-term, enduring business, which is the goal here. In the absence of that and the continued building up of cash, why not own more of one of the best wealth management businesses in the U.S., which is to say Silvercrest? So it's just acquisition by another means, you might consider it. I think it's a good use of capital to own more of a great business, and so that's what was driving our decision. We are very conservatively managed. We have light leverage. We will still have plenty of cash. So we just felt that we can do all of the above. We can pay a handsome dividend and make sure our shareholders are getting a great yield on the stock. We have a policy of increasing it on a regular basis when we can. We've sustained that. We do it when we know we can sustain the dividend, even in the wake of market downturns. We feel that this is conservative and we can do that. And we feel that given the balance sheet and growing cash position that we can afford to own more of a great business while still having the opportunity to make an acquisition when one compelling comes along.

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

Again, if you have a question, please press star, then one. The next question comes from Chris Sakai from Singular Research. Please go ahead.

Yes, hi, good morning. Good morning. Most of my questions have been asked already. I just wanted to get a feel about, I guess, the environment and the high net worth side as far as acquiring new business. Wanted to see, you know, if anything, How is the Delta variant posing on the environment now?

I'm not sure I understood that question, Chris. Could you rephrase it or maybe ask one question?

Do you see continued growth? How is the growth in high net worth as we head into the back half of the year?

Okay. Oh, and it was Delta variant you're referring to, to the virus, not a Delta, meaning a statistical measure of something. I understand that. Sorry about that. So on the high net worth side, we've got a great team. It has been very long serving, very sticky personnel and client base. It's very, very strong, compelling business. One of the best in the United States, I think, bar none. So as we have grown in size and profile in general, we get more and more of those opportunities. So I remain bullish on having built a great foundation here with my partners for continued growth in the high network business. As I have said as well, we invested in new portfolio managers just prior to the outbreak of coronavirus. We're talking to more so we have capacity, which is really important in this business. And we have worked very hard to maintain capacity as well as to mentor and bring up younger professionals in this business in the Silvercrest way. That all bodes well for good future growth in that business. And finally, just as we have good investment results driving the institutional business, that of course benefits the high net worth business. It's a great symbiotic relationship. I don't know how to put any kind of metric on the Delta variant of coronavirus. We've largely been coming back in here in New York. Most of our other offices are back in. And I'm not an epidemiologist or doctor, so I hesitate to present any view on the Delta variant and what that might mean. I guess I would just say so far I'm not seeing that having an effect, and I don't know whether to expect one or not.

Okay. All right. Well, thanks.

You're welcome, Chris. The next question comes from Christopher Maranek from J&A Montgomery Scott. Please go ahead. Hey, Christopher. Hey, Chris.

Hey, good morning. I just wanted to ask about the EBITDA margin as it relates to expenses. Would expenses kind of have any seasonality the second half of this calendar year, and is the EBITDA margin kind of goal still the same as it has been?

I'm going to let Scott answer that, Chris. I just want to give one color that I consistently mentioned in the past, which is that I do believe that this EBITDA margin is on the high end, you know, slightly different Market reaction against our fixed costs could pull that down just a bit. And historically, we have hit this EBITDA margin where we've had performance fees at the end of the year. We don't project those or budget around them. But effectively, what it means is that we've got cash to hire additional portfolio managers and make investments in the business. I fully intend to do that. And regardless of the reasons for why it's 31 and a half right now, which I'll let Scott get into, I do want to use that healthy cash flow to invest in new intellectual capital in the business, as we have consistently done so we can grow the high net worth future into the future. I just have not had, excuse me, the high net worth business into the future. I have not had really compelling recent hires that I want to make during the lockdown. And we also hired some people just before the lockdown. I think it's important to give them an opportunity to integrate into the firm the best they could in this environment and to make progress. We're still a boutique firm, a small firm, and we're going to make our personal selections very, very carefully.

Scott? Yeah, a couple things to think about for Obviously, travel and entertainment expense has been running low as the environment gets back to normal, or at least closer to normal. I would expect travel and entertainment expense to go up. Other things that impact year-end, we typically have some various year-end related G&A expenses. If you think about the professional fees line, or implied in our G&A as we get into interim audit procedures toward the end of the year and Deloitte spends significantly more time with more in-depth procedures, we tend to incur more expense related to that. So those are a couple of the highlights and things to think about as we get to the second half.

Great. Thank you both for that. And then just a quick follow-up. I mean, as you're now $31 billion of AUM, does the law of large numbers kick in that the organic growth rate just backs off a little bit, or just kind of curious how you think about that?

You know, it's obviously, even when you have strong nominal flows, your organic growth rate ticks down. If you strip away... A lot of the business, and look at ultra-high network businesses in general around the U.S., boutique, RIAs, they really struggle to have an organic growth rate, quite frankly, which is one of the issues with what I see in the M&A market. If I think I can grow something fantastic, you have to see the path to do that. A lot of businesses haven't reinvested in personnel or their networks in order to do so in a referral-based business. we've always been able to maintain that, but the industry is growing, but when you look at an individual firm, they're very often quite flat or very low single digits. I think you're familiar with that phenomenon. We have consistently been on the higher end of that when you compare us to peer firms, acquisitions, organic growth. It's definitely come down just because of the size of the base, as you pointed out, But with the investment in new personnel and also the visibility of the firm, you can also drive some additional referrals and business that you didn't get before. So I haven't changed my outlook on the organic growth. I'm still pretty bullish on it. And then that was just talking about the high net worth side of the business. We have a very, very healthy pipeline on the other side of the institutional business, which would lead to compelling organic growth numbers.

Great, Rick. Thank you both very much.

Yeah, sure. You're welcome.

The next question is a follow-up from Sumit Modi from Piper Sandler. Please go ahead.

Hey, thanks for the follow-up. Just a follow-up on the hiring commentary.

Yeah.

I just wanted, on a high level, between asset and wealth management more broadly, you know, we're seeing reports from both bracket firms sort of increasing base pay and, you know, the journal article a couple days ago highlighting retention issues and increased competition for talent and tech, you know, as we emerge from the pandemic. And I appreciate you guys are, you know, more small compared to those comps, but have you found that conversations with potential targets are different than pre-pandemic or experience any shifts from current employees?

No, I have to say in the conversations we have in the market, they're very similar. They have not shifted or changed. You know, a lot of that commentary around the bulge bracket firms are, are trading within their broker dealers, people who are like baseball players and free agents who re-up every five, seven, eight years. And we're just not in that game. We know the market. And we, in fact, when we talk to targets, have a very compelling value proposition that we don't have to tweak. So, no, it has not changed.

Okay, great.

Thanks.

Yep. And the next question is a follow-up from Sandy Mehta from Evaluate Research. Please go ahead.

Yeah, just one quick follow-up. In terms of the new hires, are you looking possibly at some new strategies? I know you had the hire and the new growth strategy on January of this year, but any other possibilities in terms of new product strategies going forward? Thank you.

Yeah, you're welcome. No, I would say that this is going to be more any of our future hires, just as the hires we made just pre-pandemic are going to be more focused on the core high net worth business and or managing that business for growth as we get to be a larger firm with more personnel. I think for now, on the On the product side, whether it's equity or fixed income, we're in a really good position. Some of our specialized fixed income has done well and might grow by a person or so. That's not a needle mover. This is really about the high net worth business. We need to make hay with the capabilities that we have. and make those a success before we try to expand further. And frankly, we have a very good suite of capabilities that we like. And we're not going to try to do it all. We're going to try to do what we can do well. So high net worth is where the focus is, at least for the hires when we get around to that.

Great. Thank you. You're welcome.

There are no more questions in the queue. This concludes our question and answer session. I'd like to turn the conference back over to Rick Huff for any closing remarks.

Well, thanks very much for the good questions and the discussion this morning about Silvercrest and the second quarter and, of course, the first half of this year. We look forward to talking to you in three months or so to discuss the third and plans for the business. Thanks so much.

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