Q3 2019 Earnings Call
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Before we begin let me remind you that during today's call Silvercrest will make forward looking statements, which went to the safe Harbor provisions of the private Securities Litigation Reform Act of 1995.
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I'd now like to have the conference over to Rick Hough, Chairman and CEO [laughter] go ahead.
Thank you very much before joining us on the third quarter 2019 result, Silvercrest results for the third quarter of 2019 reflect a full quarter of the successful integration of our new small cap growth equity.
And professionals based in Milwaukee, as we expected that transaction contributed meaningfully to our accretive growth in silvercrest cash flow margins and earnings per share since the second quarter. The firm's adjusted diluted earnings per share of increased to 38 cents per adjusted diluted share for the third quarter Silvercrest adjusted EBITDA.
Rose to 8.9 million in Silvercrest adjusted EBITDA margin has increased to 32.1% both for the third quarter 2019.
Our total assets under management at Silvercrest now stand at 23.5 billion as of September Thirtyth with associated revenue of 27.8 million for the quarter.
Institutional assets under management now comprise nearly 30% of the firm's discretionary assets under management, while the from did experience outflows, primarily due to rebalancing the from established new high net worth relationships and 2019 looks to be a good year overall for business development and continued organic growth trend, we are proud of compared with many peer.
Yes.
Last quarter, we announced that we expected near term success for the firm's outsource Chief investment Officer initiative I'm pleased to announce that we have won our first few O CIO clients, representing a diversity of institutions. The remainder of 2019 and 2020 remain important for organic growth India's CIO effort and I am pleased.
Report that the marketing opportunities for that business remains strong following a slow down for institutional business opportunity in the later part of 2018, we now have a robust interest institutional asset management pipeline with substantial institutional interest across silvercrest equity strategies.
Both our asset management Anto CIO growth initiatives for trust silvercrest value proposition, which is to deliver excellent institutional quality capabilities to our wealth management families and investors, placing silvercrest at the forefront of the competitive landscape. We will continue to invest in high net worth portfolio management professionals to support the organic.
Wrote that that business into to diversify our talent as we've discussed previously the current M&A environment for wealth management firms remains both active as well as expensive Silvercrest. However is involved in multiple conversations at any given time, we believe our brand culture capabilities and technological innovation makes.
Silvercrest, a premier partner for slight businesses and professionals, regardless of the environment Silvercrest for Opportunistically seek to effectively deploy capital to complement our <unk> organic growth. Thanks, very much and I will take questions. After Scott charter CFO presents financials.
Thanks, Rick.
As disclosed in our earnings release for the third quarter discretionary a U M. As of September Thirtyth of this year were 17.5 billion and totally you and as of the scene date was 23.5 billion included in our E. U M. As of the ended the third quarter is approximately 1.7 billion.
The U.M. acquired as part of our recent acquisition I'm certain assets of Cortine asset management revenue for the quarter was 27.8 million and reported consolidated net income for the quarter was 4.8 million.
Drilling further down on the third quarter again revenue was 27.8 million. This represented approximately a 12% increase over revenue of approximately 24.9 million for the same period last year increase management and advisory fees as a result of increased eight U.M. drove higher.
Revenue.
<unk> expenses for third quarter were 21.5 million, representing approximately 9% increase from expenses of 19.8 million versus same period last year. This increase was primarily attributable to increases in compensation, a point 2 billion and general and administrative expenses of 1.6 million.
Comp and benefits expense increased primarily as a result, the merit based increases and newly hired staff, including the addition of core to SAP, partially offset by decrease in the accrual for bonuses and a decrease in equity based compensation expense due to a decrease in a number of unvested restricted stock units and.
Invested nonqualified stock options outstanding.
The increase in general and administrative expenses during third quarter as compared to the same period last year was primarily due to increases in professional fees.
Due to an increase in acquisition related legal fees, resulting from the 14 acquisition and increase in depreciation and amortization expense related mainly to the amortization of intangible assets related to acquiring fourteena answered a renovation of our office space in New York City also an increase in occupancy and.
Related expenses and an increase in insurance costs reported consolidated net income was 4.8 billion for a quarter is compared to 3.9 million in same period last year reported net income attributable to silvercrest sort of class a shareholders for the third quarter. This year is approximately 2.7 million.
We're 30 cents 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 nonrecurring items was approximately 8.9 million or 32.1% of revenue for the quarter compared to 7 million or 20.3% of revenue for the same period last year.
Adjusted net income, which we defined as net income without giving effect to non core and nonrecurring items and income tax expense, assuming a corporate rate of 26% was approximately 5.4 million for the quarter were 38 cents per adjusted basic and diluted earnings per share.
Adjusted earnings per share is equal to adjusted net income divided by the actual class a and class B shares outstanding as of the ended the reporting period for basic adjusted EPS and to the extent dilutive, we add unvested restricted stock units and nonqualified stock options to total shares outstanding to compute dilute.
Adjusted EPS.
Looking at nine months ended September Thirtyth revenue was approximately 74.3 million representing approximately a 1% increase over revenue of approximately 73.8 billion for same period last year again, the increase was driven primarily by growth in match.
And advisory fees as a result of increase you on expenses for nine months ended September Thirtyth of this year were approximately 59.6 million representing approximately a 3% increase over expenses of approximately $57.9 million versus same period last year.
Compensation expense decreased approximately 1.2 million during the nine months ended September thirtyth of this year in comparison to one year ago.
General and administrative expenses increased approximately 2.9 billion during the nine months ended September thirtyth compared to last year.
Compensation and benefits decreased primarily because of the decreasing the accrual for bonuses, partially offset by increased salary expense as a result, the merit based increases and newly hired staff, including the addition of staff from Cortina.
The increased general and administrative expenses for nine months also included increases in professional fees due to the 14 acquisition and increasing depreciation and amortization related to the 14 intangible assets and a renovation of our office in New York.
In addition to our increases in occupancy expenses and insurance costs.
Imported consolidated net income was approximately 11.2 million for the nine months ended September thirtyth that this year that compared to 12.1 million in same period last year.
Reported net income attributable to silvercrest for nine months ended this year is approximately 6.2 million or 72 cents per basic and diluted class a share adjusted EBITDA was approximately 21.3 billion were 20.6% of revenue through nine months ended September this year compared to.
To 21.1 billion were 20.5% of revenue from same period last year. Adjusted net income was approximately 12.4 million for nine months in September of this year or 86 cents per adjusted basic and diluted earnings per share with respect to 14 acquisition. We closed this try.
As action on July Onest.
In consideration for the purchase assets in goodwill at closing, we made cash payments in the aggregate amount of approximately 33.6 million, we drew down 18 million on our term loan facility with city National Bank, and we issued class B units with the value at closing equal to approximately $9 million.
The total deal consideration includes contingent consideration in a form of two potential retention payments and the potential growth payment during the five years. After the closing of the acquisition based on achieving revenue milestones looking quickly at the balance sheet total assets were approximately 203.1 billion.
As of September Thirtyth of this year compared to 133.4 million as at the end of last year cash and cash equivalents were approximately 40.8 billion that September thirtyth and as compared to 69.3 million at the end of last year goodwill and intangible assets increased as a result that accordion acquisition.
Furthermore, as a result for the adoption of the new lease accounting standard effective January onest of this year certain lease commitments now peer understatement of financial condition is operating finance lease assets and liabilities as of September Thirtyth, our operating in finance lease assets and liabilities totaled.
34.5 million and 40.9 million respectively.
Total borrowings as of September Thirtyth of this year were 17.1 million and total class a stockholders' equity as of the same date was approximately 63 million.
That concludes my remarks, I'll now turn over to Rick for acuity.
Thanks, very much Scott and were available for questions. At this time do we have anyone in the Q.
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Okay, operator, I happened to know people are trying to ask questions and it's not working properly could you. Please.
Open up the line for Sumedh.
One moment please.
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Yeah.
Thanks.
To meet we ask your question.
Alright, great camera does.
Thanks, I mean, sorry about that Youre getting in auto problem at all so I guess, we'll get start with the court data acquisition noticed they contributed $3.2 million of revenues in the quarter just wanted to get some color how you feel even performing in the first quarter after closing the deal and how that integration progress versus your expectations.
Are you largely satisfied with the contribution in the quarter.
I'm very satisfied with the contribution in the quarter.
It hit our own projections that we internally did our deal on very closely.
The amount of accretion we expect it.
On the deal day, one was just about on the Mark for our own financials in evaluating the deal.
In an environment, where many companies will do deals on the prospect to future growth.
We seek to make sure they're accretive early on and we succeeded at the expense ratios and other metrics are also as expected and we were pretty pretty aggressive about it on the integration side, it's gone mostly smoothly youre going to get your occasional.
Pickups in particular with technology, we're still sorting through some of those but in the scheme of things are pretty minor in short term I think those will be behind us soon.
The portfolio managers, which are so important to what we're doing intellectual capital affirm our great partners, we couldn't be happier about cultural match in a business when you're talking about investment talent and people.
That is so critical and.
They are among the finest partners that frankly, we've ever started to work with and a 17 year history of this firm.
And the clients have.
Reacted positively so on that score it looks good and we're already in use searches for for institutional business.
Great that's helpful.
One of the client rebalancing in the quarter, how much of that was related to 14 clients. I mean have you seen any attrition following the deal and then secondly, we noticed 14 add a couple major clients that.
Concentrate roughly 20% of its revenues just wanted to give color on those clients, maybe you get a better understanding of the nature those relationships that.
Sure another bank with 14 or anything notable their.
Sure. So two different questions first was on rebalancing yesterday, there was some rebalancing.
They've had strong returns and you would you would expect that it's been a headwind as you know for our own value equity strategies with its performance I would not say there's anything notable.
There or of concern.
As part of the business, it's a high class problem.
With regard to.
The client concentration right. It's always been a case that they've had some in these specialized strategies the.
Clients that are better.
That is responsible for that concentration has been with the firm for most of its if history if not all.
It depends which when you're looking at and thoroughly understand that process and characteristics of the portfolio.
Small cap.
Growth or small cap opportunity portfolio, which includes micro caps can be quite volatile and.
On correlated and other respects and these clients are very familiar with the process. They really buy into what our team is doing and they've been positive about the deal.
Does that help.
Yes to answer your question Yeah, that's that's really helpful.
And then by the way I should mention there the kind of split between the two different portfolios.
That are based out of Milwaukee.
Okay. Okay.
I guess couple of for Scott here real quick.
<unk> expense side.
Comp expenses.
Notice, we reduced the equity comp in the quarter.
Yes, actually should we expect that to kind of return to more normalized levels going forward and I guess, how should we think about that.
Adjusted cash comp ratio, yes.
You may recall, we had a large number of restricted stock unit grants that we made in 2015.
With a those had a four year vast those.
Those.
We're fully vested this past August and Thats why you see the meaningful decrease in equity based compensation expense.
Okay. Okay got it and then just on the comp ratio for the rest there I mean, how are you guys expect that Ron.
Maybe into 2020, yes, so that.
That is an interesting question because of course, we have managed the company.
Towards a certain compensation as a percentage we've usually.
In right on it or even under it as we've done recently past couple of years and given the higher margins than walkie business, obviously, you've seen that.
That compensation ratio of total revenue decline.
Our cash flow.
Generated by the business ultimately needs to be.
Invested at a good rate of return.
Whether that's hiring talent or potentially doing a deals we did with our friends in Milwaukee.
I think it remains to be seen to what extent we maintain.
That percentage.
The key issue here is if we can keep our percentages lower.
And increase the cash flow and earnings for the company.
All things being equal, we'll do that however, as a small company that really feels the need to invest for growth and the need to continue diversifying our professional talent, especially to drive organic growth in the high net worth business.
It's possible that we will.
Eat into.
Into that ratio a little bit so not necessarily stay as high as it as it is I can't tell you exactly what thats going to look like because we have to be a bit opportunistic.
And unlike a deal when we make hires obviously that hits the the expense side of the of the PNM now right away and doesn't have the same tax benefits of the deal, but it's something we're going to have to do to grow.
Over time, and we're just going to be careful about it we're very aware of.
The characteristics of this this company and how they affect shareholders.
Okay, Great. That's helpful and then I guess kind of moving forward.
And that same base can you discuss a little bit how you I appreciate the comments on the M&A environment.
Paired remarks, but is that how do you balance the kind of M&A push versus.
Lift out.
You know as those that which one do you see kind of being more efficient as you go forward and maybe just talk about the priority differences there yes.
We believe we've rarely Donna lift out at Silvercrest in our 17 year history.
There is much more fertile ground for us on the M&A front.
And.
So it's much more likely and that's where we're going to personally for for us in what we're looking for in terms of the characteristics of the professional joining us.
More likely.
To find opportunity.
There is possibility down the road that as the Ri aid business matures and professional find themselves.
On happy at much larger role up type firms.
In that situation.
They may start.
Look around away some of their colleagues are the brokerage is which is not fertile hunting ground for us in our business model, it's possible that down the road that there could be some MRI a tight lift outs, but we're not.
We're not running around seeking those if you look at the business.
The wealth management side with our eyes is highly concentrated.
It's not a large number of firms that control on the majority of the of the Lamb silvercrest being lead among them.
So it's going to be on M&A.
The best opportunities for us are going to be firms that know us well from the industry or the character of our leadership here and seek a direct conversation because they know what they want and are not participating in an auction process. We have very large conglomerates banks private equity rollout.
Firms all competing.
And in what I think is a pretty expensive market right now.
Okay great.
I guess sort of just a follow up there.
As we push into the year, just want to get update on the capital allocation priorities I mean, the dividend yield kind of running around 5% you guys are.
Hi, guys thinking about balancing that against that being opportunistic in M&A and hiring and considering if you don't want to affect the float with buybacks at the debt load being pretty modest.
So.
Right.
You can be a little more specific it might be helpful. Let me just started and answer and if I'm off the Mark let's let's try again.
It has been our stated policy to support a meaningful dividend.
In in our in our business for our shareholders as a micro cap stock.
Thats fairly thinly traded.
It's not always entirely rational to kind of a funny market. We think it's important to pay our investors.
As we as we grow and in invest our money profitably. So it is very important to us to support it and prudently increase it as we have been doing on a very regular basis.
At the current yield we're starting to get towards the top end.
I think for now unless we're going to see some other movement.
But we have a strong cash generation very low debt. So we can continue supporting it.
Even in the wake of changing markets for some time, we also have cash at the C Corp level to support that dividend and still take advantage of M&A opportunities.
We have constructed this dividend in a way that we felt we could do both not have to make bahar choice at this time.
That's a function of both being lightly levered.
Having strong cash flow and having a dividend that's that's clearly manageable.
Based on those two factors.
Okay, Great. That's that's perfect.
And then just just turning to the results now I mean.
I wanted to touch on the institutional channel.
Yeah.
Especially compared to the high net worth I, just want to drill a little bit more and on the pipeline as well just about other growth continuing from the first half into the second where are you seeing some of the.
Most traction within those products and the pipeline Dutch yes, right. So what's interesting is you may recall, when we were speaking a year ago, the pipeline at really dried up and.
It's not surprising that's there was a lot of.
Downward pressure in the equity markets and I think a lot of institutions in particular, which is the pipeline we can most easily measure.
The differ decision, making or searches and then as.
Markets improved that pipeline.
Opened up.
And we define our pipeline is looking over the next six months.
And they are not a general pipeline, but there are opportunities where we're involved in it invite only RFP or whereas semifinalist a finalist candidate.
So it's near term and it's it's a pipeline of opportunities where we have a very significant chance of winning business that pipeline is now very strong and robust it's grown all the way back and exceeded.
Where we've been in the past.
So that portends to some very good organic business development in the institutional channel Interestingly, we have current.
Search activity across large cap value.
And equity income.
In addition to our smid cap value in focus value strategies.
We are softly closed except for certain institutional investors for or the smallcap value. So the activity in our other strategies is very important.
Secondly, I'm pleased to see that activity in an area, where a lot of institutions have sought to go passive or or to index and.
It just speaks to the quality of our investment team here and this in the strength of the firm. It may also speak.
Two.
Our long term trend with regards to active versus passive which I've talked about in the past and which I'm.
Somewhat contrary on I had contrarian on I think active will.
Well reassert itself.
East comparable to where it is today versus.
Passive.
So I think the fourth and.
First quarters 2020 are going to be pretty important for the institutional business in terms of realizing that business, we do have new business opportunities with.
The growth strategies, but that marketing effort in organization was part of our integration during the third quarter and.
So there is a pipeline there, but I'm not characterizing at this point in in future calls I will probably talking about our institutional new business opportunities in general I won't necessarily spotlight it by strategy, but I will mention in general where it resides just as I mentioned for example that we have large cap.
And equity income interest in our current.
Pipeline. We're also as you know incubating, our international value and emerging market strategy and we will also be incubating new growth strategies over time.
In Milwaukee, but we're going to knock off the opportunity we have now in grow into those new opportunities just as we made smallcap value a success at the firm now we're transitioning to to some other things on the back of of that success.
So hopefully find that helpful with a with a lot of cup color around that business.
Yes, that's great.
So just turning to the OCIO business, yes.
So the wins in the quarter Thats, great I, just wanted to get a little more color around the pace of growth. There I know you've talked about sort of a medium to long term.
Goal of.
Meaningful growth I, just wanted to see it was just kind of as expected or kind of coming at a little bit.
Quicker than you thought with some of the fit with I would say as expected.
When we added to this team over the past year and a half two years.
In built it up it was remember building our own CIO capability using the intellectual capital that services are high net worth client base with asset allocation.
Risk analysis and management.
As well as manager selection, and then kind of institutionalizing.
That capability in that intellectual capital in a way than it was appealing to the.
CIO marketplace, what I stated earlier this year and perhaps at the ended last year, but but certainly in our first and second quarter costs was that 2019 in 2020, we're going to be very important for seeing some wins and building that that business now that we've got the team in place and.
Well here, we are in the third quarter of 2019 were starting to see that new business flow. So I would say that is exactly as I expected and I'm pleased to see that type of wins that we're getting.
Huh.
Importantly, not unlike the institutional business on the on the equity or strategy side, you have to have clients to when clients no. One wants to be the first or be alone in that first precious client, we won several years ago and smallcap value.
Made the waters safe from many following institutions and help build our reputation among consultants.
And institutions seeking equity management, the CIO businesses no different although it's driven by a combination of boards and personal relationships as well as a more institutional.
Driven approach and Im pleased that our first few clients represent a diversity of institutions I think thats important.
We have won a college and Dauman that we will be helping to manage we have won.
Hospital, we have won a law firm pension assets and we have won a endowment slashed foundation.
Classic charitable foundation.
So for different institutions that allows us to point to them and do a good job.
That other institutions can can look to some of those flows will actually occur in the fourth quarter and are not reflected in our third quarter numbers.
And in fact, what came in in the third quarter I believe mostly went into a non discretionary.
Assets, although we're being paid a higher fee than we would normally get for non discretionary assets. So a bit of those flows you're going to see in the fourth quarter not the third but I thought it was really important.
You mentioned those wins because I had made an issue of it in my earlier cause.
This year and the same is true for 2020, it's important that we get the job done now.
Okay, great Yeah, that's really helpful.
Just one more question if I could it's really more of a modeling question, but while the discretionary fee rate looks like it just kind of came in north of 60 basis points in the quarter adjusted Four Q1 4, I just wanted to.
So how do you expect that to settle and how should we think of the drivers affecting that discretionary rate going forward.
Are you talking about how the CIO business will affected or what I see for that rate in general just at the rate in general.
Yeah in general it has been extremely stable for a high net worth business, which is 70% of our business.
We have one larger mandates over time that is driven it down by a couple basis points to be expected and the institute to growth in the institutional business.
In general at Silvercrest is driven that that rate debt down.
The Milwaukee combination and the growth strategies raised it up and.
And the nature of their specialized strategy and the rarity of it allows them to.
Maintain a higher fee level successfully.
I don't expect that to change and I don't expect it to change for the rest of the business. It's been very stable for very long period of time, what does tend to affect it on an overall basis is the shift between fixed income in equity.
We take a very long term view with our high net worth business and it doesn't change a lot even when we're making decisions.
But that is one thing that that could change it and obviously.
We've been a bit more weighted toward equity in general.
Over the past 10 years, but we're close to the midpoint of our range. So again I don't I don't expect that to change really substantially now since we're seeking to grow the institutional business with the maki growth strategies.
We'll be seeking significant mandates and it is possible that to get larger mandates.
That we will see.
The fee basis come down a bit for those wins, just as we sought with our smallcap value equity strategies here.
But they've got a really special strategy and.
It's very compelling in the marketplace and that really remains to be seen would have to be very very large mandates I think.
So no prediction other than to say that it's been stable to change you solve is just so primarily result of the combination and if it does come down due to very large wins well give me as many those as you can that said thats, a really high class problem.
Alright, great. Appreciate you taking all my questions. Thanks, guys sure assuming before you kind of you've got more you might as well monopolize the question period because of that the issue and people asking questions and.
I know you're trying to be plight for others, but you.
Don't worry about it they'll get into Q.
Okay. That's that's everything like outbreak.
All right for me thanks, very much I appreciate it again, ladies and gentlemen, if you'd like to ask a question. Please press Star then one.
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Okay.
Alright, well, thank you for joining us for our third quarter of 2019.
Quarterly results, we had a very good quarter much of a driven by the successful merger with them growth strategies of Cortina Milwaukee were very thrilled with both the professionals.
As well as that organization are quite optimistic about the future.
We had lots of discuss today about the successes in the CIO business and our strong institutional pipeline and we look forward to reporting more when we have our fourth quarter results. Thanks very much.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.