Q2 2020 Silvercrest Asset Management Group Inc Earnings Call
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Good morning, everyone that should be conference operator today. So that's how we'll be getting just a few moments we are seeing a place where more of a thank you for your patience what's against today's call will we get a just a few.
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Good morning, welcome to the Silvercrest I've said members recruit.
Q2, 2020, <unk> earnings conference call.
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Before we begin let me remind you the during today's call Silvercrest will make forward looking statements pursuant to the safe Harbor provisions of the private Securities Litigation Reform Act of 1995.
All statements other statements of historical Werent statements regarding future events and developments Silvercrest future performance, it's always managements current expectations beliefs plans estimates or projections relating to the future are forward looking statements.
These forward looking statements are only predictions based on current expectations or predictions about future events.
These forward looking statements are subject to a number of risks and uncertainties.
Important factors that could cause actual results mobile activity performance or achievements to differ materially.
That's right.
Among these factors are fluctuations in quarterly and annual results.
And finally net losses adverse supports the management focusing on implementations over growth strategy. So you're sort of old maintains silvercrest brand of other factor he's closer the company's filings with the FCC, including those factors listed under the caption important risk factors and the company's annual report on form 10-K for the year ended.
Number 31st 2019, <unk> quarterly report on form 10-Q, three months ended March 31st 2020.
And on quarterly report on form 10-Q, three and six months ended June Thirtyth 2020 filed with the FCC.
In some cases these statements can be identified by forward looking words, such as but do you expect anticipate Quinn.
The main likely May will could continue project.
Goal, the negative or oral these worse than others Awards Russians.
These forward looking statements or predictions based on silvercrest current expectations and its projections about future events.
All forward looking statements made on this call.
Dave Euro and Silvercrest assumes no no obligation to update these forward looking statements I would now like turn the conference over to recall Chairman and CEO Silvercrest. Please go ahead.
Thanks, and thanks very much for joining us for our second quarter 2020 results. It's a good to speak with you all today and it's a first time in five months had been in the same room with my CFO, which is nice.
Silvercrest is pleased to report good results for the second quarter 2020, ending June 30.
Despite the challenging backdrop, we've all seen with the krona shut down.
And we've grown both due to organic growth in each segment of our businesses as well supported equity markets. We opened new discretionary accounts of 159 million during the quarter and we saw total net organic inflows of 200 million in discretionary assets under management, which delivered our best organic growth since the second quarter of 2019.
Our discretionary assets under management, which drive topline revenue grew 16% from the first quarter and our total assets under management during the quarter increased 16% to 23.8 billion importantly, as of June 30, 2020, our assets under management now stand at nearly the same level as Q3 2019 finally.
As a result at the recovery into our creative combination with Cortina in July 2019, our total assets have increased 10% year over year. Accordingly, our revenue adjusted net income adjusted EBITDA adjusted EBITDA margins and adjusted diluted earnings per share each show increases or were flat for the quarter and first half versus.
As a year ago.
Silvergrass is maintained a proven ability over time, even during difficult environments and despite industry trends to continue we're tracking that positive asset flows from new high net worth family.
Institutional asset management and for our outsource Chief investment Officer businesses last year, we announced that 2020 and 2021 would prove important for the CIO business. While the current environment has slowed searches we reported last quarter that lets see I only have contributed half of the firm's organic growth and that does.
This continues to develop with new wins in the second quarter of 2020, the O. CIO business now advises on half a billion and assets under management. We are proud of our progress to date and we expect to grow this business into a few billion and assets under management with time.
Silvercrest institutional asset management pipeline also as rebuilding after the initial shock and economic shutting down due to the front a virus the new business pipeline is recovering and we expect the institutional business to improve a society makes further progress toward reopening.
Regardless of the environment Silvercrest will continue to opportunistically seek to effectively deploy capital to enhancing complement our organic growth, especially during an uncertain environment that is likely to experience continued market volatility silvercrest. It successfully made investments to organically grow the business and we'll continue to make those investments, but its cash flow and.
Reserves, we've hired new high net worth portfolio management professionals in New York, and we'll continue to add new talent, though to maintain a high level client service and to grow the business on July 28, 2020, the company's board of directors declared a quarterly dividend of 16 cents per share class a common stock dividend will be paid on or about September.
18, 2020 to shareholders of record as at the close of business on September 11th 2020.
Before I take questions I'll turn it over to Scott drew our CFO.
Thanks, Rick and I second, it's a great again, saying room as yours as well.
As disclosed in our earnings release for the second quarter discretionary AUM as of June 32020 were 17.3 billion and took away you I'm as of June Thirtyth 2020 was 23.8 belly revenue for the quarter was 24 million reported consolidated net income for the quarters.
8 million.
Delving into the second quarter Forever again revenue was 24 million in that represented approximately 8.5% increase over revenue of approximately 23.9 million for the same period last year. This increase was driven primarily by increased net client outflows in discretionary assets under management.
Including $1.7 billion in asset under management acquired on July Onest 2019 in connection with the courts you'd acquisition, partially offset by market depreciation in the first quarter. This year revenue for the quarter ended June 32020 related.
To the Cortine acquisition was approximately 2.6 million.
Totally you an increase from March 31st 2022 at June Thirtyth of the same year, primarily because it rebounds in the market after significant market declines in the first quarter of this year, resulting from the cobot 19 pandemic most of our revenue is building it bass based on closing market valuation the last based upon.
Previous calendar quarter.
Second quarter 2020 revenue was primarily based on March 30, Onest 2020 values.
<unk> expenses for the second quarter were 22.7 million, representing approximately 16% increase from expenses of 19.5 million. During the same period last year. This increase was primarily attributable to an increase in general and administrative expenses of 3.8 million, partially offset by decreasing.
Compensation benefits expense, a point sixmillion comp and benefits expense decreased primarily as a result of a decrease in the accrual for bonuses as a result of lower revenue and equity based compensation expense due to a decrease in that number unvested restricted stock units, partially offset by merit increases.
And newly hired staff, including the addition of Cortinas staff.
The increase in general and administrative expenses in the second quarter. This year was primarily attributable to a 3.8 million dollar increase in the fair value of contingent consideration related to the court gene acquisition increased portfolio assistance expense and higher depreciation and amortization expense related.
Mainly to the amortization of intangibles related 14 accusation and to the renovation of our office space in New York City.
There were decreases in travel and entertainment storage and moving expenses reported consolidated net income was point 8 million per quarter.
As compared to 3.4 million in same period last year reported net income attributable to silvercrest door to class a shareholders for the second quarter of 2020 was approximately 2.5 million or five cents per basic and diluted class a share adjusted EBITDA, which we defined as EBITDA.
After giving effect to equity based compensation expense and non core nonrecurring items was approximately 6.7 million were 27.7% of revenue for the quarter compared to $6.6 million or 27.5% of revenue versus same period in the prior year adjusted net income, which we did.
Fine as net income without giving effect to non core and non recurring items, an income tax expense, assuming a corporate rate of 26% was approximately 4 million sort of quarter or 28 cents for adjusted basic earnings per share and 27 cents per adjusted 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 are reporting period for basic adjusted EPS and to the extent I Wonder if we add unvested restricted stock units and nonqualified stock options to the total shares outstanding.
To confuse diluted adjusted EPS looking into first half of the year revenue was approximately 52.4 million, which represented approximately 13% increase over revenue or approximately 46.5 million. During the same period last year. This increase was driven primarily by.
Net client inflows in discretionary UN, including 1.7 billion in assets under management acquired on July Onest 2019 in connection with to 14 acquisition, partially offset by market depreciation in the first quarter. This year expenses for the first half were 30.4 million we're basically.
Flat through expense of 3 million for the same period last year comp and benefits increased approximately 1.7 million in first half compared to last year and Gionee expenses decreased approximately 1.3 million in first half of this year compared to 2019.
Compensation and benefits increased for the first half primarily because of an increase in salaries and benefits expense as a result to merit based increases and newly hired staff, including the addition of core Tina and increasing the accrual for bonuses. This was partially offset by a decrease in equity based compensation expense.
Due again to a decrease in a number of unvested restricted stock units and Unvested nonqualified stock options, which right outstanding.
The decrease in Gionee sort of first half was primarily because of decreases in the fair value of contingent consideration related to the 14 acquisition.
Also travel and entertainment expenses and storage and moving expenses were lower.
Increases in expenses were related to depreciation and amortization as a result at 14 acquisition and related to the renovation of our office space in New York City occupancy and related expenses portfolio and systems expense and increasing the fair value of contingent consideration.
Related to the Jamison cap Assembly acquisitions.
Reported consolidated net income was 10.5 billion for the first half as compared to 6.4 million in the same period last year.
Reported net income attributable silver silvercrest, where to class a shareholders for the first half in 2020 was approximately 6 million or 64 cents per basic and diluted class a share adjusted EBITDA was approximately 14.9 million were 20.4% of revenue her first half this compare.
To 12.3 million or 26.5% of revenue for the same period last year. Adjusted net income was approximately 9.1 million for first half or 63 cents per adjusted basic EPS and 62 cents per adjusted diluted EPS looking quickly at the balance.
Total assets were approximately 193.5 billion as of June during 2020 compared to 214.2 billion as of December 30, Onest 2019, cash and cash equivalents were approximately 37.7 million at June thirtyth compared to 52.8 million at this.
30, Onest last year.
Total borrowings as of June Thirtyth were 14.4 million.
Total class a stockholders' equity was approximately 60.9 million as of June Thirtyth.
That concludes my remarks, I'll, now turn or over that Rick for acuity.
Thanks, very much Scott and are now available for questions. Thank you.
Thank you Sir we will now begin the question answer session.
Good question. Your press Star then one on the Touchtone phone.
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Today's first question comes from Sumit Moody with Labor Sandler. Please go ahead.
Thanks, Good morning, Good morning, Scott Good morning.
Just wanted to start with the OCIO business seems like this but pretty nice growth.
I can't believe it was roughly $150 million now, reaching about 500 million I just couple of questions here, but but.
How much did the oshie Io initiative contribute to that 159 million new client assets.
Then can you talk a little bit about the impact of the lack of travel on the search environment and how that affects your expectation around the timing of kind of one you'll be able to reach a four scaled level of assets. I think you mentioned a few billion debate you have over time.
Sure I'm not sure what the 159, you referring to is but.
Basically.
At the we started at zero and OCI of business started flowing in and.
The fourth quarter of 2019, we had a really nice win in the second quarter of 2020.
And that was a meaningful contributor was the reason I'm hesitating here is it some of the contributions from that mandate may have bled into what is now that the third quarter a bit but basically the CIO asset sit at a 500 in 50.
<unk> million and.
A key threshold for us is going to be a billion I think because we want to build this into into a few deal it billion dollar business and I feel like with that amount of assets.
Under our belts.
Just help lead to more introductions and frankly recognition in the space because we've got sizable assets.
That does search environments really tough as you know I didn't talk about our pipeline of availabilities in our last quarterly call pretty much froze up and we had ended the year with a very very strong pipeline, we didn't really lose anything it's it's just that.
Stuff didn't move and travel definitely makes it harder to see the consultants and and cultivate relationships in this business a lot of our institutional development is through those consultant relationships that set.
We have been ramping up our client interaction.
And consulting firm conference call requests and we're staying in front of research personnel.
And.
We are finding that there is starting to be a pickup in activity.
In fact, I could say the six month actionable pipeline, which I've stopped providing a quarter ago is now about 780 million in the pure equity asset management side of the business.
Keep in mind those that is a very conservative view.
Of of our pipeline that is not just where we have tossed out RFP that is specifically, where we're in an invite only reclassed or where we're in a semi finals are finals.
With regards to bringing on accounts, we have a pretty high win rate.
Of our pipeline overall.
I expect on the other CIO side.
It slowed down a bit since the when we had in the second quarter, but I think that's as much a function of when nonprofit and other boards neat as anything else and I would expect that activity there picks up again in the fall we've seen that cycle before it's not unusual.
I serve onboards that managing Dalvance foundations and in fact, we're not meeting until the fall about some of those issues ourselves and I have we think it's the same for many other institutions. So.
We feel really good we do have opportunities in that pipeline, but I don't think it'll pick up again until.
Well into the third quarter.
Okay.
Okay. Great then just a follow up little bit on that I mean can you talk a little bit about the demand.
Where it is across the product set.
With the institutional pipeline.
The demand is mostly focused in our value equity capabilities.
There's some interest of course in the new growth opportunity, but.
Our ability to bring that to market as fast as we would've liked after the acquisition has certainly been affected by that this environment.
The performance in our growth capabilities has been has been better than benchmarks. So we're well positioned.
For potential searches.
It's just a matter of of continuing to bring that to market I'm quite confident we will build that pipeline. It's just a terrific team with a great capability, but their ability to market definitely was more affected by krona buyers that are already established value clients in fact the inflows.
This quarter institutionally.
Had very strong client additions I think thats important to note. We didnt have a lot of new wins as you would surmise based on my comments with regard to the ability to travel and what's happened with the pipeline and the fact I didnt, even talk about the pipeline a quarter ago, but we had very strong inflows.
From a from institutional investors when the markets were beaten down which was really nice to see that they had that kind of confidence with us and it bodes well for our relationship in the future.
That's really helpful. Thank you and then one on the on the seasonal impacts for tax outflows in the quarter has that gotten.
Mostly pushed back the third quarter and I mentioned this little bit last quarter, just wanted to see if there was any effect.
Good.
Yeah, Great question, and very perceptive, a view to ask because you're right usually there's a there's quite a bit a headwind at the end of the first quarter ended at second quarter is people raise cash to pay significant taxes.
It's uncertain, we're not really clear what the tax effect is going to be but.
I think it would be wise to consider that there will be outflows in the third quarter, given everyone's taxes, it would likely been pushed off into September.
There there has already been some raising of cash.
Of course that cash sits on our books as assets under management hasn't gone out the door yet for for taxes and to their clients of course with quarterly tax payments.
It's it's a little hard for us to get our arms around because there is.
In People's taxes are so individual but I would not be surprised to see the delay effect that you're referring to.
Okay great.
And then just one more for me.
Saw the nice bump and kind of discretionary fee rate the quarter can you talk about the drivers there how should we think about that for the remainder of the year.
Yeah, I, you're going to laugh at I think maybe or be frustrated at my answer I don't think you should account for that take into effect. Our fee rate has bounced between kind of 57 somewhere there and 63 for 18 years.
In it it stuck at 59 forever.
Yeah the.
It's affected mostly by what happens with regards to the markets when there is that.
When there's a significant selloff of course, you've got equities that that really drop in value and so youre overall fee basis will become more dominated by fixed income in that higher environment and vice versa. When you're in a really bullish environment. So it's not just a matter of what kind of business. We went larger the mandates the lower the fee as you would expect the bigger.
Institutional business comes because of those large.
Mandates without the need for service the lower debt. The further it lowers our fee basis, which is a really high class problem I don't mind. It at all give me all the you on the one at a slightly lower fee rate.
Those CIO would look similar so there is a slight potential trend downward interestingly.
Because of our continued growth in the high net worth business, it's still balanced out in that in that range and yes, we were a little high it for the quarter hard to know how you built your model versus what we're seeing in the reality of the business, but theres. One other thing that of course effects. The feed the fee basis, and that's a new flows in the quarter new added.
Well, because you get stub period revenue.
And if you're using beginning of hearing aid AUM to calculate what your fee basis and discretionary assets look like you're not taking into account necessarily those additional stub period revenue associated with new AOL and and revenue and that could well have been.
What you're experiencing in the last quarter to see that bump up in fee basis.
I can assure you it's nothing other than.
One of those vagaries of the business.
The market performance, new or news new assets under under management I would expect long term that.
It's going to stick around that 60 basis points high Fiftys, probably high Fiftys has been more risk realistic in recent years.
I don't see that changing unless we were to have very very significant institutional inflows or IC CIO business that overwhelm the new business from the high net worth sites possible again, a high class problem. So we're pretty hard to give you guidance, but I feel very good about where we stand I've also talked about fee pressure in the past.
And I think thats important to take into account.
Fat that so many of our competitors and asset management firms have seen fee compression and we're competing of course with with all of the issues us from space on the institutional side of the business. However, we came into the institutional business.
In the latter half of the two thousands.
Which means a lot of the concrete fee compression trends had were well in place and so we were already pricing that business to be competitive and yet we haven't seen additional fee pressures on the business. We obtained think that's important.
So there's not there's not a spiral down from what we already have the same would be true of the CIO business. We've only recently entered that so we're entering it at the market prices on the high net worth side, one key distinguishing characteristic of our model is that we also manage the assets in many cases for our clients as well as progress.
Slide wealth management advice and what that means is that to the extent our clients are using our internal capabilities. We are not levying a second fee. We for one fee are doing the wealth management and asset management. So starting 18 years ago, let alone five years ago.
Silvercrest has provided a very compelling value to clients vis-a-vis other competitors that have to outsource.
Client assets and have their clients pay a second outside asset management fee and the person is fees get cram down is the asset allocator or wealth manager in that scenario and while we have pure open architecture clients and we have fee arrangements, where we are outsourcing everything and compete with open architecture firm.
Yes, it's been an enormous competitive advantage for us to have one single fee that all in looks quite low to many competitors with very high performing.
Up equity and fixed income capabilities as you've noted in your note.
Okay, great. Thanks, that's really helpful color.
And that's that I'll leave it there thanks.
Thanks, a lot I appreciate it.
Our next question today comes from Sandy Murdo will evaluate research. Please go ahead.
Thank you good morning, congratulations on a solid set of results and strong investment performance across the board.
You mentioned that you've hired several new portfolio managers are portfolio management talent in New York.
Is this for new products as this book client service Theyre, arguing that the adding to existing.
Fund management teams.
This is strictly for high net worth family wealth management.
Given the service requirements of that business.
We want to maintain a reasonable number of clients per portfolio manager at Silvercrest hour.
Portfolio managers go well beyond what may be called the relationship manager or wealth manager at another.
Firm and their investment professionals in their own right. So we call them perform portfolio managers. So I can understand the nomenclature being a little confusing, but these are strictly to serve new high net worth families.
Our established and successful partners, who are managing wealth assets.
Eventually get to a point, where it's hard that too.
Add a lot of families without compromising on on the service model and this firm has to continue looking to organic growth and part of the way we're going to do that is by hiring new talent.
The.
We added one new portfolio manager this year, perhaps it was to actually it may have been.
And we've added two others over the past call here and a half to two years. So it's a reference of what we've done quite recently.
As well as what we've done over that over the past two years and I would expect that we'll be doing more of it both here in New York and elsewhere in a M&A environment that has been quite difficult to navigate which we've talked about before on these calls with compatible cultures people business models at a reasonable.
Price for for our investors shareholders.
We've been concentrating as you well no on the organic growth and on the wealth side that required. Some people we've made investments in the institutional business. We've made investments in the CIO business and more recently I've been turning my attention with investments to the wealth management business.
Okay, and just one final question.
Given the market environment.
Market volatility in the economic volatility due to call that are you seeing more opportunities.
On the acquisition side I know you talked to people all the time, but is that the creating possibly more opportunities for you.
No I don't think it is.
So.
It's kind of funny if if.
If the market had sustained its trough after the steep decline.
I think two things would have happened.
One you would have had a lot of stress.
On.
Players in the industry that have really levered up and used cheap debt to foster or what I consider pretty expensive acquisitions and and it would if perhaps changed.
How they looked at acquisitions or their ability to do so if it were sustained.
Secondly, there could potentially been a resetting a prices for what many cases in my experience our.
Declining annuity businesses without succession planning and a host of other business issues.
That didnt happen in the snap back was very fast and a lot of recovery and Didnt and didn't provide an opportunity in either of those fronts. The other thing that happens of course, when the markets fall down a lot, especially with closely held proprietor ships, which are endemic in this business.
Is that people can take there the firm's off the market and just wait for recovery.
So we didnt see that cycle at all it's just continued as if it were 2019 in many respects.
The cheapness financials in general in the market.
It's been a sector that is really struggled for quite some time and the attractive cash flow characteristics of these businesses has turned the attention of investors to it and so the the demand has not.
Has not gone away and.
In addition, I would say that to move the needle at this firm in.
Places I want to be with business models that work with us.
That allow us to consistently then organically grow after an acquisition.
This is a pretty pretty tall order anyway, we're very selective which is why we've always concentrated on organic growth. We are always in conversations there were still firms out there we're talking with that we we would do a deal with when the timing is right.
But I did volume or what I'm seeing has has not been any more attractive than than what I've seen recently.
Great. Thank you.
Youre welcome.
Ladies and gentlemen, as a reminder, if you like that's the question. Please press Star then one.
Our next question comes from Chris the call it with singular research. Please go ahead.
Hi, Good morning, I just had a.
My question regarding.
If you could servicing light on on the high net worth.
Client acquisition environment.
Just wanted to know what were some factors there that led to.
The growth.
Yes, I'm glad you asked the question because my experience going through the great financial crisis.
Was that.
Hi, net worth investors during that period of time really stock with the people or management wealth managers that they were already invested with its a relationship business and in that environment. It was better the Devil you know than taking it a chance on someone new of course at the time that from was six seven years old when we were.
Going through that through that crisis.
And in quite a different position from an OEM perspective, as well and stature in the business.
But.
The snap back then not unlike the snap back now then allow people to get comfortable with again with what their their wealth management was doing this time is different and I can't quite tell you why I expected along with the institutional pipeline for the wealth management opportunities to freeze up and.
In this environment, it's a relationship people business, we love meeting our clients and seen them face to face let alone new prospects.
And.
I have been quite surprised at the amount of interest from high net worth of investors. This time around I think a couple of things have changed number one would of course be technology all of us have gotten used to video calls and and the lack of travels in meetings and.
Our clients and high net worth investors are no different and they've been willing to do that and engage us.
Secondly, I think we've seen people.
In this particular environment, which is a non financial crisis, but a societal crisis people reassessing fundamental things in there lies relationships and what have you and there are a couple incidence.
With regards to new business, where I know that has been a driving factor.
Third one this time around at least with a couple of prospects Im aware of is that some of the roll up our eyes and larger very aggressively growing.
Businesses.
That are aggregating.
Businesses.
Our either taking their eye off the ball or are pushing product or giving a sense of insecurity too to their client base because we are seeing.
Opportunities from other ROI A's very often the business. We have one have been from the wire houses and bulge bracket banks, we we're now seeing opportunities not just there, but but from of some of our competitors and I think that is an element in what's happening right now so.
So we don't track a pipeline for the high net worth business, it's a little bit to serendipitous and and uneven to predict it can take years to land a family of can take two weeks.
It just doesn't have the same process that the institutions do but.
I will say that the second quarter was pretty good and that.
That opportunity has not abated. So I look forward to further organic flows there.
Okay. Thanks, Thanks for that.
Ladies and gentlemen. This includes the question answer session I will turn the conference back over to recall for any closing remarks.
Well. Thank you very much appreciate the opportunity to add some pretty good questions. This quarter. We're proud of what we achieved and were able in this environment to continue progress with organic growth and of course are very grateful for.
The market's revaluing assets, which is something we can do nothing about but certainly helps the business and allows us to.
Continue making investments rather than being quite so conservative about concern for the future, which is which is good news and in the wake of.
Realty and the potential for market volatility, we're going to continue making those investments and focusing on organic growth. While we are keeping an eye out for the right kind of acquisition not unlike we did with Cortina last year, which was just terrific.
So thank you very much for your interest and for the questions and look forward to speaking to you next quarter. Thanks.
Thank you Sir This concludes todays conference call. Thank you all for attending today's presentation. You may now disconnect your lines have a wonderful day.