Q2 2022 Silvercrest Asset Management Group Inc Earnings Call
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Good morning, and welcome to the Silvercrest asset Management Group, Inc. Second quarter 2022 earnings conference call. All participants will be in listen only mode should you need assistance. Please signal conference specialist by pressing the star key followed by zero. After today's presentation there'll be an opportunity to ask questions. Please note. This event is being recorded.
Before we begin let me remind you that during todays 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 FCC under the caption risk factors.
All such forward looking statements we claim the protection 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 Rick Hough, Chairman and CEO of Silvercrest. Please go ahead. Thanks.
Thanks, Good morning, everyone welcome to our second quarter of 2022 results and earnings call volatile economic and Marshall, who conditions, primarily affected silvercrest performance in the second quarter of 2022.
<unk> also experienced net outflows due to substantial client tax payments the firm's discretionary assets under management, which drives our revenues decreased to 24 billion as of the end of the second quarter of 2022 from $22 9 billion as of the end of the same period last year in 2021.
<unk> second quarter 2022 revenue decreased year over year to $32 2 million and our total AUM now stands at $28 7 billion.
The firm's quarterly adjusted EBITDA was approximately $9 2 million in annualized adjusted EBITDA run rate of $36 7 million.
Silvercrest second quarter 2022, adjusted EBITDA margin was 28, 5% a healthy margin in light of declining <unk> and associated revenue.
Silvercrest increased relationships during the second quarter and new accounts increased over the first quarter, partially offsetting outflows for client tax payments silvercrest institutional equity new business opportunities increased during the second quarter our.
Our suite of proprietary equity capabilities continued solid outperformance, which pretends good.
Future growth in the business, our sub advisory relationships continued to add assets during the second quarter of 2022.
Market volatility and uncertainty create long term opportunities that typically benefit the high quality of silvercrest capabilities and we look forward to more stable markets. Our tenure in the business has proven that our firm has the professional resources ability and strategy to execute through difficult periods to build a growing and enduring business. We're pleased with silvercrest continued stable <unk>.
<unk> over time.
On July 27th 2022, the board of directors declared a quarterly dividend dividend of 18 cents per share of class a common stock that dividend will be paid on or about September 23 2022.
To shareholders of record as of the close of business on September 16th 2022 that was an increase of one penny over our previous dividend.
I'll now turn it over to Scott and then well take questions. Following his presentation Scott expert.
Our earnings release for the second quarter discretionary AUM as of June 30 of this year was $20 4 billion and total AUM as of June 30 of this year was $28 7 billion.
Revenue for the quarter was $32 1 million and reported consolidated net income for the quarter was $9 5 million.
Looking further at the quarter again revenue was $32 2 million, representing approximately a 3% decrease over revenue of approximately $33 1 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 second quarter were $20 2 million, representing approximately a 21% decrease from expenses of $25 $8 million or the same period last year. This decrease was primarily attributable to decreases in compensation and benefits expense.
$5 billion, and general and administrative expenses of $5 million.
Compensation and benefits decreased by <unk> 5 million or approximately 3% to 18 million for the three months ended June 30 of this year from $18 5 million for the three months ended June 30 of 2021.
The decrease was primarily attributable to a decrease in the accrual for bonuses, partially offset by an increase in salaries and benefits expense as a result of merit based increases and newly hired staff.
General and administrative expenses decreased by 5 million to $2 3 million for the three months ended June 30. This year from $7 3 million for the three months ended June 32021. This was primarily attributable to decreases in the fair value adjustment.
Contingent consideration related to the Cortina acquisition.
$5 7 million trade.
Trade errors and occupancy related costs, partially offset by increases in travel and entertainment expense portfolio and systems expense professional fees and shareholder related expenses.
Reported consolidated net income was $9 5 million for a quarter as compared to $5 7 billion in the same period last year.
Reported net income attributable to silvercrest or to class a shareholders for the second quarter of this year was approximately $5 8 million or 58 cents per basic and diluted class a share adjusted EBITDA, which we define as EBITDA without giving effect to equity based compensation expense and noncore.
And nonrecurring items was approximately $9 2 million or 25% of revenue for the quarter compared to $10 4 million or 31, 5% of revenue for the same period last year.
Adjusted net income, which we define as net income without giving effect to noncore and nonrecurring items and income tax expense, assuming a corporate rate of 26% was approximately $5 8 million for the quarter or <unk> 40, <unk> 39 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.
To the extent dilutive, we add unvested restricted stock units and nonqualified stock options to the total shares outstanding Jacobs you diluted adjusted EPS.
Looking at the first half revenue was 65.7.
$7 million and that represented approximately a 2% increase over revenue of $64 3 million for the same period last year. This increase was driven primarily by net client inflows in discretionary AUM, partially offset by market depreciation.
Expenses for the first half were $30 3 million, representing approximately a 25% decrease from expenses of $51 3 million for the same period last year. This decrease was primarily attributable to a decrease in general and administrative expenses of $13 5 billion partially.
Offset by an increase in compensation expense of <unk> 5 million compensation expense increased.
<unk> increased by <unk> 5 million or approximately 1% to $36 6 million for the first half of this year from $36 1 million for the first half last year.
The increase was primarily attributable to an increase in salaries and benefits expense, primarily as a result of merit based increases and newly hired staff, partially offset by decreases in the accrual for bonuses and equity based compensation expense due to a decrease in the number of Unvested restricted stock unit.
Zen Unvested nonqualified stock options outstanding General and administrative expenses decreased by $13 5 million or approximately 89% to $1 7 million for the first half of this year from $15 2 million for the first half of last year. This was primarily attributable.
Two decreases in the fair value of contingent consideration related to the <unk> acquisition of $14 5 million Aki.
Occupancy and related costs trade errors.
Largely offset by increases in travel and entertainment expense portfolio assistance expense professional fees shareholder related expenses and sub advisory and referral fees.
Reported consolidated net income was $21 9 million for the first half of this year and that compared to $10 million in the same period last year reported net income attributable to silvercrest or the class a shareholders for the <unk>.
First half of this year was approximately $13 3 million or $1 35 per basic and diluted class a share.
Adjusted EBITDA was approximately $19 4 million or 29, 6% of revenue for the first half of this year and that compared to $20 1 million or 31, 2% of revenue for the same period last year.
Adjusted net income was approximately $12 5 billion for the first half or 86% 83 cents per adjusted basic and diluted EPS, respectively.
Looking at the balance sheet total assets at June 30 were approximately $207 3 million compared to $229 3 million as at the end of last year cash and cash equivalents were approximately $67 6 million at June 30 of this year and that compared to $85 7 million at the end of.
Last year total borrowings as of June 30 of this year were $7 2 million.
And total class a stockholders equity was approximately $90 7 million at June 30 of this year.
That concludes my remarks, I'll turn it over to Rick for Q&A. Thanks, Scott.
We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.
If you're using your speakerphone, please pick up your handset before pressing the keys to withdraw your question. Please press Star then two at.
At this time, we will pause momentarily to assemble our roster.
Yeah.
Our first question comes from Sumit Modi from Piper Sandler.
These go ahead.
Thanks, Good morning, Rick Scott.
Good morning, just wanted to start maybe just want to start maybe on the net cash outflow number of nearly 1 billion in the discretionary AUM you always say that we don't see that high of outflows that were tax related. So maybe just help break down that number into its parts how much was taxes versus outflows.
Sure the vast majority of it was the vast majority of it was.
In terms of the impact on the business was for taxes.
Sure.
Due to client sensitivity I want to be careful but it but they were.
Liquidity events.
That prompted taxes.
For some key clients that resulted in very high payments.
Good thing ultimately for them.
Even if we don't like paying the tax man.
I'd say in general the outflows were kind of in line.
With what we've seen historically over quarters, it's a bumpy number as you well know.
I would also comment that our second quarter tax outflows have been quite low.
In recent years.
We don't have a lot of turnover in our portfolio folios and unless a client has other.
Capital gains or liquidity events.
We're not going to see a big bump in that.
But not surprisingly it seems somewhat.
Has the liquidity from our business.
Or event, they're going to pay big taxes. In addition.
As I mentioned last quarter, we've had years of good capital gains and its not surprising at some point youre going to see.
Can see tax payments related to related to that so I can't give a lot more color than that other than the majority of the outflows were in fact for taxes.
Okay.
Okay, Great that's actually really helpful.
And then I guess, turning more on a high level basis to capital returns in the repurchase program. Just wondering how you guys thinking about using that lever now that we're sort of a year and ended the program yeah, yeah, especially over the next next 12 to 18 months, Yeah. I really appreciate you asking that obviously with the market the market downturns and the.
The relative health of the business.
Hi, maintain margins I'm sure, we'll talk more about that.
We were we've done quite well compared to market overall, if you look at our if you look at our AUM.
Which of course declined with the markets, but we feel really good about it on a relative basis.
Especially with maintaining our margins, it's a very healthy business. What we're experiencing is just comes with the territory of being in the market slowed in this business.
But with the downturn of course are our own equity has become.
Cheaper and that to me represents a really good value.
Yes, you should be looking for us to deploy it we've been frustrated with.
Getting those buybacks done.
But we're going to.
We're going to we're going to see to it.
I've said this before but I want to emphasize that I don't like announcing a buyback as press release I actually wanted to do it.
So stay tuned on that.
Okay, great and actually that kind of leads me into my next question I guess, we'll start on the on the margin questions, but really just wanted to maybe get a step back at a high level.
Thought on sort of how flexible are the expense side of the equation is here where are you guys out with TNT and the non comp side and how does that translate to the margin going forward, especially with sort of the revenue headwinds that we're seeing you know could we could we potentially be below that range of 27% to 30 that you guys like to run at.
Yes.
Well just I'll start with the end of your statement, which is 27 to 30 that we liked it to run at which you mentioned I have said before that wouldn't work up at that higher end and I would include what we are right now even.
That.
I need to be reinvesting in the business and I wouldn't mind hitting that to make key hires or build our intellectual capital for future group.
Growth.
So.
It could be hitting margins for those purposes and of course I'll be clear about that obviously that the margin compression that we've seen over the last quarter or a couple of quarters is solely due to.
Decline in and the top line and Oh.
And then translating into.
Some of our fixed expenses.
That's the first thing second of all.
In the second quarter, we had higher G&A than we normally do because of our 20th anniversary celebration. It was much more expensive are fair than we would normally have in any given year.
What are the thing only happens every five years or so 20th is a big one.
So that expense was in that quarter, and so we're going to see a bounce.
Back to little better margins, just based on that alone when we look forward in other quarters.
Fixed expenses, otherwise are pretty low for a business like this and one reason we maintain margins just because our total compensation comes down with revenues overall, so we feel very good not just maintaining this margin, but if I were not to invest in the business hire more people, which I'd like to do.
And nothing changed with AUM I would expect our margin actually go up from this level.
Yes to meet just.
Touch on Tvs.
Yes, the second quarter.
As Rick mentioned was somewhat high.
Hi.
Discount that gd levels are not running at levels historically prior to the pandemic, but there are starting to creep up and I think we've talked about in the past that we would expect that expense.
Start progressing toward more normalized levels by the second quarter.
Rick mentioned didn't represent.
A normalized level with regards to the TNA it climbing.
Obviously not to quite the level that you have in the 20th party, but it climbing in general is a good thing given where we've been with it.
Pandemic, it's tightly related to business development.
Yes.
Okay, great. Thanks, guys I'll hop back in the queue.
Thanks.
The next question comes from Christopher Merrimack from Janney Montgomery Scott. Please go ahead.
Thanks, Good morning, Rick and good morning, Scott.
Morning, I wanted to add.
Wanted to ask about the exhaust success on expenses. This quarter was there any surprise to you and do you think that could continue even just yet.
If you look ahead the next few quarters.
Chris are.
Are you referring to the GAAP numbers.
With respect to expenses, yes, yes, okay, yes. So.
The reason I ask is year over year, we had a $5 $7 million.
Reduction to expense due to the fair valuation of the <unk> earn out so that's something for adjusted EBITDA purposes that we adjust out.
Because this is a noncash fair value adjustment and you may recall, we mark to market that liability at the end of every quarter. So.
It can be quite lumpy, just so happens year with declining markets.
The fair valuation went down so we had a large decrease in that liability and that is.
Incrementally fleets operating income right because of the reduction in expense.
Got you Okay fair enough. Thanks for clarifying that Scott and then I guess just a general question just a general question about the EBITDA margin.
Should we still see some seasonality come fourth quarter as we look ahead to year end.
Yes very.
Very clearly.
Everything gets chewed up in the fourth quarter, sometimes that works.
And a very very positive direction as it did in the fourth quarter of 2021 very significant change some years.
Adjustments some years as adjustment the other way and we've never had a really big hit there but.
Because we're pretty good at running the business the ratio so we'd like to.
But in general that's a true up quarter. In addition.
We neither budget for Nord and know what we might be getting in terms of incentive fees and that too can can be pretty sizeable.
Got it and then last question for me is just an update on the CLO business and kind of your outlook there plus any of the international kind of initiatives you were working on.
Yes, so the <unk> business.
I recall mentioning was.
Falling below a $1 billion.
With the declining markets, we'd hit that benchmark ahead of schedule last year, which was an important one to us interestingly, we're now back to about $1 billion and the CIO business. So that's good news the pipeline in that business. It looks quite good I would say with that.
The actionable pipeline for the <unk> business is somewhere around $750 million.
And.
It's very competitive, but our performance on a manager selection and asset allocation remains very strong and competitive.
We're in just the right size of institution that we're looking for.
That is both relationship heavy but also underserved.
Yes, we feel good about that the team is strong and we're <unk>.
Just plugging away.
Yes.
Thank you both I appreciate it.
You're welcome Greg Thanks.
Again, if you have a question. Please press Star then one our next question comes from Sandy Mehta from evaluate research. Please go ahead.
Morning, Sandy, yes, good morning, Rick and Scott.
Uhm.
You had slight outflows in the discretionary AUM, but there was a large inflows in the non discretionary.
AUM and what drove that.
We also so that was in part related to.
Growth in a new family relationship relationships did grow.
And those were largely non discretionary assets.
We also had some clients with liquidity events.
You could see some of that on the tax side. Some of those are non discretionary assets.
Those assets as you know.
Or not.
Generally on a fee basis, some of them are but they tend to be very low.
And much of it is project or fee for services not necessarily linked directly to AUM.
But that's what drove those numbers.
Alright.
And you talked about the <unk> pipeline any comments on the institutional pipeline of non <unk>.
Yeah sure the actionable pipeline for U S value growth.
International and OCI altogether actually grew from the end of the first quarter to this quarter I think last quarter. It was 158 billion or so the total pipeline is now $1 71 billion. So a nice pick up there in that pipeline.
I mentioned that 700, plus $750 million of that is <unk>. So just call it about $1 billion.
In the in the institutional equity pipeline and we measure that as invite only rfps.
Or I should say a possible mandates in the invite only mandate semi finals and finals. So it's a real pipeline with great possibilities.
Great. Thank you.
Youre welcome.
Again, if you have a question. Please press Star then one.
Our next question comes from Chris Sakai from singular research. Please go ahead good.
Good morning, Chris.
Oh, Hi, good morning, Rick.
Just I had a question on.
Possible acquisition opportunities out there or what are you seeing are there any good deals.
That market is improving a bit as you would expect with the increase in interest rates.
You know as the markets have become more volatile and people got their fingers burned.
Ive seen folks scrutinizing the deals that they are doing a little bit more.
Which is all very helpful.
It hasnt materially changed yet I've often commented that this kind of environment could shake some things out.
And and.
It make for what I think are more rational allocations of capital in terms of these businesses given what the reality of how they look in terms of organic growth and maturity et cetera.
I'm starting to see a change I haven't seen it entirely yet.
On the other hand, I am starting to look at a few more opportunities.
Okay. Thanks for that.
Could you comment on.
The company is hiring you know how are things there is it hard to find new hire new portfolio managers.
It is hard it's not only heart, it's extremely hard to find.
Folks who are going to be a good cultural fit and help you organically grow the business and we're very particular about that one reason. This firm has been successful over 20 years and that we've had such a steady execution of strategy is a very tight team of culturally compatible people who share similar principles in building this business.
Talent acquisition is one of the hardest things that any company can do especially when you are a services business and the capital you have are the great people who work here.
We take it very seriously it's always been that way, so I would not say any harder than it ever has been.
And I personally am very aggressive at talking to any number of people. As you also know we've made some hires over the past few years, whether that's in the OCI business.
Talent acquisition includes.
M&A.
<unk> brought in some really great talent.
Almost three years ago.
On the portfolio manager side, I think we've hired at different stages of their careers.
I'm going to round four or five people over there.
Over the past three or four years, just before COVID-19.
Obviously, that's been difficult for them to go right into Covid with us, but they are doing well and.
I am looking very closely at some new potential hires because that is one way that you not only further the business organically, but.
Prudently transition business over time.
<unk> built a sustainable firm.
Okay, alright, great. Thanks Youre.
Youre welcome.
As a reminder, if you have a question. Please press Star then one.
Your line.
There are no more questions in the queue. This concludes our question and answer session I would like to turn the conference back over to Rick Hough for any closing remarks.
Thanks, very much for joining us for our second quarter results really appreciate it.
No one likes volatile markets.
It's part of our business and we feel pretty pleased with how we've maintained margin.
Done relatively well in our top line versus what it could be given the extended market downturn and we feel like our pipelines and business opportunities are pretty solid we're used to working in these environments and in fact it could.
Provide a good opportunity for us for future growth.
Given the high quality and focus on both risk management and preservation of capital that we have at this firm on behalf of our clients.
Thanks, so much and look forward to talking to you soon.
Conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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Yes.