Silvercrest Asset Management Group Inc. Q1 2023 Earnings Call
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Good morning, and welcome.
The Silvercrest asset management group incorporated first quarter 2023 earnings conference call.
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After todays presentation, there will be an opportunity to ask questions. Please note that this event is being recorded.
Before we begin reminds you that during today's call.
Payments made regarding our future performance all forward looking statements.
They are based on current expectations and projections, which are subject to a number of risks and uncertainties. Many factors could cause actual results to differ materially from the statements that are made.
Those factors are disclosed in our filings with the S. E C on the caption risk factors.
All 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 up the date hereof and sort crest assumes no.
And stop that.
I'd like to turn the conference over to Oh, sure I N C E O O Silvercrest. Please go ahead Sir.
Thank you thanks for joining us for the first quarter results for Silvercrest. Despite volatility markets were supportive during the first quarter of 2023 with silvercrest, concluding the quarter with total assets under management of $29 9 billion in discretionary AUM of $21 3 billion discretionary AUM.
Which primarily drives our revenue increased one 9% over the fourth quarter of 2022.
Nonetheless, our discretionary AUM has declined 10, 5% year over year since the first quarter of 2022. Consequently, while business results have increased over fourth quarter results. They remain down on a year over year basis as markets recover our.
Our revenue fell 12, 2% for the first quarter compared with 2022. This declining revenue significantly affected adjusted EBITDA and adjusted diluted earnings per share.
Our adjusted EBITDA declined year over year to $8 2 million for the first quarter since the first quarter of 2022.
Diluted earnings per share also declined year over year to 35 cents for the first quarter since the first quarter of 2022.
Silvercrest adjusted EBITDA margin of 27, 8% remains historically healthy for the company.
Economic uncertainty and market volatility often create long term opportunities that benefit the high quality of our capabilities. The pipeline of new business opportunities has also increased over the fourth quarter of 2022 and has increased substantially since the first quarter of 2022.
The firm's outsourced Chief investment Officer initiative also increased during the first quarter and now manages AUM of 152 billion.
Silvercrest repurchased approximately 96000 shares of class a common stock for approximately $1 6 million during the first quarter and on May 2nd 2023. The board of directors declared a quarterly dividend of <unk> 18 cents per class a share of common stock that dividend will be paid on or around June 16th to shareholders of record as.
As of the close of business on June nine.
Scott you could go through the financials, and then well open up the call for questions sure. Thanks, Josh.
As disclosed in our earnings release for the first quarter again discretionary AUM as of March 31st of this year was $21 3 billion and total AUM as of March 31 of this year was 29.9 billion revenue for the quarter was 20 944 million.
And reported consolidated net income for the quarter was $5 3 million.
Revenue.
Decreased approximately 12% year over year from revenue of approximately $33 5 million in the first quarter of 2022. This decrease was driven primarily by market depreciation and net client outflows in discretionary U N <unk>.
Expenses for the first quarter of this year were $22 7 million, representing approximately a 26% increase from expenses of $18 1 million for the same period last year.
The increase was primarily attributable to an increase in G&A expense of 6.8 million, partially offset by a decrease in compensation and benefits expense of $2 2 million comp.
Compensation and benefits expense again decreased by $2 2 million or approximately 12%.
$16 5 million for the first quarter of this year from $18 7 million for the same period last year decrease was primarily attributable to a decrease in the accrual for bonuses of $2 6 million, partially offset by an increase in salaries and benefits of <unk> 4 million, primarily as a result.
Merit based increases and newly hired staff.
G&A expenses increased by $6 8 million to $6 2 million for the first quarter of this year from negative <unk> 6 million for the same period last year. This was primarily attributable to an adjustment to the fair value of contingent consideration.
Consideration related to the CT gene acquisition.
Of $6 5 million that was recorded during the first quarter of 2022. In addition to increases in professional fees portfolio and systems expense and travel and entertainment expense.
Reported consolidated net income was $5 3 million for the quarter as compared to $12 4 million for the same period last year.
Reported net income attributable to silvercrest or the class a shareholders for the first quarter of this year was approximately $3 2 million or 34 cents and 33 cents per basic and diluted class a share respectively.
Adjusted EBITDA, which we define as EBITDA without giving effect to equity based compensation expense and noncore and nonrecurring items was approximately $8 2 million or 27, 8% of revenue for the first quarter of this year compared to $10 3 million or 36% 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 expenses, assuming a corporate rate of 26% was approximately 5 million for the quarter were 36, <unk> 35 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 reported period for basic adjusted EPS and to the extent dilutive, we add unvested restricted stock units and nonqualified stock options to the total shares outstanding.
To compute diluted adjusted EPS.
Looking at the balance sheet total assets were approximately $178 6 million as of March 31 of this year compared to $212 7 million as of the end of 2022.
Cash and cash equivalents were approximately $41 6 million at March 31 of this year compared to $77 4 million at the end of last year total borrowings as of March 31st of this year were $4 5 million and total class a stockholders equity was approximately $84 4 million at March 31.
First of this year that concludes my remarks, I'll now turn it over for Q&A. Thanks, Scott. Thanks.
Yeah.
Thank you.
I'll begin the question and answer session ask a question you May Press Star then one on your cellphone, you're using a speakerphone. Please pick up your handset before pressing the keys.
All your question. Please press Star then two.
At this time, we'll pause momentarily to assemble the roster.
Yeah.
Yeah.
Okay.
First question comes from so my body Oh Piper Sandler. Please go ahead.
Good morning, Hey, good morning, guys. Good morning.
Wanted to start with capital allocation I know you guys last quarter I believe talked about wanted to put more capital to work towards your purchases you know it seems like the dip in March let you guys repurchased pretty efficiently, but the magnitude was maybe a little lower than we were expecting I'm. Just wondering how should we think about your appetite for.
Our repurchases going forward I mean should we be looking at it as some kind of percentage of cash flows or net income.
There would be appreciated.
Yes al.
Start.
I I would not look at that as a percentage of net income or cash flows.
I would look at it more as the opportunity.
Where we can get accretion.
And if we're in discussions like we were.
Three years ago with it with a great potential partner is with the 14, a purchase that they slow down my purchases because they've got great use of capital for return on invested capital.
Other opportunities in the marketplace that we're really evaluating its much much more for me about the opportunity cost of using that capital for buybacks versus some other strategic alternatives. The way I look at it is if I've got cash to put to use I think it can be accretive to buy back shares.
And to buy back one of the better asset management companies I know, which is silvercrest. So much less about the percentage of a return on capital to investors. Similarly, I look at the dividends in terms of making sure I'm, giving a nice high steady returned to investors, but one that I can sustain over a very significant period of time, even in the wake of.
A much more substantial.
Market Downdrafts.
Even even much stronger than what we saw last year. So that's a general way of how we look at it keep in mind that while we were very efficient with buybacks.
Would agree with that the Q1 window.
Is shorter for stock repurchases for us so that that has a lot to do with the volume we were able to buy in the in the first quarter.
Yeah.
Great. That's helpful. Thanks, Rick and then kind of sticking with capital allocation would there on the on the inorganic growth side, just as far as the M&A environment I mean, it just seems like the industry wide activity and in the wealth management space has really picked up over the last let's say 12 to 18 months, particularly compared to alternative and traditional asset.
Management, So just kind of wondering if you can update us on if you're seeing any shift in conversations between March and today on on that side of the business both from M&A perspective, or maybe even team lift outs or individual hires would that be yeah. Okay. So on the let me I'll start with the M&A front. It was very strong I think a year ago.
And it really fell off a cliff towards the end of last year.
It has picked back up as I've said before keep in mind, a huge amount of that activity is not with regards to assets or companies that would be of interest to silvercrest.
Yeah.
A lot of them are you know regional retail.
Much smaller or I as they might have a accounting focus or something else. Yeah. You know, we're looking for high end firms at the high end clientele in money Center cities. So of the update of the set of firms and all of the activity Theres, a very small subset that would be of interest to silvercrest for our M&A.
It absolutely has picked up the other thing I would comment on is that our pricing seems to be moderating a bit I liked that I've been pretty vocal in our past calls about what.
What I've seen in the marketplace with how people have used capital and if a nominal prices have only come down a bit a small amount I think the implicit pricing has come down a fair bit in terms of more money being used in earn outs much more scrutiny on the deals in terms of assets that come over when when something is dropped et cetera.
So I think that's supportive.
With regards to hiring.
Potential lift outs, we usually don't participate in the normal lift outs you see from the bulge bracket firms wire houses or others that are aggressively recruiting and buying broker books, we work and look to hire people who are fiduciaries.
And many of those serving more of a private banking world.
The and just fit well into our culture and how we work with clients.
The environment has changed significantly with regards to potential hiring you may recall that I did quite a bit of hiring starting five years ago four years ago, we hit Covid those portfolio managers are growing at the firm which is great.
Hum.
As a result of the banking crisis and people questioning.
Their work environment for their clients has resulted in me currently having a probably more conversations with potential hires than I can recall over the past several years, it's very very busy on that front for potential people that value to the firm.
Because of the M&A environment, you never know what might happen I, certainly don't want to mislead anyone and suggests that we have mature conversations that are worth talking about.
I'll, just say that those discussions I've always said that we're holding but it is very active in terms of the number of people we're speaking with.
Okay.
Great. Thanks for all that color and then last one obviously on the on the on the pipeline. So six month actionable all between OCI L and equity asset classes I know last quarter, you mentioned, the CIO at around $690 million.
Overall pipeline at like 1.65 billion so.
I kind of equate to around 1 billion for equity just wanted to if you could update us on those numbers not sure. It's it has come up quite substantially again so.
Last quarter as you pointed out the total institutional actionable pipeline very conservatively measured in a careful way. So it is true apples to apples.
Was 165 billion last quarter. Its now one point 95 billion. So we've added another 300 million to the pipeline.
It should be pointed out that that includes us getting some wins in the quarter. So you know without additional potential things in the pipeline. The pipeline would've described what it would have decreased and decrease for good reasons.
But it actually increased despite those wins.
So that's great news for the future of the business. However.
I don't want to be overly optimistic I would characterize or we would characterize the U S long only institutional search environment is very slow.
The working relationship with consultants and how they are dealing with firms like US is just on a different pace. They are still a lot of them doing zoos and not meeting in person.
So you know, we'll just have to see how long it takes a lot of these things to land on our behalf.
I'm very happy about the pipeline, we've done a great job at harvesting that over the years. It just feels like the sales cycle related to it has slowed down and it's much more difficult so I.
I just want to be careful about how my comments are interpreted great pipeline looking really good especially <unk>.
Compared with the 2020 or a year ago, and certainly up nicely since last quarter, but again be the search environment itself deals. It just feels slow with regards to OCI Oh that pipeline is a little bigger its $6 95 compared to.
$6 90 at the end of the fourth quarter, but that also had some wins we had approximately I think around $30 million due OCI Oh client come on in the first quarter. So the OCI O business, which is now one point almost 152 billion.
Some of that went up with the market of course, which was supportive in the first quarter. But also includes another new client, which is really important to us expanding the number of our clients and O CIO at this stage.
<unk> is really just as important as us getting a nice new AUM in the door because it's important as we fill out RFP isn't talk to people about the diversity of types of institutions that we're working with.
Yeah.
Okay.
Great. Thanks for taking my questions.
Thank you next question will be from Sandy Mehta Valuate Research. Please go ahead.
Yes, good morning.
Last year was a very active year for new product launches and any update on what progress you're seeing I know, it's still early days for these new products and what are you likely to do this year in terms of new products. Thanks.
So maybe if you could just I'm sorry. This is yeah. This is sandy could.
Could you just.
A comment on what new product that May have mentioned I don't remember.
New product or I'd say there were some earlier last year, there was the new products and growth and then in the fourth quarter Press, who press release, you talked about a large cap value unit investment trusts. Okay launch. So so I'm not sure what it was a year ago, because we all I think I do know so.
When we acquired Cortina and built out the Milwaukee capability that was small cap and micro crap cap grew.
Growth.
Really fantastic team, we thought it was really important to build out a large cap and multi cap growth and that's what I would've referenced a year ago.
The performance in multi cap and large cap is a quite good doing really well and has been attracting high net worth.
Assets under management in that capability, that's all within the house, which is great it's giving.
The large cap a capability that we have here a kind of a balanced of a U M that makes it more and more a viable product.
Product.
The unit trusts that you're referring to for large cap value is obviously institutional class.
And it's just another vehicle to enable institutions as part of that institutional pipeline I mentioned to invest in our large cap value strategies.
I don't foresee a much in the way of product development. This year, those were really expansions up or new flavors of what we already have as existing capabilities.
In order to help us grow them, we really have a lot of that what I'll call plain vanilla asset classes covered quite strongly at the firm now we have value growth in international across the market cap spectrum and.
In both value and growth. So our mandate now I think is to grow those capabilities and continue doing so is in particular with the the the growth team.
Which has had just terrific performance of value team as you already know had a mature institutional business. It has room to grow as well, but where we're quite focused on on growth and I should mention when the one of the key wins that we had in the first quarter was to the to the growth team.
So I don't see a lot in the way of new product development I'd I'd, rather digest, what we've got and grow what we've got in a prudent way.
Okay, and given that the markets were down last last year in terms of equities as well as bonds.
Are you seeing less tax related redemptions from clients. This year like for example in Q2.
Are you seeing less redemptions foot for that reason thank you.
I don't comment on forward quarters for the quarter were.
That we're in I, usually report on that after I have all of the results, but in truth I don't have that kind of granularity at this stage for.
For the business. The flows are quite lumpy in the high net worth business they can be.
They can occur for a huge variety of reasons. However, you're right last year was quite exceptional with regards to our capital gains and taxes and my expectation for exactly the reason you state.
Less.
Less deals I think that resulted in capital gains for our clients as well as down markets probably means it will there will be less outflows. This year as a whole for taxes remember a lot of our clients are filed quarterly and half multiple tax payments, but.
That's my expectation and there's no way I actually know what at this at this stage.
Great. Thank you so much.
Thank you.
Next question will be from Christopher Merrimack, Oh, Janney Montgomery Scott. Please go ahead.
Thanks, Good morning, I just wanted to ask if if the FERC Scott can you remind us about the incentive payments and the final kind of fidelity here in mid year from.
From your prior acquisition and does that have any impact on the EBITDA margin going forward.
Yeah, great. Thanks, Chris Scott Yeah, Yeah, so basically.
Balance the liability related to the earn out arrangement, which would have been the growth payment.
Do you after the second quarter, that's a that's basically you're going to go down to zero as of June 30th it's now at less than $2000. So there won't be any future payment on that and that explains why our GAAP numbers. The G&A expense went up so much because we had a fair value adjustment related.
To that arrangement, a year ago, and Ah, but from adjusted EBITDA perspective, whether any earn out fair value adjustments are either added back or deducted from GAAP numbers. So that non-GAAP numbers are apples to apples year over year in.
In this context.
Got it great and then I guess, just holistically the EBITA margins seem to be somewhat normal if I could use that word this quarter and kind of what you had thought is that a good impression.
Yes, I think that absolutely is.
To remind those without the history.
At 27, eight or $28 million and EBITDA margin is actually quite historically good for the company. When we went public 10 years ago and even several years after that.
We're very happy with that EBITDA margin I am today, when we were hitting that 32% EBITDA margin thereabouts at the end of 2021.
The appetite that was very high it was.
We raced ahead of our investment to grow faster than we expected we had performance fees that were contributing to that.
And you know I felt that we would be making further investments that could well hit that EBITDA margin and bring it back down perhaps closer to what we are today. So yes, I would call this quite normal yes.
Some of the things come to pass that I mentioned earlier on the call as possible I hit this a little bit come down a bit in EBITDA, because when you hire people that immediately hits your cash flow and P&L you don't have the tax advantages that you do with a.
With an acquisition, but you.
You know it's the simple answer is yes. This is this is pretty normal and a big step up from the almost.
Almost 16% or 15, 6% EBITDA margin in the fourth quarter, albeit that was related to a lot of adjustments for comp at the end of the year.
Great and then last question just as back to your comment about having very busy conversations I certainly can appreciate that.
Do you think that this is sort of going to be a six 912 month process and that there's a lot more of kind of slower moving where.
Individuals may have gone to brand X kind of forced upon them and then they ultimately do change change gears are within a year is there kind of more of a longer tail to this process.
It's honestly a mix.
Have no way of knowing you don't see these environments very often I would say look there were those who are forced to have conversations.
With some of those people still.
Still do.
It depends on really their client base and in the firm, where we're going to be very very careful.
And compared to a lot of firms with regards to our culture and what we're building is not just about grabbing assets here.
And there will be those and we've been told that explicitly hey, let me see what the new environment looks like and then maybe we'll talk and then there were those who were actively speaking with us and we'll see if there's there's a match or not I'm not sure I can characterize it generally.
So.
We'll see.
Got it but the culture and the your long term principal so obviously override.
The growth aspect. So thank you Eric pointing that out.
Very clearly, it's just absolutely critical if you're building a sustainable growing business that doesn't get disrupted.
Great Rick Thank you Scott very much.
Thank you Chris.
Thank you and again if you have a question. Please press Star then one.
Next question will be from of course, the Guy Oh singular research. Please go ahead.
Hi, good morning.
Good morning.
Just had a question could you shed some light on.
So that's us doing anything on the marketing front, what silvercrest doing to really drive our growth.
Gross client inflows.
Yeah, well there's there's.
Really our three key organic growth areas of the firm one is the institutional.
Business the institutional pipeline that I was talking about that is primarily done through consultants and intermediary relationships with institutions, we have dedicated marketing professionals associated with each of our institutional capabilities. So their product specific.
But yet the consultant relationships, a coordinated and shared across the firm.
The second would be the other pipeline I mentioned as part of that the O C. I O Chief investment officer capability.
$695 million.
That business kind of sits in between pure institutional type.
Cultivation of consultants and intermediaries and RFP processes, we have marketing devoted to that.
But a lot of nonprofit foundation endowment boards have high net worth individuals that sit on them.
Often those processes are driven by the fiduciary board itself or the investment Committee on a foundation itself and it's very relationship oriented and it looks a lot more like the high net worth.
Business. The third is the high net worth business in general the 70% of our discretionary a whim.
That is a function of.
Our brand.
Supporting our brands with advertising event sponsorship visibility.
Appearance on CNBC and other venues our marketing materials.
And is a referral relationship business that is up to the existing portfolio managers working with our clients to get.
Get those referrals ASP with those referrals to network to be involved in their communities that is one aspect of it it's very lumpy hard to predict and something I've never given a pipeline too because you just can't measure.
Right line with the kind of accuracy and comparison that we can on the institutional side I would say it's quite busy.
Just looking at our marketing output, which I can tell and.
Quite a bit of the first quarter was related to the high net worth business I personally who work on prospects probably have more than I usually do.
Lot of that due to the banking disruption and then the final piece of growing that business.
Is the potential for high quality professionals with the right kind of business, who fit our culture to join the firm, which we've talked about already on this call and we're very active about pursuing.
Okay.
Okay. Thanks, Thanks for that and can.
Can you talk about but the banking crisis, how how might that possibly affect silvercrest. This up if at all.
It doesn't in three different ways, one qualitatively in terms of working with our clients. Even if they have bank deposits are things on demand deposits of banks.
And we're not getting a fee for that as their high touch a wealth management firm. They expect us to have a view and to give them advice about what to do about their banking.
And to help navigate.
The issues that they face at their institutions, especially regional banks it would be no surprise you to learn that.
That and that we have a fair number of clients who are clients of first Republic, so very busy lots of questions around that and what happens and how to navigate.
Things that are at the time, there was concern about first Republic.
How to organize accounts to.
Protect them et cetera.
So it was quite just quite busy handholding clients. The second has to do with our business and just looking overall at our broker dealer relationships.
And how our assets are held on behalf of clients and what we're doing to make sure that we're prudent fiduciary is on their behalf I feel much better about that but.
There's lots of discussion and you want to make sure. Your you are well aware of the environment and how best to protect your clients.
The third has to do with really the conversations I'm having.
In periods of like this when Theres a lot of disruption there is an opportunity I mentioned that in my opening comments.
Both clients, who may be at banks for their wealth management or institutions start wondering whether or not they ought to be combining their deposit banking.
Needs with their wealth management, maybe they should be separating those two functions and have a pure pure fiduciary like silvercrest being paid for.
Advice, while keeping a banking relationship separate I have no doubt that that is occurring likewise professionals.
Who may be at those institutions, serving clients, who are getting lots of questions.
May be facing you know a professional issues and questions that have them potentially talking to a firm like silvercrest. So I think that really covers.
How it affects the firm from our business model too.
The opportunity in the marketplace.
Okay, great. Thanks for the answers.
You are very well thank you.
Thank you.
This concludes our question and answer session now like the conference back over to Mr. <unk> for closing remarks. Thanks, I really don't have any closing remarks. It was a constructive quarter I think theres a lot of opportunity nice to see that our business development pipeline has grown and that we have any number of conversations to progressive business as always.
Really appreciate our shareholders and the questions that we get from analysts we look forward to giving you. Another report soon thanks, so much for joining us.
Yeah.
First of all concluded. Thank you for attending today's presentation you may now disconnect.
Yeah.