Q2 2023 Silvercrest Asset Management Group Inc Earnings Call
[music].
Good morning, and welcome to the Silvercrest asset Management Group, Inc. Q2, 2023 earnings conference call.
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After todays presentation, there will be an opportunity to ask questions.
Also note todays event is being recorded.
Before we begin let me remind you that during today's call.
Certain statements made regarding our future performance.
We're 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 SEC under the caption risk factors.
We're 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 floor over to Rick Hough.
Chairman and CEO of Silvercrest. Please go ahead.
Good morning, and thank you markets continue their recovery during the second quarter of 2023 with silvercrest, concluding the quarter with total assets under management of $31 9 billion in discretionary AUM of $21 5 billion discretionary a L M, which primarily drives our revenue increased <unk> 2 billion.
Over the first quarter and has increased to <unk> 6 billion or two 9% for the first half of 2020 three discretionary AUM has increased $1 1 billion or five 4% year over year since the second quarter of 2022, the firm's total AUM increased by $3 2 billion or 11 point.
2% over the second quarter of 2022 from 28, 7% to $31 9 billion.
While the business is improving most of our metrics remain down on a year over year basis as markets recover revenue for example fell nine 9% for the first half of 2023 compared with 2022. This decline in revenue affected adjusted EBITDA adjusted diluted earnings per share.
Silvercrest adjusted EBITDA margin of 27, 5% for the first half of 'twenty twenty-three remains historically healthy for the company and represents a five 8% increase over the year end of 2022 adjusted EBITDA margin.
<unk> pipeline of new business opportunities remains robust we are focused on those opportunities as well as investments to drive future growth in the business.
On July 26th of this year. The Companys Board of Directors also declared a new quarterly dividend of <unk>, one nine cents per share of class a common stock that's an increase of one penny over our prior dividend payout.
The dividend will be paid on or about September 15th to shareholders of record.
As of the close of business on September eight.
With that I'll turn it over to Scott and then we will take questions. Thanks. Thank you Rick.
Again this is disclosed in our earnings release for the second quarter discretionary AUM as of June 30 of this year was $21 5 billion and total a U M. As of June 30 of this year was $31 9 billion revenue for the quarter was $29 7 million in reported consolidate.
Net income for the quarter was $5 1 million.
Looking at the second quarter in a bit more detail revenue of $29 7 million that represented approximately eight 8% decrease from revenue of approximately $32 2 million for the same period last year. This decrease was driven primarily by a decrease in the average annual managed.
With fee based on the mix of discretionary and non discretionary assets.
Expenses for the second quarter were $23 2 million, representing approximately a 15% increase from expenses of $20 3 million for the same period last year. This increase was primarily attributable to an increase in general and administrative expenses of $4 2 million, partially offset by.
A decrease in compensation and benefits expense of $1 2 million.
Compensation and benefits expense decreased again by $1 2 million or approximately 7% to $16 8 million for the second quarter from 18 million for the same period last year.
The decrease was primarily attributable to a decrease in the accrual for bonuses of $1 6 million, partially offset by an increase in salaries and benefits of <unk> 3 million, primarily as a result of merit based increases and newly hired staff and an increase in equity based compensation of <unk> 1 million.
Due to the granting of additional Rs use general and administrative expenses increased by $4 2 million to $6 5 million for the second quarter from $2 3 million for the same period last year.
This was primarily attributable to an adjustment to the fair value of contingent consideration related to the Cortina acquisition.
A reduction to expenses last year of $4 1 million. In addition to increases in professional fees portfolio and systems expenses marketing expenses, and depreciation and amortization, partially offset by a decrease in travel and entertainment expense.
Reported consolidated net income was $5 1 million for the quarter as compared to $9 5 million in the same period last year reported net income attributable to silvercrest or to class a shareholders for the second quarter of 2023 was approximately $3 1 million or <unk> 33 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 $8 1 million or 27, 3% of revenue for the quarter compared to $9 2 million or 28, 5% of revenue for the same period in <unk>.
The prior 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 $4 9 million for the quarter were 35 cents in 34 cents per adjusted basic and diluted earnings per share.
Respectively.
Adjusted earnings per share is equal to adjusted net income divided by the actual class a and class B shares outstanding as of the end of the reporting period for basic adjusted EPS and to the extent dilutive, we add unvested restricted stock units and nonqualified stock options to the total shares outstanding.
To compute diluted adjusted EPS looking at the first half of the year revenue was approximately $59 2 million and that represented approximately a 10% decrease from revenue of approximately $65 7 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 first half were $45 9 million, representing approximately a 20% increase from expenses of $38 3 million for the same period last year. This increase was primarily attributable to an increase in general and administrative expenses of $10 9 million, partially offset by a <unk>.
Decrease in compensation and benefits expense up $3 4 million.
Compensation and benefits expense decreased by approximately 9% to $33 3 million for the first half of this year from $36 6 million for the first half of 2022. The decrease was primarily attributable to a decrease in the accrual for bonuses.
$4 3 million, partially offset by an increase in salaries and benefits of <unk> 7 million and again that was primarily a result of merit based increases and newly hired staff and there was an increase in equity based compensation expense.
$2 million due to the granting of additional Rs use general and administrative expenses increased by $10 9 million to $12 6 million for the first half of this year from $1 7 million for the first half of 2022 again. This was primarily attributable to an adjustment to the fair.
The contingent consideration related to the Cortina acquisition of $10 6 million that was recorded in the first half of 2022. There were also increases this year in portfolio and systems expense marketing expenses, depreciation and amortization and these were partially offset by decreases in <unk>.
<unk> and entertainment expenses.
<unk> consolidated net income was $10 4 million for the first half as compared to $21 9 million in the same period last year reported net income attributable to silvercrest for the first half of this year was approximately $6 3 million or <unk> 66.
Per basic and diluted class a share.
Adjusted EBITDA was approximately $16 3 million or 27, 5% of revenue for the first half of this year compared to $19 4 million or 29, 6% of revenue for the same period last year. Adjusted net income was approximately $9 9 million for the first half or 70.
<unk> 69.
Per adjusted basic and diluted EPS, respectively quickly looking at the balance sheet total assets as of June 30 of this year were approximately $182 5 million compared to $212 7 million as of the end of 2022 cash and cash equivalents were approximately $40.
Seven 4 million as of June of this year compared to $77 4 million at the end of 2022.
Total borrowings as of June 30 of this year were $3 6 million and total class a stockholders equity as of June 13th of this year was approximately $82 9 million that concludes my financial remarks, I will turn it over to Rick for Q&A. Thanks, Scott We are open now for questions.
Ladies and gentlemen at this time, if you would like to ask a question you May Press Star and then one using a touchtone telephone if you are using a speaker phone. We do ask you. Please pick up the handset prior to pressing the keys to ensure the best sound quality.
Once again in order to ask a question Please press star and one.
We will pause momentarily to assemble the roster.
Our first question today comes from semi Modi from Piper Sandler. Please go ahead with your question.
Hey, Thanks, Good morning, guys hope, you're doing well I'd just like to start with the six month actionable pipeline between O C. I O and equity asset classes I know last quarter, you'd mentioned kind of nicely increased to almost 2 billion, but cited some slowness in the domestic search environment at the time kind of giving more virtual meetings as opposed to in person.
Can you talk about yeah, how that search environment has evolved and then maybe an update on the size of the pipeline today that'd be great. Thanks, Yeah. The search environment hasn't changed it's been like this for a while and are still feels a bit slow that pipeline was quite historically high for the firm which was good.
But it does seem to be a bit of a longer timeline for things to come to fruition and so we are looking at the pipeline and thinking about it in those terms, but not much has changed since my last comments to me. The total pipeline six month actionable pipeline currently has one.
One 3 billion, which is down from from the 195 billion of last quarter.
That's attributable to a mixture of both won mandates in particular for our growth team as well as some mandates overall that we didn't win so both fall out of the pipeline.
In addition.
A $200 million of that was <unk>. It's now a $400 million pipeline. We did have a loss of one of the things in the pipeline, which brought that number down from $6 95 last quarter, but we also adjusted the pipeline because things are just taking a little longer as I was mentioning so.
We took it out of the six month those are pending items may come back into the pipeline, but as you know we try to measure this pretty accurately about what we what we think will happen over the next six months, so that that decline in the pipeline.
It's really a mix of one things we didn't win as well as readjustment.
The pipeline, it's still a very solid pipeline and we feel good about our prospects, but that's where things stand right now.
Alright, Thanks really helpful. I wanted to switch over to the non discretionary side. Obviously, you saw a nice uptick in a quarter. It looks like driven by net inflows can you talk about the driver there we know the AUM isn't directly tied to your family office revenues just wondering how if you could talk about what drove the inflow and then how does that impact our revenues in the quarter.
Sure well I would say that it's not directly tied to.
Revenue on an AUM basis, but it is tied to our family office revenue. It didn't have much of an effect at all on on revenue.
A lot of the assets in the family office or in non discretionary which is related to family office services, a lot of the assets and non discretionary periodically get repriced.
Some of it is private equity quite a bit of it and other assets that may not be quite as market influences. Others. We also have large clients, who may add assets that we didn't have reporting or other responsibilities for into into that pool of assets. So we saw both.
Meaningful inflows as well as a meaning full uptick and the value of those assets, but I would say that the revenue impact of that is fairly negligible.
Obviously it speaks to the trust our clients have in us it speaks to a very healthy relationship with those clients. It speaks to a large pool of assets that we have responsibility for counting our clients on them and working with them on so that that extent it is quite a good positive.
Great and then one more for me just on the repurchases in the quarter. It looks like you've done four quarters in a row now some some nice repurchasing any updates the buyback strategy today kind of given where the stock is trading versus three months ago and any color there would be helpful.
Yeah, I don't comment on the prices at which we are active into the market or not obviously, we have been and we still have a little bit more to go on that buyback that we announced we were very pleased with how the program turned out.
But I I don't comment on our specific thresholds or strategy.
Okay, great. Thanks for taking my questions.
You're welcome to me.
Yeah.
Our next question comes from Sandy Mehta from evaluate research. Please go ahead with your question.
Yes, good morning, Lincoln, Scott just to follow up on the question.
I presume there were no buybacks during this quarter of Q2.
Yeah, No we did buyback some additional in Q2.
Oh, Okay, Okay fine and.
Or can you disclose the current size of the AR will see eye business.
Yes, that's a 1.534.
Billion.
So that is that is up from from last quarter.
I'm not sure I've got it right here, but it's up a good 100 million, maybe $150 million over last quarter I believe.
Okay.
And.
You commented in your prepared comments about the SG&A expenses being a little bit higher this quarter, how should we any guidance or any.
You know a.
What sort of ballpark range for what.
SG&A expenses might be for the balance of the year in terms of percentage of sales or.
Absolute dollar amounts.
Yes Sandy.
The driver of the year over year change you may recall that each quarter, we needed to.
Mark to market the earn out liability related to the Cortina acquisition. So it's basically a noncash adjustment and so that earn out is now zero that liability. So we had a large fair value, we had large fair value adjustments a year ago.
A reduction to that liability, which reduced our expenses so.
That's that's really the driver of the change.
So the expenses as you see them.
In 2023 are more normalized because you don't have the effect of that earn out mark to market.
So it's going to be more sort of as a percentage of sales maybe 'twenty, one 'twenty to 'twenty, 2% something like that I mean, we do have some we as we've said before in the past we do have some seasonality to our SG&A, especially as we get towards the end of the year.
But like I said, if you look at our Q2 and our first half numbers this year.
The amount of.
Expense reduction related to the earn out liability was immaterial.
Okay.
Great. Thank you so much.
Sure. Thank you.
Our next question comes from Christopher Merrimack from Janney Montgomery Scott. Please go ahead with your question.
Thanks. Good morning, just wanted to do a quick question on the EBITDA margin and sort of if you. If you still felt comfortable with our prior comments on in terms of where that will range over the year.
Sure so.
Generally speaking if you look over you know.
The history of the whole firm much of which was.
It was before we were public but it's certainly since we have been 27, 5%, which is where we sat for the quarter is a very healthy margin.
The highest we hit was around 32 and a half at the end of 2021.
With that very high markets at that time as well as the fact that we got very significant performance fees.
So reaching that level of EBITDA is really are not feasible in last year see a real acceleration in the market and or performance fees, which obviously have no further associated cost with them to drive at that high that was that was unusual and I've commented many times that we're in the real.
Twenties, where we're running a bit hot to be honest right now feels quite comfortable.
Given where the markets are and given the fact that we haven't hit the P&L or EBITDA for significant new hires or investments.
So I think it is certainly sustainable in fact, if we were to add to steady state paused things and some of the inflation comes down as we look at our contracts it could even creep up a bit from there.
But I think this is a pretty good number to bet on if it's very little changed.
<unk>.
In terms of what might happen in the future I did mentioned in my opening comments that.
We are looking at investments in the business and I have mentioned the need to do so to drive our growth and so it could well be that we we engage in some some hires to drive organic growth.
In the business.
And if we do so we're going to bring that EBITDA margin down in the short term until revenue follows those.
Those hires.
And I would not be surprised to hear that bye bye.
By a meaningful amount what is that I don't know yet as we talk to people.
But you know if we pushed it down even to 24%, which is not what I'm projecting I'm just talking generally and openly with you all.
That would still be a very good EBITDA margin, but one that represents a margin after making investments that should drive.
Foster growth in the future. If we were to do so we're always in conversations and thinking about how do <unk>.
Continue growing this business as we have in a prudent way and in a way that our compounds.
Both earnings per share as well as invested capital.
Great. That's really helpful background and work under that scenario, where you would go lower.
The revenue payoff is relatively quick in terms of if you don't have to wait long to see that revenue inflection under that scenario.
I would say it depends.
You know, we don't tend to buy say, a broker's book of business that brings a lot of clients over day one.
It's not a business model that we're in the hammered with her or have sought to do in the past.
So in this business, where we are dealing with people as fiduciaries and driving advisory advice.
It tends to be a bit slower after we make make those investments you may recall.
We made some investments are just at the beginning of Covid.
In into it and that paid off for us.
But.
At the time it took was was Ali.
Also perhaps obscured a bit by by rising markets at the time, so in combination everything accelerated faster than than our investments. In fact, that's one reason why we ended up with such a high EBITDA margin at the end of 2021.
Aye.
When I make those investments or if I do.
Yeah, I'll try to be transparent about the timeline, but it is not necessarily a quick one however, you may.
Define that and of course, we're also always talking to potential compatible partners and firms.
Which would have the benefit of both revenue and.
And EBITDA expansion.
If the terms were right and it was at the correct culture and we engage in those conversations all the time.
Super Thanks for clarifying me on that I appreciate it and then just a final point if interest rates if interest rates stayed higher for longer what does that mean for you from a strategic standpoint does it have any impact on sort.
So how do you and Scott may have for the business are those next several quarters.
Well for one thing.
It maintains the possibility of our adding interest income to the to the P&L we.
Have a very sizable cash position that's building much of it as you know.
For compensation, which we pay out at the end of February next year, but.
But nonetheless.
Given the small buyback are relatively small buyback that's ending in the cash that's building there.
Those higher, especially short term interest rates, what will benefit us with interest income, which we really haven't had any meaningful way today. The other fact that would definitely have is.
In the M&A market as you may know that market.
Is slowing a bit.
Still reasonably active compared to recent years, and certainly compared to many years ago.
But youre seeing.
Deals, taking a little longer to get done financial engineering won't work quite as well as it has a.
Deal terms are certainly getting a little tighter.
I think that's helpful to us and the Anr conversation. So I welcome that environment I think the normalized environment is good generally for.
Capital allocation decisions and the economy at large and for companies.
I think as we adjust that's going to be a real issue about folks.
Having to develop real earnings and growth rather than depending on what I was calling financial engineering and it just continually rising market or whatever industry you're in.
And then finally from a client perspective, it does make fixed income and our fixed income capabilities more attractive.
It gives us yet another tool in the toolbox to help folks.
I don't expect much of a shift from say equity to fixed income necessarily.
And if that did happen it would have a pretty marginal effect on on revenue, even though generally speaking fixed income assets have a lower.
Basis points.
Compensation to us based on AUM.
A lot of our relationships and most of them are quite balanced and.
Would have a very small effect on on <unk>.
What happens to the firm's overall revenue so I would say that our sustained interest rate level of this where we are if it were to continue as neutral to even positive.
Got it thanks for all the background. This morning, it's very helpful.
Always a pleasure to talk to you Chris Thanks.
Once again, if you would like to ask a question. Please press star and then one so withdraw your question you May press Star and chip.
Our next question comes from Chris Sakai from singular research. Please go ahead with your question.
Yes, hi, good morning.
I just had a question on <unk>.
Can you talk about the your average annual management fee and how a decrease this quarter versus a year ago, and where do you see the next quarter and for the remainder of the year.
I have very little visibility or capability of.
Predicting.
What it could be in the future.
One of the biggest drivers of that is the market itself. So as markets have have declined.
You will you'll often very much see our average basis points coming down with it because it just means.
More fixed income versus equity.
Not dissimilar to the comments I was making before and Thats changed a bit now markets have been recovering.
The bit that it came down for discretionary assets under management.
It could well be a result of a larger mandates and of course of course, OCI O which is.
Institutionally priced it's not quite the same discretionary asset management as you find us in regular equity institutional equity management, so that would bring it down a bit it should be noted.
That if you were to impute.
A basis points based on where we stand in discretionary assets under management as of today as of June or I should say as of June 30 at the end of the quarter, we are reporting on.
And you did a run rate.
You would expect.
The basis.
<unk> that we're receiving on those assets to actually be up over.
Over last year.
And.
Remember our.
Revenue for the quarter is based on for this quarter is based on March 31st closing values. So the market has.
Has further increased during the quarter and that is not what is driving revenue for the quarter.
The billing period is always one quarter ahead.
I hope that helps.
Okay. Yeah. Thanks, and then I guess just one on your outstanding term loan of $3 6 million have you guys considered paying that down.
Well, yeah, the annual amortization on that the required amortization is $3 6 million a year so that'll.
Yes.
It's got another 12 months.
<unk> to go so if for some reason.
The yes.
The interest rate.
Formula on the term loan is not overly burdensome.
So if for some reason things changed drastically we could always look into prepayments for right now the normal amortization is prudent.
Okay, great. Thanks.
And ladies and gentlemen at this time in showing no additional questions. We will conclude today's question and answer session I'd like to turn the floor back over to Rick Hough for any closing remarks, great. Thanks for joining us.
Nice to see markets recovering and.
A fair bit of new business activity in the pipelines for our capabilities I really appreciate your attention. This morning, and all of the questions and wish you a good rest of the summer and we'll talk to you at the end of the third quarter. Thank you.
Ladies and gentlemen, with that we'll conclude today's conference call and presentation. Thank you for joining you may now disconnect your lines.