Silvercrest Asset Management Group - Q2 2023

Transcript

Operator (participant)

Good morning, welcome to the Silvercrest Asset Management Group Inc. Q2 2023 earnings conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. Please also note today's event is being recorded. Before we begin, let me remind you that during today's 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. 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. For all such forward-looking statements, we claim the protections provided by the Litigation Reform Act of 1995.

All forward-looking statements made on this call are made as of the date hereof. 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.

Rick Hough (Chairman and CEO)

Good morning. Thank you. Markets continued 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 AUM, which primarily drives our revenue, increased $0.2 billion over the first quarter and has increased $0.6 billion or 2.9% for the first half of 2023. Discretionary AUM has increased $1.1 billion or 5.4% year-over-year since the second quarter of 2022. The firm's total AUM increased by $3.2 billion or 11.2% over the second quarter of 2022, from $28.7-31.9 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 9.9% 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 2023, remains historically healthy for the company and represents a 5.8% increase over the year-end of 2022, adjusted EBITDA margin. Silvercrest's 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 company's board of directors also declared a new quarterly dividend of $0.19 per share of Class A common stock. That's an increase of $0.01 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 8th. With that, I'll turn it over to Scott, and then we will take questions. Thanks.

Scott Gerard (CFO)

Thank you, Rick. Again, as disclosed in our earnings release for the second quarter, discretionary AUM as of June 30th of this year was $21.5 billion. Total AUM as of June 30th of this year was $31.9 billion. Revenue for the quarter was $29.7 million. Reported consolidated 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 a 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 management 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 $0.3 million, primarily as a result of merit-based increases and newly hired staff, and an increase in equity-based compensation of $0.1 million due to the granting of additional RSUs. General and administrative expenses increased by $4.2-6.5 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, of 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 $0.33 per basic and diluted Class A share. Adjusted EBITDA, which we define as EBITDA without giving effect to equity-based compensation expense and non-core non-recurring 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 the prior year.

Adjusted net income, which we define as net income without giving effect to non-core and non-recurring items and income tax expense, assuming a corporate rate of 26%, was approximately $4.9 million for the quarter, or $0.35 and $0.34 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. To the extent dilutive, we add unvested Restricted Stock Units and non-qualified 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 decrease in compensation and benefits expense of $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 of $4.3 million, partially offset by an increase in salaries and benefits of $0.7 million.

Again, that was primarily a result of merit-based increases and newly hired staff, and there was an increase in equity-based compensation expense of $4.2 million due to the granting of additional RSUs. General and administrative expenses increased by $10.9-12.6 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 value of 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 travel and entertainment expenses. Reported consolidated net income was $10.4 million for the first half.

This 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 $0.66 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 $0.71 and $0.69 per adjusted basic and diluted EPS, respectively. Quickly looking at the balance sheet.

Total assets as of June 30th 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 $47.4 million as of June of this year, compared to $77.4 million at the end of 2022. Total borrowings as of June 30th of this year were $3.6 million. Total Class A stockholders' equity as of June 30th of this year was approximately $82.9 million. That concludes my financial remarks. I'll turn it over to Rick for Q&A.

Rick Hough (Chairman and CEO)

Thanks, Scott. We're open now for questions.

Operator (participant)

Ladies and gentlemen, at this time, if you would like to ask a question, you may press star and then one using a touch-tone telephone. If you are using a speakerphone, 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'll pause momentarily to assemble the roster. Our first question today comes from Sumeet Mody from Piper Sandler. Please go ahead with your question.

Sumeet Mody (Director Equity Research)

Hey, thanks. Good morning, guys. Hope you're doing well. I'd just like to start with the six-month actionable pipeline between OCIO and equity asset classes. I know last quarter you'd mentioned it kind of nicely increased to 2- almost $2 billion, but cited some slowness in the domestic search environment at the time, kind of given more virtual meetings as opposed to in-person. Can you talk about how that search environment has evolved and then maybe an update on the size of the pipeline today? That'd be great. Thanks.

Rick Hough (Chairman and CEO)

Yeah, the, the search environment hasn't changed. It's been like this for a while and 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. We are looking at the pipeline and thinking about it in those terms, but not, not much has changed since my last comments to me. The total pipeline, six-month actionable pipeline, currently is $1.3 billion, which is down from the $1.95 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, $200 million of that was OCIO. 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 695 last quarter. We also adjusted the pipeline because things are just taking a little longer, as I was mentioning. We, we took it out of the 6 month. Those pending items may come back into the pipeline. As you know, we try to measure this pretty accurately about what we, what we think will happen over the next 6 months. That, that decline in the pipeline is really a mix of, 1, things we didn't win, as well as readjustment of the pipeline. It's still a very solid pipeline, and, and we feel good about our prospects, but that's where things stand right now.

Sumeet Mody (Director Equity Research)

Great, thanks. Really helpful. I wanted to switch over to the non-discretionary side. You know, obviously, saw a nice uptick in the quarter. 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 if you could talk about, you know, what drove the inflow, and then how did that impact revenues in the quarter?

Rick Hough (Chairman and CEO)

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 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 in 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 influenced as others. We also have large clients who may add assets that we didn't have reporting or other responsibilities for into that pool of assets. We saw both meaningful inflows as well as a meaningful uptick in the value of those assets.

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 counseling our clients on and working with them on. To that, to that extent, it is quite a good positive.

Sumeet Mody (Director Equity Research)

Great. One more from me, just on the repurchases in the quarter. It looks like you've done 4 quarters in a row now, some, you know, nice repurchasing. Any updates to the buyback strategy today, kind of given where the stock is trading versus 3 months ago? Any color there would be helpful.

Rick Hough (Chairman and CEO)

Yeah, I don't comment on the, 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, to go on that buyback that we announced. We're very pleased with how the program turned out, but I, I don't comment on our specific thresholds or strategy.

Sumeet Mody (Director Equity Research)

Okay, great. Thanks for taking my questions.

Rick Hough (Chairman and CEO)

You're welcome, Smee. Thanks.

Operator (participant)

Our next question comes from Sandy Mehta, from Evaluate Research. Please go ahead with your question.

Sandy Mehta (CEO and Chief Investment Officer)

Yes, good morning, Rick and Scott. Just to follow up on the earlier question, I, I presume there were no buybacks during this quarter, Q2?

Rick Hough (Chairman and CEO)

Yeah, there. No, we did buy back some additional in Q2.

Sandy Mehta (CEO and Chief Investment Officer)

Oh, okay. Okay, fine. Can you disclose the current size of the OCIO business?

Rick Hough (Chairman and CEO)

Yes, that's $1.534 billion.

Sandy Mehta (CEO and Chief Investment Officer)

Okay.

Rick Hough (Chairman and CEO)

that is up from, from last quarter. I don't-- 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.

Sandy Mehta (CEO and Chief Investment Officer)

Okay, good. great. 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, 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 for modeling?

Rick Hough (Chairman and CEO)

Yeah, Sandy, the, 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 non-cash adjustment. That earn-out is now zero, that liability. We had large fair value adjustments a year ago, a reduction to that liability, which reduced our expenses. That's, that's really the driver of the change. 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.

Sandy Mehta (CEO and Chief Investment Officer)

It's going to be more sort of as a percentage of sales, maybe 21 point or 20%-22%, something like that?

Rick Hough (Chairman and CEO)

I mean, we, as we've said before, in the past, we do have some seasonality to our SG&A, especially as we get toward the end of the year. 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.

Sandy Mehta (CEO and Chief Investment Officer)

Okay, great. Thank you so much.

Rick Hough (Chairman and CEO)

Sure. Thank you.

Operator (participant)

Our next question comes from Christopher Marinac, from Janney Montgomery Scott. Please go ahead with your question.

Christopher Marinac (Director of Research)

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 kind of the prior comments in terms of where that will range over the year?

Rick Hough (Chairman and CEO)

Sure. Generally speaking, if you look over, you know, the history of the whole firm, much of which, you know, was before we were public, but 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 32.5 at the end of 2021, with the very high markets at that time, as well as the fact that we got very significant performance fees. Reaching that level of EBITDA is really not feasible unless you're seeing a real acceleration in the market and/or performance fees, which obviously have no further associated costs with them, to drive it that high.

That was, that was unusual, and I've commented many times that if we're in the real upper twenties, we're, 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. I think it is certainly sustainable. In fact, if we were to, to steady state pause things and some of the inflation comes down as we look at contracts, it could even creep up a bit from there. I think this is a pretty good number to, to bet on if, if very little changed.

In terms of what might happen in the future, I did mention in my opening comments that we are looking at investments in the business, and I have mentioned the need to do so to, to drive our, our growth. Could well be, you know, that we engage in some, some hires to drive organic growth in the business. If we do so, we're gonna bring that EBITDA margin down in the short term, until revenue follows those, those hires. You know, I would not be surprised to hit that by a meaningful amount. What is that? I don't know yet, as we talk to people.

You know, if, if we pushed it down even to 24%, which is not what I'm projecting, I'm just talking, you know, 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 faster growth in the future, if we were to do so. We're always in conversations and thinking about how to continue growing this business as we have, in a prudent way and in a way that compounds both earnings per share as well as invested capital.

Christopher Marinac (Director of Research)

Great. That's really helpful background. Rick, under that scenario where you would go lower, the revenue payoff is relatively quick in terms of you don't have to wait long to see that revenue inflection under that scenario.

Rick Hough (Chairman and CEO)

I, I would say it depends. You know, we don't tend to buy, say, a, a broker's book of business that brings a lot of clients over day one. It's not a business model that we're enamored with or, or have sought to do in the past. 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, that we made some investments, just at the beginning of COVID, or into it, and that paid off for us. The time it took was also perhaps obscured a bit by rising markets at the time.

In combination, everything accelerated faster than, than our investments. In fact, that's one reason why we ended up with, with such a high EBITDA margin at the end of 2021. I-- you know, when I make those investments, or if I do, I'll, I'll try to be transparent about the timeline, but it is not necessarily a quick one, however you may define that. Of course, we're also always talking to potential compatible partners and firms, which would have the benefit of both revenue and EBITDA expansion, if, if the terms were right and it was the, the correct culture, and we engage in those conversations all the time.

Christopher Marinac (Director of Research)

Super. Thanks for clarifying me on that. I appreciate it. Just a final point, Rick.

Rick Hough (Chairman and CEO)

Yeah.

Christopher Marinac (Director of Research)

If interest rates stay higher for longer, what does that mean for you from a strategic standpoint? Does it have any impact on, in terms of how you and Scott manage the business, this next several quarters?

Rick Hough (Chairman and CEO)

Well, for one thing, it, 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, is for compensation, which we pay out at the end of February next year. Nonetheless, given the small buyback, a relatively small buyback that's ending, and the cash that's building, you know, those higher, especially short-term interest rates, will, will benefit us with interest income, which we really haven't had, you know, in a meaningful way to date. The other effect it would definitely have is in the M&A market. As, as you may know, that market is slowing a bit. It's still reasonably active compared to recent years, and certainly compared to many years ago.

You're seeing deals taking a little longer to get done. Financial engineering won't work quite as well as it has. Deal terms are certainly getting a little tighter. I think that's helpful to us in our conversations, so I welcome that environment. I think the normalized environment is good generally for capital allocation decisions in the economy at large and for companies. I think as we adjust, that's gonna be a real issue about folks having to develop real earnings and growth, rather than depending on what I was calling financial engineering, and a just continually rising market of whatever industry you're in. 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. If that did happen, it would have a pretty marginal effect on revenue. Even though, generally speaking, fixed income assets have a lower basis point 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 what happens to the firm's overall revenue. I would say that a sustained interest rate level at this, where we are, if it were to continue, is neutral to even positive.

Christopher Marinac (Director of Research)

Got it. Thanks for all the background this morning. It's very helpful.

Rick Hough (Chairman and CEO)

Yeah. Always a pleasure to talk to you, Chris. Thanks.

Operator (participant)

Once again, if you would like to ask a question, please press star and then 1. To withdraw your questions, you may press star and 2. Our next question comes from Chris Sakai from Singular Research. Please go ahead with your question.

Chris Sakai (Director of Research)

Yes, hi, good morning. I just had a question on. Can you, can you talk about the, your average annual management fee and, and how it decreased this quarter versus a year ago? Where do you see that next quarter and for the remainder of the year?

Rick Hough (Chairman and CEO)

I, 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. As markets 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 that's changed a bit. Now, markets have been recovering. The bit that it came down for discretionary assets under management could well be a result of larger mandates, and of course, OCIO, which is institutionally priced.

It's not quite the same discretionary asset management as you find as, in, 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, a basis points based on where we stand in discretionary assets under management as of today, as of I, I should say, as of June 30th, the end of the quarter we are reporting on, and you did a run rate, you would expect the basis points that we're receiving on those assets to actually be up over over last year. Remember, our revenue for the quarter is based on, for this quarter, is based on March 31st closing values.

The market has, has further increased during the quarter, and that is not what is driving revenue for the quarter. The, the, the billing period is always one quarter ahead. I hope that helps.

Chris Sakai (Director of Research)

Okay. Yes, thanks. I guess just one on your outstanding term loan of $3.6 million. Have you guys considered paying that down?

Rick Hough (Chairman and CEO)

Well, the annual amortization on that, the required amortization, is $3.6 million a year. It's got another 12 months to go. If for some reason, the, you know, the interest rate in formula on the term loan is not overly burdensome, you know, if for some reason things change drastically, we could always, you know, look into prepayments. Right now, the normal amortization is prudent.

Chris Sakai (Director of Research)

Okay, great. Thanks.

Operator (participant)

Ladies and gentlemen, at this time, and showing no additional questions, we'll conclude today's question-and-answer session. I'd like to turn the floor back over to Rick Hough for any closing remarks.

Rick Hough (Chairman and CEO)

Great. Thanks for joining us. It's nice to see markets recovering and a fair bit of new business activity in the pipeline for our capabilities. I really appreciate your attention this morning and all of the questions. Wish you a good rest of the summer, and we'll talk to you at the end of the third quarter. Thank you.

Operator (participant)

Ladies and gentlemen, with that, we'll conclude today's conference call and presentation. Thank you for joining. You may now disconnect your lines.