Silvercrest Asset Management Group, Inc. (NASDAQ:SAMG) Q2 2019 Earnings Conference Call August 2, 2019 8:30 AM ET
Rick Hough - Chairman, President & CEO
Scott Gerard - CFO
Conference Call Participants
Sumeet Mody - Sandler O'Neill + Partners
Good day, ladies and gentlemen, and welcome to Silvercrest Asset Management Group Inc. Second Quarter 2019 Earnings Conference Call. [Operator Instructions] As a reminder, today's conference is being recorded.
Before we begin, let me remind you that during today's call, Silvercrest will make forward-looking statements pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. All statements other than the statements of historical fact, including statements regarding future events and developments and Silvercrest's future performance as well as management's current expectations, beliefs, plans, estimates or projections relating to the future are forward-looking statements. These forward-looking statements are only predictions based on current expectations and projections about future events. These forward-looking statements are subject to a number of risks and uncertainties. And there are important factors that could cause actual results, level of activity, performance or achievements to differ materially to statements made. Among these factors are fluctuations in quarterly and annual results, incurrence of net losses, adverse effects of management focusing on implementation of growth strategy, failure to develop and maintain the Silvercrest brand and other factors disclosed in the company's filings with the SEC, including those factors listed under the caption entitled Risk Factors in the company's annual report on Form 10-K for the year ended December 31, 2018, filed with the SEC. In some cases, these statements can be identified by forward-looking words such as believe, expect, anticipate, plan, estimate, likely, may, will, could, continue, project, predict, goal, the negative or plural of these words and other similar expressions. These forward-looking statements are predictions based on Silvercrest's current expectations and its projections about future events. All forward-looking statements made on this call are made as of the date hereof, and Silvercrest assumes no obligation to update these forward-looking statements.
I would now like to introduce your host for today's conference, Mr. Rick Hough, Chairman and CEO. Mr. Hough, you may begin.
Thank you so much and welcome to the call for our second quarter. Silvercrest finished the second quarter of 2019 with one of its strongest organic growth quarters over the past few years, with $259 million and new client accounts.
Our high net worth wealth management business led the way in the second quarter, which is a demonstration of the firm's diversified growth opportunities. We will continue to invest in our high net worth portfolio management teams to maintain that organic growth in this business. Furthermore, additional organic capital inflows from existing clients greatly diminished the effect of normal second quarter tax-related outflows. Strong capital markets since the fourth quarter of 2018 market downturn also have helped to put the firm on its growth trajectory. With discretionary assets under management now at $16 billion and total assets under management at $21.7 billion which is up approximately $1 billion during the quarter. Our strong growth in assets under management during the second quarter does not include our previously announced acquisition of certain assets of Cortana Asset Management LLC.
We have previously announced that we expected that transaction to close during the third quarter of this year. We in fact closed on July 1, and we are thrilled to welcome our new Milwaukee partners and colleagues to the firm. Their high-quality growth equity strategies bring approximately $1.7 billion of assets under management to Silvercrest at an annual revenue run rate of approximately $13 million, starting with the third quarter. We expect the transaction to contribute meaningful accretion to the firm's cash flow as well as earnings per share. Furthermore, we're excited to support the talent behind our new growth equity strategies with new opportunities in the institutional marketplace. Our marketing teams are fully integrated and we are already working to continue building that business. We have a robust institutional Asset Management pipeline and have substantial institutional interest across Silvercrest's equity strategies, whether value or growth, some of which have only recently been introduced to the marketplace.
As we mentioned last quarter, the remainder of 2019 and 2020 will be very important for growth in the firm's outsourced Chief Investment Officer Initiative. I'm pleased that the marketing pipeline for that business looks robust. Given our activity level, we expect near term positive results. The current M&A environment for wealth management firm remains both active as well as expensive. Silvercrest is involved in multiple conversations at any given time. But we believe our brand, culture, capabilities and technological innovation makes Silvercrest a premier partner for the right businesses. Regardless of the environment, Silvercrest will seek to create value on behalf of shareholders, where opportunity resides and we will continue to foster initiatives to organically grow the firm. On July 29, 2019, the company's Board of Directors declared a quarterly dividend of $0.15 cents per share of Class A common stock. That dividend will be paid on or about September 20, 2019, to shareholders of record as of the close of business on September 13, 2019.
After Scott Gerard delivers financial results as CFO of the company, I'll be very happy to make further commentary and take questions from investors, shareholders and the public. Thanks very much and go ahead, Scott.
Thanks, Rick. As disclosed in our earnings release for the second quarter, discretionary AUM as of June 30, of this year with $16 billion and total AUM as of June 30, was $21.7 billion.
Revenue for the quarter was $23.9 million and reported consolidated net income for the quarter was $3.4 million. Looking at the second quarter in a little bit more detail. Again, revenue was approximately $23.9 million. That represented approximately a 3% decrease over revenue of approximately $24.6 million for the same period last year. This decrease was driven primarily by net client outflows and discretionary AUM as well as by market fluctuations over the past year, partially offset by market appreciation during the second quarter of 2019. Expenses for the second quarter were $19.5 million. That represented approximately a 2% increase from expenses of $19.1 million per the same period last year. This increase is primarily attributable to an increase in general and administrative expenses of approximately $0.8 million partially offset by a decrease in compensation and benefits expense of $0.4 million.
Again, comp and benefits went down, primarily because of a decrease in the accrual for bonuses, partially offset by increased salary expense, as a result, the merit-based increases and newly hired staff. The increase in G&A during the second quarter, compared to the same period last year was primarily due to increases in professional fees for acquisition-related legal fees, occupancy and related costs as a result of the adoption of the new lease accounting standard, effective January 1, of this year and moving expenses related to the renovation of our office space in New York City. Reported consolidated net income was $3.4 million for the quarter. That compared to $4.2 million 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 $1.9 million or $0.22 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 or non-recurring items was approximately $6.6 million or 27.5% of revenue for the quarter compared to $7.1 million or 28.9% of revenue for the same period last year. Adjusted net income, which we define as net income without giving effect to non-core or non-recurring items and assuming an income tax expense rate of 26% was approximately $3.7 million for a quarter or $0.28 per adjusted basic earnings per share and $0.27 cents per adjusted diluted earnings per share. Adjusted earnings per share is equal to adjusted net income divided by the actual Class A and Class B shares outstanding as at the end of the reporting period for basic adjusted EPS. And to the extent dilutive, we had invested 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 $46.5 million, which represented approximately a 5% decrease over revenue of approximately $48.9 million for the same period last year. This decrease was driven primarily again by net client outflows and discretionary AUM, as well as by market fluctuations over the past year. And again, partially offset by market appreciation that we experienced during the first half of 2019. Expenses for the first half were $38 million and were basically flat through expenses of $38.2 million for the same period last year. Comp and benefits expense decreased approximately $1.4 million in the first half of this year, compared to last year and G&A expenses increased approximately $1.3 million in the first half of this year compared to the prior year. The reason for the decrease in comp and benefits again was a decrease in the accrual for bonuses and that was partially offset by increased salary expense related to merit-based increases and newly hired staff.
For the first half, G&A increased and that was primarily due to increases in portfolio and systems expense due to an increase in soft dollar research-related costs, professional fees for acquisitions, occupancy and related costs as a result of the new lease accounting standard adoption and moving expenses again related to the renovation of our space in New York. Reported consolidated net income with $6.4 million for the first half. This compared to $8.2 million in the same period last year. Reported net income attributable to Silvercrest or to Class A shareholders for the first half of this year is approximately $3.6 million or $0.42 per basic and diluted Class A share. Adjusted EBITDA was approximately 12.3 million or 26.5% of revenue for the first half and this compared to $14 million or 25.7% of revenue for the same period last year. Adjusted net income was approximately $7 million for the first half or $0.52 per adjusted basic EPS and $0.51 per adjusted diluted EPS. Quickly looking at the balance sheet.
Total assets as of June 30 of this year were approximately $151.3 million as compared $133.4 million as of the end of last year. Cash and cash equivalents were approximately $50.9 million at the end of June and this compared to $69.3 million at the end of last year. Going back to the new lease accounting standard adoption, certain lease commitments now appear on the statement of financial condition as operating and finance lease assets and liabilities. As of June 30, of this year, our operating and finance lease assets and liabilities totaled $35.2 million and $41.8 million respectively. Total Class A stockholder's equity was approximately $57.7 million at the end of June.
That concludes my remarks. I'll now turn it over to Rick for Q&A.
Thanks very much, Scott. I appreciate it and will now take questions for further commentary from our investors. Thanks.
Thank you. [Operator Instructions] Our first question comes from Sumeet Mody with Sandler O'Neill. You may proceed with your question.
Thanks. Good morning, guys. Can you guys talk a little bit more big-picture maybe about the value equity and now maybe the growth equity space in general? How are you seeing that relationship today with the backdrop of market expectations where there are rate reduction, inflation, trade war escalations, et cetera? Just have you seen any effect on the mix of strategies that clients demand in the quarter? And then maybe what are your expectations going forward?
Yes, thanks. I would view all of those elements that you just described as more issues for the macroeconomic environment. And of course, it will affect certain sectors and industries differently. Of course, companies at the company level differently than it will affect necessarily allocation to a value growth or capsize strategy, I would argue. I'm not in the business of predicting what equity markets are going to do. If I were, I'd be doing something quite different and -- so what we have to do is just continue adding value where we can, doing great fundamental bottom-up research which is what these teams are good at and making sure we have the right opportunities in the marketplace with the team we've built. I will say this. I do view the small-cap space as one generally having more opportunity for us to make headway because it's a capacity-constrained capability. Small companies often have a lot more runway. There are more risks associated with them but they can be more flexible. So there's some positive and negative attributes.
In addition, over the past several years, I think it has to be acknowledged that small caps in general, whether value or growth, have not lived up to their potential in the past over the course of the cycle. And so they may -- I'm going to go only so far as this if I'm going to get into talking about the equity markets. They may be a bit more cushioned over the long term with a little more room to run compared to some other aspects. In terms of the strategies and teams themselves, I think I mentioned in my commentary that we've now integrated the marketing teams. We have dedicated marketing teams to each aspect of the strategies, whether that's growth international or value. And they're tightly coordinated on how we're going to approach the marketplace. They're working as one unit while representing different strategies. They're energized and we've got really good pipelines. So if that talks to the opportunities, I feel really strongly about that.
As you know, with the downturn in the markets in the fourth quarter, we saw the pipeline get pretty dry. It is now fully built up and it's grown even further since my last quarterly call. So we feel pretty good and excited about that. In addition, we have seen an increase not a decrease in interest -- in strategies like our large-cap value, equity income, mid-cap and focused value. Keep in mind, we've really focused in the past on only a couple of strategies in order to do as well as we could in the marketplace with those and now we have a real breath of them whether you're talking about the two small-cap strategies that are growth-oriented out of Milwaukee or you're looking at multiple other value strategies we have at the firm from international to equity income, including the other side just made. So I hope that's enough color. Sorry, I can't be more specific about macroeconomics but, again, I'd retire and just invest if I knew what was happening there.
That's really helpful, thank you. And I just maybe wanted to drill in a little bit more on the net flows of the quarter. Felt like a lot of that strength came from the high net worth business. Can you provide a little bit more color on that? Maybe the pipeline going forward there?
Yes. The high net worth business is one where I don't necessarily look at a pipeline in a formalized way the institutional businesses has. The high net worth business is referral based. It's much more volatile in terms of when the flows come and how they come. I have not ever predicted what that's going to look like from a pipeline perspective. I have mentioned when I just kind of feel that it's busy and we're getting a lot of opportunities versus other times. And that was clearly the case going into the second quarter. I was not surprised by the results and we remain moderately busy in that business. I think two or three things are going on to give you more color there. First of all, we have new portfolio managers at the firm that we've hired last year as you may recall. Some of that activity is due to them because that's given us more capacity at the firm. There's more energy in general. I hate to use such a vague term about the company, our brand and recognition in the marketplace when you've add -- adding -- when you're adding people, when you do an acquisition like Milwaukee, even though that itself is not high net worth.
We are very active in the OCIO space. I think that's actually really helped us. We've gotten some referrals from that team to our high net worth team. Because boards of institutions have a lot of wealthy people on them. And in fact, we've gotten clients that way. The institutional business brought us a high net worth family this last quarter. So the point here, aside from it being really hard to predict is that these different revenue centers of the firm that are getting the Silvercrest brand in the marketplace has add-on effects that we don't necessarily predict or didn't even potentially expect. That's definitely helping to drive some organic growth at the firm. The second point is that this quarter was a really good example of the diversified revenue opportunities of the business. We've had several quarters where the institutional business and asset flows have driven our growth. This was a quarter where the high net worth business totally dominated our growth. And that's why we have them. That's why we've tried to diversify. That's what we've hoped would happen. They're not necessarily going to work in sync and that's what we've seen. I've seen it before. And I hope that's a trend that continues that -- to balance out the growth of the firm and make it a little bit more smooth.
Okay, great. Thank you. And then maybe just -- I'm sorry if I missed this, but can you give a little color on the effect of the rebound thing for tax purposes in the quarter relative to maybe previous years? How did that work?
You mean in the high net worth accounts?
Yes. So we -- first of all, it tends to fall pretty heavily in both Q1 and Q2. Perhaps with a bias towards outflows in Q2. The net outflows of the business overall, that is to say of existing clients so new business was very strong. But we have very strong net inflows of existing clients as well. So we had very meaningful tax outflows between the first and second quarters. It's just that those strong flows from existing clients into the firm for further investment made the net number very, very low. I think the net number was like $9 million overall. So it's just a function of that strong organic growth. We had it both from existing clients as well as new business.
Got it, okay. That's helpful.
And I would -- I just -- I would expect that again, next year that we have outflows at the end of the first quarter and into the second quarter if the equity markets hold up the way they have this year.
Okay. Yes, that's fair. And then, one last clean-up for me and I'll hop back in the queue. But when should we expect the detailed financials from Cortina to be released?
You should get pro forma financials from Cortana in September.
Okay, got it. Thank you.
I think it's important to know from Sumeet, you can come back on after people ask questions. But it's important to note that we had expected to close on that deal with our new colleagues in the third quarter. As I mentioned, we closed on the first day of the third quarter which means that the full benefit of the cash flow and accretion to earnings will occur starting with the beginning of the third quarter. Obviously, earnings takes a little more time. There's a little lag it as things ramp up and you have other aspects of the balance sheet to deal with. But on a cash flow basis, we expected full contribution for both the third and fourth quarters.
Okay, great. Thank you.
Thank you. [Operator Instructions].
Okay, thanks very much for joining us. Sumeet, thanks for your questions. It was a very good quarter for the firm. We're excited about the momentum. We were able to build in high net worth. The very strong pipeline that we have in all of our institutional capabilities across the firm as well as the team that we've built there to execute. And as I mentioned in the second quarter and will mention now we are absolutely thrilled with our new partners in Milwaukee. Now that we're working with them, it's only confirmed how good we feel about that deal and its potential for the company. And finally, I expect some very good news on the OCIO front. That pipeline remains strong. We are in invited-only searches at this point. And the energy around some of our different aspects of the firm is clearly having a positive effect in areas across the firm. Thanks so much and I look forward to speaking with you next quarter.
Thank you. Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program and email disconnect. Everyone, have a wonderful day.