Aug 14, 2013
Executives
Moffett Cochran - Chairman, Chief Executive Officer Rick Hough - President, Chief Operating Officer Scott Gerard - Chief Financial Officer
Analysts
Steven - Raymond James Associate
Michael - Sandler O'Neill
Operator
Good morning and welcome to the Silvercrest Asset Management Group’s, second quarter investor call. Mr.
Moffett Cochran, you may now begin.
Moffett Cochran
Good morning. I’m CEO of Silvercrest.
Joining me today is Scott Gerard, our CFO and Rick Hough, our President. We are very pleased to be reporting our first quarterly earnings as a public company.
As Scott and Rick will report in greater detail, it was a good quarter for Silvercrest. Substantial year-over-year increases were recorded in AUM, revenue, EBITDA and net income for the same periods in 2012.
In particular, we are pleased to see our EBITDA margin above 30% for the quarter and for the six months ending June 30. Before turning it over to Rick and Scott, I would like to make a few general comments.
Two months ago we were on the verge of ticking off a road show, which culminated in our initial public officering of June 27 of this year. As we traveled the country telling out story, we made the following points at every stop.
One, in the ultra high net worth space we saw almost unlimited growth potential, if we were able to continue to deliver excellent service and performance to these clients. Two, in the institutional space we felt we were at an inflection point with institutional consultants, with whom we were just beginning to get traction.
And three, in the M&A space we felt that our ability to do additional deals would be greatly enhanced by the cash and public stock that will come from the IPO. We also emphasized that the growth we felt confident we would achieve was the uneven, unpredictable and would require patience.
Based on our record of success in each of these areas however, we were confident the patient investor would be well rewarded. Now that we are 48 days into the life of a public company, none of our views on these topics has changed.
In the ultra high net worth space, Silvercrest continues to have meetings and conversations with individuals of extraordinary wealth. Because there is no deadline for action however, these conversations were not brought for closure until the client decides he or she is completely comfortable with the outcome; sometimes this takes weeks, sometimes it takes years.
In any event it is unpredictable and we will not expect to make predictions of this sort. In the quarter ended June 30, our new business success was somewhat muted, although the second quarter of each year is characterized by substantial high flows to the taxing authorities.
During the quarter we gained three new relationships. In the institutional space, we continued to be invited into the final presentations for institutional managers seeking new management and we continue to win a good number of mandates from this effort.
In the quarter ended June 30, we were awarded an intuitional mandate totaling $62 million and in the current quarter-to-date we await decision on a number of mandates. Our institutional pipeline is large and growing and looks encouraging.
M&A, during the IPO process we largely suspended our efforts to identify merger or acquisition incentives. Now that the IPO is behind us, we are reactivating that effort, which is a priority for us.
Moving forward on this front, we intend to follow the same formula we have used to-date. Target, small firms, whose clients and principles are culturally compatible with our own, integrate them fully with Silvercrest and build out the acquired business on the new Silvercrest platform.
We intend to focus only on firms located in major moneyed centers in the U.S. In addition to gaining clients or relationship managers, we will be alert to the opportunities to do acquisitions, which would expand our sweet and core investment capabilities as well.
Scott Gerard and Rick Hough will now provide a more detailed analysis of our operations for the second quarter and year-to-date 2013, following which we will open it up for a few questions. Scott, Rick.
Scott Gerard
Thank you Moffett. As everyone here read in our earnings release for the second quarter, AUM as of June 30 was $13.9 billion, revenue for the quarter was $14.5 million and reported net income for the quarter was $5.5 million.
Please keep in mind that the results for the three and six months ended June 30, 2013 are those of our accounting predecessor, Silvercrest L.P., and as a result, our statement of operations and cash flows, do not take into consideration changes related to our IPO, given that our shares only commence trading on June 27. Revenue for the second quarter was $14.5 million, representing approximately a 12% increase over revenue $12.9 million for the same period last year.
This increase is driven primarily by growth in our management and advisory fees as a result of increased AUM. Expenses for the second quarter were $8.7 million, representing approximately a 16% increase over expense of $7.5 million for the same period last year.
This increase was primarily attributable to increases in compensation and benefits expense of $1.1 million and to a much lesser extent general and administrative expenses. Our increase in compensation and benefits expense was primarily attributable to a special one-time non-principal bonus expense of approximately $750,000, directly related to the IPO, which was paid in July 2013 upon the confirmation of the offering.
The balance of the increase in compensation benefit expense is due to both merit increases and increased headcount. The increase in general and administrative expenses was primarily due to an increase in occupancy expense and this is because in 2012 we had a reversal of a lease abandonment liability for space that we reoccupied.
So therefore this had the effect of reducing occupancy expense last year. Furthermore, this increase was primarily offset by a reduction in professional fees, as in the beginning of 2012 we had to expand some of residual IPO related fees related to the planned IPO that ultimately was withdrawn in November of last year.
Reported net income was $5.5 million for the quarter as compared to $5.1 million in the same period last year. Keep in mind, reported net income does not included the effect of partner incentive payments, as these will begin to be expensed in the third quarter, when changes related to the IPO will begin to be reflected in our statement of operations and cash flow.
Adjusted EBITDA, which redefined as EBITDA without giving effect to equity base compensation expense and non-recurring items, but does include the effect of partner inventive payments was $4.4 million or 30.4% of revenue for the quarter, compared to $3.3 million or 25.8% of revenue for the same period last year. Adjusted net income, which we defined as net income without giving effect to non-recurring items, but inclusive of both the effective partner incentive payments and income tax expense, assuming a standard corporate rate of 40% was $2.1 million for the quarter or $0.18 per adjusted basic and diluted share.
Adjusted earnings per share is basically equal to adjusted net income, divided by the actually Class A and Class B outstanding as of the end of the reporting period for basic adjusted EPS and to the extent dilutive, we add unvested differed equity units and performance units to the total basic shares outstanding to compute diluted adjusted EPS. With respect to the first half of the year, revenue for the first half was $28.2 million, representing approximately a 14% increase over revenue of $24.8 million for the same period last year.
Again, this was primarily driven by growth in management and advisory fees as a result of increased AUM. Expenses for the first half was $16.6 million, representing approximately a 12% increase over expenses of $14.8 million for the same period last year.
This increase again was primarily attributable to compensation benefits expense increases and to a lesser extent G&A expense increases. For the same reasons we are driving the variances for the quarter applied to the first half of the year with respect to the comp and G&A.
Reported net income also does not include partner incentive payments and will begin to reflect the expensing of the partner incentive payments in the third quarter when the IPO again is reflected in our statement of operations. Adjusted EBITDA was $8.5 million or 30.3% of revenue for the first half, compared to $6.8 million or 27.3% of revenue for the same period last year.
Adjusted net income was $3.9 million for first half or $0.35 per basis adjusted EPS and $0.33 per basic and diluted shares respectively. With respect to our statement of financial condition, our balance sheet does reflect the various IPO transactions, because it’s at a point in time and because our shares did commence trading on June 27.
Total assets were $114.3 million as of June 30, compared to $52.5 million as of December 31 last year. Cash and cash equivalents were $12.7 million at the end of June, compared to $13.4 million as of December 31 last year.
We had notes payable of approximately $9.6 million at June 30 and $3.3 million at December 31 of last year.
And as everyone knows, on July 2 we did officially complete our IPO by issuing approximately 4.8 million Class A common shares, which began trading on June 27 on NASDAQ. Our ticker is SAMG.
The net proceeds from the IPO, which were received on July 2 of this year was proximally $48.2 million. In connection with the IPO, we used a portion of the net proceeds to purchase approximately $3.4 million Class B units from partners of Silvercrest LP.
The cost of those units on the net basis was approximately $35.4 million. The amounts that were due to the Silvercrest Partners that sold on the offering were paid out as well on July 2.
As a result of our IPO related reorganization tool, the stockholders equity as of June 30 was $26.1 million. And that concludes my remarks for the quarter and we’ll open it up to questions as Moffett had stated.
Thank you.
Operator
(Operator Instructions). We do have a question from Steven with Raymond James Associate.
Please go ahead sir.
Steven - Raymond James Associate
Hey guys, and by the way I hit star one a number of times and it just registered, so there might be some more people out there, just so you know.
Moffett Cochran
Okay, thanks Steve.
Steven - Raymond James Associate
Good, how are you’ll doing?
Moffett Cochran
Well, thanks.
Steven - Raymond James Associate
A couple of things for Scott. Scott, I think the AUM presentation, the role, is that done in the same manner as the S-1?
Scott Gerard
Correct.
Steven - Raymond James Associate
Okay, can we look at this in a different way if you have those numbers? I think Moffett said you had three families that came in the quarter; how much did they account for?
Rick Hough
This is Rick, Steve. Those three families which have rised to the level of our accounting and relationship accounted only for about $20 million in the quarter.
When we look at a new relationship we measure it when its open and the month is opened. Additional flows for relationships account as existing flows in or out and they could have been substantial above that.
Steven - Raymond James Associate
Okay, let me ask it a different way then. If we were to look at this as gross flows from new relationships, that would be the $20 million that you just sited.
Rick Hough
Plus at least $62 million in new institutional accounts.
Steven - Raymond James Associate
Okay, those were funded?
Rick Hough
Yes.
Steven - Raymond James Associate
Okay, and then what would be closed accounts if any?
Rick Hough
There were no lost relationships, which is very important for our business. I think we talked about this quite a bit on the road show.
As Moffett mentioned in his introductory remarks, this is a business where we are going after very high net worth individuals. It can be a very long courtship and quite lumpy in terms of quarter-to-quarter results.
The business has grown substantially over time by attracting those assets, but then most importantly retaining them, so it’s more of an annuity once we’ve gained a client relationship. Our emphasis here has to be on superb client service if the business doesn’t work and maintaining that client relationship.
So the fact we didn’t lose any relationships is very important. When you look at closed accounts, for the quarter there was only $1.4 million, which is hardly even worth mentioning, and accounts that were actually closed out, that was the amount of money that was left.
That just means someone may have switched strategies or they harvested money out of an account before, actually closing it out. There may have been other net outflows as obviously you saw in our AUM numbers for things like taxes or other events, a natural close out or closed relationship, there’s nothing to speak of.
Steven - Raymond James Associate
Okay, so the difference here is simply going to be client withdrawals from their accounts for normal reasons, including tax purposes and the like, Rick.
Rick Hough
Precisely, and as we mentioned in the Q, the first and second quarters of the year, depending when cash is raised tend to be our heaviest outflows because of the tax season.
Steven - Raymond James Associate
Okay, and then Richard if you could remind us, for modeling purposes what percentage of assets would be in fixed income?
Rick Hough
Approximately 40%. It’s actually been decreasing slightly, but that’s a good example for modeling purposes.
For those who may not be familiar, you may recall that we tend to see on a relationship across the board and therefore the marginal change in fee revenue from people switching from fixed income to equity matters, but people tend to have long-term asset allocations. We are focused on the fee basis for a relationship and the quality of the relationship and you don’t find huge differentials there over time.
Steven - Raymond James Associate
Okay and then one more if I may. You recently hired a gentlemen, started up an office in Los Angeles.
Anything new out on the West Cost?
Rick Hough
I will mention that we are building out that office still, it is very new. I’m just going to anticipate a question, which is about M&A and mentioned that the firm is in discussions with various parties all the time and looking to build our various offices around the country and that remains a potential there as it does elsewhere and we have a good new business pipeline, including in Los Angeles.
Steven - Raymond James Associate
Okay. All right, thanks guys.
Rick Hough
Thank you Steve.
Moffett Cochran
Thanks Steve.
Operator
We have another question from Michael with Sandler O'Neill. Please go ahead sir.
Michael - Sandler O'Neill
Guys, good morning. So first if I look at the shorter-term returns across your proprietary equity strategies, there is some underperformance relative to benchmark.
So just wondering to what extent, if at all, that’s had any impact on your efforts to increasingly penetrate the institutional channel.
Rick Hough
I would say that it hasn’t affected us at all. If anything the pipeline for institutional business has picked up.
As Moffett mentioned, it remains robust and we feel very encouraged about the institutional attention we are getting. I also think there’s been a closing of any under performance over the past several months.
Moffett Cochran
Its also the case if I may, the institutions are quite interested in making sure that you appear to your stated of discipline, even it happens to be slightly out of sync with the market, and we’ve done that for many years and they like that.
Michael - Sandler O'Neill
Got it, that’s helpful. Okay and then to come back to the M&A discussion, can you talk about what you’re seeing in terms of opportunities, competition and maybe pricing trends out there and how the market backdrop has maybe impacted potential discussions with firms if at all.
Rick Hough
Sure Moffett, do you want me to take that one to start?
Moffett Cochran
Yes, why not you do that.
Rick Hough
Okay. We are seeing I think a little bit more interest in firms that would be willing to sell.
The up-tick in the market of course means that they can potentially get us a better price for their business, even if it’s not based on an increase in multiples. Just due to their own revenue and profitability with a better market, it looks like a better time for some firms to talk.
So I think there’s a little bit more action. The second part of your question has to do with competition.
At the size firms we are typically speaking with and that we have started conversations with in a casual manner, I haven’t yet seen a lot of buyers at the table, maybe that were, our particular mix of business either appeals to those business in such a way that other intuitions aren’t as favorable as Silvercrest or that they are they just small enough that our larger aggregators, which we don’t consider ourselves aren’t in the market place for those businesses. We are really new back into the discussion, so we are just getting into it.
So I wouldn’t want to comment further beyond that generalization.
Michael - Sandler O'Neill
Okay, that’s helpful. And then just maybe a final one for Scott.
How should we be thinking about potential margin expansion over time? Is it mostly a function of continuing to ramp-up the intuitional business or are there opportunities to may be extract some further economies of scale as your legacy high net worth business continues to grow.
Scott Gerard
Yes, basically as we spoke about on the road show, to the extent that intuitional business does comprise a larger portion of our AUM, I think it will be an opportunity there to expand our margins as well and just as a discipline overall the firm is with 38 partners, we are constantly cognizant of effective cost management in running the business. We’ve all get a lot invested in the business.
But you are correct; the institutional AUM mix represents an opportunity for margin expansion.
Rick Hough
This is Rick. With regards to the second half of your clients, your question with regards to legacy clients, we have contracts with set [repeats] for the relationships.
We tried to remain as unbiased as possible in dealing with our clients. Its one of our key selling points in terms of the quality of the service and transparency of our business to our clients.
And as I had mentioned, the long term allocation serve our clients best and so you’re likely to see as Scott said, the major expansion more from the institutional side.
Michael - Sandler O'Neill
Okay, got it. Thanks for taking my questions.
Moffett Cochran
You’re very welcome.
Scott Gerard
Thank you.
Rick Hough
Thank you.
Operator
We have another question from Mr. Steven at Raymond James.
Please go ahead sir.
Steven - Raymond James
Yes, I like being Mr. Steven.
Just a quick one on the institutional front that Richard’s question reminds me off – Mike’s question, excuse me. The (inaudible), I think there was still some of the mandate that had not been funded.
Has there been any movement there?
Moffett Cochran
There has not. Okay, that’s all I have, thanks.
Rick Hough
Thank you.
Operator
(Operator Instructions). There are no more callers in queue.
Rick Hough
Okay, well thank you very much for attending our first investor conference call. Moffett, do you have any concluding remarks.
Moffett Cochran
We look forward to reporting to you each quarter and thank you very much for your interest today.
Operator
Ladies and gentlemen, this does conclude the conference. You may all disconnect.