Pre-Paid Legal Services, Inc. (NYSE:PPD)
Q3 2008 Earnings Call
October 29, 2008 8:30 am ET
Randy Harp – Chief Operating Officer
Steve Williamson – Chief Financial Officer
Welcome to the Pre-Paid Legal third quarter 2008 earnings results conference call. (Operator Instructions) At this time I'd like to turn the call over to the Chief Operating Officer, Mr. Randy Harp.
Good morning. This is Randy Harp, Chief Operating for the company. I want to welcome you to the 2008 third quarter earnings conference call for Pre-Paid Legal Services. Joining me here at our home office is Steve Williamson, our Chief Financial Officer.
Before we begin I want to remind everybody that the conference call will contain forward-looking statements including our expectations of future results and our future plans. Actual results might differ materially from those projected in any forward-looking statement. Additional information concerning risk factors that could cause results to differ materially from those forward-looking statements are contained in our press release announcing our earnings, as well as from disclosures in our public reports on Forms 10-K, 10-Q, 8-K, etc., filed with the SEC and are available on the SEC Edgar web site as well as our own website.
At this time, I would ask our Chief Financial Officer, Steve Williamson to step through the more significant financial highlights of the 2008 third quarter.
First I'll just paint the big picture and walk through some of the details of the income statement that we had for the third quarter. On the big picture, the third quarter of '08 we had $1.6 million more revenue with $1.2 million less expenses and taxes which was $2.8 million difference or increased net income of 10% pure shares that results in the 40% increase in EPS.
Kind of stepping through the details that make all that up, the third quarter 2008 membership fees increased 1% over the third quarter of '07 to $109.3 million. Associate services revenue came in at $6.2 million, about $200,000 up. Other revenue was down about $100,000 to $1 million and again, that's a very consistent number. It's the amortization of that $10 enrollment fee from the new memberships that pay that over the estimated life of three years. That brings us to total revenue of $116.5 million for the quarter, a 1% increase.
On the membership benefits line, they were 34.4% of membership fees for '08 which is a reduction from the 34.8% level. Again, you will remember we talked about the $0.25 per member per month savings on the IDT memberships. That has reduced our benefit ratio in '08 compared to the '07 levels. I would expect it to be close to this 34.4% for the fourth quarter, maybe a little less than that.
You may recall that in our previous earnings call we did talk about the additional cost on a roll out on an IP initiative that had some additional costs in the membership benefit ratio, and we do roll into additional savings again at the beginning of 2009 so the first quarter of '09 will see another $0.025 per member per month reduction. And then we'll have one more beginning in the January 1, 2010. We expect about a 50 basis point reduction each time these additional savings come into play.
Commissions were up slightly to $33.7 million for 2008. We had 6% fewer new membership sales, 145,000 compared to 154,000 for the prior year's third quarter. The average premium sold was almost identical at around $326 of quarters which resulted in premium written, which is the number of new membership written times that average premium of $326. That was down about 6% which is the primary driver of commissions.
With that 6% decline in premium written you would normally expect to see a decline in commissions near that same level, but that was offset by the additional $2.1 million in commission bonuses that we paid this quarter under the new expansion bonus program. I believe I talked about it last time, but basically it's a program that we put in place that's designed to pay associates additional bonus commission dollars for growth.
Associate service costs were $5.4 million for '08, down $3.5 million from '07 levels primarily due to the reduction. Last year we had a bonus program that was in the associate services level, was around $2 million. Of course we don't have that now, but we do have the expansion bonus that offsets that on an overall basis.
G&A costs were 11.5% of membership fees for '08 versus 12.7% for '07. Remember the 2007 number includes state income taxes that now are reflected in the line below the line. If you take out state income tax, I think we would have been right around 12% for 2008. Expenses of course were lower even when you back out the state tax effect.
We had lower bank service charges, postage, telephone and advertising costs and they were partially offset by some slight increases in employee costs and increases in consulting fees, primarily around a PCI or payment card initiative that we were required to undertake due to the collection of some of our revenue with credit cards.
Other net includes $2.2 million of depreciation for '08 versus $2.1 million for '07. Interest expense was $924,000. That's down from $1.7 million in the prior. Premium taxes, slightly lower at about $455,000. Those were all offset by interest income of $531,000 in this quarter compared to $143,000 lower in '07.
State income taxes, the tax rate was 40.6% for '08 versus 34.8%. Again it was higher due to the impact of the state income tax, and state income tax for this quarter was a little higher as we trued up with the final tax returns during this quarter so we had a little bit higher. I would expect the overall rate to be in that 38% to 40% throughout the quarter and probably on an annualized basis, pretty close to that 39% rate.
Net income, that all resulted in $14.4 million net income for 2008. That's a 25% increase over the '07 quarter. Diluted earnings per share decreased 10% due to our continued Treasury stock buy back. That resulted in diluted earnings per share of $1.23. That's a 40% increase over the $0.88 that we reported for the third quarter of '07.
Cash flow from operations for the third quarter was up $4.5 million to $16.7 million for '08 versus the $12.5 million for '07. CapEx was pretty consistent, $1.2 million for the third quarter. If you look at all three quarters, it's $4.5 million and really close to our average run rate, which is that $1.5 million per quarter.
Notes payable for September 30, $66.7 million. We're making $1.7 million per quarter payments, and again that includes the pretty quick pay back on that $10 million that we borrowed from DOK a couple of quarters ago. That includes $2.5 million on that figure.
All of our debt is tied to LIBOR and our average incremental cost of all of our debt per LIBOR is about 145 basis points. That put us at a little less than 4% for September with the LIBOR jumping all over the place from early up the first part of this quarter, that put our pricing at around 5.3% for the month of October.
Our debt actually re-prices near the end of the month. There's actually three different dates that these different pieces re-price at. We're about 5.3% for October if you base it upon today's LIBOR price which has come down from the end of September, first part of October levels would be right around 4.6% as far as our blended rate. We certainly hope that goes down even a little more.
We are in compliance with all of our debt covenants. We're very conservative. Debt level is at about 0.6 to EBITDA right now so we really are in very good shape in relation to the covenants. Under the most restrictive covenants that controls the amount of money that we have to spend for our buy back should be about $14 million that we'd have available for our buy back program this quarter.
At Sept 30, '08 cash and investments totaled $55 million. We did request and receive approval for an additional $10 million worth of dividends from our insurance that will be actually paid and the holding company's coffer before the end of this month. You'll note that we did provide a little more detail in regards to our investment holdings. There's been a lot of questions about those. We have a very conservative investment portfolio; 95% of U.S. Treasuries and Municipal bonds rated AA or AAA or Certificates of Deposit.
We do have remaining Board approval for about 475,000 shares under our stock buy back program and we will be back at the market today continuing our long standing buy back program. With that I'll turn it back to Randy.
Several items such as the detail of our investments, we did file our Form 10-Q yesterday, so you'll find any of the information that Steve referenced in the latest 10-Q that we filed.
I want to respond to five or six emails questions that we received that we haven't previously addressed or haven't been addressed in previous public filings and usual, utilizing our respective strengths, I'll read the questions and let Steve answer them.
The first question – Can you provide an update on cost savings you have on the IDP plan in 2009.
If you take the total stand alone plus the dual, we've got about 770,000 memberships in force right now with a $0.25 saving which is what comes into effect for that 2009 period that was referred to. That gives us about $192,000 in savings per month, $576,000 per quarter, around $2.3 million savings for the full year of '09 assuming a steady base with increased that will higher. The way I look at it is it's basically a 50 basis point reduction in our benefit ratio.
We've got one that comes up in January '09 and 2010.
Next question – Recruiting and membership sales increased in the third quarter compared to the second quarter of '08. Can you talk about changes made on recruiting and are these trends continuing into the fourth quarter?
If you'll look back to our production press release, and it's recapped in the 10-Q as well. Certainly we have a lot of programs that we're proud of that ties folks to increased recruiting levels. One of the things that drove, or certainly was a big factor in driving increased recruiting effort for the third quarter over the second quarter was the lowering of the entry price. We went from an average of around $99 to $56 because we introduced a $49 entry fee.
That moved us from 26,000 recruits in the second quarter to 37,000 almost 38,000 recruits in the third quarter. We've made other enhancements that we believe will certainly help continue this effort. We also have so far stayed at the $49 level so we certainly feel comfortable in saying that as far as what we would expect for the fourth quarter compared to the third quarter that it would be similar levels if not certainly we're shooting for much higher levels.
It's a little difficult to predict the full quarter's results based on the three weeks we're into the quarter, but we haven't seen anything substantially different in either direction.
I do know we continue to hear success stories. I was at an event this weekend in Toronto, and continue to hear success stories about certainly in the States, the sub-prime mortgage issues and foreclosures, just the ability for our members to pick up the phone and talk to a law firm that understands what their rights may be pursuant to those mortgages. In fact, even with some of our home office staff here has made a tremendous difference.
I can speak to a call we had last night where we're really highlighting that very thing with a couple of our group producers. Rob Best, our number one sales person as it relates to units sold and Marilyn Thompson a very close second, and both will do well north of 4,000 in individual membership sales, and they sell that in the group arena.
What they're saying that they're seeing is just increased interest. When they're going through an enrollment process, they'll ask, "Is there any garnishment issues or any foreclosure issues? Do you have any back loan issues or credit card issues?" People actually raise their hands inside that environment with all their peers, and a lot more than they've seen in recent past will actually come up and say, "I really need help."
Marilyn Thompson of course, those of us who understand the plan know that once you sign up, you can call the provider right then. She actually did that yesterday, had an enrollment, she said she brought in 58 memberships in one day's production and she had a couple of folks that really needed to talk to an attorney right then. After they signed up, she got them hooked up and they actually talked to an attorney to kind of settle them down and know what their options are. Just that piece of mind helps a lot.
And Rob's seeing that very thing. His thought, when he's talking to the President's, he's getting the right to go in and speak to them and he's asking if they're seeing increasing absenteeism, and virtually all of them are saying yet. There's some studies out there that certainly prove or say that a lot of folks are spending a lot of time doing some of these issues. If they had an attorney, they could actually be at work and be more productive.
So certainly he feels an increased interest in folks needing this plan and according to at least two of our people out in the field marketing in a group arena, they're seeing significantly higher closing rates than they've seen in their life, and they've been here 10 and 17 years respectively.
As you said, Rob sold over 4,000 individual memberships this year so nobody's out there more than Rob is, so we certainly value him as a producer. We also value his insights on what's going on in the marketplace.
Next question – Is the company back in the market today? I think Steve has already addressed that.
I wish we had been in it yesterday before the rise, but we will be back in today. Didn't the Fed raise the daily limit on the number of shares you could buy?
They actually did do a temporary change. Unfortunately it was right in the middle of our quiet period where we couldn't take advantage of that where they wouldn't allow company's that are executing on a buy back to buy up significantly larger numbers of shares. They limit normally 25% of the average daily volume for the prior four weeks and they basically pulled that off the table.
They took that away. It looks like October 17 was the last date that was available so we're back to the normal pool which is 25%. Given our current volume, you take 25% of even a little bit lower volume, we still have plenty of opportunities and the monies that we have available under our covenants, $14 million. We just may not be able to spend it as quickly if we do see some opportunities at these low price levels.
Suffice it to say that the lower the price goes, the more aggressive we have been and will continue to be.
The final question we have – Is there a budget for buy backs in the fourth quarter?
You might just want to talk about the constraints we do have to operate?
There's really two constraints. One's an excess cash flow and basically we get to spend all the excess cash flow. I take cash flow back out of CapEx and debt payments and those typical things that you see in one of those covenants. The other one is, how much cash you have on the balance sheet and you back out $12.5 million.
You look at both of those, and they're both very close to the same number, right around $14 million. Certainly that number could be increased if we were able to negotiate some additional debt. Typically in the new financings get put into that bucket and allows us to spend more. But as it stands right now, we're looking at about a $14 million spend ability for the fourth quarter of '08.
We're wrapping up the call. The same close I use quarter after quarter because I think it still makes a pretty valid point, is pursuant to the stock repurchases that Steve's talking about and dividends that we've paid in the past, since of April of '99, we've returned over $416 million to shareholders.
We've built this home office that we're currently in for $30 million plus. Again, at September 30, we had $55 million in cash. All of those uses if you will, that's why it's over $0.5 billion and we only have $67 million in debt. I just think that clearly demonstrates the soundness of our financial model.
We believe we have the ability to deliver an ever increasing, I think the need for our product has never been greater than it is right now. I think the opportunity to offer even part time opportunities to people that are being laid off and financially challenged has never been better than the opportunities that we have before us right now.
We can deliver that high quality life events legal plan to our members and still produce significant free cash flow. I think that's a very critical element especially in today's environment.
Having said that, Steve and I, as always, appreciate your continued confidence. We don't take it for granted. We strongly believe that our model will continue to produce results that all of our shareholders can be proud of. We appreciate your time today and look forward to talking to you in February when we have the fourth quarter 2008 earnings conference call.
Thank you very much.
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