PrePaid Legal Expenses, Inc. (NYSE:PPD)
Q1 2009 Earnings Call
April 29, 2009 8:30 am ET
Randy Harp Chief Operating Officer
Steve Williamson Chief Financial Officer
Good day, and welcome to the PrePaid Legal Services first quarter 2009 earnings conference call. Today's conference call will be recorded. At this time, I would like to turn the conference over to Mr. Randy Harp, please go ahead.
Good morning. This is Randy Harp, Chief Operating Officer of the company. I want to welcome you to the 2009 first quarter earnings conference call for PrePaid Legal Services. Joining me here at our home office in Ada, Oklahoma, is Steve Williamson, our Chief Financial Officer.
Before we begin, I want to remind everybody that the conference call will contain forwardlooking statements, including our expectations of future results and future plans. The actual results might differ materially from those projected in any forwardlooking statement. Additional information concerning risk factors that could cause the results to differ materially from those forwardlooking statements are contained in our press release announcing this quarter's earnings as well as our disclosures in our public reports on Forms 10K, 10Q, and 8K filed with the SEC and available on the SEC Edgar website 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 for the first quarter of 2009.
I will first kind of go over the big picture of the quarter, give you a little summary. We had $3.1 million less in total revenues; and we had $4.2 million less in expenses and taxes, which resulted in a 7% increase or $1,159,000 increase in net income with a 9% decrease in diluted shares outstanding. That gives us an 18% increase in diluted EPS or $1.52 for the quarter.
2008 membership revenues decreases 2% primarily due to the decrease in the average premium in force and as we saw in the press release a reduced number of memberships outstanding. Associate services revenue declined primarily due to the lower eService fee that we receive for that product that we make available to the associate sales force. Other revenue is primarily the amortization and income of the $10 enrollment fee over a threeyear period that we collect on the nongroup memberships. This revenue has declined due to the decline in the new membership [inaudible].
Membership benefits decreased 3% more than the 2% decline in membership revenue due to the reduced benefit cost of our ID theft memberships. Remember that we entered into a new agreement with Kroll that reduced payments by $0.25 per member per month on January 1, 2009, and we have one more of those $0.25 per member per month reductions that will come into play on January 1, 2010. So we'll see another improvement or reduction in the benefit ratio first quarter of next year. The benefit ratio for the first quarter of 2009 was 33.9% compared to 34.2% for last year's first quarter.
Commissions decreased 12% mainly due to the 13% decline in new membership sales. That same 13% decline was present in the premium written that we had for the quarter, so a logical decline in the amount of commissions. For both quarters, the average commission per membership was unchanged. They were the same at $220.
Then associate services and direct marketing cost. I always try to explain that in relation to the associate services revenue. To do that, I wanted to explain that during this quarter we actually had two opportunities for associates to take advantage of when they enroll. They can enroll in what we had had for several quarters, a $49 opportunity to enroll as a new associate or they could come on board at $249 for a new associate.
With the $249, they received additional marketing materials. They had the opportunity to advance in the commission structure more quickly and several other things. But the big item that was available in the $249 was a faststart bonus like we used to have a few years back. That faststart bonus represented $325. If the new associate qualified based on membership production and recruiting, then the $325 bonus would release and be paid. But it would not be paid until which time they actually qualified, and they have a year to qualify.
During the quarter, of course, we had around $120 average enrollment fee. That represented 65% of the new recruits coming in at a $49 level and 35% of them coming in at $249. Due to the way that we amortize, we amortize, as you will recall in reviewing the 10K, the portion of that $249 is amortized into revenue over the 5month period which represents the average life of an associate.
On the bonus side, that $325, we have to accrue that based upon what we expect. Although those associates that we recruited during the quarter, how much do we expect to pay during the life of that associate. So you get a little bit of a mismatch in the way that we present it on the financial statements.
Again, we wound up accruing about $1.2 million for these potential bonuses at March 31, 2009; and a portion of that revenue that we had from the $249 associates had not yet been recognized. So we have a little bit of a mismatch which created that difference, if you will, the excess associate services cost compared to the revenue.
On G&A, that increased primarily due to increases in employee health costs and PCI consulting fees. Again, we continue to have those consulting fees. We would expect those to come down. We put in play during the first quarter a plan to reduce the exposure to those PCI consulting fees by still working diligently to comply with all of the PCI requirements, but just trying to get that accomplished over a longer period so that we won't have as much exposure to that cost.
As it relates to the employee health service cost, there's about $500,000 increase during the quarter. Very unusually high if you looked at the threeyear average on a quarterly basis. Just a blip. And we expect, based on that historical average, it's been a pretty consistent number, that those costs will come back to normal trends.
We also saw, though we did see the increase costs in the employee health and the PCI, we did have reduction in legal fees, bank service charges, and our teleco costs.
Other expenses decreased $1.9 million primarily due to about a $1 million reduction in interest expense. That's due to lower debt levels and lower interest rates, as well as we had over a $900,000 reduction in litigation expense due to the $925,000 accrual that we had in the first quarter of 2008 versus no accrual for the 2009 period.
Provision for taxes both periods kind of came in at that same ratio of somewhere around 38%. Net income was up 7% to a record level of $17.1 million. We did have a 9% decrease in the diluted shares outstanding due to the stock buyback program. That resulted in diluted earnings per share of an increase of 18% over last year's quarter; $0.23 increase that brought us to $1.52 for the quarter.
Cash flow was up $8.8 million primarily due to the, you will recall last year in the first quarter we had the additional cash outlay of the state income tax expense of around $8 million, last year. Of course we didn't have that this year, so that was the biggest reason for the increase in the cash flow for the quarter.
For the first quarter of 2009, the $29.7 million cash flow, what we used that for was $774,000 for the purchases of [DP&E]; $7.1 million in debt reduction; about $13.5 million in stock; had an increase in our cash position of $5.6 million; and investments increased $2.8 million.
Again, 423,000 shares were purchased of treasury shares for the first quarter at an average cost of $32.05. That puts us at April 22 at about 10,982,000 shares outstanding and continue to reduce that level.
At March 31, our cash and unpledged investments totaled $68.5 million versus debt of $52.6 million. Our debt payments, again, were about $7.1 million for this quarter. They'll go to $6.2 million, when I say this quarter that's the first quarter of 2009. The second quarter of 2009, they will go to $6.2 million and then, after that, they will go to $4.6 million. That's due to the payoff of the $10 million stock facility that we put in place last summer through Bank of Oklahoma.
Our average first quarter 2009 cost ran at LIBOR plus 141 or about 1.9% was the rate on our debt. Our debt reprices as we talked about before based on a 30day LIBOR around a monthend time frame. That puts our April 2009 cost at that same rate around 1.9% LIBOR this morning to .42. So if it stays near this level, we'll be closer to 1.8% level for the next month.
We are in compliance with all of our debt covenants. Under our most restrictive covenants, we would have approximately $22.8 million available for stock buyback program; and we will be back in the market today. With that, I will turn it back to you Randy.
We also want to respond to email questions that we received that either Steve hasn't already addressed this morning or in our 10Q or press release. The press release, obviously, was filed Monday before the market opened. The 10Q was filed yesterday afternoon. I will just read these in the order in which we received them.
"Good morning. I'm a shareholder in PrePaid Legal and have a question I would like answered. I feel your product is excellent and think there's much potential in your company and your stock. However, I've been frustrated with the performance of my shares. Please explain to me why you continue to use so much of your available cash to repurchase shares instead of using it to try to increase recruiting and marketing efforts or pay down existing debt. According to your company, recruiting is the lifeblood of your business and, instead, it seems like PrePaid is more concerned with shrinking the flow to shares to increase the perceived EPS. I would think if cash is not used to increase marketing efforts, the shareholders would be better served with a dividend instead of a share buyback program. The share buyback has been completely ineffective so far. Please address my concerns on the conference call."
Couple of comments Steve and I both have on this question. We certainly agree that the product is excellent. We certainly agree that there's, we believe, tremendous potential in the company and its stock. We certainly share the frustration with the performance of the shares, but I think we have historically for 30 plus years now always put all of our dollars in the form of commissions on the table; and we continue to do so. In fact, we continue to add commission dollars. We continue to add incentives. We have, as Steve mentioned at the beginning of the year, offered a dual entry mode to become an associate.
So we are spending additional dollars, dollars that we've never spent before, in the form of commissions and marketing and recruiting because we do believe that recruiting is the lifeblood of the business. I would have to I guess take exception to the comment about perceived EPS. I think clearly, mathematically, it is very, very accretive to continue to buy shares of these levels. It has undoubtedly increased our EPS. There's no perception there; it's pure math.
And we have talked, we have, as you know, paid dividends in the past. We think at these levels on the share buyback, it is still a better use of shareholder resources than just paying a direct dividend. As the stock recovers and moves up, then I think as that happens, dividends certainly make more and more sense as the price of the stock increases. But we'll worry about that when we see a substantial increase.
I just think at these levels, I would also take exception to the comment about the share buyback has been completely ineffective. I think it's been very effective. We reduced the number of shares outstanding by over half. Any of you that are shareholders today that were shareholders when we began the buyback process own more than twice the percentage ownership that you did own without putting up any capital out of your pocket.
So, I share the frustration in the performance of the shares, share the frustration that we're not growing recruiting and production as much as we'd like, but do believe that we've taken shareholder resources and used them very wisely in real dollars, real benefits that will benefit all existing shareholders not just today, but every day in the future.
We feel very good about our use of excess cash flow. We have used some of it for increased commissions and increased recruiting incentives. We've used the bulk of it for share buyback.
We have, but we've also dabbled in a little extra advertising. You will remember that we did the justice for all, and we continue to be interested in trying any of those new, what I consider lowercost alternatives. For us to go through the process and actually do a fullblown, national advertising campaign, I think what we're trying say or what we've always said is that really would change the model.
In order to do that and still return on a per member basis the same margins, we would have to change the commissions. The model has worked very well for us for a very, very long time. We feel like that we have a great compensation plan for our sales associates and anything we take from the commission dollars is going to reduce our effectiveness there.
There's an argument that the advertising dollars might help. We've always said we like the paper for paper. You bring us an ap and we'll pay you cash. Then the only other comment, question was about pay down existing debt. Certainly, if the debt were costing us more, it would make sense to certainly consider that. I've always put our excess cash flow into four potential buckets and then that's to pay commissions, buy stock, reduce debt, or pay dividends.
I think Randy went over the highlights. The only point I would make is that with the debt at LIBOR plus 141, costing us 1.9% and I am earning more than that on the cash that I have sitting on the balance sheet doesn't make a lot of sense to go pay down that debt. We're just amortizing the debt in due course and plan to continue that process.
Again, as Randy said, if we see changes, as the stock price moves up, that changes the entire thought process on what we would do that. It's a fluid environment we're looking at every quarter. But some good questions and good comments.
Absolutely good comments. And we do discuss, I doubt there's been a day go by in the last at least several years that we don't have conversations about this very topic. Just a little bit more on the model and are we hesitant to get away from the model that has built this company, the model that we've used for 36 years? Absolutely. Let me just throw a couple of numbers at you to prove my point.
Since we started the buyback program in April of '99 through primarily share repurchases, but some dividends, we have returned $437.8 million to shareholders through those two venues or those two avenues. We built a $32 million home office. At March 31, we have more than $68 million in cash and investments. So if you just kind of look at all those uses of cash, that's $537.8 million in total uses. Obviously, well more than a half billion dollars. Obviously, more than 10 times our existing debt of only $52.6 million at March 31.
I just think that clearly demonstrates the soundness of our financial model. So yes, we are hesitant to deviate substantially from that. As Steve said, when you start changing components around, you are swapping advertising dollars, which is a pay and hope type process, with commission dollars which is a paper for paper process. And we're always going to be open to new ideas, but we're never going to forget what got us here.
We just think the ability to certainly continue to deliver a high quality life events legal plan and our identity theft plan and produce significant free cash very important, something we're very proud of and something that I think we're justifiably conservative when it comes to departing from that business.
One more comment. I think an important point certainly today, when we're kind of looking at the stock price, where it is and to kind of put it in a framework. When I have conversations with the shareholder public, a lot of folks look at kind of your decision to buy back shares based on your ability to obviously generate cash flow; and with $64.3 million in cash flow from operations last year in 2008, again, with an extra ding on those taxes that we paid in the first quarter of 2008, so a little bit abnormally low, that represents over $5.80 a share on a cash flow basis.
Certainly, when we're trading at the $30 level, I don't have to pull out a pencil to figure out that that's a good deal for the shareholders. As a matter of fact, we will be acquiring as much as we can at these levels. We will certainly, the goal in life if all things remain equal, we'll get pretty close to spending that $22.8 million.
Next question. Again, in the order that we received. "Can you talk about recruiting and production since the end of the first quarter?"
I think it is important to note that for the first quarter, February was better than January. March was better than February. So we have, none of the months don't take anything I say to mean that we're satisfied. But none of the months are where we think they ought to be. But they did improve throughout the quarter and April, Steve, I think right now we're still on track at about the average.
The first quarter monthly average.
It's a little hard to say that because we still have today and tomorrow. We get a significant amount of our business in the last few days of the month so, hopefully, we will do that.
And we do have a promotion that ends tomorrow and another example of things that we've done to try to spend some of the cash on incentives is we have a Chevrolet Corvette giveaway that will be announced in midMay. That contest ends tomorrow. So we hope that we're here very late today and tomorrow processing business.
One other example is the March number was certainly helped with the conventionrelated promotion where we gave away a couple of Ford Mustangs. We continue to use some of those dollars and put that carrot out there to get the new production.
The next question. "Can you talk about any additional programs or changes to increase production?"
I think we just described some that we've already put in place. We have, for any of you that are not familiar, we have a Player's Club incentive program which provides monthly incentives in the form of car bonuses and annual trips, travel, for people that consistently produce high quality business.
So, we have in addition to the commission dollars, we have a lot of other incentive programs and then on top of all that, we did two Mustangs in March and then we're doing the Corvette giveaway that ends tomorrow. So, yes, we do have some other things; and we're always looking, always looking.
I can assure you there's not a day goes by in Ada, Oklahoma, that we don't have conversations here about what else can we do. We get a lot of input from the field. We get a lot of input from investors. We get a lot of input from people that think they have the answer. We evaluate each and every one of those very carefully and are always willing to consider anything inside the box or outside the box.
Next question. "Are there any regions in the country or states that are performing much better or worse than last year in terms of both production and recruiting?"
I think the answer is yes. There's always spots either within a state, within a region, or just within organizations. We hear from people on a routine basis that this is the best month they've ever had in the business. Their organizations are producing more than they've ever produced. There's a lot of excitement in the field from our folks right now. We talk to them on a daily basis.
The only problem is not everyone is doing their best month of the business or their best month this year is better than last year's. Certainly examples of that on a state basis, regional basis, and lots of examples of that through organizational basis, just not widespread enough to lift the overall production to the level that we think it ought to be.
The last question that we have received. "Has there been any insider buying of the company's shares being as the stock is so attractively priced? When would the quiet period end to allow insider buying and buybacks to continue?"
The quiet period ends with this call. And we will be in the market. As Steve said, we have remaining authority from the board for 800,000 plus shares, which is way more than we have in available cash, but we have $22.8 million in available cash and we will start spending that in accordance with all the buyback regulations. But we will be in the market today buying back. No insider buying to my knowledge, but again if any of that happens, it has to be filed immediately on Form 4.
One added comment I meant to cover earlier, the buybacks are limited as you said by regulation; and the primary regulation it can't be more than 25% of the fourweek average. That fourweek average trading volume would put us somewhere around 30,000 shares a day based on today and would move with each week. So certainly with that daily amount and about 35 days worth of trading days available would give us the ability to utilize all the cash that we have available under our covenants.
Again, absolutely want to do anything and everything we can to increase recruiting and production. It is our lifeblood; and we're very, very focused on it. We remain very committed to our business model, very proud of our business model. I think the results that are reflected, even in this first quarter, where we're not thrilled with the production or recruiting numbers, but the financial numbers are the best in our history. We are very proud of the model. We believe the model works. It's been time tested, stress tested over the 36 years and we continue to believe it provides a very sound foundation for this company to move forward.
So Steve and I, again, appreciate your continued confidence. We appreciate the questions that we get. We take each and every question, each and every comment and suggestion that we receive, especially from our shareholders, very seriously. We don't take any of them for granted.
We both believe that we have a model that will produce results that you can all be proud of. We appreciate your time today. We appreciate your interest in the company. For the shareholders on the call, we certainly appreciate your continued vote of confidence and look forward to our next quarter's earnings call in late July. Thank you very much.
This concludes today's conference. We appreciate your participation.
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