National Financial Partners Corp. Q1 2009 Earnings Call Transcript

National Financial Partners Corp. (NFP)

Q1 2009 Earnings Call

May 12, 2009 8:00 am ET

Executives

Jessica Bibliowicz – President & CEO

Donna Blank – EVP & CFO

Doug Hammond – EVP & COO

Marc Gordon - IR

Analysts

Andrew Kligerman – UBS

Mark Finkelstein – Fox-Pitt Kelton

Eric Berg – Barclays Capital

Tim Ryan – Oppenheimer Funds

Presentation

Operator

Good day ladies and gentlemen, and welcome to the first quarter 2009 National Financial Partners earnings conference call. (Operator Instructions) I would now like to turn the call over to your host for today’s call Mr. Marc Gordon, of Investor Relations; please proceed.

Marc Gordon

Good morning everyone. Thank you for joining us on our first quarter earnings conference call. During this call management may make certain statements regarding their expectations and projections for NFP relating to future results and events which are forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995.

These forward-looking statements are based on management’s current views with respect to future results and events and are subject to risks and uncertainties that could cause actual results and events to differ materially from those contemplated by a forward-looking statement.

Forward-looking statements speak only as of the date on which they are made. NFP expressly disclaims any obligation to update or revise any forward-looking statements whether as the result of new information, future events or otherwise.

We refer you to the risk factors described in NFP’s filings with the SEC such as NFP’s Annual Report on Form 10-K for the year ending December 31, 2008.

Our first quarter earnings conference call will be accompanied by a presentation that is available for electronic download on NFP’s website at www.nfp.com/ir or upon connecting to the audio webcast of this call at the same website.

I would also like to mention that as of the first quarter of 2009 NFP modified its definition of cash earnings a non-GAAP measure to adjust cash earnings for the after-tax impact of noncash interest expense. Prior periods have been modified on a comparable basis. All of NFP’s noncash interest expense related to the adoption of FSP APB 14-1, accounting for convertible debt instruments that may be settled in cash upon conversion including partial cash settlements.

At this time I would like to turn the call over to our CEO, Jessica Bibliowicz.

Jessica Bibliowicz

Thanks Marc, and good morning everyone. As you all know the economic environment remains challenging but the headwinds we face are not impacting our businesses equally. Our benefits from revenue is holding up relatively well but our life insurance revenue was under pressure in the quarter.

In this environment we are making good progress in the areas that we can control, particularly expense reductions and cash management. We continue to believe that our firm’s focus on client service and reducing expenses coupled with the company’s focus on debt reduction and conserving cash will ensure that NFP will not only withstand the current economic downturn, but will be in a strong position to benefit from a stabilizing economy.

Looking at slide six, cash EPS was $0.44 per share in the first quarter, down 25% from the prior year period. Operating cash flow on an adjusted basis improved $43 million from the prior year period. We recorded a $607 million pre-tax impairment during the quarter. The impairment reflects the fact that NFP’s market value has remained below net book value in addition to new market focused accounting guidance.

The impairment charge had no impact on the company’s business operations, cash position, or cash flow. Donna will provide further detail in her comments.

Same store gross margin declined 22.9% due to declining revenue which was down 20.6% on a same store basis. The revenue decline was highly concentrated in our life insurance businesses. Same store revenue decline from our group benefits firms, our largest product line, declined 4.5%.

In a difficult environment we are encouraged by the relative stability of our benefits revenue. Despite the revenue decline gross margin percentage remained stable quarter over quarter and was attributable to the NFP structure and expense management at our company.

Turning to slide seven, our key objectives are first and foremost client service, retention, and new client acquisitions, improving firm profitability by reducing operating expenses, and lower corporate expenses, and conserving cash to pay down our credit facility.

We are successfully reducing expenses at the firms through a coordinated, firm level budgeting and planning process. The expense cuts are focused on the areas under the most stress, specifically our firms in the base deficits. For the first quarter total operating expenses declined 8.3% and same store operating expenses declined 4.6%.

Next, we continue to reduce corporate expenses. Corporate expenses were down 22% for the quarter and we expect G&A will be down 15% for the full year, above our previous guidance of a decline of 10%.

Lastly we are focused on utilizing available cash to pay down the credit facility. As you are aware we typically generate negative cash flow in the first quarter followed by positive cash flow in the remaining three quarters of the year.

During the first quarter of 2009 we did not borrow against our credit facility. Due to the stronger cash flow in April, we have paid down $8 million of the credit facility since the close of the first quarter.

Turning to slide eight, given the difficult environment performance relative to base and target has declined, 61% of our base attributed to firms owned for over a year is above or within 85% of target earnings, down from 68% in the first quarter of 2008.

The percentage of firms operated below base has increased to 26%. We are prioritizing expense reduction efforts on firms in the base deficit which Doug will review in his comments.

Looking at slide nine from a revenue perspective the environment remains challenging but we are seeing some signs of stability in our life insurance firms, specifically production levels at our often based marketing organizations were higher in April then in March.

While it is difficult to draw conclusions from one month of data we view this along with the improving financial stability of life insurance carriers as encouraging. The recent increased clarity regarding the estate tax, better defines the high net worth market due to more transparency regarding the exclusion limit and could accelerate sales once the economy improves.

Also the current environment highlights the need for the fixed return nature of life insurance and effective wealth preservation strategies. We expect high net worth individuals to explore life insurance opportunities as a means of bridging the gap between the reduction in their wealth from the recession and their desired financial legacy.

NFP’s position as a leading independent distributor of life insurance provides our firms with a distinct advantage. If these factors persist then it is reasonable to expect to see a recovery towards the end of this year.

In the benefits area, our largest product category, NFP’s relationships with small businesses, and the superior service we provide them as well as the need for businesses to retain valuable employees will drive growth in the benefits areas. In addition although the benefits environment is more competitive our firms are opportunistic and the current environment affords more opportunities for them to win new business based on their ability to offer competitive solutions that reduce the benefits costs of their clients.

NFP’s diverse network of advisors has significant expertise in nearly all aspects of employee benefits. While it is too early to determine the specific impact of healthcare reform on our business, we are optimistic that the current private healthcare delivery model through the employee based system, a system in which our firms play an important part, will continue to play a key long-term role in American healthcare.

In the financial advisory space, the decline in the financial markets highlights the need for sound independent advice and our firms have a tremendous opportunity to attract new clients. Given the turmoil at large financial institutions, the independent channel is an attractive alternative for high net worth individuals and their advisors.

These factors along with our current focus on cutting expenses to operate more efficiently will position us well for strong profitability growth when the economy strengthens.

At this time I would like to turn the call over to Donna Blank, NFP’s Chief Financial Officer, who will review NFP’s financial highlights.

Donna Blank

Thanks Jessica, turning to slide 11 as expected operating cash flow improved significantly from the adjusted negative $45 million in the first quarter of 2008, to negative $2 million in the first quarter of 2009.

The first quarter 2008 figure excludes a $14 million outflow for the purchase of an increased economic ownership percentage of an existing firm. In total operating cash flow improved $57 million on a quarter over quarter basis.

The improvement in operating cash flow was largely the result of lower management fee expense paid in the first quarter. As a result of this management fee expense owed for 2008 and the suspension of acquisition activity and dividends, we did not increase our borrowings during the quarter.

Cash flow is typically positive in the second through fourth quarters of the year and our priority is to use free cash flow generated during the remainder of 2009 to reduce our bank debt. We are off to a good start by paying down $8 million of the credit facility balance since the end of the first quarter.

As of the end of the first quarter taking into account the recent amendment, NFP’s consolidated leverage ratio was 2.7x, well below the maximum allowable under the credit facility of 3.5x.

Turning to slide 12, the same store revenue decline of 20.6% was highly concentrated in our life insurance business, as 79% of the decline was from our retail life, life brokerage, and life settlements brokerage firms.

Moving to slide 13, despite the revenue decline gross margin percentage declined only slightly to 17% during the first quarter from 17.3% in the prior year period highlighting the variable components of NFP’s cost structure. Commission expense declined more then revenue due primarily to a product mix shift from higher payout life insurance revenue to lower payout benefits and financial advisory revenue.

A decrease in payouts at our life insurance businesses and Austin based distribution facilities also contributed to the decline. Management fees declined at an accelerated pace due to lower firm earnings and NFP’s priority position in those earnings. Operating expenses declined [inaudible] lower rates then revenue.

Looking at slide 14 the 22% decline in G&A during the quarter was primarily the result of lower compensation costs due to the 30% reduction in staff at the corporate office over the course of 2008. The G&A decline for the quarter was well in excess of our previous guidance of 10%.

As a result of the strong start to the year in terms of corporate expense reductions and further initiatives to reduce expenses, we are increasing our full year expense reduction guidance at corporate to 15%. We continue to explore ways to reduce corporate expenses further.

The $607 million impairment taken during the quarter reflected the stressed macroeconomic environment and its impact on NFP’s market value and revenue, particularly in the life insurance area. On January 1, 2009 the company adopted FAS 157, fair value measurement, for non financial assets and liabilities which emphasizes market based measurement rather then entity specific measurement in calculating reporting unit fair value.

Among market based measurements its NFP’s market value, which has remained below net book value for a sustained period. The impairment charge has no impact on the company’s business operations, cash position, or cash flow.

On May 6, NFP and its lenders executed an amendment to the credit facility that expressly excludes this quarter’s impairment for purposes of covenant calculations. The amendment did not modify any other terms of the facility and we are pleased with the continued strong support of our bank group.

Moving on to slide 15, taxes were impacted by an $88 million benefit from impairments. Excluding the impact of impairments, the tax rate was 51.3%, above typical combined Federal and state tax rates due to non deductible expenses and interest and penalties related to FIN 48. For the remainder of 2009 we expect an effective tax rate of 46% excluding impairments.

In the first quarter we adopted FSP APB 14-1 which requires us to recognize interest expense on the convertible notes as if it were straight debt. The guidance requires us to adjust prior year period results retrospectively. Because the expense is noncash we have excluded the after-tax impact in the cash earnings calculations.

At this time I’d like to turn the call over to our COO, Doug Hammond.

Doug Hammond

Thanks Donna, I’ll discuss the status of our expense reduction efforts and our firms’ revenue performance.

As shown on slide 17 our firms continue to make progress reducing expenses under our business planning initiatives. Same store operating expenses were down 4.6% during the quarter marking our second sequential quarter where same store operating expenses have declined.

This is a trend we expect to continue. Total operating expenses declined 8.3% during the quarter due to expense cuts at our Austin operations as well as dispositions. Our firms have made progress reversing the operating expense growth trends of last year and continue to remain focused on operating as efficiently as possible including by leveraging as many resources within NFP as they can.

Turning to slide 18 our business planning initiative is aimed at cutting expenses that do not impact client service or our prospects for growth as the economy strengthens, particularly in the benefits area where our client service demands have increased in the current environment.

By design, the impact of our initiative has been most significant in our base deficit firms. Firms in the base deficit as of the end of 2008 reduced operating expenses 23% in the first quarter. In addition to firm level expense cuts since the end of the first quarter of 2008 to the present time, staff has declined by approximately 15% at our Austin facilities, which has positively contributed to our expense management efforts.

In this regard we have been careful not to reduce the core services that are most valuable to our firms and membership organizations. We continue to target a full year 4% to 5% reduction in operating expenses.

In connection with our business planning initiative we also restructured and consolidated a significant number of firms in the first quarter. We will continue to manage the performance of our firms aggressively through restructures where it is appropriate to ensure the long-term success of the firms.

Most of our restructures involve the implementation of expense controls and a modification of the firms’ earnings targets designed to motivate the principals to generate better results then in the prior year. Under a typical restructure NFP gained substantially more local operating authority as well as an increased participation in growth above revised targets.

We believe this recalibration is an important part of the long-term partnership between NFP and its firms and will ultimately maximize earnings for both NFP and its firm principals. Moving on to organic growth by product line on slide 19, as Donna touched on 79% of the same store revenue decline was in our life insurance businesses.

These firms have been severely impacted by the economic climate including consumer uncertainty, credit market turmoil, and financial issues at the carriers. Because these firms are highly dependent on new sales every year the impact of an economic decline or recovery is magnified.

Life settlements brokerage was down 67% indicative of the continued absence of competitive funders in the market available to buy policies. We understand the previously competitive funders are making progress raiding new pools of capital to reenter the market this year, although the timing at this point is unclear.

Group benefits was down 4.5%. Rising unemployment and reduced corporate spending has certainly but some stress on our benefits firms but we are generally satisfied with their revenue performance in the quarter given all the factors in play. As Jessica mentioned our benefits firms remain focused on new client acquisitions in a highly competitive marketplace that presents more opportunities then we have seen in recent years.

Our benefits firms are also committed to further product penetration with their existing clients particularly in the property and casualty and retirement planning areas. We continue to expect revenue from our benefits firms to remain largely stable throughout the year.

The 9% decline in executive benefits revenue was the result of lower executive pay, unemployment, and cost cutting measures causing lower deferrals. The drop in financial advisory revenue is tied to the contraction of the financial markets.

You’ll see our current business mix on slide 20. Benefits is now our largest product line due to both its strong relative performance and our focus on acquisitions in the benefit space over the last several years. Life insurance sales are certainly struggling but retail and life brokerage continue to represent a significant portion of our business.

Over the long-term we believe that our life businesses have strong growth prospects as the environment stabilizes and begins to recover. We remain focused on positioning the company for strong growth as the economy improves. Our principals are actively engaged and the work we are doing with the firms on the expense side will maximize profits when the revenue growth resumes.

At this time I’ll turn the call back over to Jessica.

Jessica Bibliowicz

Thanks Doug, NFP has a proven business model in long-term growth markets and generates solid annual cash flow. We have continued to focus on client service and reducing both firm level and corporate expenses to operate more efficiently in this difficult climate.

We are performing well relative to our credit facility covenants, our banks continue to be supportive, and we have begun paying down the credit facility balance. These initiatives will help us successfully weather the economic downturn and grow earnings as the economy improves.

At this time we would like to open it up to questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Andrew Kligerman – UBS

Andrew Kligerman – UBS

With sales down, same store sales down more then 20%, if this persists throughout the year you’re going to run into, you’re going to bump into the covenants issue again, if you could project out four quarters from now where do you think you’ll be, and do you think you’re going to be having to address the covenant again and how would you address that. That’s kind of a multipart question one. The second one is with respect to your producers and I kind of grew up in a family of producers and regardless of the environment if you’re good you put up the numbers. If one product doesn’t sell you sell another product and when I look at a 20 plus percent decline in sales, I could only think to myself that your producers for lack of a better word are snorkeling. They’re just out there snorkeling, they’re not selling other products, they’re not doing things to get the numbers up. So I think the important part of any question I’m going to ask is, is what are they doing to get the ball rolling, why aren’t they selling other products, why aren’t they doing different things, who’s motivating them. I’ve heard a lot about expense cuts and I think that’s great, but I want to understand how your producers are going to get motivated to get the number up.

Jessica Bibliowicz

Let me just start on the sales side and then I’ll turn it over to Donna to go through the credit facility impacts, but as you could kind of hear from our comments I think we do expect that sales of the company will improve through the course of the year. The first quarter as you know for life insurance sales were never really the motivating quarter simply because people tend to think about life insurance particularly as a tax planning event and it tends to be more back end loaded.

We do see activity at our firms that is very important to us in terms of they’re building up their pipelines and clients that they’re working with. They are extremely busy out there but one of the issues that has impacted them, is that while they are dealing with their clients and they’re doing exactly what you said, which is selling other things, some of those other things include term insurance and less permanence insurance which has a pretty big negative impact on the revenue side of the business.

We are also seeing some of our life firms introducing their largest clients to some of our asset management firms and we don’t expect to see the impact of that in the first quarter but I would describe them as being extremely dynamic in using their client relationships. On the benefit side I think we are seeing more cross selling into clients then we’ve seen in the past. We see firms working together going into corporate presentations, not only talking about the health and welfare side, but also planting the seeds for executive benefit side, for retirement planning and very importantly for the property and casualty arena, which we are really seeing the expansion of.

But in one quarter you are not going to see the fruits of all of those labors so what I would say to you is that our firms are extremely focused. They are engaged in their business. They are planning for the future. And they are thinking very closely with us and among themselves on how to diversify their business and take advantage of what’s occurring at NFP.

Doug do you want to comment further on that?

Doug Hammond

On the life insurance side, we’ve spent a lot of time with the life insurance firms. I would definitely say that the firms are not snorkeling at all. At the end of last year, there was a real shock to the system I think for a lot of the high net worth clients that are making the types of decisions regarding the policies that our firms are involved in selling and there’s a relatively long sales cycle with respect to many of those larger ticket cases.

So you’ll see a lot of the first quarter historically has been sort of a closing of the cases that didn’t close in the fourth quarter for estate and tax planning purposes. And as Jessica mentioned we have seen some recovery and some growth in our marketing organization which services a broad demographic in April so we’re seeing some momentum building in that area. And there’s just a long sales cycle when the clients’ mindset gets back into the mode of planning and writing checks.

And that’s where are our firms are engaged on the life side.

Jessica Bibliowicz

And I would say too that last year at this time when we did the call we saw sort of a different impact which was we saw the beginning of a decline in the third month of the first quarter and then we saw a weaker April and the trend we’re seeing this year and that obviously made us very concerned about the headwinds ahead of us, the trends we are seeing this year are quite different then that and I think its important to note it and that’s what helped us pay down the $8 million after the April cash flow.

Donna Blank

I think its important when you think about the credit facility though, look at the way the amendment was negotiated in terms of the leverage ratio at each quarter and we obviously expected the first quarter leverage ratio to be the highest.

You can see we built in the 3.5 and then it goes down sequentially until the end of the year. So we expected the first quarter to need more room and as you heard, we are using our free cash flow to pay down the facility and we do not expect at this point to have any issues getting back down below the ratios required by the end of the year, precisely because of what Jessica mentioned in terms of April cash flow being better and the fact that first quarter generally is our weakest quarter.

Andrew Kligerman – UBS

I’d just say that I tried to model it last night and it gets close or even you miss it if you keep the sales declines at this pace, but if what Doug and Jessica were saying earlier is right, then of course you would make it. So thanks a lot for your answers to the questions.

Operator

Your next question comes from the line of Mark Finkelstein – Fox-Pitt Kelton

Mark Finkelstein – Fox-Pitt Kelton

You put up a chart that I thought was interesting I think on page eight and you indicated that 61% of the firms are within 85% or above the target, do you happen to know what that metric is for the life side of the business. I’m just curious how that compares, because if benefits is pretty stable, I just very interested in knowing just what that looks like on the life side specifically.

Jessica Bibliowicz

We did not break this down on life base but just looking at the 80% of the decline coming from the life firms I think you could expect that the majority of them were not necessarily in that category. So I think that with 80% of the 20% decline being in life, most of the 85 and plus the target would be benefits and other.

Mark Finkelstein – Fox-Pitt Kelton

How are you thinking about that, I know you have had a process over the last few quarters of maybe kind of looking at base levels and making adjustments where they make sense, how active have you been in that and what are the implications.

Doug Hammond

We talk about a large, about a pretty significant number of restructures and then we definitely recognize that the firms need to be motivated so as we go through and we evaluate what’s required from a performance standpoint, we’ve restructured several transactions in the first quarter and in connection with that, we’ve reduced some of the base target levels, the vast majority of which we have not reduced below 2008 levels so we don’t expect the impact to be that significant for the year but they do provide greater motivation with respect to the producers that are operating those firms in a difficult environment.

As we do those restructures now as a part of them and a requirement we amend our management agreements and obtain far greater local operating control so moving forward if we continue to have issues with the firms that are struggling, we can take much swifter action with respect to their local operating environment.

We also are very focused on the expenses and the operating efficiencies of those firms and as I’ve said we’ve reduced the operating expenses at the base deficit firms and we’ve got a lot of life firms in that category by 23%. So that’s where we’re moving.

And another component of many of the restructures that we’re doing is a shifting of the earnings to NFP in excess of some revised targets in order to recover amounts that we may lose in connection with the restructures.

Mark Finkelstein – Fox-Pitt Kelton

You put in place an incentive plan I believe for 2009, I guess with the decline in gross margin above 20% in the first quarter its pretty hole to work of it, how real is that incentive from the producers’ standpoint at this stage.

Jessica Bibliowicz

We’re actually in the process of evaluating that plan and determining whether or not it will stay as is or whether there’s a modification to the plan that will be more incentivizing to the firms so we’ll report on that when we’re finished with it. But it is being reviewed.

Mark Finkelstein – Fox-Pitt Kelton

And then in terms of the $8 million pay down of the revolver in April, was that simply out of cash flow or where there any other transactions that created the ability to pay that $8 million in April.

Donna Blank

That was simply out of operating cash flow.

Operator

Your next question comes from the line of Eric Berg – Barclays Capital

Eric Berg – Barclays Capital

A few questions, first when you talk about the percentage of firms that are within 85% or above of target, just remind me the target which starts out as roughly twice the base, that does not change over time or are you referring to it’s the target changing over time as referenced in slide eight.

Jessica Bibliowicz

That’s the target established at the time of their transactions.

Eric Berg – Barclays Capital

Okay, that’s what I thought, and my question is why is that a meaningful statistic in terms of in the sense that why is it interesting and helpful to know how the firms are doing relative to when they were acquired especially if they were acquired years ago. Let’s say you have a firm that was acquired before you went public, why would seven, eight, nine years ago, why would its performance relative to some seemingly very stale number be relevant today.

Jessica Bibliowicz

When we first do the transaction, I think the way that the principals look at it is that the difference between their base and target is basically the income to them and I agree with you, they are extraordinary focused on growth right, that’s where the incentive and the sharing does get richer so we’re looking for firms that get inspired that way.

But regardless of the time of the transaction that reflects the business that we have acquired and their basic expectations of what they can do in terms of cash flow to the principals as payment for running the business.

So to the extent that they are operating based on those expectations I think it is relevant that the companies are in fact getting paid. They’re getting paid in this case almost 50% over what their base amount was. There’s no question in our mind that over time the bonus amount is going to be the critical part, the firms that are actually in growth mode, but in this type of economy where you’ve seen businesses reset based on levels of opportunity out there, you’ve actually seen businesses reset backwards to an earlier date.

So I do think it remains relevant but we would like to see that bonus number in particular move up significantly as we move forward.

Eric Berg – Barclays Capital

Okay, that was a helpful explanation, a couple of more questions, first with respect to expenses at the firm level, its apparent that you feel you’re making progress, you’ve talked about it repeatedly, you’ve presented some slides here that speak to the progress, but 4% to 5% expense improvement doesn’t seem like a lot for a company that is clearly experiencing by your own acknowledgment very significant challenges. I would think to be very blunt and candid, that 4% to 5% would be easy to take out of pretty much any business and that faced with the challenges that you and your colleagues are facing that you would be able to and would be shooting for more. Why should I feel good about a percentage reduction that on the surface doesn’t seem particularly large.

Doug Hammond

Well first of all internally our, what we’re shooting for are numbers that are appropriate on a firm by firm basis and each of our firms perform they’re individual operating units and what we can do with the individual firms really depends on what’s happening at the individual firms.

So we’re targeting 50% expense reductions at some firms where its appropriate and we’re targeting expense increases in firms that are growing significantly and require additional staff or services in order to effectively serve their clients.

So we’re talking about an aggregate number on a, a consolidated number on a same store basis. I think a good metric to look at in terms of whether or not we’ve been effective with respect to our expense reduction initiative is the progress that we’ve made with respect to our base deficit firms which are down 23% in operating expenses and we continue to work with them.

We work with many of our firms and continue to work with them on contingency budget planning throughout the year on second stage expense reductions based on the performance of the firms throughout the year. We have to see how our life insurance firms and what their pipelines are looking like as the year progresses and see, given their historic seasonality and see what additional actions and measures are required.

For the first time we have a very transparent and robust budget process with each one of the firms that we monitor on a monthly basis. And based on that I think we’re making great progress.

Eric Berg – Barclays Capital

Last question, I just wanted to sharpen my understanding of these restructures, again on the surface it would not seem to be appealing to the firms to the principals, you approach the principal and say, we’d like to have even a greater piece of your profits then we have at present. He or she I would think would want to reject that, can you go over with us once again the basic elements of a restructure and why its in everyone’s interests to go forward with these restructures even though NFP ends up with a bigger piece of the pie then before the restructure. Just how do these restructures work.

Doug Hammond

First of all in terms of the de motivating aspects of a shifting of the earnings in excess of the revised target, I’m very focused on it and the implications relative to the individual firms. A typical restructure does involve a reduction of the base and target levels and it typically is required in order to focus on current income relative to the firm principals.

We certainly have an issue if as Jessica mentioned, a business has effectively reset at a lower level and their base and target levels preclude the principals that are managing the business from making any income at all. So we look at the entire process holistically. In some instances we take cash consideration back and reduce down the base and target amounts in that matter.

In other instances where that may not be appropriate, we restructure the transaction to an earnings level that is sort of a reset earnings level that also provides greater motivates and the vast majority of restructures that were effected in the first quarter we did not reset the earnings levels to below the earnings level of the firm performance in 2008.

So there still is a motivating factor for the firm to grow in excess of those earnings levels in order to make income for this year but based on mutual discussions we get to the right place. On the earnings split in excess of the revised targets where we’ve shifted the earnings, we generally do it for a quarter in order to recover what we’ve given up and then switch back to an earnings split that motivates them.

So there’s a motivating factor to move beyond a growth level above the revised target levels. We’ve also, as I’ve said, worked to increase our operational control of those firms where necessary and we’ve done that carefully in partnership with the firms and so far we’ve been very successful and the firms have been happy to give it up because we’ve been effective in working with them to collectively help them manage their business more efficiently.

Operator

Your final question comes from the line of Tim Ryan – Oppenheimer Funds

Tim Ryan – Oppenheimer Funds

Can we just step back for a second and just make sure that I understand sort of your general philosophy on where value creation comes from. I guess I had always been of the mindset that the majority of the value creation came from the producers and management’s role historically had been in buying the right firms if you will that could flourish within the business model.

Jessica Bibliowicz

I think that there’s no question that the acquisition model in buying the right firms and I would define that as being the right producers, that to Andrew’s word are not snorkeling but in fact the Olympic swimmers. But also firms that really want to grow their business because they see the value add as being part of something bigger and the ability to diversify their business and take advantage of the core resources.

And I think in the environment that we’ve been in really over the last two years where you’ve had such a compression of revenue opportunity that being part of something bigger and taking advantage of other skills of other firms is actually more relevant today then its been in the past.

And I think the partnership with NFP and the work that Doug and the teams have done have also been every important to the firms as they budget for this new environment, this reset environment, and think about their expenses in the way that they never really necessarily have before and work closely to maximize the efficiency of the business and that truly is a partnership.

I think you’ve got virtually all of the firms under our budgeting system. They embrace it, it makes them better managers. It creates cash flow to them and the alignment is there. So I think that this company was never designed just to be a collection of firms but in fact it was firms that were really motivated to serve their clients and to grow their businesses and to take advantage of bigger resources [then] each other to get the job done.

And I think we’re, with the internal focus we have today, we’re really able to help the firms execute.

Tim Ryan – Oppenheimer Funds

It was a simpler question then that, it was just where the value creation comes from just broadly speaking and I guess what I was just getting at is, its still the case that when you think about it, the producers, the firms, the principals, are the ones driving the business every day and at the end of the day driving the cash flow that is needed to create value.

Doug Hammond

There’s no other way to look at the business.

Jessica Bibliowicz

Absolutely, there’s no other way.

Tim Ryan – Oppenheimer Funds

Okay so given that sort of as a premise, and Mark touched on this, but how do I think about an incentive system that was designed at the end of last year for the producers and understandably there’s talk now whether its correct in this environment, but an incentive system that even when it was designed, you needed pretty heroic assumptions to come up with even amounts that probably would have been deminimous to the people that created the value and yet last year management got hundreds of thousands of shares at $2.73. How do I think about incentives within a firm like that when the value creators are being given incentives that even if they knock the cover off the ball, it will probably be deminimous and management is getting shares that if you just got the stock back to a level that is half of the IPO could see millions of dollars.

Jessica Bibliowicz

Okay a couple of things, first of all with the firms and as I acknowledged to Mark, that that plan needs and will be reviewed to make sure that the plan we added needs to be reviewed to make sure that it is consistent with the intention which is to incentivize the firms. But as you know the firms also have their own incentive plans in place. Nothing was removed when we actually did this. This was really just an addition so all the firms have whether they’re on their earn out or their second or their third incentive programs, those are all in place and may actually reward the firms for their individual growth.

And as you have probably have seen we are looking to do things to [re-equitize] the firms and to get more equity to be able to re-equitize them in a way that definitely promotes the growers but there is no question that this firm is all about the earnings and the earnings that are provided from these firms.

So we are doing everything that we can to make sure that we put more and more incentive places in there for growth.

Tim Ryan – Oppenheimer Funds

Forgive the bluntness but I guess I’m just, at the end of the day trying to understand given that the stock was down 93% last year, you basically underperformed every financial service of this company that didn’t go bankrupt or become a ward of the US government, why management was given stock at all.

Jessica Bibliowicz

I think that I don’t want to get into too much detail but the compensation committee always looked at comp for management as being in two components. One is the equity component which we have always done on the same date so there’s never kind of a sense that there’s a timing issue or any of the other things that have gone on with equity compensation at other companies and cash compensation.

And last year cash EPS at this company was down I think about 11%--

Tim Ryan – Oppenheimer Funds

And stock was down 93.

Jessica Bibliowicz

I understand that and as you know I’m a pretty big owner of the stock and I would tell you that that pain was taken. Not only was I an owner of the stock, I had been a buyer of the stock but just to give you a little bit of a reference point, if you look for example just at my compensation, its obviously disclosed, if you look at it apples to apples I was down 64% for the year.

So that was the decision of the compensation committee and again we also look to what the actual performance of the company is, but we do not ignore all the performance of the stock. And I think that I can certainly speak to it personally. My whole net worth was on the line with the stock and I understand it but we are doing everything possible and have been to recreate value for shareholders and that is our sole motivation in running this company.

Operator

There are no additional questions at this time; I would like to turn it back over to management for any additional or closing comments.

Jessica Bibliowicz

I thank everybody for being on the call and we look forward to our continued reports. Thank you and have a great day.

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