Pre-Paid Legal Services, Inc. (NYSE:PPD)
Q2 2009 Earnings Call
July 29, 2009 8:30 am ET
Randy Harp - COO
Steve Williamson - CFO
Welcome to today’s-Paid Legal Services second quarter 2009 conference call. Today’s conference is being recorded. And now for opening remarks and introduction, I would like to turn today’s conference over to Mr. Randy Harp. Please go ahead sir.
Good morning. This is Randy Harp, Chief Operating Officer of the company. I want to welcome you to the 2009 second quarter Earnings Call for Pre-Paid Legal Services, Inc. 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 such forward-looking statement.
Additional information concerning risk factors that could cause the results to differ materially from any forward-looking statements are contained in our press release announcing these 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 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 second quarter of ’09. Steve?
Okay. Randy, I'll start with kind of the big picture summary. We had about $4.5 million less in revenue, 5.2 million less in expenses and taxes, which resulted in a $735,000 increase or 5% in our net income, with 9% fewer shares resulted in a diluted EPS, up 15% over the prior year second quarter.
2009 membership fee decreased 4% due to the decrease in the average premiums in force that we had during the period. Associate services revenue declined primarily due to the lower eservice fees. Other revenue is primarily the three year amortization of the $10 enrollment fee that we collect on group memberships, that revenue decline to $127,000.
Membership benefits decreased 5%, and more than the 4% decrease in the top line, our membership revenues is due to the reduced cost that we have on the ID Theft membership benefits, due to the new Crowe agreement that we put in place that reduced those benefits by $0.25 per member per month on January 1, 09.
We have one more round where we may see another increase, January 1, 2010. The actual benefit ratio was 34.1 for this year for 2009 second quarter, compared to 34.6 for the 2008 second quarter. Commissions decreased 6% primarily due to the 9% reduction in new membership sales. Commissions per member were $8 higher, came in at $240 per member.
New associates can pay, as you may recall in your first quarter call that we had, we instituted beginning in January the opportunity to come in at a $49 fee or a $249 fee and that's split between the $49 new associate fee and $249 and stayed pretty consistent to that 65, 35 split. Associate services cost were actually greater than associate services revenue about $594,000 for the second quarter of '09 versus $726,000 in excess for 2008.
G&A decreased $839,000 primarily due to decreases in employee cost, bank service fees, advertising, postage, telco costs and were partially offset by legal fees and increased consulting fees.
We did see on the consulting fees a decrease of about $50,000 for the sequential basis, sequentially comparing from the first quarter of ’09 to the second quarter in our PCI consulting fees. But again, when you compare to last year’s period we did have overall higher consulting fees.
Other expenses decreased $1.1 million due to $505,000 reduction in interest expense and of course that’s because we have less debt outstanding and also a much slower interest rate environment. We also saw $400,000 plus reduction litigation expenses due to the reversal of the previous accrual, due to some favorable litigation developments we had during the quarter.
Depreciation was down about $143,000 and interest income and premium taxes were about the same level.
If you go down taxes, provision for taxes was approximately 39% versus 38% for 2008. Net income again, was up 5% to 15.8 million. We did have a 9% decrease in diluted shares outstanding of course due our longstanding stock buyback program and we’ve been in that since April of ‘99. Diluted earnings per share increased 15% or $0.19 a share to about 44 for the second quarter of ’09.
Cash flow was $5.8 million for ’09 versus $6.9 million for ’09, down $1.1million, primarily due to lower membership fees. And of course and even on a cash flow basis we had lower membership benefits in G&A and some other things. We did have a little bit higher tax estimates on cash taxes paid during the quarter they are little bit higher again. These are estimates so that very well may reverse in some of the forward quarters.
Purchased 13,000 shares of stock at $39.42 during the second quarter of '09, at July, 22, of '09 shares outstanding were 10.965 million. At June 30, '09 our cash and unpledged investments totaled about $67 million versus debt of a little over $46 million.
Our total debt payments, principle payments, $6.2 million from the second quarter, we did pay off the $10 million that we purchased from BOK last year and our payments for the third quarter, principle payments would be $4.6 million.
Our average current interest rate or cost of debt is LIBOR plus 1.4. That's the blended average of the three remaining pieces of debt that we had, which approximates to about 1.7%. Our debt reprices is based on 30 day LIBOR. I noticed that's down even again, 0.28 versus about 0.29 which it was at the end of the second quarter.
So we continue to see a lower interest cost in our future and we are very much in compliance with all of our debt covenants. Under the most restrictive covenants we would have about $22.1 million available for stock buyback program. And with that I'll turn it back to you, Randy.
Thank you, Steve. Not free money but certainly good interest rates I think our lowest rates based on the 28 LIBOR is 1.17 and our range is upto I think plus 150, so the 1.78 pretax interest rate. So we're going to have debt that's the kind to have.
I want to respond the email questions that we received, that Steve has previously addressed this morning on the call or in our 10-Q, which we filed on Monday and utilizing our respective strengths I will read the questions and let Steve answer and although I may have a couple of comments to add, in the order that they were received.
First question I think Pre-Paid only purchased about 15,000 shares in the second quarter. Why such a low number when share price was down. Steve?
We go through the same process pretty much every quarter when we make decisions relative to our stock buyback and we take into consideration a lot of things not only Pre-Paid Legal operational metrics but also kind of big picture things. I will try to address everything at least that I considered it and Randy can add to that if he would like.
The one thing that was kind of bothersome to me of course, and in all these questions is the overall production level that we have. We have not been setting any records for new production. And the other challenge that I saw in the second quarter, going into second quarter right after the first quarter purchase was the level of cancellations that we had for the fourth quarter and the first quarter were both over a 150,000 units. And I was a little concerned that the global economy was causing lot of that there. We really want to do evaluate what was going on the cancellation side.
And then kind of the again just a big picture economy when we're going to turn out of this and then when we walked into the period when we purchased, the prior quarter we actually were able to buy on average of about $32 of share, a little over $32 share. So, we had traded up with our earnings release pretty quickly in that first day. I think we are up –a buck or two in the first couple of trading days.
The other thing I wanted to add is we kind of step away whenever the stocks move in pretty aggressively you don’t like to push the stock, you can kind of participate in it. So we decided to kind of step away. We then ran up pretty aggressively and just got to a level that we feel like will be better served to kind of wait and see what's going to happen on the global economy and kind of what happens with our own individual production and cancellation levels.
So, that kind of why we never really got out and really didn't buy any open market purchases during the second quarter. Those purchases primarily were non-market purchases that we've I think addressed before from the associate investment club, folks that have physical fiscal stock certificates and then from our employees that want to diversify out of the company stock within the 401-K plan.
So, those are kind of all the things that we considered. Certainly feel much better about the cancellation level this quarter, came in at 143. That's much more in line with where we felt like that it should be and can kind of see that the cancellation level, probably was more of blip in the screen if you will for that fourth quarter and first quarter, due to just kind of everybody's nervousness out in the marketplace. So, that's kind of the thought process that I have certainly gone through.
I agree, I think we saw some small deviations from our historical model and wanted to be sure that they were only one-time blips and certainly starting to believe they are based on subsequent numbers.
Let me assure you one thing, all of you one thing, neither Steve and I trying to time the market or pick highs or lows. I think it was Clint Eastwood, who said a good man has got to know his limits and neither of us have visions of being in the investment community on a professional basis. We just look at our fundamental metrics within the Pre-Paid world and then as Steve said, global anything outside of the Pre-Paid world impact.
Has there been a targets set for when the company might formally start activity to go private, whether this is a date share price or number of shares outstanding?
Now there hasn’t. What we really do to evaluate; one, how much excess cash that we have, that we have available to do anything with then there are several things that obviously you can do with excess cash. You can pay a dividend, you can pay down debt, you can accumulative it for a while or you can buyback shares with it. First and foremost, we would like to pay out commissions, we should not have that excess cash flow, we would rather grow the company. But with that being said, obviously, we’ve got some excess cash flow.
So there is really not a lot of incremental costs associated or incremental pain with being public now. I think it doesn’t make a lot of sense for us to be public at this time. We really do not need to raise a lot of capital. So, that really was the reason. Originally it was just the need for capital to grow this business. But now we have got such a large membership base that shows on the cash flow. That need isn’t obviously needed.
But there is not a lot of harm in being public. There is not a lot of incremental cost. We run the shop I think pretty efficiently from an operational side as far as being a public company. So, it’s really more of an evaluation of what we do with our cash flow and it’s just been painfully obviously over the last 10 years that it makes more sense to buyback shares. And that’s what we’ve done with a vengeance and bought back more than half of the company.
So, if those opportunities present themselves in the future, wouldn’t be surprised if we bought back another half in the future, at which all things considered it makes sense to go private and everybody agreed to go through the formal process of that evaluation, and maybe that will happen but not certainly saying that there is any goal or date specific or any specific plans to do that. We have just been buying back shares, because we think that's the best thing to do.
And I think somewhere early on we characterized what we're doing is, going private one share at a time and I don't think we ever disagree with that but we're still $0.5 billion away. So it would be a little I think aggressive of us to try to predict date or time or anything else. We are going to continue to do for the next 10 years what we have last 10 years and that's to be good stewards of shareholder resources and allocate that money, we think is in the best interest of our long-term shareholders.
A follow-up question, which was early I think Steve answered to some extent what is plans for the large cash build up?
Again, its either we would love to be paying it out it commissions that were related to growth. We obviously have the debt service, stock repurchases to continue. In the past, we've declared dividends two or three times and always possible acquisitions more, I think if we ever did an acquisition and certainly nothing on the drawing boards at this point in time. But it would be more from a distribution standpoint than it is a product or service standpoint.
Next question, what effect if any would the SECs new rule dated today against naked short-selling have on PPD and the huge short position against it?
I guess, the short answer is none. If you believe most of the regulatory authority say this hasn't been going on anyway. I don't know that necessarily agree with that, but we have not been on the regulation SHO list for quiet some time. Again, I'm sure most of you know our short position at its peak was in excess of 11 million share short. Currently its about 1.3 million. So it has come down dramatically over the last year and a half or two years. But percentage-wise still more than 10% of our shares outstanding are sold short.
So we have, I think clearly on record being for more regulation or at least the enforcement of existing regulation on the naked short-selling, because we actually do believe it occurs. We think we have proof that it occurs and if it has any impact on our stock it should be, if any rule has any impact on our stock it should be beneficial. But again kind of depends on who you want to believe or what's going on in the market place.
Next question, Hyatt Legal Plans, boasted it’s the nation's largest provider of group legal plans and claims it serves more than 5 million plan members. It also claims it had more than 100 fortune 500 companies offer a legal plans.
The person has submitted question, cites the Hyatt Legal Plans website as a source. And then the question, how does Pre-Paid Legal compare in the group market and what percentage of Pre-Paid Legal members are served through group plans?
To answer that last question first, at 12/31/08, it was 26%. Now it has remained very steady. I don’t have an exact percent at June 30, but it won't change by more than 1% or 2% per share.
How do we compare in the group market? We've always talked about the number of members here at Pre-Paid as the number of families. So if it’s a single individual that family is one person, if it’s a mom and dad and six kids then obviously that single-family as eight people. We've never counted heads. We've always talked about families.
I know some of the other companies, I am not sure how Hyatt does it but they count the number of covered lives. So, if you took our million five families and assumed an average of three people per family then obviously we're 4.5 million plan members, but we never -- we don’t collect premiums that way, so we've never counted our members that way.
The last question on that topic, are there any tax benefits to the employers or employees when they participate in a Pre-Paid Legal Group plan? From the employer side it would just be another corporate expense. It certainly should be deductible as a reasonable necessary expense and providing employee benefits.
The question maybe pointed at an expired section internal revenue code section 120, which provided that companies could provide group legal services to their employees up to, I believe the value of, $70 without being taxable to the employee.
That section expired many, many years ago. There have been numerous steps, attempts at various levels to get it reactivated within the internal revenue code to date but that has not happened. So, we would like to see it happen. We've been supportive of efforts to make it happen. It's just another reason that companies should offer our membership to their employees. But, so far hasn't happened. That would be, kind of like the short selling world. If it comes to be, it would be a nice addition, but we don’t believe that either those as critical for our success.
Next question, given benefits of the legal plans offer why do you think the membership base has not grown in the last few years? What changes are taking place to try to increase the membership base. Steve, I’ll let you go first on that one.
Yes, there is not a good reason for not growing this company in my mind. The product just has such a great appeal to a large demographic of the folks in North America. I guess, at the end of the day we just haven’t done a good enough job of recruiting folks to sell our memberships is probably the best answer. To continue to focus on a lot of things that will encourage that, whether it’s recruiting new associates. Certainly need to have that new blood, new excited, new associates or part of the most excited creates a lot of activity.
We are also looking at a lot of different things. We did the advertising, the 30 minutes commercial here about a year ago, maybe a little more than the year ago.
Now, we’ve developed some 30 minutes and 60 seconds spots that the associates can take advantage of, kind of a very succinct commercial with our own individual associates promoting working for yourself is a way to kind of help yourself out financially. There’s been some success from some of our associates using that, but just trying to do anything and everything to help grow that number of associates, and that’s really what we are focused on.
Yes, I think new blood is always the answer. We have a good problem. The problem is that our associates those that work and apply themselves can become very successful in this business, and we have a good portion of them that have. And as they become more and more comfortable that incremental new business is not worth as much to them and so that is a good problem, but it’s a problem and so we're always looking for sources of new blood in addition to the 30 and 60 second TV commercial that Steve's talked about.
We're also seeing a lot of increased interest from insurance agencies and agents, I know without mentioning names, we've had some folks that we've talked to for years and years and years about getting involved with us that are now seemingly ready to get involved with us.
So regardless of whether it's via mass communications or via specific industry segment, we're always looking for new people that want to get comfortable, that want to have some success and we believe for those that want to apply themselves and work hard that there is tremendous opportunity here at Pre-Paid so we are always trying to find more of them.
We're also always looking for ways to assist the existing associates with new novel ways to get leads to recruit new folks. And currently, we're working on a project that would fit right into that particular mode. Is like the hundreds of things we've done before. Time will tell but its not like we're sitting on our hands.
We certainly are trying a lot of new and very novel things and we will be talking to you in the coming months about some new things that hopefully will be some tools that will help our existing associates and potentially even more new associates to come on board.
Well, and as I have said before, 95, 98, maybe a 100% of meetings that we have here at Pre-Paid way all deal was with one thing and that is how do we recruit more associates and how do we write more membership. We think we've built the model and refined it and operationally are efficient as always. I mean, we are always are looking for additional efficiencies that we believe we kind of build the machine, that we just need to find additional and new ways to feed the machine
If the membership base and new membership sales continue to remain flat what additional expenses can be taken out of G&A? And I will just make an overriding comment that we want G&A to remain -- we believe our business model every quarter that we report I think continues to prove that our business model, G&A typically has been 12% to 13% of membership fees for the last several quarters and we certainly aim to keep it there.
Couple of ways that we will continue to evaluate that is, use some outside consultants that are assisting us and our PCI compliance payment card industry compliance. We have the ability to scale those back. It does have, the ramifications is it pushes our compliance, our full compliance off into the future, but I think we will always do as we have over the last 36 years. We will always do what we need to do to make sure that the results are as everyone expects, as far as the margins and business model is concerned.
Kind of specifically I kind of will talk about ways to move it down. Now certainly I feel like on a percentage basis we can maintain as Randy said the 12% to 13% margins that we had for quite some time. Well there are some things that just naturally come down because they are really based on units like our bank service charges, which are the ACH fees and the credit card fees from collecting our revenue.
And those are unit specific and as the units go down that cost goes down. Postage and telephone is based on calls from our members or mail going out. But we are looking at every single line-item, looking at ways that we can be more efficient, more effective and have instituted many things at the beginning of this year.
The biggest cost that we have it's in G&A is our employee cost. So, we focus on that a lot, that's the largest dollars and have implemented a lot of things relative to controlling overtime when only necessary and just trying to be more efficient at way that we do our job each day. But everything is open for review and getting into quite a bit more detail this quarter just to make sure that we do maintain that line.
Well, again as I said, when we have most of the meetings that involve Mr. Stonecipher and the Senior Management 98% to 100% of those deal with how to recruit more associates and write more memberships.
I have 12 managers that report to me. We have or attempt to have weekly meetings every Wednesday and as Steve said everything is always on the table. We are always looking for additional ways to save money. That has been true for the past 19 years that I’d been here and will be true as we get into these little tighter economic times.
But, we're always looking for additional efficiencies and cost savings if we can, and technology always plays a part in that and we're always evaluating the use of technology. Is the increase in efficiency worth the trade-off in dollars? So, again, those types of topics are the most often discussed on a weekly basis with my operating group.
The last set of questions, we have today, could you address following questions on the conference call tomorrow. Under your contingency section and your recent 10-Q you list on the accrued liability a $50,000 as of June 30, 2009. This figure is down from $500,000 as of March 29. Year ago this accrued liability was in the amount of $1 million. Why have you lowered the dollar amount of this accrued liability, given that you seem to be a target of lawsuits on an ongoing basis? Was it prudent to lower the reserve?
Finally, has any the $150,000 reduction in accrued reserve since June 30.’08 flow to your income statement in the third quarter of ’08 and the second quarter of ’09?
Let me you give just an overview, and then I will let Steve dig into the details. But for us to accrue and again we cannot accrue legal expenses. The only attempt to accrue is for judgments that we believe under SFAS 5 in order to book a liability has to be probable, has to be reasonably estimable and if so, then you book the lower end of the range. And so, we always have to evaluate every suit that we get in that.
On standalone basis, is it probable that are going to have a judgment against us? If so what’s the range? Is it reasonably estimable? If it is, then we book the low end of the range. It’s certainly one of the fundamental underlying principles that all companies must abide by.
So, Steve, with that if you want to walk through a couple of the transactions.
Sure. And since that $1 million reserve that you referred to back there, really the only thing that changes that is, each quarter we go through that evaluation that Randy referred to and it has to be on that individual lawsuit basis and we had a couple of changes since that time that has allowed us to move a portion of that $1 million through the income statement.
Then to address that specific question, this quarter, second quarter of '09 that we did push through a $450,000 benefit if you will, or negative expense through the litigation accrual that. It shows up in other expenses along with depreciation, premium tax and interest. And then before that there were very minor changes that went through the income statement. Second quarter of '08 we had a $37,000 benefit and in the fourth quarter of '08 we had $18,000 expense. So net-net you know somewhere around $460,000 of the benefit has flowed through there in the last five quarters.
And again, one has to read our 10-Q disclosures, one was the Blackburn & McCune case. We had accrued substantial dollars on that and won that suit on summary judgment. That's twice now that the court, they have granted our motion to dismiss originally, the plaintiff’s appealed and got that reinstated. So it was headed for trial.
We filed motion for summary judgment and won that. And so in visiting with council. None of our council that was involved can tell us that it's probable or more likely then not that the plaintiffs are going to appeal and so we have no choice. They are going to appeal they cannot tell us its more likely then not that they would ultimately get or receive a judgment against this.
So we don’t have any choice in that matter. We have to reverse the accruals that are associated with all the specific litigation. Similar situation with the Rocklin Group, that was in the June 30, '08 quarter. We had accrued a number there and then we actually reached a settlement in that case, which generated a reduction.
So two things to keep in mind, we have to evaluate each case. We cannot maintain general type reserves. You cannot accrue for anticipated legal expenses. We have to look and we do, at each case on a standalone basis and then whatever the change is, the change is and it will flow through our income statement. Always has, always will.
I guess in closing. I sound like a Baptist preacher here. I sound like my Baptist preacher here. There are still lot of folks out there even after 36 years you can find some fairly recent analysis of our business model that says we're in the process of cratering and they've been saying that for 36 years now, and most recently its kind of been revived if you will by a convicted felon that thinks he knows our business model better than we do.
So I just want to throw a couple of numbers at you that I think just seem to me to be a slam-dunk, that proves out our business model and that really just goes back 10 years since we started our stock repurchase program April 1999, we spent $438.3 million in share repurchase and dividends and those are dollars that we paid back to shareholders either in the form of share repurchases or dividends.
We build $32 million home office that Steve and I have the pleasure of sitting in this morning. At June 30, we have $67 million in unpledged cash and investment. So, add all that up, it's well over $0.5 billion and you look at our existing debt of $46 million. So, that's about a 12:1 actually ratio of uses versus our existing debt. And to me that just clearly demonstrates the soundness of our financial model.
We believe most importantly that we have the ability to deliver a high quality Life Events Legal Plan and still produce significant free cash flow. I think that can't be overstated. I know you heard that a lot. At least I have said it a lot. We've all said it a lot because it is something that certainly, yes we are proud of, but more importantly it has been proven quarter-after-quarter-after-quarter.
So, we are very focused as hopefully Steve and I want you to believe on increasing recruiting and increasing new memberships, we believe we certainly have the business model, and the cash, and the corporate finance structure to handle growth substantially, higher growth than we have had in the last several years. And we feel good about where we're positioned, but we do have to go out and execute and again we are very, very focused on that.
Steve and I both appreciate your continued confidence. We will never take it for granted We are proud of what we built here, but we are also very anxious to make the most out of the model and machine if you will that we built. So, we appreciate your being on the call today. We look forward to next quarter’s earnings conference call in late October for the third quarter of 2009. Appreciate you.
And that does conclude today’s teleconference. Thank you for your participation.
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