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National Financial Partners Corp. (NYSE:NFP)

Q2 2014 Results Earnings Conference Call

August 06, 2014, 09:00 AM ET

Executives

Veronica Moo - VP and Senior Counsel

Douglas Hammond - Chairman and CEO

Brett Schneider - EVP and CFO

Analysts

Alan Danzig - Lord, Abbett

Operator

Very good morning, ladies and gentlemen, thank you all for joining. And welcome to the Second Quarter National Financial Partners Corp. Earnings Conference Call. My name is Lisa and I’ll be your coordinator for today. Today’s conference is being recorded. At this time, all participants are in listen-only mode. Following the prepared remarks, there will be a question-and-answer session. (Operator Instructions)

I would now like to turn the conference over to Ms. Veronica Moo, Vice President and Senior Counsel for opening remarks. Please go ahead. Thank you.

Veronica Moo

Hello, my name is Veronica Moo and welcome to NFP's second quarter 2014 earnings call.

During this discussion management may make certain statements regarding their expectations and projections for NFP. These forward-looking statements are based on management's current views 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, and NFP expressly disclaims any obligation to update or revise any forward-looking statements. This recording will be accompanied by a presentation upon connecting to the audio webcast of this call.

At this time, I'd like to turn it over to our Chairman and CEO, Doug Hammond, and his presentation starts on Slide 3.

Douglas Hammond

Thanks, Veronica, and good morning, everyone. We are pleased with our second quarter results. In the second quarter our revenue was up 5.5%, to $279.7 million compared to Q2 2013. We had strong organic revenue growth of 10.8% with contributions from all of our business segments.

Revenue was impacted by approximately $17 million from the disposition of the wholesale life brokerage operation during 2013. Our transaction adjusted EBITDA for the quarter was $47.3 million, up 28.7%. Our gross revenue margin was 16.9%, up from 13.9% in the second quarter of 2013.

On a net revenue basis our margin improved 530 basis points quarter-over-quarter to 25.2%. Growth in our brokerage and consulting operations has been strong, assets under management grew and wealth management performance was solid.

Turning to Slide 4, we continue to strategically deploy capital to transition NSP to a more traditional business model and build our P&C capabilities. For the first six months of 2014, we used $144 million for management contract buyouts and acquisitions, subsequent to June 30, we reprised the interest on our current credit facility down 75 basis points and raised an incremental $75 million of term loan which was used to fund MBOs and acquisitions and to repay 40 million outstanding under our revolver.

The net of these transactions reduced our annual interest expense $3.2 million. Our MBO initiative is well ahead of plan and our pipeline for MBOs and acquisition for the rest of the year is very strong.

Turning to Slide 5, the stability of our earnings has significantly improved. For the second quarter 2014, recurring revenue accounted for 75.1% of total revenue and increased from 70% in the second quarter 2013.

Our recurring transaction adjusted EBITDA in the second quarter was 87.3% compared to 85.6% in the second quarter last year.

Turning to our segment performance for the second quarter, you can see on Slide 6 NFP's three business segments and their percentage revenue contribution.

Turning to Slide 7, our consolidated transaction adjusted EBITDA margin improved nicely to 16.9% on a gross revenue basis and 25.2% on a net revenue basis up 22% and 27% respectively quarter-over-quarter. These results were driven by strong performance in our corporate client group which is our largest business.

Our corporate client group continues to perform well as our clients see strong technical advisors to address the complex healthcare retirement plan and risk management environment in which they operate.

Organic revenue growth in CCG was 9% in the quarter, due to solid performance in our core benefits, retirement plan and P&C business.

ICG's organic revenue growth was 9.2%, while total revenue was down from the disposition of a wholesale life brokerage operation tied to the final stage of the reorganization of our life business.

The consistently solid performance of our wealth management business continues to drive an increase in wealth management's percentage of total revenue within ICG. Our wealth management business showed solid performance in the quarter and represented 30.5% of ICG's total revenue and over 50% of ICG's bottom line performance.

Second quarter 2014 ASG was strong. Organic revenue increased 15.3%, and assets under management grew 27% year-over-year to $14.6 billion.

ASG's transaction adjusted EBITDA in the quarter increased 21% to $4.9 million from $4 million. Performance in ASG was driven by solid performance across the business and strong recruiting activities.

I would now like to turn the call over to our CFO, Brett Schneider.

Brett Schneider

Thank you, Doug. Turning to Slide 8, we reported second quarter net income from operations of $8.7 million compared with income from operations of $2 million in the same period last year. The growth and income from operations was driven by the company executing on MBOs acquisitions and from topline growth offset by increase in amortization of intangibles relating to our going-private transaction last year.

Moving to Slide 9, cash flow used in operations for the second quarter 2014 was $21.8 million. During the second quarter 2014, the company made cash payments of $9.2 million for management contract and producer buyouts of $3.2 million for earn-outs that impacted operating cash flow.

As adjusted cash flow from operations was $34.2 million in the quarter.

Slides 10 and 11 show our transaction adjusted EBITDA for the three and six months ended June 30, 2014 and 2013.

On slide 12 we broke out other to reflect these adjustments.

Turning to Slide 13, you can see our last 12 months pro forma transaction adjusted EBITDA of $201 million. The pro forma adjustments include completed dispositions, management contract buyouts and acquisitions, all of which have been presented to give effect as if they had occurred at the beginning of the period.

As of June 30, 2014, NFP had $865 million outstanding on its term loan, $300 million outstanding on it’s senior unsecured notes and $10 million drawn on its $135 million senior secured revolver.

As Doug mentioned, subsequent to June 30th, we reprised our existing credit facility and increased the term loan by $75 million on the same terms as the reprise.

We would now like to open the line for any questions.

Question-and-Answer Session

Operator

Certainly. Thank you, Mr. Schneider. (Operator Instructions) And our first question is from the line of Alan Danzig of Lord, Abbett. Please go ahead.

Alan Danzig - Lord, Abbett

Hi, just a couple of questions about the CCG EBITDA margin. See you're up around 24% for the last two quarters. Where do you think that can go and do you think you can approach some of your peers, sometimes approach 30% margins in that business.

Douglas Hammond

I think net revenue margin, and remember historically we had presented our margins in across our business on a gross revenue basis. When you do the conversion to a net revenue basis, I think the CCG is operating at – what's the number in the second quarter Brett?

Brett Schneider

27.1%

Douglas Hammond

So 27.1%. So, if you compare that to, I think any of our peers with the exception of maybe one, our margins are performing in line if not better than many of our peers.

So, I think there is upside on that. Remember, the management contract buyout transactions are really a buyout of earnings and there are buy-up of earnings without any change to the revenue line.

So, they drive nice margin enhancement as we normalize the business to a more traditional structure. We're done with and off a lot of that. But we still have over the course of the next year and a half or so, some more room in that area, probably in the $10 million to $15 million of earnings range.

So, we should see some margin improvement above that. So not exactly, sure exactly where it's going to come in, but there should be some nice improvement.

Alan Danzig - Lord, Abbett

And then just to follow-up there. In your disclosure as I see the compensation expense ratio declined at CCG, I am just curious what went from 58% to 48%, just curious if that had some of the impact on the margin growth and just in general but what you’re seeing in terms of compensation - number considering the strength of your performance.

Douglas Hammond

Yeah, it does have an impact on the margins. Remember that we take down the overall compensation expense line when we do the management contract buyout transactions.

Alan Danzig - Lord, Abbett

Okay.

Douglas Hammond

So they are being driven by those – that number is being driven by those transactions.

Alan Danzig - Lord, Abbett

Okay. Thank you.

Douglas Hammond

You're welcome. Thanks.

Operator

Thank you for your question. (Operator Instructions) We do have one question in the queue and that comes from [indiscernible] of ING. Please go ahead.

Unidentified Analyst

Yeah, good morning, thanks. Can you talk a little bit about the Advisor Services Group? You probably had to start handy, but just number of advisors, AUM trends, that's what of thing. And maybe if you could touch a little bit on how activity, trading activities can shape enough through the end of the quarter and then into the third quarter. Some more details around what's going on there.

Brett Schneider

Yeah, total advisors at ASG break in sort of giving exact number but I think we're around 1,400 advisors at ASG. Remember our business mix tends to be a little bit higher end, not so much of a [mess out] (ph) from broker-dealer but advisors to tend to serve upper end markets, so the margins are bit nice and the assets are a bit nicer.

We gave the asset growth figures for the broker-dealer, I think, let me foot through quickly, on page six, slide. Yeah, assets are up $14.6 billion which is up 27% year-over-year.

Some of that was driven by an acquisition that we did in connection with wirehouse recruiting, where we brought over some assets, but a lot of it is just core asset growth based on recruiting and broader market performance.

So really nice asset growth in the business. Our focus at the broker-dealer has been over the course of the past five years to build out a best-in-class hybrid advisor platform, meaning advisors that serve their clients in both a registered investment advisory capacity and also serve them in other ways including stock trades.

So, good overall momentum in the broker-dealer, very strong growth. Our growth has been well more than 10%, pretty consistently last year and through this year. And that’s really a function of the success of the overall recruiting initiatives and pulling folks out of the wirehouses and they want to move into independent channel and also being quite competitive in the recruiting of advisors within the independent channel over to our offering.

Our broker-dealers doesn't just focus and our RIA. It doesn't just focus on serving the independent financial advisors in a financial advisory capacity. But we also look to serve them with the broader suite of services available within our company in the life insurance and wealth transfer area and in the executive benefits and deferred comp and the employee benefits area, so they can broaden their relationships with their clients. And hopefully do a better job serving them in a more complete way.

So, that's fundamental to the value proposition seems to be resonating very nicely in that marketplace.

Unidentified Analyst

And the advisor count, 1,400, what was that maybe a year ago?

Brett Schneider

Give or take, maybe we're up a bit. We can give you the stats. I don’t have it off, top of my head.

Unidentified Analyst

Okay. Has recruiting slowed?

Brett Schneider

No, recruiting is, recruiting is, we really only started - if you look back in some of our comments from last year, we only started really ramping our recruiting staff at the broker dealer post private transactions, so about a year ago.

So, we have been operating with a pretty same group on the recruiting side because we want to really build out the suite of resources and we had three or four build on the technology ramp up to make sure that we were very, very competitive in the marketplace.

And since we've done that, the recruiting activity has ramped significantly not just in terms of the investments in the broker-dealer, on the recruiting side but in our ability to recruit higher end advisors. And also start to target the wirehouse marketplace more historically we had not been targeting the wirehouse marketplace and with Washington Wealth Management acquisition that we did. We have a team of folks that is very focused on that channel.

So, the recruiting activity has ramped up and has been very strong this year.

Unidentified Analyst

Yeah, you think you have sort of a goal from 1,400 to somewhere north of that, is there a number that you guys are thinking about?

Brett Schneider

No, we don’t actually have a specific goal in terms of number of advisors. We actually are more focused on the right advisor fit. From a culture perspective we want to create a lot of consistency with respect to the culture and we're focused on advisors that will recognize the broader and more diverse value proposition associated with our business.

So, we're looking for advisors with more assets, higher end advisors and folks that get the value proposition of the company and are looking to serve their clients more broadly.

So, we have some view on GDC and what we like to see coming from an asset in GDC growth perspective. But in terms of advisor count, we are not targeting any specific numbers.

Unidentified Analyst

Okay. And just as part of that business, what's the transaction oriented revenue versus others in that, what's the mix there?

Brett Schneider

If you look at it from an asset perspective and sort of a recurring revenue perspective, we are actually at 67.8%. If you look at page six of the slide presentation, 67.8% is asset-based fees and trails so recurring type revenue and 32% is commission and non-recurring fees.

Unidentified Analyst

Okay, got it. All right. Okay.

Brett Schneider

And we continue, our goal, we pushed up the recurring nature of our BD at awful lot over the course of the past five years. And that continues to be the push in the context of our ideal recruiting candidate and the push for the business, it's really a very, very targeted and focused on the recurring revenue advisor.

Unidentified Analyst

Got it. Okay. In the future, if you can work it out, things like AUM flows in what market, where the AUM growth coming from flows market and all that and the advisor counts would be useful on an ongoing basis in your disclosures. Right?

Brett Schneider

Got it, yes, thank you.

Unidentified Analyst

Thank you.

Operator

Thank you for the question. And we have another question in the queue, and that's from the line of [Mark, GSO Capital Markets] (ph). Please go ahead, thank you.

Unidentified Analyst

Hi, thank you for taking my questions. I think you may have said this, I just didn’t catch it, but the asset growth in ASG was more the outside of the kind of the acquisition associated with wirehouse recruiting. Was that more just AUM growth from market appreciation or was it asset gathering greater, just production from your existing recruiting sales force?

Douglas Hammond

Yeah, I think the market certainly has helped year-to-date but recruiting and new accounts are a bigger driver.

Unidentified Analyst

Excellent. And, at least one of your other competitors have talked about on the commission side, non-traded REIT monetization's being a boost in the latter part of 2014. Did you guys have a similar experience? And is there any headwind on the commission fees for the second half of this year?

Douglas Hammond

Yeah. We definitely had some benefit in the second half of last year. And as we look out to this year, we are around tripping those numbers but we still feel comfortable that broadly speaking the recruiting activity is driving nice growth in the broker-dealer. And we are seeing a lot of accounts added.

So we're feeling pretty good about the remainder of the year but there are certainly headwinds created by the REIT activity at the end of last year.

Third and fourth quarter was heavier for us. I believe in the third quarter we had some benefit in the fourth quarter but the biggest benefit came in the third quarter, I believe last year.

Unidentified Analyst

Got it. That's all. Thank you.

Douglas Hammond

Thanks.

Operator

Thank you for all your questions ladies and gentlemen. I'll now hand back to Mr. Doug Hammond, for closing remarks. Thank you.

Douglas Hammond

Great. Thanks everyone. We appreciate everyone's support and if we weren't able to cover anyone's questions, please feel free to reach out directly to Brett Schneider. And he can answer whatever questions you have. And if you need to talk to management, we'll make ourselves available on the business side as well.

So thanks and have a great day.

Operator

Thank you for participating. That concludes today's conference call. You may now disconnect your lines. Have a great day. Thank you.

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