Pre-Paid Legal Services, Inc. (NYSE:PPD)
Q1 2011 Earnings Call Transcript
April 27, 2011 8:30 am ET
Randy Harp – President, Co-CEO and COO
Steve Williamson – CFO
Good day ladies and gentlemen, and welcome to the Pre-Paid Legal first quarter earnings results conference call. At this time, all participants' are in a listen-only mode. (Operator instructions)
I would now like to turn the conference over to your host, Mr. Randy Harp, Chief Operation Officer. Please go ahead.
Thank you Ally. I want to welcome everyone to the 2011 first-quarter earnings conference 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 like to remind everyone that the conference call will contain forward-looking statements, including our expectations of future results and future plans. Actual results might differ materially from those projected in those forward-looking statements. Additional information concerning risk factors that could cause the results to differ materially from these forward-looking statements are contained in our press releases announcing our earnings as well as disclosures in our other public reports on Forms 10-K, 10-Q, and 8-K and any amendments filed thereto with the SEC, and those reports are available both on the SEC’s EDGAR website as well as Pre-Paid Legal’s website.
As we have mentioned previously and publicly announced, we entered into a definitive merger agreement on January 30, 2011 with newly created entities formed by MidOcean Partners, a New York private equity firm, and the merger agreement provides that MidOcean will acquire all the outstanding shares of Pre-Paid for a cash payment of $66.50 per share, or approximately $650 million in the aggregate. The closing of the transaction is subject to certain terms and conditions customary for transactions of this type, including receipt of stockholder and regulatory approvals.
We expect the merger to close as we anticipated sometime in the late June, July timeframe. Additional information regarding the merger is included in a proxy statement we filed with the SEC and upon SEC approval will be provided to shareholders. So we will not be responding to any e-mail questions regarding the merger on this call.
At this time, I'd like to ask our Chief Financial Officer, Steve Williamson, to step through the more significant financial highlights for the first quarter of 2011. Steve?
Thanks Randy. Total revenue for the first quarter of ’11 compared to '10 was down about $7 million. Expenses and taxes were down were down about $5 million, resulting in about $2 million or 10% decrease in net income. With 3% fewer shares diluted EPS was down 8%. On a sequential basis, the membership fees were down $2.2 million.
Kind of stepping through on a kind of more detailed basis on a line item by line item, membership fees for the first quarter of 2011 decreased $4.8 million over the first quarter of 2010. It is about a 4.4% decline. Membership fees, as you all know by now are driven by average premium in force, which was down around 5%. That actually is equal to the product of the average number of members times the average annual fee that those members are paying.
Associate Services revenue decreased $2.2 million, primarily due to the associate fee revenues, which was a result of a big drop in the new recruits, 16,000 versus 38,000, and partially offset by higher enrolment fee. We went through the higher Fast Start fees, which averaged $147 for the quarter versus $70 for the prior year’s quarter. We also saw a slight decline in e-Service fees. They were down $269,000 for this quarter compared to the last year’s quarter.
Other revenue, which is primarily that three year amortization of that $10 enrollment fee, they were down $32,000 at $851,000 for the quarter. Membership benefits decreased 4.5%, very consistent with the 4.4% decline in membership revenues. The benefit ratio for both quarters were 33.2%. In that we have all the benefits from the renegotiated Kroll contract, and expect that ratio to be pretty consistent on a go forward basis.
Commissions were down 20% to $23.7 million primarily due to the decline in production, 24% decline in annual membership premium sold for a quarter. Commissions on a per unit basis or per member basis came in at $220, which is $4 higher than the first quarter 2010, represented 71% of new premiums sold. So pretty consistent with what we have had in earlier quarters.
Associate Services costs was $648,000 higher than Associate Services revenue for the first quarter of 2011 versus in 2010 we actually had more revenues and costs to the tune of about $2.5 million.
G&A increased $2.8 million, primarily due to the additional expenses associated with the advisers and special committee, both financial and legal. And those of course all resulted in the merger that Randy was talking about previously. We also saw an increase in legal fees, over $300,000 increase in legal fees, primarily due to the litigation that ensued around the merger.
We did see some offsets, some decreases in employee costs, bank service costs, telco costs and postage, some of the items that can be tracked with the top line.
Other expenses decreased $85,000 in the first quarter of 2011 versus 2010 due to a $218,000 decrease in interest expense, paid off the debt at the end of last year, so had no interest expense to speak of for the quarter. premium tax decreased 54,000, had a $244,000 decrease in depreciation and a $30,000 increase in interest income, and all that was partially offset about $500,000 litigation reserve. We did set up a litigation reserve this quarter.
Provision for taxes came in at 39% for both first quarter ’11 and 2010. That resulted in that 10% decline in net income, came in at $16.8 million, which is an 8% decline of diluted EPS at $1.72. And just a quick note on production, kind of wanted to summarize some of that. We went to the new Fast Start program November 1, which we talked about on the last quarter’s call.
The new associate enrolment fee during this time frame has been $149 for those who come into the Fast Start program then they obtain more training. Of course the goal was to increase the productivity of our associates and improve persistency rates. And although we’re not anywhere near where we want to be relative to new membership sales, our associate productivity measures have improved and are certainly going in the right direction.
For the prior year’s quarter, that productivity and we measure that by new membership divided by new associates recruited. And if you look at the first quarter of 2010 that measure was 3.6 new members per new associate. For this quarter it is 6.7 for the first quarter of 2011. So seeing certainly some positive trends and the results that we are looking forward need just continue to increase the recruiting and increase this productivity and keep going in the right direction.
Also saw improvement in persistency, if you look at it on a sequential basis 71.8 was what we came in for the end of the year, fourth quarter of 2010 and went to 72.4 for the first quarter of 2011. So just need to continue going in that direction for some of those productivity measures. We did generate a lot of cash, $26 million worth of cash flow. Again that is unusually high compared to what we do on a typical annual run rate due to the fact that our first quarter federal tax estimate payment doesn’t happen until April 15.
So we really have two tax estimates, cash flow outflows in the second quarter, April 15 and June 15. So that results in a little bit higher cash flow in the first quarter, and then it will back up a little bit for the second quarter. We did have about $694,000 of Capex, and of course, the result is we just saw an increase in cash and investment balances for the quarter.
With that I will turn it back to you Randy.
Thanks Steve. Now I want to respond to any e-mail questions that we have received and Steve hasn’t address or was addressed in the 10-Q that we filed yesterday or are merger-related. We actually received about five questions, three of them are clearly merger related, which I am not going to address. I will address portions of two questions that are not merger-related. Can you describe the trends driving the 56% decline in new associates recruited, are these trends permanent, also I was interested to understand why the average enrolment fee doubled over last year’s quarter, 147 versus 70. How much of the increased directionally reflected increased costs of materials and services provided versus discretionary increase.
I think Steve really answered that talking about the Fast Start changes, Fast Start success training program that we reinstituted in November of 2010. Certainly the enrolment fee was a discretionary increase. We intentionally increased from an average of 70 to practically 149. The average for the quarter was 147, but the cost of the Fast Start program, the participation of associates was 149, and I think that our intent was to charge more and to provide more.
So the 56% decline in the associates we attribute a very, very significant portion of that decline to the increase in the average enrolment fee. It is always difficult to move – it is always easy to move down the enrolment fees, always difficult to move it up. So as Steve said…
Well, and I might jump in there and give a little bit more of a historical perspective of one why we went there, but certainly I think first answer is price certainly is going to move that number of new enrollees pretty dramatically. But, we are really making what we feel like are longer term decisions in what we did, as we went back and looked at what we had done in prior years when we did have a more productive sales force and we did have better retention rates, persistency rates, and if you look back in the years 99 through 2001, we had average enrolment fee of around $240 something, and we had a productivity measure of somewhere around little bit north of 6. I think it is at 6.3 for those three years.
Then for 2002 to 2004, we had an entry price of somewhere around $140 on average, and our average productivity measure during that time was 5.7. And then we got to the lower entry prices that we just came out of, and we were anywhere from $50 to a high of $87 as far as the average enrolment fee from 2005 to 2010. The overall average was around $66 and productivity measures were from 4.5 to a low of 2.9. And again these were annual totals.
The average was 3.6, the same as what we kind of came out of that I referred to. so we basically looked at and said what can we do to kind of help long-term productivity and that is why we went back to that Fast Start program because during those times when we had the higher productivity measures that was we had a higher rate of entry and we had more training for those new sales associates. so that is kind of the thought process, but as Randy said any time after the first few months after you make that change it takes a little while to get kind of get past that and start seeing some good growth results.
So that is kind of what we are working through but we are as I said previously certainly happy with the productivity measures, not happy at all with the totals that we are posting, but certainly feel like that we are going in the right direction on the productivity side.
And expected, as you said, as we expected downturn in recruiting when we more than doubled the recruiting fees. So not something that we never intentionally want to slow down recruiting, but 38 year, throughout the history, we know what the results typically are going to be. And the next question really goes in the same vein, what has driven the decline in active memberships over the last years and now the first quarter cancelled memberships relatively constant over this period, I’m interested in understanding what has driven the decline in new memberships produced.
Is it simply a result of the decline in new associates recruited, or is the productivity of associates changing, and I think the answer is yes. It is the decline in new associates and until recently we had a declining productivity of our sales associates. So, certainly our goal is to turn both around. But typically you are always going to turn around the productivity per associate before you turn around the number of gross associates enrolled. So just to I think again follow Steve’s explanation on the recruiting side, the same thing happens with – we had when we lowered the enrolment fee, we had less productive associates. There is no question about that.
There might be a lot of different discussion about why and how to fix it, but we simply went back and analyzed what we knew had worked in prior years and started putting some of those changes back in place November 1. So as Steve said, we are certainly not satisfied and certainly don’t believe any of these current levels that we are at recruiting lines are permanent and the reduction in recruiting was certainly anticipated, but never enjoyed.
So we are looking forward to driving both the persistency of the business written and the productivity of the new sales associates that are coming on board and as Steve had indicated in his remarks certainly have seen those numbers start to improve rather dramatically on the productivity metrics. So, I hope to continue to do both. Again, we just want more and better business, and the wave we get that is by having more and better, more productive sales associates.
So I want to wrap up the call today just reminding everyone the thing that Pre-Paid centers around is the value proposition of our membership. I do believe a very unique business model, a win-win-win approach, our sales associates are provider law firms and certainly the company on behalf of its shareholders, we are all codependent on each other. we all benefit when the others benefit, and the person in the middle, the focal point of that three sided approach is always the fee-paying member that has to receive more in value every month than they pay us in cash, and we believe that they are always, always better with us than without us and we believe that received high-quality legal services very consistently in a customer service friendly manner that no one else has the ability to deliver outside of this company.
So, always keep that in mind that is that is what has been the basis of this company for the last 40 years. It will be the basis of the company for the next 40 years. So, with that Steve and I appreciate your confidence both now and at least for me over the last 21 years, and these 11 years for Steve. Neither of us take it for granted. We appreciate you being on the call today. Thank you.
Ladies and gentlemen, this does conclude today’s conference. You may now disconnect and have a wonderful day.
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