National Financial Partners' CEO Discusses Q3 2011 Results - Earnings Call Transcript

Oct.28.11 | About: National Financial (NFP)

National Financial Partners Corp. (NYSE:NFP)

Q3 2011 Earnings Call

October 27, 2011 8:00 am ET

Executives

Abbe F. Goldstein – Senior Vice President, Investor Relations

Jessica M. Bibliowicz – Chairman, President and Chief Executive Officer

Douglas W. Hammond – Chief Operating Officer

Donna J. Blank – Chief Financial Officer and Executive Vice President

Analysts

Matt Rohrmann – KBW

David Burstein – Madison Valley Investment

Operator

Good day, ladies and gentlemen, and welcome to the Third Quarter 2011 NFP Conference Call. My name is Natasha and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will facilitate a question-and answer-session towards the end of this conference. (Operator Instructions)

I would now like to turn the call over to Mr. Abbe Goldstein. Please proceed.

Abbe F. Goldstein

Thank you, good morning everyone, and thank you for joining us on our third quarter 2011 earnings conference call. During this call, management may make certain statements regarding their expectations and projections for NFP, 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 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.

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 ended December 31, 2010. 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.

Our third quarter earnings conference call will be accompanied by a presentation that is available for download on the Investor Relations section of NFP's website or upon connecting to the audio webcast of this call at the same website.

A reconciliation of the non-GAAP measures discussed on this call can be found in the presentation or in the quarterly financial supplement, which is also available at the same website.

At this time, I would like to turn the call over to our CEO, Jessica Bibliowicz and her presentation starts on Slide 7.

Jessica Bibliowicz

Great. Thanks, Abbe, and good morning everyone. Before I comment on our third quarter results, we would like to spend extend a warm welcome to Pat Baird, who just joined our Board of Directors. As the former CFO and CEO of AEGON USA, Pat brings tremendous industry leadership and experience. All of us on the board and the management team look forward to working closely with Pat.

During the third quarter, we continue to see strength in our Corporate Client and Advisor Services Group. Within the Individual Client Group strong trends continued for us in our wealth management business, the challenges in the life insurance market remained. We continue to execute on our balance capital allocation strategy, which includes strategic acquisitions, our share repurchase program and reinvestments in our existing businesses.

So far in 2011, cash consideration for acquisitions was approximately $49 million, which is consistent with the capital allocation we discussed for acquisitions. Our pipeline for acquisitions and sub-acquisitions continues to build and we remain focused on property and casualty transactions as well as building out regional hubs in our other recurring revenue businesses. As of September 30, 2011, we have repurchased a total of $28.6 million of NFP’s stock and had $21.4 million remaining on our buyback authorization.

Turning to Slide 8, you can see NFP’s three business segments and their percentage revenue contributions to the company in the third quarter of 2011. The Corporate Client Group represented 42% of total revenue with 5.3% organic growth. The Individual Client Group represented 33.7% of total revenue and organic revenue for this group declined 7.8%. Our Advisor Services Group represented the remaining 24.3% of total revenue with 19.7% organic growth.

Now turning to CCG on Slide 9, during the quarter our performance was strong, in spite of the challenges that remained in the general economic environment. With the expansion of our P&C platform, we’re introducing a revenue breakdown for CCGs three business lines; Corporate Benefits, Executive Benefits and P&C. Previously P&C was included within Corporate Benefits. Corporate Benefits generated 81.8% of CCGs revenue, Executive Benefits generated 9.4%, and P&C the remaining 8.8%.

For the nine-months of 2011, organic growth in CCG was 3.4% and we expect organic growth for the full year 2011 for CCG to be approximately 3% to 4%. CCGs adjusted EBITDA margin for the nine-months 2011 was 18.6% consistent with what we expect for the full year 2011 adjusted EBITDA margin.

Results for the Individual Client Group in the quarter were primarily driven by our life insurance business, which has been challenged by market conditions. We’re seeing activity in the life insurance marketplace particularly at the lower end of the market. Sales cycles in the high net worth market however continue to be long with uncertain outcome. Given the sluggish general economy, continued impact of last year’s temporary estate tax laws and consistent with our performance trends throughout the year, we expect that ICGs fourth quarter performance will be weaker than the fourth quarter of last year.

Our Wealth Management business, continue to have strong performance in the third quarter and represents 18.8% of ICGs revenue, an increase from 15.1% in the third quarter of 2010.

Turning to the Advisor Services Group, we saw revenue growth and margin expansion. We remained focused on recruiting as we continue to see opportunity because of advisors and transition in the market.

Looking ahead for the fourth quarter 2011 in ASG, fees generated from assets under management maybe impacted by market volatility and therefore we expect full year 2011 organic growth to be in the range of 12% to 14%.

We expect adjusted EBITDA margins for ASG to be approximately 4.5% for the full year. These expectations are dependent on financial market conditions. On our fourth-quarter call, we expect to give an update on our capital allocation strategy, as well as our views on 2012 performance.

Turning to Slide 10, a key focus of ours over the last several years has been to enhance the stability of our revenues and earnings. While the Corporate Client Group represents the biggest component of our recurring revenue, all three of our business segments include recurring revenue components.

In the third quarter 2011, recurring revenue accounted for 64.1% of total revenue, an increase from 51.1% in the third quarter 2010. Our solid results are due to the hard work of our talented and innovative advisors and employees, who are truly committed to excellence in client service in all market environments.

I would now like to turn the call over to our Chief Operating Officer, Doug Hammond. Dough?

Douglas W. Hammond

Thanks, Jessica and good morning. This morning I will discuss the factors driving the performance in our businesses. Turning to Slide 12, despite the challenging market environment driven by high unemployment and economic uncertainty, our well-diversified Corporate Client Group continue to deliver organic growth and positive performance.

The changing landscape of healthcare reform continues to present unique opportunity for us to leverage our resources, to assist our corporate customers and navigating employee benefit decisions. This cements our customer relationships and creates opportunities for us to do more with them. The ultimate outcome of healthcare reform remains uncertain and the debate continues including potential legislation that could eliminate or cause advisor compensation out of the medical loss ratio. Whatever the outcome, we have built our resources towards consulting relationships, which support the trend toward fee-based competition.

Our retirement business continued with another strong quarter, despite volatile financial markets, many companies are beginning to reinstate previously suspended retirement benefits. The trend of employers to retain specialized retirement planning advisors with robust administrative and benchmarking resources differentiates NFPs advisors and has created a strong prospecting environment for us.

Our executive benefits business continues to be positively impacted by increased savings, enrollments of new executive benefit plans and a shift to retirement security, as well as continued diversification opportunities within NFP.

Yesterday we announced the launch of NFP Executive Benefits and the nfpeb.com website as a single executive benefit service solution for advisors and clients. NFP has been a leading independent executive benefits advisor for many years and currently delivers its services to over 1,100 corporate clients in over 25 countries.

Our executive benefits business has previously operated under multiple brands and service offerings within NFP. By bringing our core executive benefits capabilities to the market under a single NFP executive benefits brand and framework, we are in a better position to optimize our size and scale in service market, as well as more effectively recruit new advisors and create institutional partnerships.

Turning to P&C, we are pleased with our progress integrating the Lapre Scali acquisition with our NFP P&C business and have begun putting our additional P&C resources to work, with our other businesses. We’re focused on building our scale and service quality under our single NFP P&C business. From an industry perspective we have begun to see some steadying of rates in our commercial line sales.

Finally within CCG, we are just starting our implementation of NFP 360, an integrated CRM solution with salesforce.com as its core. We’ll be working on the implementation with our core CCG businesses through next year followed by our broader implementation throughout NFP.

NFP 360 will facilitate CCGs ability to leverage its total scale in the management and growth of the business. The core benefits of the system will be an integrated view of CCGs client base, enhanced reporting in management tools at the corporate and local level and interrupt its collaboration around new business opportunities. In CCG, we continue to build on the strength of our value proposition, which distinguishes NFP in the market and helps to offset the strong environmental headwinds.

Turning to ICG, consistent with last quarter, our wealth management business continue to perform well, but ICGs performance was largely driven by ongoing challenges in the life insurance market. Predicting the performance of our life insurance business is challenging particularly given the non-recurring nature of the business and the impact of the large individual cases on overall performance. The size of the exemptions under the current estate tax has at least temporary reduced the size of our market and economic uncertainty has weighed on the funding decisions, associated with a large cases in play with our wealthiest customers. Based on this continued uncertainty along with economic and regulatory headwinds, we expect ICG’s 2011 fourth quarter performance would be weaker than the fourth quarter it was last year.

Our wealth management business has consistently been a solid performer, positively impacted by asset growth and new clients. In ASG, we saw growth in revenue and profitability, our assets under management grew 1% in the quarter to $9 billion, compared to the third quarter of last year due to increased net new accounts and advisor recruiting. We also continue to see growth in ASGs variable annuity sales driven in part by our life producer’s production through ASG.

All in all, we do the quarter positively and want to recognize the contribution of our advisors and employees that remain focused on achieving goals in a tough market environment.

Now, I will turn the call over to our CFO, Donna Blank.

Donna J. Blank

Thanks, Doug, and good morning, everyone. Turning to Slide 14, third quarter 2011 cash earnings was $23 million or $0.53 per diluted share, compared with $22.3 million or $0.50 per diluted share in the third quarter 2010.

Cash earnings in the third quarter 2010 excluded a $9.7 million pre-tax gain from NFPs recapitalization as well as a $13.4 million pre-tax charge related to the accelerated vesting of RSUs for certain principles.

NFP reported third quarter 2011 net income of $9.3 million, compared with $8.2 million in the same period last year. Recurring revenue in the quarter was 64.1% versus 59.1% in the third quarter of 2010. The increase was primarily driven by strong sales in the Corporate Client Group, which was attributable to an equal mix of organic and acquired revenue. The Advisor Services Group, also experience strong revenue growth. CCG revenue in the third 2011, included full quarter results for Lapre Scali acquisition and other sub acquisitions as well as partial quarter results for the DA Financial acquisition.

Please note historic information for CCGs P&C revenue is included in the presentation appendix. Adjusted EBITDA in the third quarter 2011, was $32.2 million compared to $26.8 million in the same period last year, an increase of 20%. As a percentage of revenue the adjusted EBITDA margin was 12.8% compared to 11.3% in the third quarter of last year, margins improved in each of the segments. In CCG and ASG margin improvement was driven by revenue growth and in ICG weakness in life insurance revenue was offset with reductions in management fees due to NFPs priority position in the earnings.

Turning to management fees on slide 15, for the nine months ending September 30 2011 CCG management fee percentage was 40.9%, compared with 40.2% in the nine months of 2010. For the nine months of 2011, ICG management fee percentage was 52.1% compared with 58% in the same period last year. These 2010 percentages exclude the impact of the acceleration of RSU vesting for principles that ramp for management fees. The increase in the CCG percentage year-to-date in 2011, compared to 2010 is related to earnings growth, while the ICG decline was largely due to weak performance of many of our life insurance subsidiaries.

For the fourth quarter 2011, we expect management fee percentages to be approximately the same as the fourth quarter of last year for CCG and Horizon ICG, but remain in the low 50s on a year-to-date basis.

For the nine months of 2011, the combined PIP accrual for ICG and CCG was 1.4% of adjusted income before management fees. For 2011, we expect to combine 2011 PIP accrual for the year will be in the range of 2% to 2.5% of adjusted income before management fees.

Turning to taxes; the effective tax rate for the third quarter of 2011 was 42.3% compared to 22.9% effective tax rate in the third quarter of last year. The effective rate in the third quarter of last year was positively impacted by the resolution of an uncertain tax provision. For the full year 2011, we expect our effective tax rate to be between 43% and 44% excluding impairments.

Turning to slide 16, cash flow from operations for the third quarter was $45.8 million compared to $34.2 million for the same period last year. On a year-to-date basis, cash flow from operations was $79.8 million compared with $76.4 million for the nine months 2010.

Lastly, turning to slide 17, we are pleased to provide you with an update on our share repurchase program. As previously announced we initiated a $50 million buyback program in May 2010.

During the third quarter of 2011, NFP repurchased 1.7 million shares at a weighted average cost of $11.69 per share or $19.8 million. As of September 30, 2011, the remaining outstanding share repurchase authorization was $21.4 million.

We continue to execute on our balanced capital allocation strategy using our strong cash flow to direct capital to shareholders through our repurchased plan while maintaining financial flexibility to make acquisitions and to reinvest in the company for a long-term growth. As Jessica mentioned, we expect to provide you with an update on our 2012 capital allocation strategy on our fourth quarter earnings call.

I would now like to open the lines to questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Matt Rohrmann with KBW. Please proceed.

Jessica M. Bibliowicz

Good morning, Matt.

Matt Rohrmann – KBW

Hey, guys, good morning. Great quarter and certainly appreciate the further disclosure on the P&C business. I guess first question growth has been pretty strong in CCG, getting some good momentum there. In the quarter, I know you guys’ work with sort of a wide variety of partners and different types of businesses out there. Were there any particular pockets of strength or weakness that had to be dealt within the quarter?

Jessica M. Bibliowicz

No, I think it was a solid quarter all the way around, I think it really shows the strength of the underlying business, but it is enhanced by the diversification of our businesses, but there was nothing unusual in there.

Douglas W. Hammond

It’s pretty broad based.

Matt Rohrmann – KBW

Okay. Great, and then you guys noted, ICG has been kind of a lumpy business and 4Q could be weaker. When you talk about the weakness, is that more on the growth side or the margin, both?

Jessica M. Bibliowicz

Well, the margins have been enhanced so far really because of the management fees as Donna mentioned, but we’re just not seeing particularly positive trends in the closing of sales and so really it is revenue side that we are referring to.

Matt Rohrmann – KBW

Okay. Great, and then you guys have been working hard to sort of unify and solidify the NFP overall brand. Where do you stand there, are we kind of half way through finalizing that three quarters away?

Jessica M. Bibliowicz

For the brand, I think is really, it’s there, it’s out there, the firms are incorporating and I think some of the initiatives that Doug talked about this morning really take us to the next level with NFP Executive Benefits, NFP property and casualty. And then using the CRM NFP 360 in there to really kind of bring all of the firms together under the brands, so the clients can see our presentations more effectively, I think just takes it that step forward.

Matt Rohrmann – KBW

Okay. Great and I guess just on the CRM, is there going to be any material costs associated as you roll that out?

Jessica M. Bibliowicz

Doug, do you want to comment on that?

Douglas W. Hammond

No, we don’t see any material costs, I mean they are sort of baked into our technology budgeting.

Jessica M. Bibliowicz

Yeah, lot of the development cost would be capitalized.

Matt Rohrmann – KBW

Okay. Great, thanks, guys, great quarter.

Jessica M. Bibliowicz

Thank you, Matt.

Donna J. Blank

Thank you, Matt.

Operator

Your next question comes from the line of David Burstein with Madison Valley Investment. Please proceed.

David Burstein – Madison Valley Investment

Hello.

Jessica M. Bibliowicz

Hello, Dave.

David Burstein – Madison Valley Investment

Good morning.

Douglas W. Hammond

Good morning.

Jessica M. Bibliowicz

Good morning.

Donna J. Blank

Good morning.

David Burstein – Madison Valley Investment

I noticed in the comparisons from the same quarter, the prior year, that the management salaries or fees. There is $20 million less, which really means your earnings per share, I guess was it bring a difference of about $0.08, what was the reason for that?

Jessica M. Bibliowicz

I’m not sure I understand the question, but just to talk about management fees as Donna mentioned.

David Burstein – Madison Valley Investment

Comparison quarter, previous quarter of 2010?

Jessica M. Bibliowicz

Yeah, you should remember in the third quarter 2010, we had the vesting of RSUs, which ramped through management fees as I mentioned in my comments that was $13.4 million. So that’s the biggest cause of the variance on a year-over-year basis.

David Burstein – Madison Valley Investment

Okay. And the second question is, I know that there is still an impairment on goodwill?

Jessica M. Bibliowicz

Correct.

David Burstein – Madison Valley Investment

And I guess about two, three years ago, you wrote-off over $500 million, why is there still impairments on goodwill?

Jessica M. Bibliowicz

It was actually an impairment of intangible. It doesn’t necessarily mean it’s good will and what we talked about in our press release is the fact that we have reached an agreement with a principal to sell his business and we have now have a fair value. That sale hasn’t completed, hasn’t been completed in the quarter, but given the fact that we have a established market price we have the basis for talking an impairment on intangibles and the sale is pending for the fourth quarter.

David Burstein – Madison Valley Investment

And then lastly, do you expect to restore you dividend in the next year or so?

Jessica M. Bibliowicz

As both Donna and I mentioned, we will discuss our capital allocation strategies at the fourth quarter call, which will be beginning of next year. So we haven’t made any statements on that.

David Burstein – Madison Valley Investment

Okay. Thanks very much.

Jessica M. Bibliowicz

Thank you.

Donna J. Blank

Thank you.

Operator

(Operator Instructions)

Jessica M. Bibliowicz

Okay. I guess if there are no other questions, we would like to thank everybody for joining us on the call. We appreciate all of your attention. We hope you have a great day and we are going to go back to work. Thank you all very much.

Douglas W. Hammond

Thank you.

Operator

This concludes the presentation. You may all now disconnect. Thank you.

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