National Financial Partners Corp (NYSE:NFP)
Citi Financial Services Conference
March 8, 2012, 2:45 p.m. ET
Jessica Bibliowicz - Chairman, President & Chief Executive Officer
Donna Blank - Chief Financial Officer
I will give you a quick introduction to the company, and hopefully, we’ll have an interesting Q&A at the end of it. So let me first walk through all the disclaimers so you guys know that everything here is on the up and up.
But first, just a very quick description of who we are as a company. NFP is a leading distributor of insurance benefits and wealth management products. We are only a distributor. We do not actually manufacture products or take any risk.
We’ve actually built the company by acquiring independent providers of these services and also through organic growth of these companies once they’re part of NFP. One of the critical founding mandates of NFP is that we are open architecture. We actually aren’t associated with any products, but we actually search the marketplace to make sure that we’re giving conflict-free advice to our clients.
We run the business in three segments. Our largest is our Corporate Client Group where we serve corporations, particularly in the world of benefits and 401(k), property and casualty executive benefits. Our second largest segment is our Individual Client Group, which is where our wealth management and life insurance capabilities live. And then our third, smaller but growing, segment is our Advisor Services Group, which is our broker dealer and our registered investment advisor. And when you look at NFP as a company, you can see that in a lot of categories, we really kind of stand out among the crowd.
We are the eighth largest global insurance broker in the world. That’s kind of interesting because we only have businesses in the U.S. and Canada, so even though our stock will move when Greece moves, and we don’t know exactly why that correlation exists, but I think you all understand that dilemma.
We’re the fourth largest provider of executive benefits. Our broker dealer is a top-ten broker dealer. And when you open up Barons, when they talk about firms that the best wealth managers in the country, we actually do very well in those surveys as well. So a company that’s really been growing and is a consolidated company and has achieved lots of awards.
2011, I think Keith alluded to this, was a very strong year for NFP. It was the year that we really returned to acquisitions in our business and we saw very strong growth. Our overall revenue growth was 3.2% and our organic growth was 2.3%.
Our Corporate Client Group had a 3.6% growth rate. That’s organic, no acquisitions. And I think that’s pretty impressive particularly when you think about the type of economy that we’ve endured.
Our Advisor Services Group had a very strong 16% revenue growth. The only category that really has declined was the Individual Client Group, and that was driven mostly by challenges I’ll talk about in a minute in the life insurance division.
Our EBITDA grew by 8%. Our adjusted EBITDA grew by 8%. And I think very importantly, we are a strong cash flow company and we executed a very strong balance capital allocation program. We deployed $50 million of our cash towards acquisitions, which we do all in cash. And we deployed another $50 million to a successful buyback of NFP stock, which we completed in February.
Just to kind of drill down a little bit more to our three categories, as I mentioned, the Corporate Client Group is our largest. That’s about 41% of our revenues. 81% of that is in what we call our health and welfare businesses, so corporate benefits and the like. That business has grown for us significantly. At this time it’s actually been positively impacted by Healthcare Reform because there’s so much dialog around it and because of our services infrastructure, we can really help companies navigate through it.
We do look at that area closely and think about long term risks. And one of the things we really focus on in that business is making sure that we are diversifying the business that we do with our corporate clients. And most of our business is middle market, and so they really do look to us to provide a multitude of services. That’s where you’ll see 401(k), group life, group disability. And in 2011, we did a large acquisition of a P&C firm to help us diversify there as well. And where about 9% of that business is executive benefits, which is deferred compensation, disability, and the like.
The Individual Client Group actually has three kind of interesting components to it. 50% of the revenue, that’s about 34%, 35% of our business and I’ll show you in a little while that really has changed dramatically over the life of NFP. That was the core of the business. And as Keith said, that has really been a big transition for us.
50% of the revenue in there is what we would call wholesale life brokerage where agents come to us and basically execute their life insurance business. That’s – 32% of that category is retail where our agents are dealing directly with the high net worth clients. And the remainder, the 17%, the 18% is in our wealth management business, work we’re fee-based advisors. And that business has grown very successfully for us. But the most stressed part of that category and frankly of the company has been the significant clients in very high end life insurance sales.
The Advisor Services Group is a segment that really came out in our reorganization. We always had the broker dealer, but it was kind of buried underneath the company. It’s now about 25% of our revenues. And that’s where we serve what we think is our rapidly growing and very opportunistic independent advisor marketplace. And we serve them through our broker dealer as well as our registered investment advisor. And that’s been a business that we continue to invest in and really seeing the rewards of that. And as I mentioned, that had a very nice growth rate in 2011 of 16%.
We’ll talk about a little bit more moderate growth going forward. But I should say off of that that’s the business where our margins are the lowest because typically in the independent channel, you have large payouts to the independent advisors. So the margins there are significantly lower than the other components.
I talked before about the open architecture. We really have always believed that when you separate distribution of financial products from the manufacturing of them, that you really can stand up in front of the clients with open architecture and a conflict-free environment. But if you are going to operate your business that way, then scale really matters. You really want to be a big player with the carriers and the asset managers. And because of our multiple businesses and because of the scale we bring, we really can get ourselves a lot of leverage from the providers, the manufacturers of financial services products. And we can use that to help on the underwriting process as well as making sure that they are appropriately compensating us for access to distributions.
This is the fifth and Keith alluded to it, I think it’s really interesting to look at this company and how it’s weathered the storm. And why our cash flow has been so strong through the period. If you go back to 2007, life sales were extremely strong. We were seeing 20% to 30% growth in that business. And at the time, the Individual Client Group represented about 54% of the revenue of NFP. And about 59% of our bottom line earnings. We were actually taking that capital and deploying it into the acquisitions of firms that had much more of what we would call quality of earnings return revenue stream. Not as much of a growth rate, but much more consistent earnings. And that was really the benefits business and the wealth management.
So if you kind of fast forward to 2011 when life insurance has taken its’ big hit, you can see that at the end of 2011, it was actually the benefits business that had – our Corporate Client Group that had 40% plus of the revenues. And 60%, over 60% of the actual bottom line earnings. So while life insurance was naturally shrinking, we were also able to acquire our way into a much steadier cash flow. So the business today has a significantly different dynamic than what we would have seen looking at the company in 2007.
And that’s the theme that we are very, very focused on that we have a large proportion of our earnings that are actually coming from recurring revenue. And I’ll show you a slide on that right here. So even between last year and this year, we’ve grown the recurring revenue significantly. But this year, about 62%, 63% of our revenue is recurring. And the way we think about recurring revenue is typically out of the Corporate Client Group where we’re broker of record. That is recurring. Wealth management, a fee-based business is recurring.
In our broker dealer, we have both the broker dealer component, which is about 30% of the Advisor Services Group. The remainder is in the RIA. And again C-based businesses, so in all of our segments, we actually have recurring revenue. And when I talk about the capital allocation going forward and how we’re thinking about acquisitions, it is all in businesses that provide us that recurring revenue stream. So all of the acquisition dollars last year and what is being deployed this year are going primarily into the Corporate Client Group.
Let’s talk about that a little bit because we did announce how we were going to think about our cash flow for this year. Last year as I mentioned, we deployed about $50 million of capital into acquisitions. Again, all into the Corporate Client Group. This year we are taking that number up to $80 million. There is a pretty strong pipeline at companies that actually want to be part of NFP who want to see their businesses grow because they’re part of a company that has broader infrastructure than they could ever build on their own. Brand in this market sales, balance sheet sales, credibility sales, so that’s why we’re really seeing a strong pipeline there.
Of the $80 million, $60 million will be primary acquisitions. And approximately $20 million, we will actually buy up earnings of existing NFP companies. So we’re actually – our own firms where we only have been entitled to a portion of their earnings, we’re buying up a portion of that so that we can really build up our EBITDA with firms that we know well and we’re very comfortable with. So that’s the acquisition side.
And then we also announced that beginning in May, we would deploy another $50 million assuming things are consistent with where they are now, that we would deploy another $50 million to another share repurchase program. So again, that will begin in May.
And then also to continue to reinvest in the business because we believe in this combination of organic growth as well as growth through acquisitions, so we would continue to really focus the business on making sure that we have diversified products offerings, that we’re using the benefits of scale to make sure that we’re bringing more to the bottom line. We have built a pretty significant clients and regulatory system, which is important in the world we live in as you all know. And technology, open architecture, and all the things that we think make us different, differentiate us in the marketplace makes the employer want to do business with NFP. But also makes the independent firm feel like they would be able to do more if they were part of a company like NFP.
And then finally, we did give some guidance in terms of what we thought would be reasonable expectations for 2011. You’ll notice that we do give some guidance in our corporate client group. And we do it in our advisor services group. We do not do it in our individual client group because that is a very transaction based business. And it’s very tough to actually predict it. So for the corporate client group as I mentioned, organic growth was 3.6% last year. This year we’re expecting to see organic growth again in that 3% to 4% area. We expect our margins in the first part of the year to be pretty consistent with last year, about 18.5% margin in that business. But we do expect to see a growth in the second part of 2012. We expect to see that to move to 19% to 20%. And again on top of that, the growth from acquisitions because that’s the category – that’s the segment that we will be acquiring in.
The individual client group, what we did say there, and again, that had a negative return last year. Wealth manager is strong. Life insurance still under a great deal of pressure. Matters frankly less and less to us over time because of the other businesses. But we did say that based on what we know that it’s possible that the first quarter life insurance could be actually lower. It could be lower than it was in the first quarter of 2011.
And then finally advisor services group, which is again the broker dealer and our registered investment advisor last year, the growth was over 16%. That follows 2010 with a very strong growth rate. So now we’re expecting that we’ll do about 4% to 5% organic growth. And that the margins there, which did hit 4.5% for 2011 would be somewhere between 4.5% and 5% for this year.
So again, continuing the solid growth. It’s a business we’re still investing in to make sure that we’re in sort of the leadership position on technology. So over time with scale and with the recruitment of advisors, we do expect to see that that margin will improve from the 4.5% to 5% level.
So with that, I'm going to turn it over to Donna Blank, our chief financial officer. And after that, we will answer questions.
Thanks, Jess. I’m going to start off here with the financial highlights, looking at the revenue and adjusted EBITDA. Same themes Jessica just went through in terms of the two segments that are doing really well; the green and the light gray. The Corporate Client Group and the Advisor Services, you can see revenue growth in those two segments. There is obviously a challenge in the ICG, the Individual Client Group, the darker gray, where we still have the challenges of – with the life insurance market.
So revenues down in that segment, recurring revenues, though, on an overall basis, up from 58% to 62% in the year. And then on the adjusted EBITDA, we actually got growth in all of the segments and that was really because we were able to, even though there were revenue declines in ICG and revenue pressures, we were able to get the expenses there under control and get the margins up there. You see the margins on the bottom of the page, the consolidated EBITDA margin from 11.9% to 12.5% for the year.
The compensation ratio is obviously a big part of our P&L. It’s composed of two elements, if you’re looking at the face of the income statement. The Fees to Principals, which are Independent Contractor Producers, they are in the profit from the businesses that they have and sold to us and that is in the – that’s one of the components and then there’s compensation for any Employee Producers or other compensation that we pay.
The Corporate Client Group has a higher compensation ratio and that’s generally because there’s more of an administrative component to that business, so it costs a little bit more to service. So it has an average of 52% with some seasonal variations there and the Individual Client Group at 49% for the year.
The EBITDA margins are kind of interesting to the – and it tells the same consistent story we’ve been saying; the EBITDA margin for CCG is the highest, it’s the segment that produces the most EBITDA so that’s a good thing. It’s fairly stable, it’s landed at 18.6% at the end of 2011.
The margin in ICG is much more variable. You can see a lot of volitility there, it depends on whether the revenues come in and how that business is performing overall. So again, it’s another signal of why we’re not predicting exactly how that business is going to shake out because it’s really hard to tell how it’s going to work.
The margin in ASG, Jessica already alluded to the fact that the payout ratios for the Independent Broker Dealers are quite high. They average around 82% of the gross revenues and obviously, then we have some other expenses to incur, so those ratio, the margin lands somewhere between 4 and 5% and we obviously gave the guidance for 2012.
The one thing I would highlight though is it did go from negative, if you look at the left hand side of the page and has been increasing over time. So that’s something we continue to work on and increase the margins there.
This is a snapshot of our capital structure and the maturity profile of our capital structure. You can see it’s composed of two pieces of debt; one is the – a term loan and credit facility that we have with a bank group that’s due in 2014. We pay down on the term loan 10% of the outstanding principal on a yearly basis, that’s about 12.5 million each year in 2012 and 2013.
The other component of the capital structure is a convertible that’s due in 2017 and the strike price on that is 12.87. We did put a bond hedge on there, so the effective economic strike is at 15.77. So at this point, we’re getting close to being in the money on both those components and that’s something to pay attention to as you’re thinking about diluted share count and the impact it will have on that EPS.
The cash flow, this was something (Keith) said when I walked in the room, that cash is king, and I believe that. The cash flow from this company has been terrific, even through the downturn. You can see 124 million, those are the dark gray bars going across, 124 million in 2009, 119 in 2010 and then 116 in 2011. You can see the uses of cash has been quite different as we’ve gone through the cycle. So in 2009, we used most of to pay down debt and that was a smart thing to do, de-lever in the face of what we were going through and get – right size our capital structure, put us in a position to recapitalize to that capital structure I just went through.
In 2010, part of it was debt pay down until we got to the recapitalization and then we were just saving. We have very light capital expenditures, those run anywhere between 10 and $12 million a year. And we have earn-out payments for any acquisitions that have achieved their earn-out target. So that’s something that you’ll see on an ongoing basis.
This past year in 2011, we started deploying that cash. And what we’ve done is, the acquisitions, about 50 million, just under 49 million in 2011 and a stock repurchase, so we’re very committed to a balanced capital allocation where we invest in long-term growth in the company and then direct return to shareholders.
This is a snapshot of the capital allocation and on the bottom of the page, you can see what we accomplished in terms of the share repurchase, purchasing almost 4 million shares over the course of the program that ended in February. And the average price of the share buyback was 12.45. So we think that was a very effective deployment of cash and something that we’ve announced we would continue this year beginning in May.
So to sum it all up, I think we have three very different segments, very diverse. The – two of those segments are doing really well. ICG, we’ve already said, has some challenges but we’re working through them. The cash flow that those segments generate is very strong and it’s enabled us to deploy cash in a very effective way to build long-term growth for the company as well as the more short-term focused return to shareholders. It also gives us tremendous financial flexibility, which is something, obviously, that we value and will continue to value on an ongoing basis.
As we keep on reinvesting in the business, we expect to have organic growth as well as growth from acquisitions with the reinvestments that we’re talking about. And we’re committed to the increasing shareholder return.
And with that, I think I will open it up for questions.
Okay, we’ll get it started. I’ll throw one out and then we’ll go to the audience. Just on M&A, can you just remind us where the incremental investment dollar or M&A dollar is going? Is it in the P&C and benefits space? And then also, you alluded to doing deals from existing businesses already. Is that a preferable way to do deals versus new acquisitions out there? If you could just maybe talk to that a little bit.
First of all, the – for the first part of your question, the transactions really right now are primarily happening in the Corporate Client Group and we are looking to build up our property and casualty capabilities. We just announced one on the West Coast that is a tuck-in to our existing P&C operation. And – but we are also building up our benefits business and particularly looking where we can get some real regional presence. So far this year, we have announced a deal in New York that we think really is going to create a lot of scale for us in a city that we think is, obviously, a very good place to be.
The second part of your question, which was the buying up of earnings of existing firms, and I’ll just spend one minute talking about how we do transactions and how we’re thinking about the business today.
NFP always did it’s transactions by looking at a company’s earnings. We would buy 100% of the company, but we actually – our principals became independent contractors and we did the valuation on a percentage, typically 50 to 60% of their earning. We, NFP, had the priority on that 50 to 60% earning and we paid the rest out assuming it was being earned to the principals as a management fee expense, which Donna alluded to in her slides.
So for us, the reason we’re deploying 20 million of capital to buy up some of those earnings is that we’re able to go to our firms, to our strongest earners who have earnings well in excess of the original transaction recurring revenue and we’re buying up a bigger portion of that that goes to NFP’s bottom line. We know them, so I wouldn’t say any transaction is a no brainer but we certainly have lots of close history with them and we’re doing it the way that allows us to run the business more strategically going forward because they actually, we buy out their management company and they become employees of NFP and so things like control and branding and being part of a region really flows through from that and that’s very important to us.
So when we describe the New York transaction, it was a new firm, simultaneous with the buy up with a very strong NFP firm in New York, they’re coming together under the common NFP brand and running as a much bigger subsidiary.
So it’s a great use of capital, but it’s not the only one because NFP needs to grow and grow it’s footprint. So [inaudible] focus there.
One thing to add from a financial perspective is, even though it is an acquisition from an economic perspective, because we already own that firm and have a contract with them, a management contract, the expense will run through the P&L as a expense during the period. We’ve already disclosed that we are not expecting to include that in adjusted EBITDA or cash run, and so you will notice a P&L hit that will [inaudible].
Anything from the audience? Okay, I have a couple other ones here. Just on the ASG business, the Advisors Services Group, you gave value to, I think, 4 to 5% EBITDA margin, if I recall. I am not looking for guidance, but as we go out, how should we think about this business? Is there an ability to get margins up, you know, five years from now to 10 – like, what’s the right number that we should think about when you get scale here, or should we just think about this as more of a growth business, but maybe not a lot of margin expansion going on?
I think typically when you think of a broker dealer you will think about scale, over time will equal margin expansion. So we’re still in an investing period, we are kind of past the big technology invest, all though there will always be pieces in that world. What we’re investing in right now is recruiting, so that we can really bring that scale, you don’t want to rely totally on organic growth, you want to be continuously attracting more producers into the business. So over time you will see us move up in the single digits, never, typically not a double digit margin business, it will take time, but right now we’re at about 1,700 producers, so we continue to build that, we will get some benefits at the scale.
Okay, I’ll keep going. I guess, Donna, just thinking about, you know, you talked a little bit about – I’m looking at the debt profile here, you talked a little bit about what debt EBITDA level that you are looking at right now for the company, where do you want to get that to ideally? I guess, when we look at other insurance brokers, you know, 2 1/2 use to be the standard, now it’s sort of 2, and even a lot of them go below that. So, how do think about debt levels for this business that doesn’t use a lot of cash as per your slides?
The a – when we did the recapitalization we talked about having a debt-to-EBITDA ratio of somewhere between 1 ½ to 2, and that is where we’ve stayed. I think we have a nice level of debt at this point, a very sustainable level of debt for a company like ours. You wouldn’t want to see it go much above where we are today, but I also think if we can keep that level of debt, I think there is no real reason to pay it down at this point in any substantial way other than some we have to pay down on the term loan.
Any one interject if they got anything. But, another slide I’m looking at here, I am looking at the operating cash flow, it’s actually down slightly in 2011 versus 2010, but the EBITDA was up. Can you just talk a little bit about those dynamics?
The real reason for that is taxes, and we have taken a – we have a high effective tax rate. We are trying to chip away at it, but we did get the benefit in 2010, and even in 2009 with the dispositions and the refinancing there were some tax benefits associated with that that enabled us to have a higher operating cash flow in those years compared to 2011.
I mean, 2011, it’s impressive to see like from ’09 and ’10 the uses of cash and how they have changed substantially. I’m sure that has made your job a lot more fun as CFO…
Yes, much better than [inaudible].
Is this the pattern that we are going to continue to? Do you think the acquisition level, sort of in that 49 million out of 116, like that as a percentage, how do you think about that going forward, as well as the buyback at sort of the percentage breakdown that we are seeing it right now?
Yes, I would answer a couple of them, then Doonna. As you can see, we actually raised the number year over year, so last year we were at 50, and this year it’s at 80 when you look at it combined between primary and the [inaudible] of the amount of buyouts. So I think seeing that number go up over time is reasonable because it is the statements that we see a way to continue to investment in the business for growth and scale. So I would think that is something that we would like to be continued, and then on the debt side – I mean, on the buyback side, the 50 million is kind of a fixed number from the credit facility, but we do want to keep a balance with what we’re doing from a shareholder perspective. But you know, the key is often growing [inaudible].
I would just add that there’s probably other uses of cash for our shareholders that we would look at in the future and are under consideration so we haven’t left anything off the table at this point, but right now, for 2012, we’re committed to sort of the [inaudible].
That’s it for me. Anyone in the audience? Okay, thank you very much.
Thank you. Thank you all for being here.
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