Abbe Goldstein – SVP, IR and Corporate Communications
Jessica Bibliowicz – Chairman, President, CEO
Doug Hammond – COO, President
Donna Blank – EVP, CFO
Matt Rohrmann - KBW
National Financial Partners, Corp. (NFP) Q1 2012 Earnings Call April 27, 2012 8:30 AM ET
Good day, ladies and gentlemen, and welcome to the First Quarter 2012 National Financial Partners Earning conference call. My name is Dianna and I’ll be the operator for today. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. (Operator Instructions). As a reminder, today’s conference is being recorded for replay purposes.
And I would now like to turn the conference over to your host, Ms. Jessica Bibliowicz, Chairman and CEO. Please proceed.
Hi, good morning. This is Abbe Goldstein. Thank you for joining us on our first quarter 2012 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, 2011. 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 first 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 available at the same website.
At this time, I’d like to turn the call over to our CEO, Jessica Bibliowicz.
Great, thanks, Abbe, and good morning, everyone. I’m pleased to talk about our first quarter results, but first, I will comment on the succession plan that we announced yesterday afternoon.
I have informed the Board that I intend to step down as CEO at the end of the first quarter of 2013. Doug Hammond, our COO, has been promoted to President, effective immediately. It is expected that Dough will assume the role of CEO in April, 2013, at such time, at the request of the Board, it is expected that I will become the non-executive Chairman.
We have accomplished a lot at NFP over the past 13 years, with the right leadership in place in our core businesses, a strong strategy, a sound financial position and a deep talent bench, NFP is well positioned for continued growth. We believe that now is the right time for us to begin the implementation of a smooth year-long trans-management transition.
Doug has been with NFP since its inception, serving it various key management positions. As our Chief Operating Officer since 2008, he has been instrumental in defining and implementing our strategy, including the reorganization of our business into client-centric segments, our balanced capital allocation approach and our focus on recurring revenues as well as our transition to a more unified brand. He is a proven leader with a deep understanding of our core businesses.
The Board’s long-term succession plan was developed with external experts to ensure that our process was complete and thorough. Doug’s promotion is well deserved and reflects the important role he has had at NFP for a number of years.
We are all confident that Doug, along with our very talented senior management team, principals and employees will continue to build on NFP’s strength, provide outstanding service to clients and enhance value for our shareholder, and lead NFP successfully into the future.
With that, I’d like to turn your attention to our first quarter.
Turning to Slide 7, the first quarter 2012 included solid contributions from each of our business segments. For the quarter, we reported revenue growth of 8.9% and organic revenue growth of 5.9%, and adjusted EBITDA over 30% and margin expansion.
Now turning to Slide 8. We plan to continue executing on our balanced capital allocation strategy in 2012, which includes acquisitions, a repurchase program beginning in May and investments in our company. We believe these actions will continue to enhance shareholder value and NFP’s client value proposition as well as our leadership position in our core market of benefits, insurance and wealth management. We remain committed to our strategy, which is to continue to build shareholder value by delivering the highest quality client service, expanding our offering, maintaining our financial flexibility and growing recurring revenue and profitability.
Strategic acquisitions complement our existing businesses, especially in P&C, Corporate Benefits and Wealth Management. With these transactions, we are growing and strengthening our client offerings and the NFP brand by adding management strength and diversification of products and geographies. We are focused on regional consolidation. Our pipeline for acquisitions is strong and continues to build. Based on our current stock price, we expect to continue to use cash for acquisition.
Turning to Slide 9, a key focus of ours over the last several years has been to enhance the stability of our revenues and earnings. For the first quarter 2012, recurring revenue accounted for 65.8% of total revenue, an increase from 63% in 2011. For 2012, we are reiterating our guidance and expectations for our businesses.
I would now like to turn the call over to Doug Hammond and he will go over more details with you. But before I do, I just want to really wish you a heartfelt congratulations and I know you will continue to do a great job for this company. Congratulations, Doug.
Thank you, Jessica, and good morning, everyone. It’s been my privilege to work under Jessica’s leadership since NFP’s inception and with the entire NFP team to build NFP into a leader in benefits, insurance and wealth management.
Jessica’s and the Board’s vote of confidence to take on this opportunity is greatly appreciated. We have an exceptional team and a strong client focus culture. We have tremendous opportunities ahead of us as we continue to deliver on your strategic and operational goals. However, we are pleased that our CCG organic growth, without the lift of these bonuses remain generally in line with our organic growth throughout 2011.
We are reiterating our February CCG outlook and continue to expect organic growth for CCG to be approximately 3 to 4% for 2012. This rate of revenue growth follows 3.6% organic growth in 2011. We continue to expect quarterly variability in CCG and anticipate that our third quarter 2012 will have relatively flat organic growth in CCG.
CCG’s adjusted EBITDA for 2011 was 18.6%. We still expect our adjusted EBITDA margins to be approximately 18.5% in the second quarter of 2012 due to seasonally lower CCG margins in the second quarter. We also still expect our adjusted EBITDA margins to be in the range of 19 to 20% in the second half of 2012 for CCG.
Turing to Slide 13, in ICG, our Wealth Management business had a strong performance in the first quarter and represents 20.6% of ICG’s revenue, an increase from 19.2% in the same period last year.
While we are pleased with our first quarter performance in Life Insurance, we do not yet see a consistent trend. The life insurance market continues to be challenged by the issues we have previously discussed of a state tax uncertainty and higher exemption levels, the extended low interest rate environment and consumer confidence issues.
We continue to benefit from the diversification of our business offerings as our broker-dealer supports our life producers and there are budding diversification opportunities that exist between Life and other areas of our business.
Turning to Slide 14, in ASG, we saw revenue growth and continued profitability. Our assets under management grew 4.7% sequentially in the first quarter to 10.1 billion compared to the fourth quarter 2011 due to increased net new accounts and advisory recruiting.
Looking ahead in ACG, we still expect organic growth to be in the range of 4% to 5% in 2012. Because of our billing cycle, the strength in the financial markets in the first quarter, 2012 should be reflected in our second quarter 2012 fees and did not meaningfully impact our first quarter of 2012 results.
We expect adjusted EBITDA margins for ASG to be approximately 4.5 to 5% for the full year 2012. Of course, market conditions will impact ASG’s overall performance.
Now I will turn the call over to Donna Blank, our CFO.
Thanks, Doug, and congratulations, and good morning everyone. Turning to slide 16, first quarter 2012 cash earnings was $24.4 million compared with $18.5 million in the first quarter 2011. On a per share basis, cash earnings were $0.57 per diluted share compared with $0.41 per diluted share in the first quarter 2011.
NFP reported first quarter 2012 net income of $5.6 million compared with $6.9 million in the same period last year.
Cash earnings and net income were positively impacted by a low effective tax rate for the quarter, which I will discuss in a few moments.
NFP had 42.6 million shares, a weighted average, full-diluted shares outstanding for the first quarter 2012 compared with 42.4 million shares for the fourth quarter 2011. The increase in the first quarter 2012 includes 1.5 million shares that may be issued upon conversion of NFP’s senior convertible notes. NFP’s share delivery obligation of the 1.5 million shares may be offset by the obligation of the counter parties to the convertible note hedge agreement to deliver a similar number of shares. This increase would partially offset by a reduction of weighted average shares of 1 million from shares repurchased by NFP during the fourth quarter 2011 and the first quarter 2012. Also offsetting the dilution from the convert in the first quarter 2012, we settled 363,000 in the money principals option in cash.
Adjusted EBITDA in the first quarter of 2012 was $32.1 million compared to $24 million in the same period last year, an increase of 33.7%. As a percentage of [inaudible], the adjusted EBITDA margin was 12.6% compared to 10.35 in the first quarter of last year with growth and adjusted EBITDA and margins in each of our business segments.
Margins expanded in all segments as revenue growth outpaced an increase in expenses.
On Slide 17, you can see that our total compensation ratio for CCG as approximately 49% for the first quart of 2012. This decline was driven by a management contract which converted what would have been a fee to principals into a commission expense. The total compensation ratio for ICG is 51% related to the increase in revenue in the segment. The increase in the percentage over the prior year was due to increases in both normal course feels to principal as well as those related to the principal incentive plan.
We expect that there will expect to continue to be quarterly variations in these ratios.
Turing to Slide 18, cash used in operations for the first quarter was $14.6 million compared to cash used in operations of $5.9 million for the same period last year. The first quarter 2012 included payments of $7.3 million for the principal incentive plan. There were no comparable PIP payments in the first quarter of last year.
In addition, the management contract buyouts of $3.4 million are expenses that run through operating cash flow.
As of March 31, 2012, there was $15 million outstanding on the company’s revolving credit facility.
The P&L impact of the management contract buyout completed in this quarter can be seen under two expense captions on the income statement; Impairment and Management Contract Buyout. Impairments are related to the write off of the management contract once the terms of the buyout are reached. The management contract buyout expense is related to the consideration paid for the termination of the contract.
As previously disclosed, for analytical purposes, we’re excluding management contract buyout expenses from adjusted EBITDA and cash earnings.
We have also recognized a change in the estimated acquisition earn out payable in the quarter of 4.5 million related to an increase in the share value of the expected payout.
At this time, we expect the contingent consideration payments for the year to be approximately $7 million in third quarter and less than $1 million in the fourth quarter 2012. These payments will partially impact operating cash flow and financing activities for the year.
As Doug mentioned, we recently acquired NEMCO. Prior to this transaction, NFP owned a minority interest in NEMCO and it’s contributions were recorded in other income. Going forward, NEMCO will run through and come from operation.
Turning to taxes, the interim effect of tax rate in the first quarter 2012 was 24% and it was due to a reduction in unrecognized tax benefits. For the remaining nine months of 2012, we continue to expect our normalized effective tax rate to be approximately 42%, excluding the impact of discrete items. We will provide updates on our expected effective tax rate throughout the year.
Turing to Slide 19, we continue to execute on our balanced capital allocation strategy in 2012. In the first quarter, we used approximately $27 million for acquisitions out of the $60 million allocation and we used over $3 million for the management contract buyout, which was part of the $20 million allocation.
As Jessica mentioned, we have the Board’s authorization for a $50 million share buyback program, which we expect to begin in May, 2012.
I’d now like to open the line to questions.
(Operator instructions). And the first question comes from the line of Matt Rohrmann, KBW, please go ahead.
Matt Rohrmann - KBW
Hey guys, good morning.
Matt Rohrmann - KBW
First, let me be the first to say thank to you, Jessica, for all the help, and I wish her the best as she moves forward, and congrats to Doug with the promotion. And I’m sorry you’re going to have to work with guys like myself more often now. But just wanted to get, Jessica, you’re thoughts, and perhaps Doug’s thoughts, on, sort of the near-to-medium term changes that need to occur as the, kind of, session plays out.
Well, as you noted from the release, I’m obviously going to be very engaged in the company, certainly through the first quarter of next year, and then on going as the non-executive chairman,. But I think the beauty of this succession is that we have really worked together as a team, not only Doug and I, but the whole management team, to create our strategic plan and our focus on the segments, on our capital, balanced capital allocation program, the focus on recurring revenue. So in that regard we really expect them to continue as we are with our strategies. So I think there’s always change with new leadership, and I think that Doug will be a great leader. But I think in terms of the overall focus of NFP, it will remain the same.
Matt Rohrmann - KBW
Okay, great.. And then just going to the numbers; obviously just a – you know, great quarter really across the board. I was wondering if you guys could talk to, you know, some of perhaps, some of the seasonality, or timing issues, you know, that aided in particular CCG’s organic growth and margins?
Yes, we have several businesses within CCG that participate in long-term profitability bonuses, so they are not necessarily tied just to the prior period, but an extended period. And just based on the performance of long-term blocks of business that have been placed over the years, the bonuses were pretty outsized in the quarter for some of these businesses. So we, frankly, had budgeted sort of something a bit more consistent with historical trends, came in a bit higher, and we don’t expect any – we don’t expect the level of bonuses that we saw in the quarter to continue over next year.
The underlying business though, I would just reiterate what I said in the comments, was solid across the board, consistent with what our own expectations were, so – and pretty consistent with the growth trends that we sought out last year.
Matt Rohrmann - KBW
Okay, and Doug, any sort of longer-term systemic changes that you’re seeing with, you know, further enhanced, you know, results going forward. You know, I guess beyond, or you know, beyond sort of the metric that you’ve spec’d out for the remainder of the year?
As we look at sort of the opportunities in the business, you know, part of what we’re doing on the acquisition front is really working to scope out the best opportunities for integrating our businesses on a regional basis. And I think where we should have that, and where we’re in a position to execute with the management contract buyouts, or buy using an acquisition as a catalyst to further that strategy, there are always opportunities I think down the road to enhance our control position in order to create more consistency around our processes, and also to expand on the margin; not just in the context of the first consolidation, but also as we look to future acquisitions to build up and grow scale through more consolidated regions. So that’s pretty fundamental to the strategy particularly in the corporate client group.
Matt Rohrmann - KBW
Okay, great, and, I guess lastly, is for Donna, obviously, you know, a little bit of overhang with the converts and the accounting there. Obviously, you guys will be ramping up the buyback, you know, hopefully starting next week. Will there be any other opportunities, you know, I guess nearer or medium term to take big chunks out of dilution overhang, you know, beyond the buyback? I see as generating a lot of cash?
Yes, you saw what we were able to do with the money options this quarter even though there wasn’t a share repurchase after early February when we announced earnings. We were able to settle those in cash, so, that was sort of a mini buyback. And we’re always looking for opportunities to reduce the dilution. So we – any good ideas are welcome at this point in addition to the share buyback.
Matt Rohrmann - KBW
Okay, great. And just thanks again to Jessica, and best luck. Thanks guys.
Thank you, thanks, Matt.
Well, I guess there are no other questions, we did try and wait. But I do want to thank everybody for their time, and I think it’s just a great opportunity for me to thank all of the talents around NFP for doing such a great, great job, and this quarter, I think, is a reflection of the capabilities of our company. And to Doug and to the senior management team, congratulations. I know we have many great years ahead of us. So, thank you all and have a great day.
Ladies and gentlemen, thank you, once again for participating. This concludes today’s conference. You may now disconnect and have a great day.