National Financial Partners Corp. (NYSE:NFP) Q3 2010 Earnings Call November 3, 2010 8:00 AM ET
Abbe Goldstein - SVP of IR
Jessica Bibliowicz - CEO
Doug Hammond - COO
Donna Blank - CFO
Good day ladies and gentlemen and welcome to the third quarter 2010 National Financial Partners earnings conference call. (Operator Instructions)
I would like to now hand the call over to Ms. Abbe Goldstein, Senior Vice President of Investor Relations.
Good morning everyone and thank you for joining us on our third quarter 2010 earnings conference call. During this call, management may make certain statements regarding our expectations and projections for NFP relating to future results and events, 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 with respect to future results and events 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. NFP expressly disclaims any obligation to update or revise any forward-looking statements whether as a result of new information, future events or otherwise. 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, 2009.
Our third quarter earnings conference call will be accompanied by a presentation that is available for electronic download on NFP's website at www.nfp.com/ir or upon connecting to the audio webcast of this call at the same website.
A reconciliation of the non-GAAP measures discussed in this call can be found in the presentation or in the quarterly financial supplements.
At this time, I would like to turn the call over to our CEO, Jessica Bibliowicz and her presentation starts on slide seven.
Thanks Abbe, and good morning everyone. In the third quarter of 2010, revenue increased 3.3% to $237.5 million, and organic revenue grew 6.5%. Revenue growth was driven largely by growth in the corporate client group and adviser services group.
Our adjusted EBITDA was 26.8 million with an adjusted EBITDA margin of 11.3%. In September, we introduced our new branding initiatives, which I will describe in more detail in a few minutes.
We continue to generate strong, positive cash flow and in the quarter used $7.4 million to reduce diluted share counts by approximately 600,000 shares. We will continue to evaluate the best uses of our cash, including reinvesting in our businesses for growth through acquisitions in areas that generate recurring revenue for our company.
We are also reviewing other uses of capital, as our cash position builds and business trends, especially in life insurance become more transparent.
Turning to Slide 8, you can see NFPs three business segments and their persistent revenue contribution to the company. The corporate client group represents 40%, individual client group represented 39%, and our advisor services group represented the remaining 21%.
Our strong organic growth for the quarter included positive contributions from each of our business segments, with the primary drivers of growth coming from the corporate client group, with 9.6%, and the advisor services group with 11.4%. The individual client group generated 0.8% organic revenue growth.
Turning to Slide 9, CCG continued to show strong organic growth as well as margin improvement. This segment's revenue breakdown was corporate benefits at 89% and executive benefits at 11%. We continue to offer high quality services for our clients.
While healthcare reform creates potential challenges in the marketplace, it has also created opportunities for us to add value to our clients and further strengthen our relationships. We are especially enthusiastic about how our new branding initiatives will enhance our brand equity and recognition for the corporate client group.
The regional structure of this segment, combined with the natural cross-selling opportunities created by our diverse product and service offerings, well positions CCG to compete effectively in the marketplace.
Turning to Slide 10, the individual client groups' revenue breakdown was retail life at 33% and our marketing organizations and wholesale life brokerage operations at 52%. These two units make up our high net worth life insurance business. Our life insurance business shows mixed results in the quarter.
The diversity of our revenue sources was a benefit to revenue growth. However, the growth was skewed in the quarter to firms where NFP owns a lower than average percentage. This mix, combined with the PIP put pressure on our life margins.
Although trends are hard to identify in this sector, Doug will go into more detail on the positive and negative drivers impacting our life business. The remaining portion of our individual client group is the investment advisory business, which accounted for 15% of the group's total revenue in the quarter.
Investment Advisory performed well in the third quarter and year-to-date, due to market factors and new client growth. We are benefiting from the industry experience of our advisors and the trusted relationships they have established with their clients.
Turning to Slide 11, within the advisor services group, asset-based fees accounted for 62% of the revenue, while commissions accounted for the remaining 38%. Volatility in the financial markets in the second quarter of 2010 impacted our performance in the third quarter of 2010 because of the natural lag and the timing of our RIA fees.
Generally, we bill on balances in the beginning of the new quarter based on the prior quarter's last day asset balance. Our 16% growth in assets under management to $8.9 billion is attributable to market performance, new advisors that we have recruited and growth in assets from existing advisors.
Turning to Slide 12, 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 of 2010, recurring revenue represented 59% of the total revenue, up from 56% in the third quarter of 2009.
And lastly, turning to Slide 13, we are focused on leveraging the NFP brand and highlighting the rich industry experience of our advisors; we're highlighting our scale, independence and open architecture that drive growth and better serve our clients. Our new corporate brand and tagline, "Partner. Preserve. Prosper", reflects this integrated growth strategy and underscores our continuing commitments to our clients.
On this slide you can also see our commitments in moving toward the One NFP framework with our new brand architecture. This standardization will assist our clients in recognizing the NFP brand as well as the value of the brand equity of our local businesses. As a leader in benefits, insurance, and wealth management and operating under this One NFP framework, we look forward to enhancing the value of the NFP brand across all of our business lines to present our capabilities more seamlessly to our clients.
At this time, I would like to turn the call over to our Chief Operating Officer, Doug Hammond. Doug.
Thanks, Jessica, and good morning. This morning I'll discuss the factors we see driving performance in our businesses.
Turning to Slide 15, our corporate client group is a leading advisor to middle market corporate customers. While economic headwinds continue to challenge our clients, we've begun to see the employee headcount of our clients stabilize. While we are pleased with the 9.6% organic growth rate in the quarter, on a normalized basis, the organic growth rate was more consistent with the 5% growth we saw in this segment in the first half of 2010.
We continue to maintain expense discipline and execute on our One NFP plan to deliver shared resources to our firms to operate more efficiently, increase client acquisition and retention efforts and expand our offerings. In addition to our compliance resources, we now offer centralized actuarial, RFP and benefits administration resources.
On the healthcare reform front, we're working with clients to help navigate a changing regulatory environment and continue to improve the quality of our resources to support our clients' compliance needs. This initiative has been a great added value for our clients. It not only helps us retain and win new clients, but allows us to expand our relationships and advise in additional areas like P&C, ancillary, retirement and executive benefits.
Our renewal season is heating up, and we continue to see medical inflation in our markets. National averages on medical inflation are ranging from 9% to 11%. In the middle markets where we are more focused, we are seeing renewals in the teens and even up to 20% or higher. While these numbers are highly dependent on specific local dynamics and carriers, high medical inflation rates are an added burden for businesses in the current economy. We continue to be a valued resource to our clients, as they evaluate more cost efficient ways to address their healthcare needs.
Turning to Slide 16, the individual client group is a leading provider of life insurance and wealth management solutions for high net worth individuals. ICG continued to grow revenue organically, though our life insurance results have been mixed due to a combination of factors. Continuing the theme of last quarter, the results in our retail businesses have been spotty. Some of our firms performed well and closed some large cases, while others have struggled with unusually long sales cycles driven by consumer uncertainty over the economy and the estate tax.
Sales dynamics have also been impacted by a reduction of competitive long-term guaranteed UL products that are available in the market. With respect to our wholesale life businesses, we continue to see opportunity and strong performance in our relationships with financial institutions that are looking to drive more insurance revenue by partnering with experienced national distributors.
Although longer sales cycles and fewer cases pressure the margins at the wholesale level, we are benefiting from having multiple platforms and resources to access a broader array of products as we deliver solutions for our advisors. We continue to focus on recruiting to our various life distribution platforms, client introductions from our advisors in other business lines, and improving the quality of our resources to assist our life advisors serve their clients with advanced underwriting and planning resources.
Turning to Slide 17, positive performance in our advisor services group was driven by new clients, solid retention of existing clients, recruiting, and the growth of asset-based fees due to broader market performance. With the uncertainty driving market fluctuations, our advisors are well positioned to provide clients' independent advise, particularly as clients continue to migrate to the independent channel.
Turning to Slide 18, we have been building a pipeline of acquisition and sub-acquisition opportunities within our recurring revenue businesses. We've been concentrating on businesses that will strategically complement our firms and the resources currently available to our clients.
We could potentially see our first deal close as early as the end of the fourth quarter. The timing is not predictable given the dynamics of diligence and the deal process.
At this time we anticipate using about half of our cash flow for acquisitions.
Now I'll turn the call over to our CFO, Donna Blank who will review our financials.
Thanks, Doug, and good morning everyone. Turning to Slide 20, NFP reported third quarter 2010 net income of $8.2 million compared with net income of $10.5 million in the same period last year.
Net income includes a one-time pre-tax gain of $9.7 million in the net interest and other caption of the income statement associated with the completion of our recent recapitalization. Part of this recap included the tender offer for our 2007 convertible notes. Having tendered the notes below par, we recognized a $9.7 million pre-tax gain.
Net income also includes a $13.4 million pre-tax charge associated with the acceleration of the vesting of long term incentive-based restricted stock units to certain principals. There was no acceleration for RSU awards granted to Directors or Executive Officers of NFP.
These actions reduced NFPs fully diluted share count by approximately 600,000 shares, eliminated potential earnings volatility associated with the variable accounting treatment of the principals' RSUs and resulted in a pre-tax charge which is included in our management fees.
Third quarter 2010 cash earnings was $22.3 million or $0.50 per diluted share compared with $26.4 million or $0.61 per diluted share in the third quarter of 2009. Cash earnings in the third quarter 2010 exclude the impact of the one-time gain of $9.7 million associated with the recap and the one-time charge of $13.4 million associated with the accelerated vesting of the principal RSUs.
Adjusted EBITDA in the third quarter of 2010 was $26.8 million, compared to $30.9 million in the same period last year. Adjusted EBITDA has been adjusted for the impact of the RCU acceleration.
As a percentage of revenue, the adjusted EBITDA margin was 11.3% compared to 13.4% in the third quarter of last year. On a consolidated basis, revenue increases were offset by commission expense increases, and while compensation expenses declined, these were more than offset by increases in non compensation expense and management fees, particularly in the individual client group.
On a segment basis, the margin results varied. We saw margin improvement in the Corporate Client Group from 16.8% in the prior year period to 18.2% in the third quarter of 2010.
In the Individual Client Group, our adjusted EBITDA margin declined to 9.1% compared with 14.7% in the prior year period. Management fees, which I will discuss in a moment, were the biggest driver of the margin decline.
Our Advisor Services Group is comprised of our broker-dealer and corporate registered investment advisor. The commission payout ratio for this segment is comparatively high, and the margins are therefore lower. There are also no management fees. Adjusted EBITDA margin of 2.5% in the third quarter of 2010 compared with the margin of 3% in same period last year. While lower than the previous quarters, the year to date margin of 3.6% is more representative of the current economics of this business.
Now turning to Slide 21, we believe that it is most relevant to review our management fees on a segment basis because NFP has a different priority interest percentage in each of the segments.
On average, NFP's priority interest in the Corporate Client Group was 60% and was 47% for the individual client group.
In addition, for the purposes of this analysis, we are excluding the impact of the accelerated vesting of the RSUs which are included in management fees this quarter.
CCG management fee percentage of adjusted income before management fees was 42.7%, including 1.4% PIP accrual compared with 45.3% in the prior year period. ICG management fee percentage of adjusted income before management fees was 65.7% which included a 6.7% PIP accrual compared with 52.6% in the prior year period.
The increase in this percentage was driven by the concentration of earnings and retail live firms where the percentage ownership is lower than the average, resulting in higher management fees.
On slide 22, we have illustrated our cumulative accruals for the four quarters of the principal incentive plan, which began in the fourth quarter of 2009. The third quarter accrual was $2.9 million, and the total PIP is $10.7 million for the four quarters, representing 3.6% of adjusted income before management fees for the four quarters and in line with prior ongoing incentive plans as a percentage of adjusted income before management fees.
This payment will be made in the fourth quarter of 2010. Introduced to our principals in September 2010, our new PIP will be a five-quarter plan. We are making these plan five quarters so that by 2012 we should be in a position to have an annual PIP that is consistent with our calendar year reporting.
The new PIP will be similar to the plan that just expired. We plan to accrue for the new PIP each quarter based on the historic seasonality of our businesses. As you may recall, the previous plan was accrued on a straight line basis.
In terms of taxes, the effective tax rate for the quarter of 23% was impacted by the resolution of an uncertain tax position. This resolution contributed $0.4 to cash earnings per share. For the remainder of 2010 we expect an effective tax rate of approximately 40%, excluding impairment.
Turning to Slide 23, cash flow from operations for the nine months of 2010 were $76.4 million compared to $83 million for the same period last year. However, when looking at cash flow generated from operations, there are a few things to note. In the third quarter of 2010, we paid out $7.4 million for the cash portion of our RSU acceleration, and in the second and third quarters of 2009 we received cash proceeds of $6.7 million related to key-person life insurance policies.
I'd now like to turn the call back to Jessica.
In short, strength in our recurring businesses continues while life insurance remains challenging. We will focus on growth in these recurring revenue businesses through acquisitions and by driving more operating efficiencies. Our new branding initiatives will further enhance our sales efforts.
Our strong cash flow generated throughout the year provides us financial flexibility to invest in our company, enhance our long term growth and deliver shareholder value.
With that, we are happy to open it up to questions. So, Operator, we have questions I think from Mark Finkelstein.
If there are no questions, we thank you all very much and look forward to speaking with you over the near term. Thank you.
Ladies and gentlemen, thank you very much for your participation in today's conference call. You may now disconnect. Have a wonderful day.
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