National Financial Partners' CEO Discusses Q4 2011 - Earnings Call Transcript

| About: National Financial (NFP)
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National Financial Partners Corp. (NYSE:NFP) Q4 2011 Earnings Call February 8, 2012 8:30 AM ET


Jessica Bibliowicz – Chairman, President, Chief Executive Officer

Donna Blank – Executive Vice President, Chief Financial Officer

Doug Hammond – Chief Operating Officer

Abbe Goldstein – Senior Vice President, Investor Relations and Corporate Communications


Mark Finkelstein – Evercore Partners

Matt Rohrmann - KBW


Good day ladies and gentlemen and welcome to the Fourth Quarter 2011 National Financial Partners Earnings conference call. My name is Chanelle and I’ll be your operator for today. At this time, all participants are in listen-only mode. Later we will conduct a question and answer session. If at any time you require operator assistance, please press star followed by zero and we will be happy to assist you. As a reminder, this call is being recorded for replay purposes.

I would now like to turn the conference over to Ms. Abbe Goldstein, Senior Vice President, Investor Relations and Corporate Communications.

Abbe Goldstein

Thank you. Good morning everyone and thank you for joining us on our fourth 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 fourth 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 would now 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. 2011 was a solid year for NFP and we accomplished a great deal. Our revenue grew to more than a billion dollars, driven by organic growth and acquisitions. Adjusted EBITDA grew by 8% and we expanded our margin. We saw particular strength in the corporate client and advisor services groups where we generated growth in revenue and adjusted EBITDA. In the individual client group, strong positive trends continued in our wealth management business but we faced market challenges in life insurance. Despite a decline in our life insurance revenue, adjusted EBITDA and margins expanded.

In 2011, we continued to generate strong cash flow and executed on our balanced capital allocation strategy. We invested approximately 50 million of cash for acquisitions in 2011. All of the deals, which are recurring revenue businesses, were in the corporate client group.

In May 2011, we put in place a $50 million share repurchase program, and as of February 6, 2012, we completed the buyback program. In addition, NFP has continued to make investments to enhance our leadership position in our core markets of benefits, insurance and wealth management.

Our strategy in 2012 is to continue to build shareholder value by delivering the highest quality client service, expanding our offerings, maintaining our financial flexibility, and growing recurring revenue and profitability. To this end, we will continue to pursue strategic acquisitions that complement our existing businesses, especially in property and casualty, corporate benefits, and wealth management. With these transactions, we will seek to grow and strengthen our client offerings and the NFP brand by adding management strength and diversification of products and geographies.

2011 demonstrated NFP’s ability to once again be a competitive acquirer of attractive businesses. Our acquisition focus is to complement our existing core operations and facilitate current and future regional consolidation. In July 2011, we acquired Lapre Scali, which has since been consolidated with NFP P&C, operating under a single structure and brand.

In September 2011, we acquired DA Financial, a leading provider of benefits, insurance and wealth management services which is now our NFP-branded presence in the San Francisco Bay area.

In January 2012, we purchased AGS Benefits, a benefits brokerage firm in the New York metro area and Boston. Simultaneously, we bought out the management contract of NFP Dreyfuss & Birke and combined it with AGS Benefits. These businesses together establish a major NFP-branded benefits presence in New York.

These acquisitions are consistent with our strategy of purchasing highly successful diversified businesses with strong management to grow NFP’s scale and value proposition as well as increase recurring revenues.

Turning to Slide 8 and looking ahead for 2012, we plan to continue to execute on our balanced capital allocation strategy. We expect to use approximately 80 million of cash for acquisitions in 2012. We intend to allocate approximately 20 million of the 80 million to buy out the economics of certain businesses that we already own. These management contract buyouts increase our share of the earnings in our best performing businesses and allow us to more seamlessly consolidate our operations and realize more of the benefits of our scale. In this context, we maintain economic alignment and appropriate growth incentives for our key managers and employees.

Our pipeline for acquisitions is strong and continues to build. We expect the majority of our acquisitions to occur in the corporate client group, and based on our current stock price we expect to continue to use cash for acquisitions.

In addition, the Board has authorized a new $50 million repurchase program. We anticipate that the program will begin in May 2012 due to restrictions in our credit facility and subject, of course, to market and other conditions.

Turning to Slide 9, you can see NFP’s three business segments and their percentage revenue contribution to the Company for the full-year 2011. The corporate client group represented 40.7% of total revenue with 3.6% organic growth. The individual client group represented 34.7% of total revenue and organic revenue for this group declined 6.9%. Our advisor services group represented the remaining 24.6% of total revenue with 16.1% organic growth.

For 2012, we expect organic growth for CCG to be approximately 3 to 4% following 3.6% organic growth for 2011. CCG’s adjusted EBITDA margin for 2011 was 18.6%. We expect our adjusted EBITDA margins to be approximately 18.5% in each of the first and second quarters of 2012. We expect our adjusted EBITDA margins in the second half of 2012 to be in the range of 19 to 20%.

In ICG, we expect pressure in the life insurance market to continue, which could cause further declines in 2012 depending upon the performance of individual life businesses. At this point, we anticipate that our first quarter of 2012 could be weaker than the first quarter of 2011.

Looking ahead in ASG, following a 16% increase in organic revenue in 2011, we expect organic growth to be in the range of 4 to 5% in 2012. Our growth going forward will be somewhat more moderated as we compare 2012 to high teens organic growth in ASG in the past two years. We expect adjusted EBITDA margins for the advisor services group to be approximately 4.5% to 5% for the full-year 2012. Clearly, market conditions will impact ASG’s overall 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. For the full year 2011, recurring revenue accounted for 62.4% of total revenue, an increase from 58% in 2010.

We would very much at this time like to thank our talented and innovative advisors and employees who are committed to excellence in client service and who drove our very solid results this year.

At this time, I’d like to turn the call over to our Chief Operating Officer, Doug Hammond. Doug?

Doug Hammond

Thanks, Jessica, and good morning. This morning I’ll discuss the factors driving our performance. Turning to Slide 13, the corporate client group continued to deliver organic growth and positive performance. Corporate benefits generated 81.9% of CCG’s revenue, executive benefits generated 10.7%, and P&C generated 7.4%.

Despite economic challenges, we have seen some improvement in employment trends and continue to see opportunity in the corporate marketplace. Our advisors continue to focus on an enhanced value proposition driven by our diversified middle market client offering. In addition to health and ancillary benefits, we are focused on retirement plans, property casualty, and executive benefits opportunities.

Our retirement plan business is performing quite well and we are optimistic that the new fee transparency requirements put our advisors at an advantage compared to other generalist brokers. For years, it has been our practice to disclose fees to clients versus those who now will face the challenges of compliance and transitioning with clients. As generalist advisors struggle to remain competitive and justify a limited value proposition in the face of fee disclosure, we believe our market position will continue to improve.

We are seeing signs of improvement in the P&C market with modest rate increases. With the Lapre Scali acquisition now fully integrated into NFP P&C, we are well positioned to acquire, build our scale in P&C, and better serve our existing clients. Our efforts to identify new P&C acquisition targets are progressing well.

The changing landscape of healthcare continues to present a unique opportunity for us to assist our corporate clients in addressing their employee benefit needs. This has been a general positive for us. While we can’t predict the outcome of the reform landscape, we have managed our small group businesses, which still account for about 5% of our total revenue, to ensure that our client relationships are well diversified beyond group medical. In addition, we have consolidated the scale of these businesses to optimize our commission levels. These initiatives drove solid growth in 2011.

Turning to ICG, our wealth management business had strong performance throughout 2011 and now represents 17.9% of ICG’s revenue, an increase from 13.9% for the full-year 2010. ICG’s overall performance was largely driven by ongoing challenges in the life insurance market. The life insurance market continues to be challenged by the issues we have previously discussed - estate tax uncertainty and higher exemption levels, the extended low interest rate environment, and consumer confidence issues. As the difficult cycle in life insurance continues, we have begun to strategically reposition our life insurance assets to better complement our other businesses and approach the market in a more coordinated manner.

In ASG, we saw growth in revenue and profitability. Our assets under management grew 3.7% in 2011 to 9.7 billion compared to 2010, due to increased net new accounts and advisor recruiting. The quality of our resources, industry consolidation, the trend towards smaller broker-dealer closings, and the ongoing transition of advisors to the independent channel are driving a strong pipeline of attractive recruiting opportunities. As our major resource upgrades wind down, we are investing more in our recruiting and marketing activities as well as maintaining a solid compliance function.

In closing, I’d like to briefly discuss our recently announced transactions involving AGS Benefits and NFP Dreyfuss & Birke in the context of our broader strategic initiatives. Simultaneously with the AGS acquisition in January 2012, we acquired the management company of NFP Dreyfuss & Birke, a New York benefits advisor and wholly owned sub of NFP since 2003. We subsequently combined NFP Dreyfuss & Birke with AGS Benefits to establish a major NFP-branded corporate benefits presence in New York. As a result of these transactions, the former owners of AGS Benefits as well as the principal of NFP Dreyfuss & Birke became employees of NFP. Donna will review the financial implications associated with these activities.

These transactions underscore our strategy to acquire and combine outstanding businesses under strong management teams. We look forward to pursuing similar transactions in other desired geographies in order to improve our earnings position in our strongest businesses, expand our client offering, build more scalable operations, and better coordinate our growth initiatives. These activities will also continue to advance the NFP brand.

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

Donna Blank

Thanks, Doug, and good morning everyone. Turning to Slide 14, fourth quarter 2011 cash earnings was $27.7 million compared with $27.4 million in the fourth quarter 2010. On a per-share basis, cash earnings were $0.65 per diluted share compared with $0.60 per diluted share in the fourth quarter 2010. For the full year 2011, cash earnings was $90.8 million or $2.07 per diluted share compared with $96.8 million or $2.19 per diluted share in 2010. The variance was driven primarily by growth in adjusted EBITDA that was more than offset by reduced gain on sale and a higher effective tax rate.

NFP reported fourth quarter 2011 net income of $11.2 million compared with $15.3 million in the same period last year. NFP reported full-year 2011 net income of $36.9 million compared with $42.6 million in the same period last year.

Adjusted EBITDA in the fourth quarter 2011 was $40.1 million compared to $36.1 million in the same period last year, an increase of 11.1%. As a percentage of revenue, the adjusted EBITDA margin was 13.9% compared to 12.7% in the fourth quarter of last year. Adjusted EBITDA increased in CCG with revenue growth and flat margins. Adjusted EBITDA increased in ICG and margins improved despite revenue declines due to lower expenses. Adjusted EBITDA declined in ASG as expense increased outpaced revenue growth in the quarter.

Adjusted EBITDA for the full year 2011 was $126.4 million compared to $116.8 million in the same period last year, an increase of 8.2%. As a percentage of revenue, the adjusted EBITDA margin was 12.5% compared to 11.9% for the full year 2010.

Turning to Slide 15, cash flow from operations for the fourth quarter was $36.4 million compared to $43.1 million for the same period last year. On a full-year basis, cash flow from operations was $116.2 million compared with $119.4 million for the full year 2010. The decrease in 2011 operating cash flow as compared with the prior period was primarily related to a commission payment on a large transaction that was accrued in 2010 offset by an increase in cash collections for balances on notes held by principals and an increase in accrued principal incentive plan liabilities, or PIP liabilities. During 2011, no PIP payments were made, whereas in the prior year the Company paid PIP payments in the fourth quarter of 2010. The payment of approximately $8 million for the plan that ended in 2011 will be made in the first quarter of 2012.

I’d like to draw your attention to several changes that we’ve made to our income statement and our supplemental disclosure illustrated on Slide 16. On the face of the income statement, we have changed the caption called Management Fees to Fees to Principals. It now appears below Compensation Expense, Employees. In addition, we are introducing a new compensation ratio which will replace the disclosure that we had provided on compensation as a percentage of revenue and management fees as a percentage of income before management fees. As we continue to acquire businesses without the management contract structure and convert non-employee principals into employee managers through management contract buyouts, our management and production talent at the business level will be either employees or principals. Former owners and former NFP principals that become employees of NFP will have their compensation recorded through Compensation Expense, Employees; and for our non-employee principals, the existing fees to principals structure will remain in place.

With this evolution, we believe that the way to analyze our compensation expenses is to combine employee compensation and fees to principals. Taking this total compensation and dividing by revenue is the total compensation ratio that we’re introducing this quarter.

On Slide 17, you can see that our total compensation ratio for CCG varies on a quarterly basis but was approximately 52% on a year-to-date basis. The total compensation ratio for ICG was 49%. We expect the quarterly variations in these ratios to continue.

I’d like to comment on dispositions and management contract buyouts. In the fourth quarter 2011, we recognized $8.3 million of impairments mainly related to dispositions and the NFP Dreyfuss & Birke management contract buyout in connection with the AGS transaction. With positions, as soon as we agree on terms for a disposition, if the consideration is lower than the carrying value, we recognize an impairment if the transaction has not yet closed. For management contract buyouts, we recognize an impairment of the management contract when we agree to deal terms. In addition, we will recognize an expense related to the consideration of the buyout that will be recognized through the P&L and therefore operating cash flow.

For analytical purposes, during the first quarter 2012 we will exclude management contract buyout expenses from adjusted EBITDA and cash earnings.

Turning to taxes, the effective tax rate for the fourth quarter 2011 was 41.7% compared to 39% effective tax rate in the fourth quarter last year. For the year, the effective tax rate was 43.5% compared to 38.4% in 2010. While in 2010 we saw the impact of disposition activity and the reduction of unrecognized tax benefit due to settlements with tax authorities, the current year tax rate was impacted by deferred tax adjustments related to the repatriation of foreign earnings from our offices in Puerto Rico.

For the full year 2012, we expect our effective tax rate to be between 40 and 42% with quarterly variability. We will provide updates on our expected effective tax rate throughout the year.

Lastly turning to Slide 18, we are pleased to provide you with an update on our share repurchase program. As previously announced, we initiated our $50 million buyback program in May 2011. During the fourth quarter 2011, we repurchased approximately 1 million shares at an average cost of $12.80 per share or $13.2 million. As of December 31, 2011, the remaining outstanding share repurchase authorization was $8.2 million. As of February 6, 2012, we completed our current repurchase program. In aggregate, NFP repurchased approximately 4 million shares at an average cost of $12.45 for approximately $50 million.

As Jessica mentioned, with the Board’s authorization of a new $50 million buyback program, we expect to resume our repurchase program in May 2012 due to credit facility restrictions and subject to market and other conditions.

We accomplished a great deal in 2011, which positions us well for the future. I’d now like to open the line to questions.

Question and Answer Session


Thank you. Ladies and gentlemen, if you’d like to ask a question at this time, please press star, one. If your question has been answered or you’d like to have your question be removed, please press star, two. Once again, please press star, one to ask a question.

And your first question comes from the line of Mark Finkelstein, Evercore Partners.

Mark Finkelstein – Evercore Partners

Hi, good morning. Quick question – the margin outlook for 2012 in CCG, stable first half of the year and actually going up in the second half of the year. Can you just walk through what the drivers are of that, particularly why it goes up in the second half of the year?

Doug Hammond

Yeah, it’s just as we look at our budgets and the performance of the business, Mark, there are different activities that occur throughout the year; and from a planning perspective, where we’re seeing the revenue is a little bit more heavily weighted towards the back end.

Mark Finkelstein – Evercore Partners

Okay. And I guess just thinking about healthcare reform, are you seeing anything in terms of carrier behavior, in terms of commission outlays or anything along those lines that is different from what you saw in 2011?

Doug Hammond

No, thus far we’re not. In our markets, we’re seeing sort of the same issues. Certainly the MLR discussion has been out there, but ultimate outcome is unknown. There was just a Senate companion bill presented along HR1206 to exclude brokerage commissions that has—from the MLR calculations, which has bipartisan support, so we’re tracking that pretty closely. But as far as its impact on our business, it’s really been de minimis so far. And as I said in my comments, we’ve been working pretty hard with the businesses that do have that exposure to consolidate the scale of the businesses regionally. It is fairly heavily concentrated in certain areas of the business, and in those areas we have a lot of presence with the carriers so we’ve been able to actually improve the commission position of those businesses rather than have it deteriorate.

Mark Finkelstein – Evercore Partners

Okay. And then just thinking through the move from a management contract to an NFP employee, obviously under the management contract you have non-compete clauses, et cetera. And I guess I’m just curious how those change, if at all, as you move them to employee status.

Doug Hammond

Yeah, the structure relative to the non-competes and the non-solicits is maintained on a consistent basis. There’s also—I mean, in some respects there’s added value since there’s incremental consideration associated with these buy-ups that almost re-ups the strength and enforceability of the non-competes and the non-solicits.

Mark Finkelstein – Evercore Partners


Jessica Bibliowicz

Mark, I’d just be careful to add too that we understand the concept of incentivizing and making sure that there is upside potential for those folks as well, so I think both sides are maintained effectively.

Mark Finkelstein – Evercore Partners

Okay. Actually, one final question – Donna, how much cash is at the holding company above and beyond what is needed to support the broker-dealer?

Donna Blank

We’ve always talked about having about 50 to $60 million encumbered in terms of the consolidated cash balance, which is at 135 million at this point. So 50 to 60 of that would be encumbered.

Mark Finkelstein – Evercore Partners

Okay, so 75 to 85, if my math is right.

Donna Blank


Mark Finkelstein – Evercore Partners

Okay, thank you.


Once again, to ask a question, please press star, one. Again, that is star, one.

Your next question comes from the line of Matt Rohrmann, KBW.

Matt Rohrmann – KBW

Hey guys, good morning. Great quarter. I guess just—I know you’ve been managing expenses very well in ICG, and obviously it’s a tough environment; but looking back on 2011, the margin continued to improve. I was just curious, getting your thoughts of how much you felt was the business itself was better and you were able to get some extra revenue in the door where perhaps you didn’t think you were able to, as opposed to kind of just cutting costs back.

Jessica Bibliowicz

Well, I think you saw a revenue decline in ICG, so the revenues were not the wind in that one. It really did relate to expense control and cost cutting.

Matt Rohrmann – KBW

But I think everyone’s expectation was that it would be down, maybe down less than expected. Is that perhaps a way to look at it?

Doug Hammond

You know, it’s so difficult to predict because of the volatility of the performance of individual businesses and the size of cases and their impact on the overall performance of the business. But down at that level is not necessarily out of the ballpark of what we were thinking of it on an internal basis.

Matt Rohrmann – KBW

Okay, great. And then just to get back to the M&A outlook, I was just wondering—obviously there’s a lot of opportunities out there. Are you seeing more opportunity on the benefit side or the P&C side looking ahead?

Jessica Bibliowicz

It’s actually pretty balanced, Matt. We’re seeing both, and that’s exactly where we want to be. So we’ve got a lot of work on both sides.

Matt Rohrmann – KBW

Okay, great. And then last question just for Donna – I know we’ve discussed the tax rate before, and the outlook this year is kind of in line with what we discussed. Is there room for improvement down the road, just as the business gets restructured over time and acquisitions come in?

Donna Blank

We’re always looking for room for improvement there. Obviously we have a high effective tax rate, relatively speaking; but I think with the integration that can come from the management contract buyouts that we’re talking about and the way we are acquiring businesses now, there’s probably more opportunity than we’ve had in the past, so we’ll continue to work on that.

Matt Rohrmann – KBW

Okay, great. And just want to applaud the reporting change – very nice to see that in the quarter, and great results as well. Congrats. Thank you.

Donna Blank


Jessica Bibliowicz

Great, thanks Matt.


Currently there are no further questions in the queue. I would now like to turn the call back over to Jessica Bibliowicz.

Jessica Bibliowicz

Great. Thank you everybody, and we do appreciate all the hard work of our team all over NFP. It really was a great year for us and I think we’re very well set up for the future. So thank you all and have a great day.


Ladies and gentlemen, that concludes the presentation. Thank you for your participation. You may now disconnect. Have a great day.

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