Q1 2022 Focus Financial Partners Inc Earnings Call
Good morning, I would like to welcome you all.
Everyone to the focus financial partners 2022 first quarter earnings call.
Joining today's call are Rudy Adolf founder and CEO .
Jim Shanahan Chief Financial Officer.
Rusty Mcgranahan General counsel, and Tina Madden head of Investor Relations and corporate communications.
At this time all participants are in a listen only mode.
A question and answer session will follow the formal presentation.
If anyone should require operator assistance during the conference. Please press Star then zero on your telephone keypad as.
As a reminder, this conference is being recorded.
Mcgranahan. Please go ahead.
Okay.
Good morning, everyone before we begin let me remind you that during the course of this call. We may make a number of forward looking statements. We call your attention to the fact that focus as results may of course differ from these statements. These statements are based on assumptions made by and information currently available to folk.
<unk> financial partners and involve risks and uncertainties that could cause the results of focus to materially differ from these statements.
Focus has made filings with the SEC, which lists some of the factors that may cause its results to differ materially from these statements and finally focus assumes no duty and does not undertake to update any such forward looking statements with that I will turn it over to our founder and CEO Rudy Adolf Rudy.
Thanks, Rusty good morning, everyone, then why come to our call today. We appreciate your interest in focus.
Before getting into the details of the call I want to take a moment to reflect on the geopolitical events that have unfolded in recent weeks.
Native European this unimaginable tragedy hits, particularly close to home.
We must all acknowledged bravery and sacrifice and spirit of the citizens of Ukraine in the face of such inhumane, an unprovoked aggression.
This morning, we announced excellent Q1 results again, reflecting the stability of our business. There is diversity of our revenue mix at the resiliency of our adjusted EBITDA marching during challenging market conditions.
We grew revenues 36, 1% year over year to $536 6 million and our organic revenue growth rate was 22% for the same period.
Our adjusted net income excluding tax adjustments for share was 98 cents and picks adjustments for share it seems since increasing by 22.5 38, 45% respectively.
Performance again exceeded our expectations on all measures and reinforced our continued disciplined execution.
The quality of our partnership also was evident in these results is our apartment trumps remain agile and helping our clients navigate the complex macro backdrop.
It is critical to remember that stay primarily surface sophisticated high and ultra high net worth clientele that seeks to achieve a capital preservation across market cycles, while the volatile market conditions are being prudent fiduciary advice is of utmost importance.
Reinforcing the loyalty of these relationships.
Although we believe that market and geopolitical uncertainty.
Will persist well into 2022.
The strengths of our first quarter performance is significant because it enables us to reaffirm our 20% plus revenue and adjusted EBITDA growth targets for 2022, and the progress towards our 2025 objectives.
I would challenge listeners to find companies with comparable targets in the financial services industry.
These targets reflect substantial upside in future value creation for our shareholders.
Year to date, we have continued to invest in leading wealth management firms to complement our partnership but further strengthening our presence in strategically important markets.
The addition of <unk>, which closed on April 1st it's our newest partner for them as a good example.
Often most which manages approximately $3 5 billion in client assets is a prominent independent wealth management firm in Michigan.
And an industry leader Awesomeness is known for its very established business. The distinctiveness of its investment management capabilities and the continuity of its dynamic management team.
We have also closed four merchants year to date and signed one additional merger, which we expect will close late in the second quarter. Two if these transactions off of partner firms completing their first purchase you're supposed to manage our wealth advisors and indoor who joined us in 2021 into 'twenty 'twenty, respectively.
And one for connectors. Additionally, Buckingham into colony is suppose completed their first merchants after Europe .
These transactions reinforce our expertise in helping our partners to extend their businesses and add additional talent by sourcing attractive opportunities.
We recently announced the signing of Octagon group, which will be our 86 partner firms.
And our first in Switzerland. This represents an important evolution in our international growth strategy, which is to expand our partnerships in countries, which large independent wealth management sectors that cater to high and ultra high net worth clients and are experiencing secular dynamics similar to the U S.
The toy changes are they'll just continue with this.
Australia, Canada and the U K are examples of this.
We had always envisioned that full.
This would be a global business and that decentralized structure is flexible enough to support partner from many different countries with just five 5% of our revenues coming from partner firms operations outside the U S B beliefs.
The expansion will be a meaningful growth opportunity.
Switzerland is a good example of a market that's the correct risk mix that are very attractive to us.
According to the 2020 annual report if dismissed association wealth managers, the independent bucket in Switzerland.
Approximately half a trillion dollars implying that since its demographic trends that are similar to the U S.
Italy, the Swiss financial market Supervisory authority is implementing new licensing requirements for independent wealth managers, which will be a catalyst for consolidation.
B has a significant first mover advantage in this market, which we believe will give us access to high quality firms, it's truly global high.
Altra high net worth clientele.
Octagon as well off the Mark just Didnt most elite.
I'm from Switzerland was approximately 5 billion in client assets and significant expertise.
In the ultra high net worth market globally.
Founded nearly three decades ago Octagon provides comprehensive wealth management solutions to wealthy individuals and families in Europe . The U S that didn't recur in the middle East.
Its team. It includes almost 70 wells specialist spanning 18 nationalities in 10 languages, reflecting its global orientation.
Reflective of its reputation.
Could they go out and has a substantial global pipeline of new business.
This is an important strategic acquisition for focus positioning us to into additional markets in Europe and other international geographies, while further diversified.
Our partnership and extending our footprint in the ultra high net gross market looking forward our pipeline is robust and our momentum remains strong positioning us for another successful how many years.
Our business model continues to resonate with significant interest across our three acquisitions structures.
That's what you saw last year and contrary to many pundits M&A momentum has continued to build in 2022.
Boarding to Dubose latest update coupons set a new high end, Baltimore, Baltimore or industry M&A activity.
And whilst the second strongest quarter ever.
The late third quarter slowdown like keep temporary in nature.
The advantages of scale the aging of our generational found us and importantly, increasing client demand for our highly personalized I'm conflicted advice.
<unk> driving a strategic long term consolidation of this industry.
It's trying to trying to make here navigating successfully in this environment. It's not just about staying the course, but also about positioning ourselves to take advantage of the opportunities that will arise post the current geopolitical crisis.
We can highlight it's a really data.
In the U S have historically increased their client asset grow substantially in the first two years after the market disruption relative to their long term average growth rates, creating an exceptional margin of outperformance the.
The driver of this growth has been already a industry performance and the value of coal.
This decline service stream, all market cycles, including both drugs.
As we predicted in Q2 of 2020, we saw this dynamic play out in 2021.
We were a substantial beneficiary yourself that delivering our strongest year, yet which generated meaningful upside to our shareholders.
We believe that this scene market gross dynamic I mean, the repeat itself when we emerge from the current geopolitical crisis.
The strength of our Q1 financial performance also enables us to continue deepening our value added capabilities.
So rounding out partners into clients with robust suite of services in the areas such as alternative investments credit Trust and estate planning and insurance to name a few.
Especially important in disadvantage not only are these resources central to our value proposition.
They also further reinforce the attractiveness of our partnership.
As we turn our sights to the second quarter and through remainder of this year I firmly believe that investors will soon again. They appreciate the enormous resiliency and stability of our business model.
They will also come to appreciate the size of our addressable market both in the U S and internationally and our differentiated value proposition within those markets.
We'll see the power of our programmatic global approach to M&A as well as our continued discipline.
And being good stewards of our capital.
We have successfully navigated market dislocations through our 16 years of history and the learnings from those experiences are embedded in our business model.
Our performance in 2020 was a great example of that but Jamie when you and I are confident that 2022 will be another excellent year for our business and that we would continue to be the beneficiaries of substantial industry growth and consolidation.
Coated indie growth in 2020, and I think this his quote as equally irrelevant to date.
Bad companies are destroyed by crisis, good companies survive them great companies.
Got it.
One final note before turning to call over to chip.
We recently issued our third sustainability high level.
Highlights report.
And made further enhancements to our ESG initiatives, including the purchase of carbon credits to neutralize the impact of business air travel by focus employees. The details can be found on our website and in our recently filed proxy statement we.
We remain committed.
Two taking ESG considerations into account for all aspects of our business.
They're also encouraging and supporting our partner firms in their development of ESG investing and.
Other strategies to support the increasing ESG interests of their clients.
With that let me turn the call over to Jim Jim.
Good morning, everyone.
We delivered excellent results this quarter once again, demonstrating the stability and resiliency of our business against the choppy macro backdrop.
Well the dynamics driving the current environment are different than what we experienced in 2020, our partner firms are equally well equipped to weather the storm and are performing very well.
Our business is stronger and more diverse with a substantially larger footprint globally than where we were just 24 months ago from.
From Q1, 'twenty to Q1 'twenty two we have increased our partnership by 20 firms and added connect us.
Over the same period, our revenues grew 59, 2% and our adjusted EBITDA by 73, 1% I have no doubt that will be we will successfully navigate the current challenges in our business will emerge even stronger and better positioned for growth.
Now turning to the key elements of our P&L.
Our Q1 revenues were $536 6 million increase in 36, 1% year over year and $16 6 million above the high end of our guidance range of $510 million to $520 million.
Our revenue outperformance was driven by an increase in our non market correlated revenues associated with our family office services and a small amount of performance fees of which approximately $3 million was one time and will not recur in Q2.
Our Q1 year over year organic revenue growth rate was 22% also above the high ends of our 16% to 19% guidance, primarily due to the factors I just mentioned.
I want to take a moment to highlight several elements of our revenue model, which drive the resiliency of our revenue store in periods of market stress.
95, plus percent of our revenues in Q1 were recurring and are primarily fee based rather than being based on commission or other transaction fees I can't emphasize strongly enough how important the recurring nature of our revenue is stability and predictability of our revenues and profits.
Second 21, 8% of our revenues in Q1 came from sources not correlated to the markets. Unlike twenty-twenty. When these revenues were impacted by the effects of Covid on live events. They are and will continue to provide an important source of diversification as we navigate this period.
Our five 5% of our Q1 revenues came from international sources, which provides another important source of global revenue diversification as Rudy discussed our international expansion is an important strategic priority.
And fourth approximately 66% of our Q1 market correlated revenues were billed in advance while 34% were billed in arrears. This structure is also an important source of diversification because it reduces the impact of volatile markets on our revenues in any given quarter generally results in a one quarter lag.
Back on any market movements on our revenues.
The combination of these four revenue elements plus the variable nature of our management fees in earnest preference enabled us to navigate the volatility of 2020 and position us for the record year. We had in 2021. They are also why we have been able to deliver so successfully against the tight quarterly guidance we have provided.
Quarter since Q1 2020.
Our Q1, adjusted EBITDA was $135 1 million, reflecting year over year crowds of 33, 7% and our adjusted EBITDA margin was 25, 2% in line with our guidance of approximately 25%.
As we anticipated and noted last quarter, our Q1 M&A closings were lower given the 22 transactions. We completed in Q4 of last year.
We close one merger during Q1 and on April 1st we closed on azimuth capital management are 85th partner firm. We estimate estimates will contribute approximately $4 5 million in revenues and $2 8 million and adjusted EBITDA in Q2.
Additionally, we anticipate that octagon will close in Q3 subject to regulatory approval and will contribute estimated annual recurring revenues and adjusted EBITDA of more than $20 million and 5 million respectively. This firm will further enhance the diversification of our revenues and cash flows.
As already highlighted our 2022 pipeline is strong with a high quality transaction mix, joining our international partnership of 85 firms led by dynamic management teams and catering to high and ultra high net worth clients, which are generally the stickiest relationships in the industry is unique in the independent.
Wealth management space.
Now turning to our Q unexpected and cash flow manner.
Management fees were $137 8 million or 25, 7% of revenues, which was a slightly lower percentage sequentially. This percentage is reflective of the contractual economic relationships, we have with our partner firms.
Noncash equity compensation expense was approximately 1.2% of revenues in line with our estimate and we expect to expense will be approximately one 4% of estimated Q2 revenues.
The first quarter of 2022 is impacted by $9 million of noncash earnings reflecting changes in the fair value of estimated earn outs pursuant to our Monte Carlo simulations on their gout.
Market conditions drove a reduction in the estimate at these long term liabilities as of March 31st as markets recover. These estimates typically increase.
As of March 31st our LTM cash flow available for capital allocation was $299 6 million increased 36, 2% year over year further amplify into sustained growth and financial performance of our partnership.
The increase also reflected the effect of our typical Q1.
<unk> of our management fee a hold back in connection with our annual audit.
Our gross unamortized tax shield was in excess of $2 5 billion as of March 31, and will support our cash flows from future periods. We also paid cash earn out obligations of $34 2 million, which was in line with our Q1 estimate and we estimate that our earn outs will be approximately $35 million in Q2.
<unk>.
Now, let me review, our Q2 P&L expectations, we estimate that our Q2 revenues will be in the range of 525 million to $535 million and that our organic revenue growth rate would be 11% to 14%.
Our revenue guidance reflects the recent market volatility and our Q2 acquisition activities, including.
Included in our Q2 outlook is approximately $4 5 million in revenue from asthma as well as approximately $3 million in one time revenues from Q1, which will not recur in Q2.
Additionally, our Q2 weighted average adjusted shares outstanding will increase by approximately 512000 shares associated with Q2 acquisitions to date.
We anticipate that our Q2 adjusted EBITDA margin will be between 24, 5% and 25%, which would bring our first half 2020 to March to approximately 25%, while our margin can vary quarter to quarter, we evaluate our business based on annual performance.
Importantly, I'd like to reiterate that we are reaffirming our annual growth guidance for this year of 20 plus percent growth in revenues and adjusted EBITDA to.
The strength of our Q1 results together with the resiliency of our revenue mix and stability of our business positioning us to reaffirm these targets despite challenging market conditions.
Now, let me turn to our balance sheet.
As of March 31st we had approximately $2 5 billion of debt outstanding and we ended the quarter with net.
Our net leverage ratio of 384 times, which was within our estimated range of $3 75 to four times, we estimate that our Q2 net leverage ratio will be in the same range.
I know that a number of you have asked about the trajectory of our interest expense. This year given the backdrop of rising interest rates as it reminds our $850 million of our $2 5 billion of debt outstanding has LIBOR swaps from a floating rate to a fixed weighted average interest rate of 62 basis points, plus a spread of 200 basis points.
The remaining $1 6 billion.
Floating rate, which is a few pieces to larger elements include a $794 4 million tranche B term loan, which is a 50 basis point LIBOR floor, plus a spread of 250 basis points and.
$756 $7 million tranche, a term loan, which is LIBOR plus 200 basis points with no LIBOR floor.
We typically use 30 day LIBOR on our term loans, assuming 30 day Library was 200 basis point higher in Q1 than the average LIBOR rate of 14 basis point and a factor in the quarter on our term loan borrowings, we would've had incremental quarterly pro forma pre tax interest expense of approximately $7 million.
This type of pro forma increase does not inhibit our ability to achieve our growth targets. This year. We have included a sensitivity analysis on page 19 of our earnings supplement to show you. The pre tax effect on our Q1 interest expense of various increases in 30 day LIBOR.
I also wanted to comment briefly on our recent extension on the charter over our revolver. We extended the maturity date to June 'twenty, 'twenty, four which further reduces our duration risk.
Current with the extension will use sulfur as a revolver replacement benchmark interest rate for labor.
But we don't anticipate this change will have any material effect on our revolver interest expense in future periods.
In closing our strong Q1 financial results enable us to reaffirm our 20 plus percent for revenues and adjusted EBITDA growth targets for this year.
The benefits of the diversification of our revenues are once again evident in our financial results during a very challenging period in the markets.
Our partners' businesses are built on deep longstanding client relationships that have stood the test of time across many cycles. So.
Similar to 2020, we have we fully expect that the resiliency and stability of our results will continue to be evident as we navigate the current market and geopolitical turbulence.
We and our partner firms are also actively planning for post the current crisis period, which we believe offer substantial growth opportunities as it has after other major crisis is as was most recently evident in our 2021 results.
That's one of our partner firms sat in 2020, which is fitting in for today's environment as well.
Not about weathering the storm, it's about coming out strong on the other side.
Turning the call over to the operator for Q&A now operator.
Thank you at.
At this time, we will be conducting a question and answer session. If you would like to ask a question. Please press Star then one on your telephone keypad.
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First question is from Craig Siegenthaler of Bank of America. Please go ahead.
Good morning, Rudy Jim Hope, you're both doing well and congrats on your first switched transaction.
Thank you Greg.
Very exciting.
So my first one is on the competitive landscape for U S. R. I, a M&A given the sharp correction in equity and bond prices year to date combined with higher rates are you seeing any change in the competitive landscape and what I'm really looking for is have you seen any of your competitors pull back which could benefit future.
Multiples on your future transactions.
Yeah. So.
As you know Craig we have.
Never been overly kind of worried about competitive pressures.
Because we have a very unique value proposition you want to be an entrepreneur you want to have value added services and you want access to permanent capital flow because it's the only game in town and we have never seen and big kind of multiple inflation.
And the way, we deploy capital and we have proven that in Investor day, where I gotta be showed that actually our returns over time for capital deployed have actually improved.
So we yes certainly.
So many of the Oh, Yeah, I think I called I called them drunken sailor transactions that we had seen last year and yes. What we are seeing is that some of these heavily overpriced transactions the.
The buyers are suffering now.
And quite frankly, we do see I mean, I looked at our pipeline.
We see a stable maybe even slightly improving multiples in the way we are deploying our capital. So we have a very strong pipeline Ah I can state with confidence that 2022 will be one of our most successful M&A.
Again, probably not quite on the level of last year.
We'll have a lot of it.
Very very successful year and.
Multiples are stable, if not improving and yes. Some of these highly over Levered Yep P E type models and foreign bias into others from what we can tell our are suffering from some of the deals that they did last year.
Thanks, Rudy and just for my follow up it was nice to see a deal in a new market sweat Cherilyn. So yeah. Now you guys are obviously very big in the U S, Canada, Australia U K, Switzerland kind of five very large markets what markets could be next.
Well you know, we just announced our first deal in Switzerland, and do you still have to close it but quite frankly, I couldnt be more excited about this market that I <unk> been watching.
Watching the market traveling in and out for four years steel and with.
Octagon, we really manage to attract wander off the top players.
In the Swiss market, it's a half a trillion dollar market following many of similar dynamics.
So are we quite frankly also do response, when we announced this transaction I spent time with the team that she yesterday.
Could not have been stronger and it's.
It's boding well for the future in this market.
Additional markets.
I have nothing to announce yet, but we are constantly looking at.
Where are the most attractive locations to you in the wealth management industry, we have our tentacles into a number of markets rule number one for US is continue growing in the U S to continue expanding into markets that we already have a presence three now.
Edit, Switzerland, and yes, you did.
Other markets on the drawing board.
When.
We already are we will add to our yes, Tim here, most importantly, and I think a distinctive competitive advantage.
Yes.
You know that we are ultimately of course deploying capital by partnering with entrepreneurial well manage firms and we can deploy capital into wherever we.
See the best opportunities and this gives us a very unique.
Our ability to diversify the deployment of capital and.
You have obviously, a very strong track record of doing just since 2006.
Thank you Rudy.
Our next question is from Owen Lau of Oppenheimer. Please go ahead.
Thank you for taking my question, it's Mark Gucci on for Owen.
Just wanted to ask you reaffirmed your 2022 2025 target for 2020% revenue and EBITDA growth given the weakness in equity markets and volatility it looks like M&A has slowed down recently.
What kind of makes you feel confident you can reaffirm this guidance. Thank you.
Well I'm of course, Jim and I don't do this easily been rereading form our reaffirmed guidance and the excellent.
Q1 results really gave us a terrific foundation to do to do that.
Q1 was a little slower on the M&A side, but it usually is but.
Frankly.
<unk> closed gymboree closed 22 transactions in the fourth quarter last year.
And you just came out of a year, where we did 38 deals. So we need to take a little bit of a brief though in the first quarter, but.
Said before his pipeline is very strong.
You will see one announcement after the other off very attractive.
Transactions and transactions that are both strategic and high value and of course financially are within the framework that we are deploying capital.
So.
What you see and what we are demonstrating again is simply the resiliency of our business model if anything in 2021 and some of you remember the second quarter of 2020.
When you have the full impact of the Covid market correction, you really impacted that.
Business.
We really demonstrated how well be weather. This storm how quickly we've recovered out of the storm and ultimately hit the momentum out of 2020 to turned into 2021 being the most successful year.
In certainly since since we've been public so we are very confident.
Revenue, 20% plus gross EBITDA.
20% plus growth.
Don't think that there are many businesses in financial services that.
Can provide this guidance, but even more important you'll see this in the context of our long term focus 2025.
And you Avi.
Our.
Tracking towards.
Our 2025 schools.
The belief that they are ambitious but achievable.
Achievable.
And to remind two 4 billion in revenues $1 1 billion and EBITA adjusted margin of 28%.
So yes confidence in 2022, but also confidence as we are tracking towards 25, I think maybe the only thing I'd add is.
Obviously in our industry, we have the largest M&A team.
Our partner firms are an extension of that and as you know we go to the market with three acquisition models and a new partners.
We have connectors that we launched about a year or plus.
They go and we do mergers for our firm. So we have over 85 firms now that our platforms are accretive merger, so that kind of gives us the confidence and visibility into the pipeline to set these 20 plus percent goals for 2022 events are in times of market volatility.
Alright, thanks for the color and then.
One more as you know I appreciate the color you provided on slide 19 around interest rate sensitive.
Maybe if you could just talk about some of the levers you can pull with the recession looming on the horizon, how you're thinking about capital allocation I know your management team that's been through this situation in the past.
And focus is to remain resilient, but maybe some of you know if you can call out maybe some of the shields.
That you have or.
Anything that you have to kind of weather the storm.
And then Jim can go through some of these kind of structural shields of defense to be here from a business model, but more important.
And certainly.
Certainly I don't want to sound callous here, just as a very tough times out there in just many.
So if the economy uncertainty geopolitical leap up.
Our business is meat for times like this.
There is no other time when prudent fiduciary advice, yeah holistic delivered by advisors, who are not like a brokers selling things, but really providing.
Holistic advice to clients.
Usually of course that they know for many many years this is where you.
Just advice led us the most.
And just looking back to 2020 again.
They're very resilient during 2020 is still growing almost 20% year on an EBITDA basis in 2020, but it wasn't as client retention. It will see a quite funky new client referrals. Some consolidation of assets from clients that then led to this tremendous performer.
In 2021 and quite.
Quite frankly, yes, a volatility complex it detects changes geopolitical uncertainty. This is win best advice is absolutely critical Jim do you want to go through this financial year.
I would just say I mean, some of them I noted in the prepared remarks, but yeah.
We are a business with 95 plus percent fee based recurring revenue our management fees, which are our second largest operating expense are variable in nature.
21, 8% of our revenues in Q1 arent correlated to the market at all obviously, we're adding a new partner firms internationally. So that gives a further diversification of our revenue. Our P&L are run by entrepreneurs, who know how to manage their cost structures are in volatile times. This was.
Clearly evident in.
In 2020 on the onset of Covid and we.
We certainly have some volatility now and they'll they'll run the p&l's.
Accordingly to support the the margin of the.
Of the business and you know.
We continue to generate.
Great cash flow, our LTM cash flow for capital.
Vacation continues to grow and we redeploy that into the business or.
If there are extreme periods of volatility.
Then we would use that excess cash to pay down debt piece of <unk> to an acquisition.
Okay.
Marc does that answer your question.
Yep all set thanks guys.
Thanks.
Our next question from Alex <unk> of Goldman Sachs. Please go ahead.
Good morning, Rudy and Jim This is actually Brian on behalf of Alex.
Hi, How's it going.
So I had a question on merger activity, which looks like it continues to be solid and <unk> and I was wondering if you can speak to.
What are your partner firms are thinking about mergers just given the volatile market backdrop, and then also for the merger target firms.
What are you hearing from them in your conversations.
Yeah, So merch us in so many ways Ryan, but most was really an innovation. It you bumped it industrial scale that would be brought to this industry.
We have done probably 150 or so of mergers over the years and have just built tremendous expertise you may remember last year, we did 38 transactions 24 of which some mergers.
Which includes of course to connect those transactions.
Year to date, we've either closed or announced already five merchant transactions. So this is a terrific way.
For our partner firms to grow.
It's a terrific way for a quite.
Quite frankly, a small or medium sized firms to team up with teams with similar cultures and similar clients.
Similar prospects.
And ultimately.
Complice what is critical in this industry and data scale.
So much of what is driving mergers in general is a yeah first clients need more and more sophisticated services and for smaller firms. It is very difficult to deliver these services to yeah, when you're at a larger scale.
Quite frankly, you can grow better gross is easier.
Because so many firms that are kind of small to medium sized in this industry is classic entrepreneur's dilemma, where they have to do everything and of course, most importantly desk, who advice to our clients.
Very little of our support around them.
And as.
As such.
Quite frankly can't grow because we don't have enough time to develop new business.
Kidney mergers are for four reasons.
First at.
For to support geographic expansion second to provide new services to two two to affirm.
Three very important and particularly important in this day and age right now is to it next generation talent to a partner firm and then yes of course still our expense synergies that can be very very helpful. So very important part of our business model a critical reason by partners join us.
And we have a terrific merchant pipeline.
Got it okay.
And maybe just one question from the outlook for <unk>.
I was just wondering if you could comment on your thoughts around the use of equity for deals just given what's happened with the stock price year to date.
And how youre thinking about that I think the implication from the 512000 shares of something like $23 million ish, roughly but I guess I was just wondering how you're thinking about it more.
More philosophically.
So most of the deals did we do all cash and that will continue to be the case. Your cashes is still very cheap and very attractive currency to deploy but we use our stock and yesterday he be use it from time to time first info.
For strategic reasons.
We feel that quite frankly, sometimes takes reasons as well but.
There is an interest and need for this kind of deeper level of alignment.
<unk> stock is very attractive and as I said to you a very tax efficient currency for us to use.
So of course, we are factoring into the economics, when we look at D.
Accretion of Oh for transaction the use of our stock.
It's just part of the Formula that we are using of course, it's a very small percentage.
Look at the $84 6 million shares outstanding that we currently have.
But it's just part of the economic equation and yes, when we see the right opportunities strategic tax wise D&B will continue to use stock on on them.
On an exception basis.
Got it thank you.
Yeah.
Okay.
Our next question is from Karl break off can't be doubling please go ahead.
Yeah.
Hi, This is actually Matt Moon on for Kyle.
Just one on capital management for me.
Just given the stock performance year to date and.
Guys sitting towards the lower half of your target leverage range.
Just kind of wondering.
How are you thinking about your use of capital from here, maybe specifically thinking about if you would ever consider a buyback or a repurchase program as an alternative capital versus M&A or debt paid out.
Hello.
Well first and foremost.
We manage the business not to stock.
The business is not the stock and the stock is not the business certainly in the short term volatility and ultimately.
Ultimately we are committed to awards just a journey it is 2025 journey.
We have laid out on Investor day, we are when we deploy capital and we showed this in Investor day, and 90% of the transactions that we are doing create IRR north of 20%.
So VC trim.
Tremendous.
Unity.
Buybacks I think is a very short term opportunistic.
Thing.
Of course, we'd be they'll look at you are looking at this math quite frankly would not be attractive right now given the terrific returns to be generating going to deploy capital.
And quite frankly, there are.
Strong pipeline and we need the business that we want to build so it's effect of no. We have tremendous opportunities and we will continue to manage the business with the discipline that we have demonstrated.
And quite frankly, a win yep.
Ultimately there will be an alignment between the excellent business performance and share price and you just got to be patient you along the way here.
Okay and then just another one for me just going back to Octagon I.
Just given that your size of the market is.
Is it fair to think that.
That might mean that you guys would be more aggressive in the near term.
And targeting and pushing into this country, specifically and I guess for those.
Sure maybe not as familiar with the characteristics of that market and the flight actually buy space could you maybe just go through the characteristics of what makes this a region an attractive opportunity and maybe compare that to the secular trends youre seeing in the U S. Since we're most familiar with those trends.
Yeah, So b b.
And quite frankly, I personally know the Swiss market very well for for a very long time in my career was in and out the market.
And ultimately if you want to be in the wealth management industry globally, you'll need to have a footprint in the Swiss market.
It has almost centuries of expertise buildup of client relationships of just a very very.
High quality businesses, and quite frankly to Switzerland credit.
After all of these kind of tax issues that.
They had to deal with the really cleaned up the market and turned it into a high quality a wealth management up there.
We believe we will have just tremendous opportunities going forward.
You know.
I stated on the on the on the other earnings calls and Investor days, Yes, we have a strategic objective to internationalize the business more it would be likely diversity b O getting be like the quite frankly, the returns on capital that we expect king in this market we liked it be hit first mover advantage.
In any of these new markets in a tremendous way.
And quite frankly, you're starting with a partner like aka development. We are starting with is an absolute winner.
That has tremendous potential.
And so yes, we expect more announcements of course in this market, but it's C&I, it's not some aggressive push because quite frankly, we have opportunities everywhere.
As I said, we have a very strong pipeline and yes for the right opportunities. We are very eager to deploy capital in a number of these international markets, but you.
It has to be the right opportunity was there right.
Kind of long term.
<unk>.
<unk> that we've seen this transactions, but stay tuned there will be more.
Okay, great. Thanks, guys.
Our next question is from Michael Young of curious Securities. Please go ahead.
Hey, good morning wanted to follow up kind of on the international M&A question, just given the volatility.
Both equity markets and the disruption from kind of the Russia issue in in Europe is that has that caused any delay deals that maybe would have come through otherwise and should we expect that there might be some like pent up demand at all.
Well of course.
When you're in Europe , you're feeling the impact just so much closer.
Yeah.
Particularly of the board and then when Youre here in the states.
And the reality is impact number one is quite frankly, a it's.
Nobody's doing business with rush and clients and we need to make sure that they are no Russian clients you in any of these targets.
We are looking at.
That's a very kind of tangible impact but otherwise.
Fundamental dynamics in these markets are very similar to the U S. You've got a large half a trillion dollar market. In this case, it's a market that has somewhere 2000 2500 players FINMA.
Regulatory authority created a very.
Kind of a rigorous new regulatory regime that quite frankly menu smaller firms will simply not be able to adjust to.
This is one of these traditional drivers of of consolidation that we've seen so many of the markets that you're operating in and you have.
A very good universe of true high quality firms, Oxford on being one of them that can really turn into platforms for four mergers.
Ultimately that you're envisioning.
So yes, yeah, you'll need to be very cognizant of course, what's going on in the world out there.
But at the same time, we are so unique in the business model that we are offering in this market.
Yeah just under.
Under any realistic.
Sometimes people have a terrific.
Pipeline.
Head of us in a number of these markets.
Okay, Great and maybe one for Jim just on the EBITDA margin guide for <unk>, and maybe just thinking more broadly.
Curious kind of the assumptions that are going into that that <unk> EBITDA guide.
A market performance and then separately just you know you mentioned, obviously that the entrepreneurial firms can cut costs.
Market's sort of perform worse, but to what extent can they you know if we had a bigger dislocation or is there some point at which.
These aren't heavy cost structure businesses. So how much can they really cut costs and when would you actually start to fill in EBITA margin squeeze.
Yes, I think.
2020 was a test of that we had extreme volatility and I think if you go and you look at the quarterly results in 2020, we had margin stability.
I, often say that the management fees reset with the profitability.
It's a very unique feature of our model and it's really nice feature in our model to have during volatile times. So.
Our partners know how to how to manage the business and maintain our margin.
Obviously as I commented on earlier, we are fortunate to have a fee based recurring revenue model right.
A critical we have a slide in our earnings supplement that talks about the earnings preference as it's grown over time, which helps supports the resiliency.
Of that margin.
Obviously, we're very proud of our 25, 2% in Q1, which was in line with the guidance and.
We've provided a margin on our on our Q2 acquisition of the new partner firm connect this over time will support and enhance the.
The margin and.
You know probably for the first half of this year would be plus or minus 25% and that reflects a lot of the market volatility because as you know majority of our market correlated revenues are billed in advance so that visibility is built and been built into the Q2 guidance.
We provided a $525 million to $535 million of revenue maybe.
Maybe just.
A little more from the business.
If you are going to be out there talking to partners.
Also talking to prospects.
They are very optimistic about the trajectory of the business. The certainly do not see a need to adjust expenses at this point I think you'll see it with our 2020 guidance you know that we are we also remain very very optimistic and.
It speaks to the resiliency and the <unk>.
Paolo if this business model that yep.
We will continue to track towards ultimately out 2025 objectives.
Yeah.
Okay, great. Thanks.
Thank you.
Okay.
We have a follow up question from the line Alex Blaustein of Goldman Sachs. Please go ahead hi.
Ryan again here I just wanted to just quickly tie together a few comments and make sure I was thinking about this right in terms of the sort of the pace of acquisitions and mergers over the course of the year.
So I think you said 2022 would be once again one of the most successful years you've had.
Positive comments on the pipeline, we have sort of the daughter deals.
To date, and so I'm just wondering should we expect the pace of deals to look similar to last year in terms of <unk> was very very strong quarter, which built on <unk>, which was better than Turkey, which was better than waikiki was that sort of the same.
Sort of path that you're seeing for this year.
You know Ryan, it's kind of impossible to precisely time M&A transactions.
Beyond our certainly our skills.
But I very much stand to what I've said before is.
Looking at the pipeline looking at wherever yard this will be one of our most successful M&A years I can say that Q2 Q3 are we are going to see quite a number of attractive your announcements, but the actual timing of announcement and then even more so the actual timing of closing.
Is.
Difficult you like October would be just the mountains, we expect it to close in Q3, but do we really know it could it be a Q2 closing.
It's really in the hands of regulators and lawyers.
Which makes the.
The timing very very difficult to predict but very much so.
The way, Jim and I look at where we are this is going to be yet again, no quite like last year, but it's going to be yet again, a very very strong M&A year.
Okay makes sense. Thank you.
Yeah.
So.
Ladies and gentlemen.
If there are there any more operator any more questions.
So we have no further questions back to you for closing remarks.
So thank you all in closing I'm extremely proud of the excellent core to that we had demonstrating the resiliency of our business as well as our strong momentum in fundamentals, despite the challenging macro backdrop our skill.
And the diversity of our global partnership as well as the nimbleness of our partners and our holding company team.
Were instrumental in helping us to deliver this level of performance.
To invest in leading wealth management firms to complement our partnership and execute on an important strategic expansion into Switzerland.
Running a top firm in that market and further expanding our Tam we further enhanced our value add services, providing substantial resources to our partner firms or M&A momentum remains excellent and we are well positioned to deliver another strong year in 2022.
We capitalized on the industry opportunity.
Each of these elements contributes to the many points of upside in our business, which we believe are undervalued today, but will deliver substantial future value to our current and prospective shareholders. Thank you all for your interest bye bye.
Yeah.
This concludes today's conference. Thank you for joining US you may now disconnect your lines.
Okay.
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