Q4 2022 Focus Financial Partners Inc Earnings Call

Good morning, I would like to welcome everyone to the focus financial partners 2022 fourth quarter and full year 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.

Mr. Mcgranahan. Please go ahead.

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 focus financial partners and.

And involve risks and uncertainties that could cause the results of focus to materially differ from these statements focus has made filings with the FCC, 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.

In addition, due to the recently announced acquisition proposal and exclusivity arrangement with Clayton Dubilier and Rice, we will not be taking questions. Following Rudy in Jim's prepared remarks with that I will turn it over to our founder and CEO Rudy Adolf Rudy.

Thanks, Rusty good morning, everyone and thank you for joining us today.

Despite the challenging macro environment correlated across virtually all asset classes throughout 2022, our full year performance was solid finishing well in Q4 with strong momentum into 2023.

Our business demonstrated its resiliency and consistently outperformed relative to expectations, our disciplined diversification and scale very instrumental in helping us much us to navigating the challenging market conditions, but in positioning us to capitalize on the eventual recovery.

The depth and diversification of our global partnership our strong M&A momentum and our array of value added programs were all instrumental to this outcome.

These elements are at the core of our competitive differentiation reinforcing our leadership advantage in independent wealth management.

We generated solid results in 2022 growing our revenues by 19, 2% year over year to approximately $2 1 billion.

Our adjusted net income excluding tax adjustments per share was $3.62 and tax adjustments for sure yeah.

97 cents, increasing over the prior year by seven 7% and 37, 5% respectively.

These results reflect our partners excellent job in managing their businesses and advising their clients.

He also further reinforced the value of the diverse and recurring nature of our revenues and the benefits of our variable cost base our earnings preference.

Collectively these attributes have enabled our business to weather bullet that market conditions are what multiple corridors vials mitigating the downside risk to our earnings.

2020 to set another record for M&A in our industry with transaction volumes, increasing nearly 11% over the prior year and achieving the 10th consecutive year of growth. According to economic partners people research highlighted that sub acquisition volumes more than doubled in the last two years since we have 50.

And how you're in 2022 versus 2021.

Firms mentioned less than 1 billion inclined assets represented nearly 75% of total activity in 2020 to.

We capitalized on this momentum as did our partner firms. We closed 24 transactions last year, adding five new partner firms and completing 19 mergers on behalf of our partners, who took advantage of the substantial consolidation opportunity to accelerate their growth.

Our differentiated ability to source structure and execute these accretive transactions remain a key part of our value proposition to growth oriented firms Mr.

Mr largest M&A team in the independent wealth management space, we continue to bring industry, leading scale to the benefit of our partner firms their clients and our shareholders.

In 2022, we increased our footprint in crucial wealth management markets across the U S. Adding excellent new partners with strong businesses dynamic management teams talented advisors and longstanding client relationships.

The value proposition of entrepreneurship permanent capital and value added programs continue to resonate strongly.

We also expanded our international presence into Switzerland last year with our partnership with Octagon.

Further extending our partnership in countries with high Sibley independent wealth management sectors catering to high end Ultra high net worth clients remain an important priority.

We are off to a strong start in 2023 with seven transactions closed year to date, including one partner firm and six mergers and we assigned for mergers, which we expected to close in the first quarter.

We continue to acquire high quality arrays.

And other independent wealth managers, but you'll also selectively adding firms with unique capabilities that can benefit our partnership such as the announced acquisition of origin investments about partner from Covid at the start of this year.

<unk> closed origin will edge, two coverts private real estate solutions.

The time and alternative investments have becoming increasingly important to sophisticated investors. This transaction is expected to facilitate the ability of origin dwarf alternative solutions to our partner firms clients.

We have about 1 billion of liquidity available to deploy and our LTM cash flow available for capital allocation was $317 7 million as of December 31st.

Our M&A pipeline is strong it's a good mix of opportunities in the U S and internationally and our partners remain active in pursuing merchants to expand their businesses and to recruit high quality talent.

We continue to structure transactions in an efficient way remaining nimble in our approach to achieving the best alignment between our objectives and seller interests, while staying within our three five to 4.5 targeted net leverage ratio range. However, while we will continue to grow our partnership.

And additional scale, we remain highly selective in our M&A process and disciplined in our capital allocation to ensure we execute transactions that generate incremental value for our shareholders.

<unk> 22 was another year in which the value of prudent fiduciary advice was evident, particularly given the unique challenges presented by markets and economies last year.

Our partners saw a trusted advisors in every aspect of their client's financial lives beyond the investments.

These deep multifaceted relationships result in continued high client retention, which drives higher recurring revenues and the stability of our financial model.

We believe that the flight to comprehensive I'm conflicted advice, but continue to accelerate as a result of last year's market correction in terms of accelerating the growth in client assets managed by the REIT industry. The way it has in prior sectors.

Our partners benefited from our value added programs last year, enabling them to meet the growing and highly personalized needs of a sophisticated high and ultra high net worth client base.

But taking advantage of our scale and dedicated resources, our partners can deliver ever increasing value to their advisors and clients, which are essential catalyst for retention referrals into other sources of organic growth.

We continue to invest in areas such as alternative investment opportunities lending Trust and insurance solutions among others. This adoption by partners continuing to increase as these are the programs their advisors and clients want the most.

As 2023 gets underway, we anticipate volatile conditions may persist in the near term before markets begin to recover.

We are confident that we will continue to successfully navigate this environment further reinforcing our resilience and the strength and consistency of our financial performance.

We remain highly disciplined capital allocators is focused on achieving the appropriate risk reward in each transaction we do.

Similar to what we did in 2008 and nine in 2020, we are actively positioning ourselves for the market recovery.

For every 2020, there is a 2021.

We are uniquely positioned in a multi trillion dollar global industry experiencing in non market correlated secular shift driven in part by the need of founder succession and scale.

Transaction volumes continue to climb each year, we believe industry consultation is just beginning presenting an opportunity that will continue for years to come.

Our diverse and growing global partnership creates enduring scale advantage is reinforcing the sustainability of our strong growth over the long term and uniquely positioning us to create significant value to our shareholders.

For these reasons, Virginia, Lenny and I are excited about the outlook for full crews as we continued to expand our industry leading position.

With that let me turn the call over to Jim Jim.

Good morning, everyone. Our business further demonstrated its resiliency in 'twenty to 'twenty, two with solid growth and financial performance and strong M&A momentum.

Our diverse recurring revenue stream variable management fee structure and the strong economic alignment, we have with our partners have withstood the volatile macro environment over the last year, we are executing well and we remain confident that we will weather the ongoing challenges and be well positioned to capitalize on the gross opex.

Unity once markets recover.

Partners have taken the uncertain macro environment in stride and are doing an excellent job working with their clients.

The market events with 2022 reinforced the value of experienced trusted advisors deep client relationships and balanced portfolio structure to deliver growth over the long term.

Now, let's turn to our Q4 and full year P&L.

Our Q4 results were solid and exceeded our estimates on all measures. Our revenues were $547 7 million up four 5% year over year at six 3% above the top end of our guidance of 505 to have 515 billion.

This was primarily due to the euro year over year change in organic revenues, which were negative three 5% versus our initial estimate of negative 10%.

Our organic revenues were impacted by the volatile market conditions in 2022.

Our revenue outperformance of $32 7 million was primarily related to higher than anticipated non market correlated revenues from our family office firms due to client activities and year end value building.

Approximately $7 million of this amount won't repeat in Q1, but could recur in future quarters.

Yeah.

Our Q4, adjusted EBITDA was $136 7 million increase in five 9% year over year and our adjusted EBITDA margin was 25% above our estimate of approximately 23%.

The revenue outperformance I just walked through are contributed to a portion of this increase the remainder was attributable to variable compensation, where cash compensation and related expenses were sequentially lower by approximately $3 million.

Compensation as a percentage of revenue, which includes the effect of M&A transactions. We closed in Q4 declined sequentially by two three percentage points.

Our Q4 adjusted net income excluding tax adjustments for share was 79 cents declined 16% year over year. This reduction includes the impact of higher interest expense due to the 20th 22 increase in the library and sulfur rates as well as a pretax $7 4 million increase in other.

<unk> expense, primarily associated with a write off associated with an insurance receivable.

Our Q4 tax adjustments for share was 20, 25% higher year over year.

For the full year, our revenues were approximately $2 1 billion or 19, 2% increase over the prior year driven partly by an organic revenue growth rate of eight 5% for the same period.

Our full year adjusted EBITDA was $537 5 million 19, 1% higher year over year.

Our adjusted EBITDA margin was 25, 1% unchanged from the prior year.

We are proud of this achievement given the market volatility in 2022.

Our full year adjusted net income excluding tax adjustments per share was $3 62 seven.

Seven 7% higher than the prior year, our full year tax adjustments per share was <unk> 77 increased 37, 5% for the same period.

Reflecting the growth in our tax shield due to M&A activity.

The tax efficiency of our business remains a significant and growing economic benefit to our shareholders.

Our 2020, it's two M&A activity reflected strong momentum throughout the year as already highlighted we closed 24 transactions, including five new partner firms.

In 19 mergers in Q4, we closed nine transactions, including two new partner firms that contributed approximately $3 1 million of revenue and $1 million of adjusted EBITDA with an adjusted EBITDA margin of approximately 31% for the quarter.

On a full quarter basis, we estimate that these friendswood contributed approximately $5 million at $1 8 million in revenues and adjusted EBITDA, respectively.

Now, let's turn to our Q4 expenses and cash flow.

Management fees were $132 7 million or 22% of revenues slightly up sequentially.

Due to the Q4 revenue outperformance.

Our noncash equity compensation expense was one 5% of our Q4 revenues in line with our expectation and we anticipate that this expense will be approximately one 4% of our estimated Q1 revenues.

As of December 31st our LTM cash flow available for capital allocation was $317 7 million, reflecting the resiliency of our cash flows starting in a volatile market here.

We paid cash earn out obligations of $32 6 million in Q4, and we estimate that would pay approximately $24 million in earn outs in Q1.

The deferred deal consideration, which involves paying a portion of the deal consideration at the time of closing and a portion of several years from the timing of close and creates long term liabilities for us in the form of deferred cash payments. These payments are in addition to the contingent consideration payments that we make to help invest.

This understand the amount and timing of these deferred payments, we have provided disclosure in the EF pages of our 'twenty to 'twenty two to 10-K as well as on page 24 of our earnings supplement.

Now for a few words on our Q1 P&L expectations.

We estimate that our Q1 revenues will be in the range of $560 million to $570 million.

Estimate includes the real estate related performance fees, we had discussed on our third quarter call that we anticipate will add approximately 10 million. So our Q1 revenues and a sequential decline of 7 million from Q4 revenues that will not repeat in Q1.

We estimate that our year over year organic revenue growth rate will be in the range of 1% to 3% and we estimate that our Q1 adjusted EBITDA margin will be approximately 24%, which excludes any expenses associated with the Clayton dubilier and rice process.

Now turning to our balance sheet. We ended Q4 with approximately $2 6 billion of debt outstanding and our net leverage ratio was four nine times slightly under our estimate of four and a quarter times, we anticipate that our Q1 net leverage ratio would be approximately four three times, we continue to.

Remain flexible in how we structured transactions such as the deferral structure I mentioned previously we remain committed to our three five to four five net leverage ratio range.

We refinance a portion of our debt in November and raised a new $240 million term loan.

Details of which can be found on pages 26, and 27 of our earnings supplement.

We took advantage of a window in the credit markets to extend the maturity on our $1 6 billion tranche of our term loan for 'twenty 'twenty four to 'twenty 'twenty eight and to extend the maturity of our $650 million revolver to 2020 seven reducing the duration risk of our borrowings.

We also converted I remain in LIBOR borrowings to sulfur.

$850 million of our outstanding debt has so for swap to a fixed weighted average rate of 53 basis points plus a spread of 325 basis points. The remaining amount of our outstanding debt has a floating sofa rate with a spread of 250 to 325 basis points, our new term loan a has.

Nine month delay draw feature giving us added flexibility.

While wider spreads create some incremental interest expense headwind for us we continue to focus on prudently managing our capital structure and maturity ladder.

At year end, our new term loans together with our Undrawn revolver, our cash balance gives us approximately 1 billion firepower.

As we anticipate another strong year of M&A activity. Additionally, our LTM cash flow available for capital allocation was $317 7 million last year as.

As Rudy noted we are highly disciplined in allocating capital even more so going to the increase in interest rates over the past year.

In closing, we delivered a solid year of growth and performance. Despite the volatile macro backdrop with the hallmarks of how we invest and grow our business again, clearly evident our business demonstrated its resilience supported by a diverse base of recurring revenues our partners generate a strong performance in <unk>.

Their clients well positioning themselves to strong growth.

As markets recover.

We continue to navigate the ongoing market challenge as well.

We remain highly disciplined in how we deploy capital position ourselves to take advantage of the enormous growth opportunity ahead once markets begin to recover.

I'll now turn the call back to Rudy for closing remarks.

Thank you Jim in closing I want to reiterate how proud we are of what our business and to our partner firms accomplished last year did.

And then navigate the difficult market value and deep expertise and long term orientation were evident.

They demonstrated the value of prudent fiduciary advice and deliver outstanding service to their clients.

As I've said before it is environment like we have experienced last year when the industry leadership and the value of what they do really shows positioning them for strong growth in financial performance as financial markets recover.

Now as Rusty indicated given our recently announced ongoing discussions regarding a potential transaction with Clayton Dubilier <unk> Rice, we will not be opening up the lines for Q&A as we normally do but want to thank everyone. This always will get tight and interest in focus.

Thank you. This concludes today's teleconference. You may disconnect. Your lines at this time and thank you for your participation and have a great day.