Q1 2023 Focus Financial Partners Inc Earnings Call
Good morning, ladies and gentlemen, I would like to welcome everyone to the focus financial partners 2023 first quarter call.
Joining today's call are Rudy Adolf founder N G E L. James Shanahan, Chief Financial Officer, Rusty Mcgranahan General Counsel, and Tina Madden head of Investor Relations and corporate communications missed.
Mr. Graham. Please go ahead Sir.
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 focuses the 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 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 our pending merger with Clayton Dubilier <unk> Rice, we will not be taking questions. Following Rudy and Jim's prepared remarks, and we will not be providing earnings guidance for the second quarter of 2023.
With that I will turn it over to our founder and CEO Rudy Adolf Rudy.
Thanks, Ross and good morning, everyone and thank you for joining us today.
This morning, we announced our first quarter results with $557 $5 million of revenues adjusted net income excluding tax adjustments pressure of 69 cents and <unk>.
<unk> adjustments brushy of 'twenty.
While slightly below our expectations financial performance continued to reflect the resiliency of our business. Despite the challenging macro backdrop during the quarter.
Our partners continue to deliver excellent service to their clients and managed care business as well remaining agile during the quarter.
Providing highly personalised integrated advice is extremely valuable to declines, especially during periods of volatility.
According to excellent partners industry M&A transaction volumes rebounded in the first quarter.
Slower fourth quarter last year.
Noted that buyers demand and sell.
So supply is strong and do you anticipate activity to increase as the year progresses.
Year to date, our M&A activity has been strong with 16 close transactions, including two new partner firms and 14 mergers on behalf of our partners.
Our differentiated ability to source structure and execute these transactions remains a core element of our value proposition to growth oriented firms.
Mr largest M&A team in the independent wealth management space.
To bring industry, leading scale to benefit our partner firms and their clients through acquisition.
As I've mentioned before we believe that the flight to comprehensive I'm conflicted advice, we continue to accelerate due to last year's market correction, leading to substantial growth in client assets managed by the <unk> industry as experienced in prior cycles.
Our partners continue to take advantage of our value added programs designed to give them an edge in meeting their clients' growing and highly personalized needs by leveraging our scale and dedicated resources, our partners can deliver ever increasing value to the advisors and clients.
Our essential catalyst retention referrals and organic growth.
While market conditions remain unsettled.
Diverse and growing global partnerships creates a number of scale advantages.
<unk>, forcing the sustainability of our strong growth over the long term and our differentiated value proposition in this industry.
With that let me turn the call over to Jim Jim.
Good morning, everyone.
Our business remains resilient supported by diverse recurrent revenue stream variable management fee structure and the economic alignment we have with our partners. We are executing well and we remain confident that we are well positioned to capitalize on our industry's substantial forward growth opportunity.
Now, let's turn to our Q1 P&L.
Our revenues for the quarter were 557 5 million up three 9% year over year, but slightly below our guidance of $560 to $570 million.
This was primarily due to lower than anticipated non market correlated revenues.
Our Q1 results also reflected $9 1 million in real estate related performance fees slightly below our $10 million guidance.
Our Q1, adjusted EBITDA was $132 $5 million of one 9% lower year over year, excluding the expenses associated with the merger process.
Our adjusted EBITDA margin was 23, 8% marginally below our estimate of approximately 24%.
The revenue shortfall versus expectations that I, just mentioned earlier contributed to the variance in our margin.
Our Q1 adjusted net income excluding tax adjustments per share was <unk> 69 cents decline of 29, 6% year over year. This reduction reflects the effect of higher interest expense on our borrowings.
Our Q1 tax adjustments per share was <unk> 11, 1% higher year over year, reflecting our tax efficient acquisition activity associated with the high M&A transaction volume for the period.
Our Q1 M&A activity reflects our continued strong momentum we closed 12 transactions in Q1 included one new partner firm and 11 mergers on behalf of our partner firms. So far in Q2, we have closed three mergers on behalf of our partner firms and one new partner firm.
The partner firmly closed on January 1st added revenues of approximately $1 2 million and adjusted EBITDA of approximately 400000 to our quarterly results.
Additionally, West CT capital the new partner firm that we closed on May <unk> is expected to add $11 1 million in annual acquired base earnings.
Now, let's turn to our Q1 expenses and cash flow.
Management fees were $124 6 million or 22, 3% of our revenues lower sequentially by one 9%, reflecting the contractual economic arrangements, we have with our partners our noncash equity compensation expense was one 4% of our Q1 revenues in la.
Line with our expectations.
As of March 31, our LTM cash flow available for capital allocation was $303 9 million, reflecting the resiliency of our cashless store in a volatile market here.
We paid cash earn out obligations of $26 1 million in Q1, we also paid $12 5 million in deferred acquisition consideration in Q1.
Now turning to our balance sheet.
We ended Q1 with approximately $2 7 billion of debt outstanding and our net leverage ratio was 441 times marginally above our estimate of approximately four three times due primarily to the modest shortfall in our adjusted EBITDA versus our expectations.
As of March 31, our Undrawn term loan a together with our Undrawn revolver and cash balance gives us over $850 million of available firepower as we anticipate another strong year of M&A activity.
Additionally in April we entered into a $500 million in forward starting interest rate swaps. These swaps fix our one mile terms sulfur for $500 million of borrowings at approximately three 7% plus a spread of 325 basis points for the April 2024 to April 2028.
Period.
In closing, we continue to navigate the ongoing market challenges as well and we remain highly disciplined in deploying capital we remain committed to driving substantial growth enhancing our value add programs and position ourselves to take advantage of the secular growth opportunity within the global wealth management industry.
I'll now turn the call back to Rudy for closing remarks.
Thank you Jim in closing I would like to reiterate the strength and resiliency of our business model.
Our differentiated competitive position and the value of prudent fiduciary advice in volatile market environments.
As I have said before it is in an environment like we experienced last year.
<unk> industry leadership and the value of what they do really shows positioning them for solid growth in performance, it's financial markets recover.
Regina Lindy and I could not be proud of our incredible partnership and the quality of the business that focused team together with our partners who has built over the last 18 years.
We look forward to continuing to grow and evolve the company aimed to capitalizing on the substantial growth opportunities that lie ahead of us.
Now as Rusty said, given the pending merger with Clayton Dubilier <unk> Rice, we won't be opening up the lines for Q&A. However, we want to thank everyone for their time and interest in focus.
And with that ladies and gentlemen that does conclude the call. You may now disconnect your lines and thank you again for joining us today.