Focus Financial Partners Inc. (FOCS) Q4 2022 Earnings Call Transcript

Focus Financial Partners Inc. (NASDAQ:FOCS) Q4 2022 Earnings Conference Call February 16, 2023 8:30 AM ET

Company Participants

Rusty McGranahan - General Counsel

Rudy Adolf - Founder, Chief Executive Officer & Chairman

Jim Shanahan - Chief Financial Officer

Conference Call Participants

Operator

Good morning. I would for illustration to invited everyone to nan Focus Financial Partners 2022 Fourth Quarter and Full Year Earnings Call. Joining today's telephone 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 spell ahead.

Rusty McGranahan

Good morning, everyone. Before we begin, fto maine punctual you that during nan people of this call, we whitethorn make a number of forward-looking statements. We telephone your attraction to nan truth that Focus' results may, of course, disagree from these statements. These statements are based connected assumptions made by and accusation presently disposable to Focus Financial Partners and impact risks and uncertainties that could origin nan results of Focus to materially disagree from these statements. Focus has made filings pinch nan SEC, which lists immoderate of nan factors that whitethorn origin its results to disagree materially from these statements. And finally, Focus assumes nary work and does not undertake to update immoderate specified forward-looking statements.

In addition, owed to nan precocious announced acquisition connection and exclusivity arrangement, pinch Clayton, Dubilier & Rice, we will not beryllium taking questions pursuing Rudy and Jim's prepared remarks.

With that, I will move it complete to our Founder and CEO, Rudy Adolf. Rudy?

Rudy Adolf

Thanks, Rusty. Good morning, everyone. And convey you for joining america today. Despite nan challenging macro situation correlated crossed virtually each plus classes passim 2022, our afloat twelvemonth capacity was solid, finishing good successful Q4 pinch beardown momentum into 2023.

Our business demonstrated its resiliency inconsistently outperformed comparative to expectations. Our discipline, diversification and standard were instrumental successful helping america not conscionable to navigating nan challenging marketplace conditions but successful positioning america to capitalize connected nan eventual recovery. The depths and diversification of our world partnership, our beardown M&A momentum, and we are each instrumental – are astatine nan halfway of our competitory differentiation, reinforcing our activity advantage successful independent wealthiness management.

We generated coagulated results successful 2022, increasing our revenues by 19.2% year-over-year to astir $2.1 billion. Our adjusted nett income excluding taxation adjustments per stock was $3.62, and taxation adjustments per stock were $0.77, expanding complete nan anterior twelvemonth by 7.7% and 37.5%, respectively. These results bespeak our partners fantabulous occupation successful managing their businesses successful advising their clients.

They besides further reenforce nan worth of nan divers and recurring quality of our revenues and nan benefits of our adaptable costs guidelines and our net preference.

Collectively, these attributes person enabled our business to upwind volatile marketplace conditions complete aggregate quarters, while mitigating nan downside consequence to our earnings. 2022 group different grounds for M&A successful our industry, pinch transaction volumes, expanding astir 11% complete nan anterior twelvemonth and achieving nan 10th consecutive twelvemonth of growth, according to economical partners. DeVoe Research highlighted that sub acquisition volumes much than doubled successful nan past 2 years and were 50% higher successful 2022 versus 2021.

Firms mentioned little than 1 cardinal successful customer assets, represented astir 75% of nationalist activity successful 2022. We capitalized connected this momentum, arsenic did our partner firms. We closed 24 transactions past year, adding 5 caller partner firms and completing 19 mergers connected behalf of our partners, who took advantage of this important consolidation opportunity to accelerate location growth.

Our differentiated expertise to source, building and execute these accretive transactions stay a cardinal portion of our worth proposition to maturation oriented firms. It's nan largest M&A squad successful nan independent wealthiness guidance space. We proceed to bring manufacture starring standard to nan use of our partner firms, location clients and our shareholders.

In 2022, we accrued our footprint successful important Wealth Management markets crossed nan US, adding fantabulous caller partners pinch beardown businesses, move guidance teams, talented advisors, and agelong opinionated customer relationships. Our halfway worth proposition of entrepreneurship, imperishable superior and worth added programs proceed to resonate strongly.

We besides expanded our world beingness into Switzerland past twelvemonth pinch our business pinch Octogone, further extending our business successful countries pinch sizable independent Wealth Management sectors catering to precocious extremity ultra precocious nett wealthiness clients stay an important priority.

We are disconnected to a beardown commencement successful 2023, pinch 7 transactions closed year-to-date, including 1 partner patient and six mergers, and we assigned 4 mergers, which we expect to adjacent successful nan first quarter. We proceed to get precocious value RIAs, and different independent wealthiness managers, but we’re besides selectively adding firms pinch unsocial capabilities that tin use our partnership, specified arsenic nan announced aliases acquisition of Origin Investments by our partner patient Kovitz astatine nan commencement of this year.

When closed, Origin will adhd to Kovitz Private Real Estate Solutions astatine a clip successful replacement investments are becoming progressively important to blase investors. This transaction is expected to facilitate nan expertise of root to connection replacement solutions to our partner firm's clients.

With astir 1 cardinal of liquidity disposable to deploy, and our LTM rate travel disposable for superior allocation was 317.7 cardinal arsenic of December 31. Our M&A pipeline is strong, it's a bully operation of opportunities successful nan US and internationally. And our partners stay progressive successful pursuing mergers to grow their businesses and enlistee precocious value talent. They proceed to building transactions successful an businesslike measurement remaining nimble successful our attack to achieving nan champion alignment betwixt our objectives and seller interests, while staying wrong our 3.5 to 4.5 targeted nett leverage ratio range.

However, we will proceed to turn our business and adhd further scale. We stay highly selective successful our M&A process and disciplined successful our superior allocation to guarantee we execute transactions that make incremental worth for our shareholders.

2022 was different twelvemonth successful which nan worth of prudent fiduciary proposal was evident, peculiarly successful nan unsocial challenges presented by markets and economies past year. Our partners are trusted advisors successful each facet of their client's financial lives beyond nan investments. These heavy multifaceted relationships consequence successful continued precocious customer retention, which drives our recurring revenues and nan stableness of our financial model.

We judge that nan formation to broad un-conflicted proposal will proceed to accelerate arsenic a consequence of past year's marketplace correction successful move accelerating nan maturation successful customer assets managed by nan RIA manufacture nan measurement it has successful anterior sectors.

Our partners benefited from our worth added programs past year, enabling them to meet nan increasing and highly personalized leads of a blase precocious and ultra precocious nett consequence customer base. But taking advantage of our standard and dedicated resources, our partners tin present ever expanding worth to their advisors and clients, which are basal catalysts for retention, referrals, and different sources of integrated growth.

We proceed to put successful areas specified arsenic replacement finance opportunities, lending, spot and security solutions, among others. With take by partners continuing to summation arsenic these are nan programme their advisors and clients want nan most.

As 2023 gets underway, we expect volatile conditions whitethorn persist successful nan near-term earlier markets statesman to recover. We are assured that we will proceed to successfully navigate this situation further reinforcing our resilience and nan spot and consistency of our financial performance. We stay highly disciplined superior allocators focused connected achieving nan due consequence study successful each transaction we do.

Similar to what we did successful 2008 and 2009, successful 2020, we are actively positioning ourselves for nan marketplace recovery. For each 2020, location is simply a 2021. We are uniquely positioned successful a multi-trillion dollar world manufacture experiencing successful non-market correlated secular shifts driven successful portion by nan request of laminitis succession and scale. While transaction volumes proceed to climb each year, we judge manufacture consolidation is conscionable beginning, presenting an opportunity that will proceed for years to come.

Our divers and increasing world business creates enduring standard advantages reinforcing nan sustainability of our beardown maturation complete nan semipermanent and uniquely positioning america to create important worth to our shareholders. For these reasons, Rajini, Lenny and I are excited astir nan outlook for attraction arsenic we proceed to grow our manufacture starring position.

With that, fto maine move nan telephone complete to Jim, Jim?

Jim Shanahan

Good greeting everyone. Our business further demonstrated its resiliency successful 2022 pinch coagulated maturation and financial capacity and beardown M&A momentum. Our divers recurring gross stream, adaptable guidance interest structure, and nan beardown economical alignment we person pinch our partners person withstood nan volatile macro situation complete nan past year. We are executing good and stay assured that we will upwind nan ongoing challenges and beryllium good positioned to capitalize connected nan maturation opportunity erstwhile markets recover.

Our partners person taken nan uncertain macro situation successful stride, and are doing an fantabulous occupation moving pinch their clients. The marketplace events of 2022 reenforce nan worth of knowledgeable trusted advisors, heavy customer relationships, and balanced portfolio building to present maturation complete nan long-term.

Now let's move to our Q4 and afloat twelvemonth P&L. Our Q4 results were coagulated and exceeded our estimates connected each measures. Our revenues were $547.7 million, up 4.5% year-over-year, and 6.3% supra nan apical extremity of our guidance of $505 cardinal to $515 million. This is chiefly owed to nan year-over-year alteration successful integrated revenues, which were antagonistic 3.5% versus our first estimate of antagonistic 10%. Our integrated revenues were impacted by nan volatile marketplace conditions successful 2022.

Our gross outperformance of $32.7 cardinal was chiefly related to higher than anticipated non-market correlated revenues from our family agency firms to diminution activities and year-end worth they own. Approximately $7 cardinal of this magnitude won't repetition successful Q1, but could recur successful early quarters.

Our Q4 adjusted EBITDA was $136/7 million, summation successful 5.9% year-over-year, and our adjusted EBITDA separator was 25%, supra our estimate of astir 23%. The gross of capacity I conscionable walked done contributed to a information of this increase. The remainder was attributable to adaptable compensation, wherever rate compensation and related expenses were sequentially little by astir $3 million. Compensation arsenic percent of revenue, which includes nan effect of M&A transactions we adjacent successful Q4 declined sequentially by 2.3 percent points.

Our Q4 adjusted nett income excluding taxation adjustments per stock was $0.79 declined 16% year-over-year. This simplification includes nan effect of higher liking disbursal owed to nan 2022 summation successful nan LIBOR and SOFR rates, arsenic good arsenic a pre-tax $7.4 cardinal summation successful different expense, chiefly associated pinch a write-off associated pinch an security receivable. Our Q4 taxation adjustments for stock was $0.20 cents, 25%, higher year-over-year.

For nan afloat year, our revenues were astir $2.1 billion, a 19.2% summation complete nan anterior year, driven partially by an integrated gross maturation complaint of 8.5% for nan aforesaid period. Our afloat twelvemonth adjusted EBITDA was $537.5 million. Our adjusted EBITDA separator was 25.1%, unchanged from nan anterior year. We are proud of this accomplishment fixed nan marketplace volatility successful 2022.

Our afloat twelvemonth adjusted nett income, excluding taxation adjustments per stock was $3.62, 7.7% higher than nan anterior year. Our afloat twelvemonth taxation accommodation per stock was $0.77 summation successful 37.5% for nan aforesaid period, reflecting nan maturation successful our taxation shields owed to M&A activity. The taxation ratio of our business remains a important and increasing economical use to our shareholders.

Our 2022 M&A activity reflected beardown momentum passim nan twelvemonth arsenic Rudy highlighted, we adjacent 24 transactions, including 5 caller partner firms and 19 mergers. In Q4, we closed 9 transactions, including 2 caller partner firms that contributed astir 3.1 cardinal of revenue. And $1 cardinal of adjusted EBITDA pinch an adjusted EBITDA separator of astir 31% for nan quarter. On a afloat 4th basis, we estimate that these costs will lend astir $5 cardinal and $1.8 cardinal successful gross and adjusted EBITDA respectively.

Now, let's move to our Q4 expenses and rate flow. Management fees were $132.7 cardinal aliases 24.2% of revenues, somewhat up sequentially owed to nan Q4 gross outperformance. Our non-cash equity compensation disbursal was 1.5% of our Q4 revenues, successful statement pinch our expectation, and we expect that this disbursal will beryllium astir 1.4% of our estimated Q1 revenues.

As of December 31st, our LTM rate travel disposable for superior allocation was $317.7 million, reflecting nan resiliency of our rate flows during a volatile marketplace year. We paid rate earnout obligations of $32.6 cardinal successful Q4, and we estimate that we'll salary astir $24 cardinal successful earnouts successful Q1.

The deferred woody consideration, which involves paying a information of nan deal, information astatine nan clip of closing and a information respective years from nan clip of closing creates semipermanent liabilities for america successful nan shape of deferred rate payments. These payments are successful summation to nan contingent information payments that we make.

To thief investors understand nan magnitude and timing of these deferred payments. We person provided disclosure successful nan F pages of our 2022 10-K arsenic good arsenic connected page 24 of our net supplement.

Now, for a fewer words connected our Q1 P&L expectations. This will beryllium successful nan scope of $560 cardinal to $570 million. This estimate includes nan existent property related capacity fees we discussed connected our 3rd 4th telephone that we expect will adhd astir $10 cardinal and nan sequential diminution of $7 cardinal from Q4 revenues that will not repetition successful Q1.

We estimate that our year-over-year scope of 1% to 3% and we estimate that our Q1 adjusted EBITDA separator will beryllium astir 24%, which excludes immoderate expenses associated pinch a Clayton, Dubilier & Rice process.

Now, turning to our equilibrium sheet, we ended Q4 pinch astir $2.6 cardinal of indebtedness outstanding and our nett leverage ratio was 4.19 times, somewhat nether our estimate of 4.25 times. We expect that our Q1 nett leverage ratio will beryllium astir 4.3 times. We proceed to stay elastic and really we building transactions, specified arsenic nan deferral building I mentioned previously, and will stay committed to our 3.5 to 4.5 nett leverage ratio range.

We refinance a information of our indebtedness successful November and raised nan caller $240 cardinal word loan. The specifications of which tin beryllium recovered connected pages 26 and 27 of our net supplement.

We took advantage of a model successful nan in installments markets to widen nan maturity connected our $1.6 cardinal tranche of our word indebtedness for 2024 to 2028 and to widen nan maturity of our $650 cardinal revolver to 2027, reducing nan long consequence of our borrowings. We besides converted our remaining LIBOR borrowings to SOFR, $850 cardinal of our outstanding indebtedness has SOFR swapped to a fixed weighted mean complaint of 53 ground points positive a dispersed of 325 ground points. The remaining magnitude of our outstanding indebtedness is simply a floating SOFR rate, pinch a dispersed of 250 to 325 ground points.

Our caller Term Loan A has a 9 period delayed tie feature, fixed america added flexibility. While wider spreads create immoderate incremental liking disbursal headwind for us, we proceed to attraction connected prudently managing our superior building and maturity ladder. At twelvemonth end, our caller word loans together pinch our undrawn revolver and rate equilibrium gives america astir 1 cardinal of firepower, arsenic we expect different beardown twelvemonth of M&A activity.

Additionally, our LTM Cash Flow Available for Capital Allocation was 317.7 cardinal past year. As Rudy noted, we are highly disciplined successful allocating capital, moreover much truthful fixed nan summation successful liking rates complete nan past year.

In closing, we delivered a coagulated twelvemonth of maturation and performance, contempt nan volatile macro backdrop pinch nan hallmarks of really we put and turn our business again intelligibly evident. Our business demonstrated its resilience, supported by a divers guidelines of recurring revenues. Our partners generated beardown capacity and service their clients well, positioning themselves to beardown maturation arsenic markets recover.

We proceed to navigate nan ongoing marketplace situation arsenic well. We stay highly disciplined successful really we deploy capital, position ourselves to return advantage of nan tremendous maturation opportunity ahead, erstwhile markets statesman to recover.

I'll now move nan telephone backmost to Rudy for closing remarks.

Rudy Adolf

Thank you, Jim. In closing, I want to reiterate really proud we are of what our business and our partner firms accomplished past year. They navigated nan difficult marketplace good and their heavy expertise and semipermanent predisposition wherever evident. They demonstrated nan worth of prudent fiduciary proposal and delivered outstanding work to their clients.

As I said before, it is environments for illustration we person knowledgeable past year, erstwhile they are manufacture activity and nan worth of what they do really shows positioning them for beardown maturation successful financial capacity arsenic financial markets recover. Now, arsenic Rusty indicated, Tina precocious announced ongoing discussions regarding a imaginable transaction pinch Clayton, Dubilier & Rice. We will not beryllium opening up nan lines for Q&A arsenic we usually do, but want to convey everyone arsenic ever for your clip and liking successful Focus.

Operator

Thank you. This concludes today's teleconference. You whitethorn disconnect your lines astatine this clip and convey you for your information and person a awesome day.

Question-and-Answer Session

End of Q&A