PPD, Inc.
Q2 2010 Earnings Call Transcript

Published: 23 Jul 2010

[Operator:]

Good day ladies and gentlemen, and welcome to the Pre-Paid Legal Services second quarter earnings results conference call. (Operator Instructions.) I would now like to turn the conference over to your host Mr. Randy Harp, co-CEO, president, and chief operating officer. Please go ahead.

[Randy Harp:]

Good morning this is Randy Harp. I want to welcome you to the 2010 second quarter earnings conference call for Pre-Paid Legal Services Inc. Joining me here at the home office is our chief financial officer, Steve Williamson. Before we begin, I need like to remind everybody that the conference call will contain forward-looking statements, including our expectations of future results and future plans. Actual results might differ materially from those projected in any forward-looking statements. Additional information concerning risk factors that could cause the results to differ materially from these forward-looking statements are contained in our press release announcing the second quarter earnings as well as disclosures in our public reports on Forms 10-K, 10-Q and 8-K and any amendments thereto filed with the SEC and as always they’re available on the SEC Edgar website as well as our own website. My co-CEO, Mark Brown, is travelling today to British Columbia, but had passed on two very recent articles that were of interest to him and would be of interest to folks on this call and certainly pertain to the area that this company is focused on. One is dated July 12. The title is--and I’m just going to hit a few sentences from each of these articles--judges say litigants are increasingly going pro se, meaning that they represent themselves, and at their own peril. “A survey of nearly 1200 state trial judges around the country indicates that the weak economy has increased the number of litigants representing themselves in foreclosures, domestic relations, consumer issues, and non-foreclosure housing matters and the judges say litigants are doing a poor job as well as burdening courts already hurt by cutbacks. More than half the judges saw case filings increase in 2009, and 60% of them say fewer people are represented by counsel . The greatest increase is in foreclosures, followed by domestic relations, consumer cases, and other housing matters. The economic crisis has only exacerbated the problems in the courts says (inaudible). Self-representation is resulting in worse outcomes for litigants according to 62% of the judges. 78% of the judges say the increase in self-representation is hurting the courts, especially by slowing down the docket.” Another article that was in the New York Times July 12

[Steve Williamson:]

Thanks Randy. I’ll just start with a little overview for the second quarter of 2010 compared to ‘09. We had total revenue up about $1.7 million. Total expenses and taxes were up about $1 million, which resulted in about a $695,000 increase or a 4% increase in that income. 9% fewer shares gave us a 15% increase in diluted earnings per share. On a sequential basis, membership fees were down about $581,000. Looking at the quarterly comparison, second quarter 2010 membership fees increased 1% over the second quarter of ‘09 due to the 1% increase in the average premium enforced that we had for the second quarter of 2010. Associate services revenue increased $588,000, and that was primarily due to higher e-service fees that we had during the quarter compared to the ’09 quarter. The revenue, which as most of you know, is the 3-year amortization of that $10 enrollment fee that we have on some of our memberships. That was down $74,000, bringing that total line to $895,000. Dropping down to expenses, membership benefits, they decreased less than 1% versus the 1% increase in membership revenue, and that’s due to the reduced cost that we have on the I.D. theft memberships for 2010. Versus ’09 it dropped a quarter, as many of you know who have read our documents. It brought our benefit ratio to 33.6% for 2010’s second quarter versus 34.1% for ’09. I would expect it to be somewhere around that 33.5% on a go-forward basis. For commissions, they were virtually unchanged. They did around $29.2 million, and that’s basically because if you look at the annual membership fees written, which is the total new members that we wrote during any given period times the average fee per member that gives you the membership revenue written that we refer to. That was up just slightly, I think less than 1%. Commissions on a per-member basis were about $7 higher at $233 for the second quarter of 2010. Associate service cost was higher than associate services revenue by $1.1 million for the second quarter of 2010 versus being $594,000 in excess cost for the 2009 period. Associate services cost for the second quarter of 2010 was higher primarily because we had more bonuses paid in the 2010 quarter versus ’09. G&A decreased $478,000. And again, we had an increase in the top line but improved the margins a little bit by reducing the G&A cost in the quarter. So down $478,000 primarily due to a decrease in employee cost, legal cost, our telco and data communications cost, and some consulting fees that were lower. And those were partially offset by some slight increases in bank service charges overall and that’s primarily driven by the fees associated with processing the credit card payments. Other expenses increased $382,000. The biggest reason for that change, you may recall that last year from the second quarter of ’09 we had a reversal of our litigation accrual of $450,000. We also had $174,000 decrease in interest income in 2010 versus ’09 quarter. Those two items were offset by $117,000 less in interest expense, primarily due to the lower debt levels and slight decrease in interest expense on average over the period and a $114,000 reduction in depreciation expense. Provision for taxes came in at approximately 39% for both periods, which brings us to net income that was up 4% to $16.5 million and with a 9% reduction in our diluted shares outstanding due to our buyback program. That brought our second quarter diluted earnings per share to $1.65, up 15%. For the full first six months of 2010, diluted EPS was up 19%, to a record $3.52. So a pretty decent run rate. We used $3.8 million in cash to purchase 84,000 shares during the second quarter at an average cost of $45.15. The shares outstanding at July 16 were around $9.9 million. At June 30 we had cash and unpledged investments of about $70 million versus our total debt of about $28 million, and again that debt, we’re annualizing that out at about $4.5 million, $4.6 million per quarter. The biggest portion of that of course is the stock note that we had from Wells Fargo. That one will actually mature and that $1.2 million or so that we make on a monthly basis on that particular piece of debt will be gone as of June of next year, so rapidly approaching actual debt-free status. And the rate on that, on average we’re paying LIBOR plus 1.35%, which puts us at about 1.7% for the current LIBOR rates that are in place. And they’re all based upon the 30-day LIBOR rate, which is actually down a couple of ticks from last quarter at about 0.33 versus 0.35. We are in compliance with all of our debt covenants, under the most restrictive covenant that we have we have about $27 million available on our stock buyback. And then to go over, on a six-month period, want to just do a high-level overview of what we did with the cash flow. We generated $34.3 million in cash flow from operations for the first six months of 2010. We spent $1.1 million of that on capital expenditures, reduced debt of about $14.1 million, bought back shares with $5.4 million. That left about a $13.7 increase in cash and investments. And with that I’ll turn it back to you Randy.

[Randy Harp:]

Just another rock-solid cash flow quarter for sure and the company continues to move towards debt-free status. Certainly already there easily on the net debt basis, but thanks for all the numbers Steve. We now want to respond to the email questions that we received that haven’t been addressed this morning that are in our queue that we filed yesterday. We have three questions, and one of them is fairly long and I’m going to save it and answer these other two first. Any changes in the first half in terms of the percent of the business sold to group marketing or multiple-level marketing compared to the prior year? Have you seen any growth in any of the specialty legal plans that you sell, small business or commercial drivers? Group business has been down compared to the previous year. That changes sometimes but most weeks it is down. I’ve been travelling a lot and I have heard from some of our longtime, significant group producers that with this economy it is tougher to actually get in front of the employees to do presentations. I think employers are concerned about surviving and not necessarily looking for additional benefits. But as the last person I met with was telling me, that just means they need to call on more businesses. So exposure is still the biggest hurdle in front of us. Maybe this will make us get out and talk to more folks. Any growth in any of the specialty legal plans? Small business and CDLP for example, both are pretty consistent. They fluctuate again from week to week but pretty consistent with what we’ve seen and still represent a relatively small piece of our overall business. Any new specific programs or plans to help new associates become more productive in selling the legal plans? We have retained and are starting down a path, from a training standpoint, primarily on the group side, although a lot of the material and a lot of the training seminars or conference calls and video presentations would certainly be applicable to any of our sales associates, but the primary motivation and focus has been on our group division or group area, so we will be in the third quarter rolling out a very specific to pre-paid training program that hopefully will help better prepare our associates to deal with issues that they may be seeing in the workplace. Last question that we have is a long one. I may paraphrase and just hit the high points but it starts out