Focus Financial Partners Inc.

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 results may, of course, differ from these statements. These statements are based on assumptions made by an 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 SEC, which lists some of the factors that may cause its results to differ materially from these statements, including without limitation, uncertainty surrounding the COVID-19 pandemic. 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 Adolph. Rudy? Rudy?

Thanks, Rusty, and good morning, everyone. We appreciate you joining our call today. We delivered another strong quarter in Q3, and we are having an exceptional year across every dimension of our business. Our financial performance exceeded our expectations on all measures, positioning us for another record year. We generated third quarter revenues of $454.5 million adjusted net income excluding tax adjustments per share of $0.84 and tax adjustments per share of $0.14. Our last 12-month cash flow available for capital allocation grew 54.4% year-over-year to $299.7 million, reinforcing not only our strong performance but also the economic value of our tax shield. Our high-growth business is complemented by a resilient economy tax-efficient financial model that has consistently delivered strong results across market cycles. We are also proud that 10 of our US RIA partner firms were recently included in the Barron's 2021 list of America's top 100 RIA firms, with most achieving this ranking for many years in a row, reflecting the consistently high quality of the firms in our partnership. Our M&A momentum continued to accelerate in the third quarter, as we closed two new partner firms and seven mergers on behalf of our partners, including a merger for Connectus in Australia. The first quarter to date, we have closed another 12 transactions and announced three that are pending closing. This brings our year-to-date total to 31 transactions, which included nine new partner firms, 22 mergers for our partners, including eight mergers for Connectus across four countries. Our expanding international footprint is an important source of revenue diversification. Our value proposition continues to resonate strongly, and we are seeing an extraordinary level of potential transactions, both in terms of new partner firms and mergers on behalf of our partners. Connectors also continues to experience significant interest in the U.S. and internationally. We have a good mix of transactions in our pipeline and are seeing new opportunities to expand our business. Our partnership stood at 79 firms as of November 1st. I've never been more excited about the caliber of firms we are attracting. Not only are they industry leaders in their own right, but they further complement and diversify our partnership through their track records of growth, as well as their deep expertise in wealth structuring and client service. Ancora, Cardinal Point, and Almond, three recent partner firms we have closed or announced, are great examples of this. Combined, they oversee approximately $11 billion in client assets, and we anticipate that they will add approximately $60 million in annual revenues and approximately $22.5 million in annual acquired base earnings. A little context on each. Ancora, which closed October 1st. is a premier wealth advisor and investment management firm in Cleveland, Ohio, with over 9 billion inclined assets. The firm is a scaled wealth manager that has differentiated itself through its diversified service model, which is complemented by an impressive investment team and performance track record spanning more than 15 years. Ankor is particularly well known for its deep investment management expertise, offering its clients an array of proprietary solutions in equity, fixed income, mutual funds, and alternative investments. Cardinal Point, which closed November 1st, is a Toronto-based wealth manager with approximately $1.1 billion in client assets. Over more than a decade, Cardinal Point has built a reputation as a leader in cross-border wealth management. The firm addresses the complex needs of clients who are domiciled in both Canada and the US through the highly integrated approach it has developed over time. Cardinal Point brings a unique value proposition to the focus partnership, enhancing our existing network while also expanding focus presence in Canada. Almond Wealth Partners, which is expected to close in late first quarter, is an RIA based in Jacksonville Beach, Florida. with approximately 700 million in client assets. Allman's dynamic, multi-generational principal group make it a preeminent firm to partner with in the attractive Florida market. Each of these firms, as well as Sonora Investment Management, which closed October 1st, joined Focus because we are much more than just financial acquirers. We are permanent investors offering a unique combination of entrepreneurship, gross capital, and value-added services. I've said this before, and it is worth reemphasizing. Having focus as a long-term strategic partner with the resources, intellectual expertise, and scale advantages that enable our partners to become stronger businesses, grow faster, and serve their clients better is an important competitive distinction. The value-added services we provide are an essential element of what makes us attractive to the firms that join us. These are services that our partners have specifically identified as a need, and we are working closely with them to build advisor-friendly solutions that leverage our scale and purchasing power. The most recent example of this is trust services. This quarter, we began to offer dedicated trust services under the stewardship of Ted Simpson. who recently joined us to head Focus Fiduciary Solutions, our trust and estates offering for our partner firms and their clients. These services will create a significant opportunity for our partners' advisors to expand and retain multi-generational client assets. Similar to the approach we took with our cash management and credit solutions, we are leveraging a network of third parties, in this case, advisor-coordinated independent trustees who have the scale and expertise to meet the diverse needs of our partners' clients and can do so at highly competitive pricing. That team works on a consultative basis with our partners to develop solutions that are tailored to the client needs. As we turn our sights to the fourth quarter, I have no question that Focus will continue to generate outstanding business growth and financial performance driven by the combination of five elements. First, we are the market leader in arguably the most attractive segment of financial services. There's no other firm that has our track record in independent wealth management and operates globally with our scale, scope, expertise, and resources. Since our first partners joined us in 2006, we have been at the forefront of the industry, but we are actually just getting started. We are a pure play partnership capitalizing on industry consolidation that is in its early innings, a trend that we believe will accelerate further and will characterize this space for the foreseeable future. Second, our three M&A models, direct partnership at the holding company level, mergers on behalf of our partners, and connectors acquisitions comprehensively serve the needs of this industry, and as a result we are attracting many of the best firms. As such, we expect that we will have a sustained pipeline of high quality domestic and international M&A opportunities for many years to come. Third, the continued growth of our partner firms. They are operating as entrepreneurs but are also benefiting from our value-added services which are enabled by our unique scale and expertise. Their performance track records demonstrate the caliber of their businesses, which was particularly evident during the onset of the 2020 pandemic crisis. Our third quarter year over year organic revenue growth of 28.8% underscores this point. Fourth, a tax-efficient financial model that derives its stability from its reliance on fee-based and recurring wealth management revenues that are not subject to fee pressure the way the asset management industry is. Our financial model is also CapEx Lite, with a highly variable expense base. And fifth, a prudently managed capital structure, with acquisitions funded by a combination of increased cash flow and low-cost debt, and by selectively using equity consideration for transactions and earn-out payments. With that, let me turn the call over to Jim.

Good morning, everyone, and thank you for joining us today. Our third quarter results reflect the strong performance of our business, and we have continued to build momentum into Q4. Our partner firms performed well in Q3 and delivered another quarter of strong growth. We have a long track record of acquiring excellent firms that are value accretive, capitalizing on a rapidly growing market that is consolidating quickly. Embracing the entrepreneurship that make these firms industry leaders central to everything we do, and we provide them with breadth and depth of resources unavailable through any other acquirer in the market. We manage our business and growth in a disciplined way, and the strength and consistency of our financial performance is a testament to that. We have a substantial market opportunity ahead of us, not just here in the US, but internationally as well. which will fuel our expansion for years to come. We have demonstrated success in not only taking advantage of the opportunity set immediately in front of us, but also at identifying where the market is evolving to and adapting our business to capitalize on what the future opportunities will be. With that, let's turn to the highlights of our Q3 P&L. Our revenues were $454.5 million, up 37.1% year over year, and slightly above the top end of our estimated range of $440 million to $450 million, as organic revenue growth across the partnership was 28.8%, exceeding the 27% high end of our estimate. Our Q3 adjusted EBITDA was $113.5 million, up 45% year over year, our adjusted EBITDA margin was 25% in line with our estimate. We continue to expect that our margins will expand over time due to the scale-driven operating leverage of our business. Year-to-date September 2021, our adjusted EBITDA margin expanded by approximately 1.8% compared to the prior year period. Our adjusted net income, excluding tax adjustments per share, were $0.84, 33.3% higher year-over-year than which reflected the effect of the incremental interest expense associated with pre-funding of our acquisition activity in the second half of this year. As a reminder, we drew down $650 million of our $800 million term loan raise on July 1st. Our tax adjustments per share were 14 cents, up 16.7% for a comparable period, reflecting our strong M&A momentum. It is important to note that our tax-efficient structure of M&A transactions continues to provide a significant benefit to shareholders in the form of tax savings and frees up additional capital for the execution of our acquisition strategy. As of September 30th, our gross unamortized tax yield was over $2 billion, the details of which are in our earnings supplement. Almost every acquisition we make increases the value of this tax yield. Our M&A momentum was strong in Q3, and as Rudy noted, that has continued into Q4. We closed the acquisition of two new partner firms, ARS on July 1st and Badgley Phelps on August 1st. These two firms contributed a total of 5.4 million in revenues and 2.1 million in adjusted EBITDA in Q3, or about 38% in adjusted EBITDA margin. Based on mid-quarter activity, we estimate Q4 full quarter revenues and adjusted EBITDA of $7.3 million and $2.7 million respectively from these closings. Additionally, Q4 to date, we have closed on three additional partner firms and have one signed and pending close, which we estimate will contribute a total of $69 million in annual revenues and $24.9 million in annual adjusted EBITDA, or about 36% in adjusted EBITDA margin. Based on mid-quarter closings, we estimate $15 million in revenues and $5.3 million in adjusted EBITDA in Q4 for these firms. Now, turning to our Q3 expenses and cash flow. Management fees were $127.2 million, or 28% of revenues, relatively in line with the prior quarter. Our non-cash equity compensation was 1.3% of Q3 revenues, in line with our expectation and we estimate this expense will also be approximately 1.3% of estimated Q4 revenues. As a reminder, our GAAP results are impacted each quarter by the re-measurement of our earn-out liabilities. This re-measurement, which is estimated using Monte Carlo simulations, resulted in an increase on the non-cash change in the fair value of estimated contingent consideration of $36.2 million for Q3, reflecting future growth of our partner firms. Additionally, in Q3, we also issued approximately 64,700 Class B units in connection with an earn-out obligation. As we have said previously, we selectively issue equity in connection with acquisitions and earn-out payments. Regarding cash flow, our LTM cash flow available for capital allocation as of September 30th was $299.7 million, 54.4% higher year-over-year. reflecting the growth of our partnership as well as the addition of 10 new partner firms and 21 mergers during this LTM period. We paid cash earn out obligations of $33.7 million in line with our Q3 estimate. We anticipate that we will pay cash earn outs of approximately $35 million in Q4. Now for a quick review of our Q4 expectations. We estimate that our Q4 revenues will be in the range of $475 million to $485 million. We estimate a Q4 organic revenue growth rate of 17% to 20%. Our Q4 expectations also reflect the contributions of new partner firm additions. We anticipate that our Q4 adjusted EBITDA margin will be approximately 25%. As I've mentioned previously, we will update our long-term adjusted EBITDA margin target at our Invest Today on December 9th as part of our overall review of our business strategy and long-term growth targets. Now for a few comments on our balance sheet. We ended Q3 with approximately $2.3 billion of debt outstanding and a net leverage ratio of 3.54 times in line with our Q3 estimate. Assuming markets stay constant at current levels, we anticipate that our Q4 net leverage ratio will be between four times and 4.25 times. We remain committed to our net leverage ratio range of 3.5 times to 4.5 times, which we believe is the most appropriate range given the highly acquisitive nature of our business. To close, we continue to deliver strong growth and financial performance in Q3, and we anticipate that this will continue into 2022 and beyond. We are uniquely positioned to benefit from the large and growing independent wealth management industry, which, according to an investment report, stood at approximately 6 trillion in 2019 in the US alone and is expected to grow to 9 trillion by 2024, expanding at a compound annual growth rate of 10%. According to several sources, the addition of international markets just in the countries we are invested in adds another approximate $4 trillion to this total. It bears repeat in that FOCUS is a pure play investor in the growth and consolidation of this industry globally. No other acquirer in this space, public or private, offers our track record and value proposition, which is supported by the benefits of permanent capital investment or has anywhere near our scale. It takes time to build these capabilities, and we have a distinct first mover advantage. Taken together, all of these attributes contribute to outstanding and sustained financial performance, industry-leading growth, and enduring competitive differentiation that creates sustained long-term value for their shareholders. With that, let me turn the call over to the operator for Q&A. Operator?