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's 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 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?

Thanks, Rusty. Good morning, everyone, and welcome to our call today. We appreciate your interest and focus. We had an outstanding year in 2021, and Regine, Lenny, and I are incredibly proud of the performance that our business delivered, reinforcing our clear leadership in the independent wealth management sector. We generated excellent financial performance for the year, exceeding our expectations on all measures with revenues and adjusted net income excluding tax adjustments reaching new heights. We continue to attract some of the highest quality firms in the industry and we ended 2021 with 84 partner firms in four countries. The quality and scale of our partnership combined with record M&A activity and new value-added services that further enhanced our value proposition We are all integral to this outcome. We entered 2022 with excellent momentum, extending the strong pace of activity we experienced last year. We are working on a substantial pipeline in the US, Australia, Canada, and the UK, and plan to expand into other countries. Our December primary equity race demonstrated our ability to access the equity markets to further support and capitalize on the attractive M&A opportunities that we expect in 2022 and beyond. We delivered excellent results for our shareholders, growing full-year revenues by 32.1% year-over-year to nearly $1.8 billion. Our adjusted net income excluding tax adjustments per share was $3.36, and tax adjustments per share were $0.56, up 36.6 and 19.1% respectively. These results reinforce the high growth nature of our business, which is a function of the value being created by the firms in our partnership. The results also reflect the value of our recurring revenue stream, which drives the stability and predictability of our financial performance, regardless of market conditions. In 2021, in excess of 95% of our revenues were recurring. However, what made 2021 a standard year was the acceleration of our M&A momentum as we capitalized on the industry consolidation opportunity in a disciplined way. We closed the record 38 transactions last year, including 14 partner firms and 24 mergers, inclusive of eight mergers for Connectors, which expanded its footprint in Australia, Canada, and the UK. We continue to add outstanding new partner firms, each an industry leader with a strong business, talented advisors, and seasoned management teams, and deep, long-standing client relationships. Each added complementary capabilities to our partnership, including geographic reach, and an array of wealth and investment management expertise, by further diversifying our revenues and cash flow. As we discussed in our December Investor Day, our core value proposition of entrepreneurship, permanent capital, and value-added services is unique in the market and resonates strongly, enabling us to continue attracting many of the highest-performing firms in the industry. As you heard, many of our partner firms say, having focus as a long-term strategic partner with the resources, intellectual expertise, and scale advantages to help them become stronger businesses, grow faster, and continually service their clients better was at the core of the decision to join us. Every time we add a firm of the caliber of the 14 partners that joined us in 2021, it further validates the attractiveness of our value proposition and our partnership. At our investor day, you heard my co-founder Rajini Kodialam describe the value that is created by our programmatic approach to M&A. Central to this process is ensuring that we are adding the right firms. This is what drives the consistently high investment returns we are generating. Our value-added services are also an important differentiator and essential to helping our partner firms enhance their organic growth. My co-founder, Lenny Chang, explained that to stay competitive, RIAs need to add services to position themselves to meet evolving client needs, which vary based on the complexity of their wealth and assets. RIAs concurrently need to upgrade their business practices as scale has become an increasingly important differentiator. We enable our partner firms to meet those needs through both our business and client solutions. and we further expanded our value-add offerings last year in important areas such as trust, lending, insurance, and valuation solutions. Last week, we announced our partnership with CASE to provide a customized alternative investment platform to all of our partner firms. This platform will allow our partners to seamlessly access a range of alternative investment strategies on behalf of their clients. The unique scale and reach of our partnerships gives us insights that we can leverage to the benefit of all of our partners. And we have the profitability to continually enhance our value added services in the areas that will help our partners the most. We structured our investor day to answer the key investor questions in each of these areas. And the feedback we have gotten has been excellent. In particular, The disclosures we provided on our long-term organic growth rates, excluding mergers, were well received. As of September 30, 2021, for firms that have been with us for at least two years, our partnership generated a since-inception organic growth rate of 9.6% excluding mergers, and our portfolio of US RIAs, 11.2% on a weighted average basis. Our update on the size and stability of our investment returns was also viewed very positively, with 91% of such firms generating levered IRRs in excess of 20%, compared with 86% at our 2019 investor day. Most importantly, investors were impressed by the quality and depth of our partnership, as demonstrated by many partners who joined us for the panel discussions. We have made substantial progress in the evolution of our business with the COVID crisis reinforcing the stability and resiliency of our business model. And we increased our 2025 financial targets to reflect this. Our growth trajectory continues to accelerate and we are executing on record M&A volumes by widening our leadership position within the independent wealth management sector. Perhaps the most important takeaway is that we are consistently delivering 20 plus percent annual growth supported by strong organic revenue growth and outstanding execution, investment discipline, and nimbleness. I can't emphasize this point strongly enough. Although we and our partner firms expect some level of market volatility in 2022, We anticipate 20% plus annual revenue and adjusted EBITDA growth and adjusted EBITDA margin of approximately 25.5% this year. Similar to 2020, the value of financial advice and longstanding client relationships provide a solid foundation for this outlook. It also bears repeating. that we are uniquely positioned in a multi-trillion dollar global industry that is experiencing a transformational shift driven by succession and the need for scale. At our investor day, we highlighted that despite the increase in merger activity in the last several years, consolidation in this industry is just beginning, representing an opportunity that will spend many years, if not a decade or more. Given our scale, track record, and exclusive industry focus, we believe that Focus is the best position company in the world to capitalize on these dynamics, which we believe will result in significant value creation for our shareholders. It is for these reasons that we updated our 2025 financial targets, including revenues of approximately $4 billion, adjusted EBITDA of $1.1 billion, and adjusted EBITDA margin of 28%, supported by a future partnership of approximately 125 firms. To reach these targets in about four years' time requires that we more than double the size of our revenues and adjusted EBITDA by increasing the number of partner firms we have by about 50%. We believe that these targets are aggressive but achievable. Our diverse and growing global partnership creates enduring scale advantages, reinforcing the sustainability of our strong growth for many years to come. I'm very excited about our outlook, both near and long term. With that, let me turn the call over to Jim.

Jim? Good morning, everyone. In Q4 and for the 2021 full year, our business performed exceptionally well. Our growth and financial performance were very strong as our partner firms delivered excellent results. We closed 38 transactions, a new record for our M&A activity, and continued our international expansion. We enhanced our value-add services, added new capabilities in many important areas. The revenue and adjusted EBITDA growth we achieved drove strong year-over-year growth in our cash flow generation. substantially increasing our flexibility to invest in value and creative opportunities around the world. Our tax yield continued to increase, which was also an important enabler of the growth in our cash flows. The new partner firms we acquired and the mergers we completed on behalf of our partners last year further position our partnership for continued strong growth and performance in the future. The quality of results our business is achieving and the consistently high performance our partner firms are delivering are the catalysts for the updated 2025 financial targets we shared with you at our December investor day. As Rudy noted, we also laid out the annual growth targets that support our longer-term view, which provides important near-term context. Based on current market levels and the trajectory of our business, We believe that we will deliver full-year 2022 revenue and adjusted EBITDA growth in excess of 20% and adjusted EBITDA margin of approximately 25.5%. To further emphasize a point that Rudy made, it is important to remember that our business is relationship-based, with over 95% of our 2021 revenues coming from recurrent sources. This is a central element to the high growth we are consistently delivering. Now let me turn to the highlights of our P&L. Our Q4 revenues were $523.9 million, reflecting a year-over-year increase of 38%, and 8% above the top end of our estimated range of $475 to $485 million. Our Q4 year-over-year organic revenue growth rate was 26.6%, well above the top end of our guidance of 17% to 20%. This outperformance primarily reflects approximately $20 million in performance fees associated with alternative investment funds managed by some of our partner firms, which will not repeat in Q1. Our Q4 adjusted EBITDA was $129 million, up 42.2% compared to the prior year period, and our adjusted EBITDA margin was 24.6%, in line with our approximate 25% outlook. The performance fees I just mentioned contributed approximately $7 million in adjusted EBITDA. Reflecting the strong growth and profitability of our business, our Q4 adjusted net income excluding tax adjustments per share was $0.94, increasing 30.6% from the prior year period. Our tax adjustments per share were $0.16, 33.3% higher year over year. On a full year basis, our revenues were approximately $1.8 billion, 32.1% higher than the prior year, driven by our organic revenue growth rate of 24%. Our full year adjusted EBITDA was $451.3 million, 40.3% higher than the prior year, and our adjusted EBITDA margin was 25.1%, 1.5 percentage points higher, reflecting the addition of new partner firms and operating leverage. Full-year adjusted net income excluding tax adjustments per share was $3.36, reflecting year-over-year growth of 36.6%, and our tax adjustments per share were $0.56, up 19.1% for the same period. As of December 31, our gross unamortized tax yield was over $2.5 billion, the details of which are in our earnings supplement. Almost every acquisition we make increases the value of this tax shield, which grew by approximately $800 million in the last year alone. We had a record year in 2021 for M&A activity, underscoring the attractiveness of our value proposition and the scale benefits we offer our partner firms globally. As Rudy noted, we closed on 14 new partner firms and 24 mergers, including eight mergers for ConnectUS for a total of 38 transactions. In Q4, we closed on 22 transactions, including nine partner firms. The nine new partner firms contributed approximately $16.8 million of revenue and $5.6 million of adjusted EBITDA, with adjusted EBITDA margin of 33.4% in Q4 2021. On a full quarter basis, these firms are estimated to contribute $37 million and $12.4 million in revenue and adjusted EBITDA, respectively. In December, in connection with two partner firm acquisitions, we issued approximately 440,000 shares as part of the consideration paid. Approximately 59,000 of these were Class A shares, and the remaining 381,000 were LLC units with an equivalent amount of Class B shares. As we have highlighted on prior calls for our Tractor transactions, we have the unique ability to use our public shares or LLC equity capital as part of our acquisition consideration. These share issuances, as well as our December equity offering, will increase our Q1 weighted average adjusted shares outstanding by approximately 3 million shares. As Rudy highlighted, and we have discussed at our invest today, our M&A momentum heading into 2022 is very strong. Industry M&A activity continues to increase, and the opportunity set internationally is also growing. While our M&A closings in Q1 will be lower, given the substantial number of deals we completed in late Q4, our pipeline for 2022 is substantial, and we anticipate that it will expand further, particularly as the number of our partner firms that use mergers to accelerate their growth increases. Connectus also has a robust pipeline and will expand its global footprint in 2022. In anticipation of growing levels of M&A activity, we raised $161.9 million to our primary equity issuance in December, net of offering expenses and a synthetic secondary. This capital will provide us with additional working capital flexibility to efficiently capture M&A opportunities globally. Now for a few comments on our Q4 expenses and cash flow. Management fees were $146 million, or 27.9%, of our Q4 revenue in line with our prior quarter. As a reminder, management fees are our second largest operating expense because they are tied to the profitability of our partner firms and therefore highly variable, they limit the effect of revenue volatility or increases in operating expenses on our adjusted EBITDA. Our non-cash equity compensation expense was 1.3% of our Q4 revenues in line with our expectation and we expect this expense will be approximately 1.2% of estimated Q1 revenues. As of December 31, our LTM cash flow available for capital allocation was $319.9 million, a year-over-year increase of 59.6%, reflecting the strong sustained growth and financial performance of our partnership, as well as the addition of 14 partner firms and 24 mergers during the Q4 LTM period. We paid cash earn out obligations at 27.5 million, which was within our Q4 estimate. And in Q1, we estimate that we will pay cash earn outs of approximately 35 million. Now let me turn to our Q1 P&L expectations. We estimate that our Q1 revenues will be in the range of 510 to 520 million. We anticipate that our organic revenue growth rate will be in the range of 16 to 19%. we estimate that our Q1 adjusted EBITDA margin will be approximately 25%. Our outlook for both revenue and our organic revenue growth rate exclude the approximate 20 million in year-end performance fee revenues for Q4, which will not recur in Q1. Additionally, due to the seasonal impact of our non-correlated revenues, we estimate revenues will be lower by approximately 10 million in Q1 relative to Q4. With the recent backdrop of unsettled equity market conditions and the heightened volatility, it is important to note that the diversity of our revenues, with approximately 23% of our Q4 revenues not correlated to the financial markets, limits the effects of market volatility on our revenue stream. Additionally, our partner firms' client portfolios are actively managed and allocated across investment classes, which helps limit their exposure to equity market turbulence. These characteristics, together with the highly variable nature of our expenses and our earnings preference, limit downside risk to our revenues and profitability. The most recent example of this dynamic was our financial performance in 2020 at the height of the COVID uncertainty. Now for a few comments on our balance sheet. We entered Q4 with approximately $2.4 billion of debt outstanding, inclusive of the $150 million we tapped in December, under the delay draw feature of our $800 million term loan. We ended the year with a net leverage ratio of 3.85 times lower than anticipated due to the incremental adjusted EVA we generated in Q4 and our equity raise. Assuming that markets stay constant at current levels, we anticipate that our Q1 net leverage ratio will be between 3.75 times and 4 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. Our borrowing costs remain low in 2021 as we've been a beneficiary of the low interest rate environment. While we expect that our interest expense will increase this year as the Fed begins raising rates, $850 million or approximately 35% of our borrowings are swapped to a fixed rate of approximately 2.6%, inclusive of the 200 basis point spread. Additionally, while not hedged, 796.4 million of our borrowings have incurred the carry cost of a 50 basis point LIBRA floor. In 2021, we closed acquisitions with consideration in excess of 1 billion, significantly higher than our annual deployment in the past years. As of year end, we had over $900 million of firepower between Kaish on hand and our $650 million unjoined revolver in anticipation of another exceptionally strong year for M&A activity globally. As always, we are stringent about only pursuing acquisitions that meet our return criteria and are a good fit for our partnership. As you have heard through the partner panel discussions in our December Invest Today, we acquire entrepreneurial value creating firms with substantial growth potential. These are the firms that are best positioned to benefit from our scale advantages, value add resources, and permanent growth capital. In closing, we delivered another strong quarter in Q4 and an excellent year in 2021. These results reflect not only our ability to capitalize on the large and growing market opportunity, but also our consistent financial discipline as our business has grown. Our partner firms delivered another year of exceptional financial performance last year. Our value proposition resonated strongly, supported by a well-designed portfolio of business and client solutions. We continue to be careful stewards of our capital, investing in firms that are leaders with attractive growth profiles. These are hallmarks of the way in which we manage and grow our business. which we believe will generate substantial value for our shareholders in the years to come. We believe that our growth trajectory is one of the most compelling in the financial service sector, reinforced by our new 2025 growth targets, approximately $4 billion in revenue, $1.1 billion in adjusted EBITDA, and a 28% adjusted EBITDA margin. We are optimistic about our strategy for growth and our financial outlook, and we believe that we are uniquely positioned to capitalize on the secular dynamics shaping our industry. With that, let me turn the call over to the operator for Q&A. Operator?