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. 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, Rudi Adolf. Rudi?

Thanks, Rusty. Good morning, everyone, and thank you for joining our call today. The second quarter results we announced this morning were outstanding. Our performance was again above the top end of our guidance, and our business is weathering the volatile market environment well. The benefits of our diverse revenue stream, the variable nature of our cost structure, and the scale of our global partnership are evident. We generated Q2 revenues of $539.2 million, reflecting year-over-year growth of 26.8%, and our organic revenue growth rate was 15%. Our adjusted net income excluding tax adjustments per share was $0.99, and tax adjustments per share was $0.19, increasing 17.9% and 35.7% respectively. Year-to-date, we have closed or announced three new partner firms and 11 mergers, bringing our year-to-date transaction total to 14 deals. We closed on Octagon, our first partner firm in Switzerland, on July 1st. We also closed on ICON Wealth Management as our newest partner firm on August 1st. ICON, which manages approximately 1.6 billion in client assets, is a premier firm with a proven management team that will help us expand our presence in the fast-growing Texas wealth management market. Despite the macro backdrop, industry M&A deal volume in the second quarter and first half of this year hit new records, according to Echelon Partners. We continue to have an excellent pipeline with a good mix of new partner firms and mergers on behalf of our partners and connectors. Our momentum going into the second half is strong, and we continue to believe that 2022 will be one of our best years for M&A. Our partner firms remain active in seeking mergers to strengthen their client service capabilities and enhance the growth of their business, and we expect deal volume and momentum to only increase once current market volatility subsides. As an example, according to Echelon Partners, Deal activity in 2021 was nearly 50% higher than in 2020, which was impacted by COVID. We capitalized on this dynamic in 2021, closing on a record number of transactions, with our year-over-year deal volume increasing by over 50%. Our partners are again demonstrating their ability to handle the challenges of difficult market conditions. Central to the stability of their businesses and to our financial results is high client retention. Our partners are trusted advisors in every aspect of their clients' financial lives beyond simply managing investments and have deep multifaceted relationships that frequently span decades. The clients are high and ultra high net worth individuals and families who seek to preserve their capital across cycles through sophisticated multi-asset class portfolio construction. These clients are less concerned with the impact of market declines in the near term, focusing more on multi-generational wealth creation and efficient tax planning in the long term. Collectively, these attributes drive strong client retention and are important sources of diversification and stability in our business. We believe that the flight to comprehensive, high-quality advice will accelerate the growth in client assets managed by the RIA industry in the first few years after this correction, the way it has in prior cycles. In my many recent conversations with our partners, they are taking the current macro environment in strides and have said that their clients feel well prepared to weather this storm. Our partners have navigated multiple market cycles during their careers, including inflationary environments. This experience substantially enhances the ability to be trusted advisors in turn reinforcing the value they provide. Clients, especially those who have benefited from the last decade of rising markets, have on balance been calmer over the last six months than they have been in prior periods of volatility. What client portfolios have been impacted, our partners highlight. that they spend a significant amount of time helping their clients structure their asset allocation to mitigate downside risk. The investment management objectives are not about hitting home runs, but instead are tied to a holistic financial planning process, and clients are not relying on their portfolios to meet short-term liquidity needs. The current volatility may persist for some time. Our partners are confident that they will weather this period as well as they did in the 2008-09 financial crisis and subsequent recessions, and most recently in 2020. In fact, as we have demonstrated again and again, these times of disruption create excellent opportunities for client retention and referrals. Anecdotally, we are hearing that many of our partner firms are again experiencing strong referrals. Our family office firms, who provide services to artists, entertainers, and other ultra-hand adverse clients, have been an important source of revenue diversification year to date. They are the primary component of our non-market correlated revenues, which represent approximately 23.3% of our Q2 revenues. Unlike 2020, when a portion of our non-market correlated revenues were adversely impacted by COVID, we are getting the full benefit of this diversification in our 2022 results. As we turn to the second half of the year, it is difficult to know how the macro environment will evolve, although we anticipate that markets will remain volatile. Given the potentially recessionary outlook, we remain prudent in our capital deployment. With 14 transactions closed or announced year-to-date, we continue to execute on converting our strong pipeline. Despite deal signings and closing getting somewhat delayed in the current environment, we anticipate that 2022 will be one of our strongest M&A years. As a result, while we continue to expect our revenue growth for 2022 to be approximately 20%, we are resetting our adjusted EBITDA growth guidance for this year from 20% to a range of 16% to 18%. Similar to prior patterns, when markets normalize, we expect an attractive catch-up phase. similar to what occurred in 2021 and subsequently a normalization to the 20% plus growth rate we have demonstrated in the past. Looking ahead, we see several important takeaways. The first is that our business is resilient despite the market backdrop. The second is that we continue to be highly disciplined capital allocators and even more so today given heightened risks in this environment. The third is that although markets may remain depressed for a while, they will eventually recover. Until that time comes, our diversified revenue stream and the structure protection in our business model will continue to mitigate our market sensitivity. We believe that the growth opportunities ahead, and particularly after significant market volatility, combined with the operating leverage on our business, will lead to a sustained outperformance once conditions stabilize. The first of these is opportunities in accelerated industry consolidation. We believe that the secular tailwinds of succession and scale will accelerate once a recovery takes hold and lead to substantial incremental growth opportunities in our business. The second is the large international opportunity we have. We plan to continue expanding our presence outside the US, particularly in the ultra-high net worth segment, which will further increase the growth and diversification of our partnership. The U.S. independent wealth management industry, which stands at approximately $7 trillion in client assets, will remain our largest market and primary focus. That said, the international markets represent an incremental multi-trillion dollar opportunity and one that lends itself well to our decentralized partnership structure and the type of resources we make available to our partner firms. And finally, our value-add capabilities, which are a substantial differentiator today, particularly in these markets, and which we believe will become increasingly important to our partners' ability to provide the highest level of services to their clients. As with previous cycles, client demands will continue to become more complex, driving the need for scale in order for independent wealth managers to remain competitive. My co-founders and I have every confidence that Focus will successfully continue its growth path and deliver superior value to its shareholders. While we are very attuned to the dynamics influencing our partner firms, our decentralized structure, enables us to manage our business with maximum flexibility in both down and up markets. Because our partners have autonomy, they are nimble in how they manage their businesses. These attributes allow us to adapt quickly as conditions evolve and positions us to better environments like the current one particularly well. With that, let me turn the call over to Jim. Jim?

Good morning, everyone. We delivered excellent results this quarter, reinforcing the resiliency of our business model and the quality of the firms in our partnership globally. As Rudy mentioned, our business is weathering the challenging environment well. The diversity and recurring nature of our revenues, our earnings preference, the structure of our management fees, and the strong economic alignment we have with our partners have withstood the recent volatility. Our partners have done an excellent job of focusing on their clients while at the same time positioning themselves for the growth opportunity that will emerge when markets begin to recover. Now turn into the key elements of our P&L. We reported Q2 revenues of $539.2 million at 26.8% year-over-year increase and above the top end of our $535 million guidance. Our organic revenue growth rate was 15%. also above the top end of our 11% to 14% guidance. To help investors better understand the composition of our organic growth rate, we have added the rate excluding mergers to our earnings supplement on page 5 and 10. Against the backdrop of an exceptionally difficult market environment, the resiliency of our revenue performance is notable. While our revenues are not immune to market movements, they have four important sources of diversification, which we continue to believe are not fully appreciated by the investment community. First, approximately 23.3% of our Q2 revenues were not correlated to the financial markets, meaning that they are typically derived from family office-type services, tax fees, and fixed fees for investment advice. Second, our partners' clients are sophisticated high and ultra-high net worth investors, whose portfolios are invested in multiple asset classes and are highly diversified as a result. Third, we don't manage the client investment process at the focus level. Each partner firm has its own investment committee and follows its own asset allocation strategy, which creates substantial diversification within the 76.7% of our revenues that our market correlated. And fourth, Our partner firms use a variety of billing methodology, which mitigates the impact of quarterly market movements. Approximately 67.2% of our Q2 market correlated revenues were billed in advance, meaning they were billed typically based on prior quarter movements. Approximately 32.8% are billed in arrears, meaning they are billed typically based on Q2 quarterly movements. Our earnings preference is another important structural protection of our model. The cumulative acquired base earnings, for the 30 firms we have added as new partners since the beginning of 2019 totals 148 million. As a reminder, acquired base earnings represents our annualized preferred position in our partner firm's earnings and typically must be met prior to the respective management companies earning any management fees. The acquired base earnings is typically between 40 and 60% of the partner firm's EBPC. Our management fees adjust real time as our partner firms' earnings fluctuate. For firms that are above their target EBPC earnings, we share in the amount above that level. For example, for a partner firm with a 50-50 split, this means for every dollar of decline in its earnings, there is a 50-cent reduction in focus earnings and a 50-cent reduction in the firm's management fees. This is an important structural aspect of our financial model, as management fees are our second largest operating expense. and create an economic alignment of interest. Our adjusted EBITDA for Q2 was $137 million, a 27.1% increase year-over-year, and our adjusted EBITDA margin was 25.4%, above our guidance of approximately 24.5% to 25%, reflecting lower compensation expense as a percentage of revenue due to variable compensation. So far in Q3, we have closed on two new partner firms, Octagon and Icon, which based on mid-quarter closings, we expect will add estimated revenues of approximately $7 million and adjusted EBITDA of approximately $1.7 million in the third quarter and over $30 million in annualized revenue and $7.8 million in annualized adjusted EBITDA. As Rudy noted, our pipeline for the second half of 2022 remains strong. we continue to be a highly sought after partner by leading firms and merger targets seeking to enhance and grow their businesses. Now let me turn to our Q2 expenses and cash flow. Our management fees were $136.8 million or 25.4% of revenues sequentially consistent with Q1. Our non-cash equity compensation expense was approximately 1.4% of Q2 revenues and we expect this expense to be approximately 1.5% of revenues in Q3. The second quarter was impacted by $42.8 million of non-cash earnings, reflecting reductions in the fair value of estimated earnouts pursuant to our Monte Carlo simulations under GAAP. As a reminder, partner firm earnouts generally occur over a six-year period. Weakened market conditions drove a reduction in the estimate of these liabilities as of June 30th. As markets recover, these estimates typically increase. Our LTM cash flow available for capital allocation was $323.2 million as of June 30th, increasing 21.5% from the comparable prior year period, reflecting the earnings growth of our partner firms and the addition of new partner firms. Our gross unamortized tax yield was more than $2.7 billion as of June 30th, or approximately $5.82 per share. demonstrating the substantial incremental value that our tax-efficient structure creates for our shareholders. In Q2, we paid cash earn-out obligations of $33.3 million, which was in line with our estimate, and we estimate that we'll pay earn-outs of approximately $50 million in Q3. Now turn into our Q3 P&L expectations. We estimate that our Q3 revenues will be in the range of $505 to $515 million, a sequential decline of approximately 4% to 6% from Q2. These estimates reflect the impact of the 2022 market declines on our market correlated revenues. We estimate that our Q3 organic revenue growth rate will be between 0% and 2%. We expect that our Q3 adjusted EBITDA margin will be approximately 24%, which would bring our first nine months margin to approximately 25% on a rounded basis. Our partner firms remain nimble in managing their clients and businesses while navigating the macro environment. While lower market levels are impacting their revenues, our partners are not immediately adjusting their operating expenses. They manage their costs conservatively to begin with and take a long-term view to invest in and consistently manage their businesses. This approach ensures that they're delivering a superior client experience across cycles. Unlike 2020, during which discretionary costs drop sharply in response to the COVID shutdowns. Our partners are taking a measured approach to reducing these types of expenses. Although this approach impacts the management fees and creates negative operating leverage for us in the near term, our partners are positioning themselves to take advantage of the substantial growth opportunities when the macro backdrop stabilizes. We anticipate that our adjusted even and margins will recover as the markets recover. However, should unsettled markets persist for a longer period of time, our partners have levers that they can pull on expenses, including discretionary spending and variable compensation. Now turn into our balance sheet. We had approximately $2.5 billion of debt outstanding as of June 30th, and our net leverage ratio was 3.9 times, within our estimated range of 3.75 to 4 times. we expect that our Q3 net leverage ratio will be approximately four times. As Rudy highlighted, we are deploying our capital in a very disciplined, measured way, particularly given the height in risk created by the broader macro environment. Our Q2 interest expense was $19.9 million, $2.3 million higher than the $17.6 million in Q1 due to the rise in rate environment and the increase in our borrowings. Similar to last quarter, we have included an interest rate sensitivity analysis on page 22 of our earnings supplement. The important takeaway is that if 30-day LIBOR or SOFR rates, as applicable, were, for example, 200 basis points higher than the actual rates in effect on our borrow and store in Q2, our pre-tax interest expense would have increased by approximately $7.9 million. On an annualized basis, this is a modest headwind on a business with over $2 billion in annualized revenues. To conclude, we are pleased with the strength of our financial performance this past quarter, particularly given the challenging environment. Our business is benefiting from a diverse revenue stream that is 95-plus percent fee-based and recurrent, and an earnings stream which has substantial downside protection due to the variable nature of our managing fees and the earnings preference we have on the cash flows of our partner firms. Our pipeline continues to be strong, and we believe that 2022 will be an excellent year for M&A activity. While our estimated Q3 revenues and earns will be impacted by the challenging conditions in recent months, the reduction is modest when compared to the broader decline across the financial markets. Our partner firms' businesses are performing well, and they're doing an excellent job servicing their clients. They have no tangible attrition, which reflects the quality and depth of their client relationships. Times like these position our partners well for strong growth in the future. We are confident that the resiliency of our business will again be evident in our performance, even if it takes a longer time period for markets to recover. We are executing well and navigating this storm. This is extremely important because it means we expect to be well positioned to benefit from the growth opportunity once macro conditions improve and deliver incremental value to our shareholders. I'll now turn the call over to the operator for Q&A. Operator?