Lpl Financial Holdings Inc. · NASDAQ:LPLA
Lpl Financial — Q3 2018 Earnings Presentation
37 slides from Lpl Financial's earnings presentation, Nov 5, 2018
Slide 1: LPL Financial Investor Presentation Q3 2018
LPL Financial Investor Presentation Q3 2018 November 5, 2018 Member FINRA/SIPC
Slide 2: Notice to Investors: Safe Harbor Statement
Notice to Investors: Safe Harbor Statement Statements in this presentation regarding LPL Financial Holdings Inc.’s (together with its subsidiaries, the “Company”) future financial and operating results, growth, plans, priorities, and outlook, including forecasts and statements relating to the Compan
Slide 3: Notice to Investors: Non-GAAP Financial Measures
*Notice to Investors: Non-GAAP Financial Measures Management believes that presenting certain non-GAAP financial measures by excluding or including certain items can be helpful to investors and analysts who may wish to use some or all of this information to analyze the Company’s current performance,
Slide 4: LPL Overview
LPL Overview Our Value Proposition Key Markets and Services Q3 2018 Metrics We are a leader in the retail financial advice market and ~$680B+ Retail Assets: Q3 Business Metrics LTM Financial Metrics the nation’s largest independent broker-dealer(1). • Brokerage: $375B Assets: $681B Average Assets: $
Slide 5: We remain focused on growth and execution to create long-term shareholder value
We remain focused on growth and execution to create long- term shareholder value Grow our Core Business Execute with Excellence + Leverage the strength of our markets and model + Drive greater efficiency and productivity • Capitalize on secular trends • Continuously improve over time • Expand leader
Slide 6: LPL Investment Highlights: Significant opportunities to grow and create long-term shareholder value
LPL Investment Highlights: Significant opportunities to grow and create long-term shareholder value 1 Attractive market with secular industry tailwinds 2 Established market leader with scale advantages 3 Organic growth opportunities through net new assets and ROA 4 Positively levered to rising inter
Slide 7: Demand for financial advice is growing, and the independent channel is gaining share
1 Attractive market with secular industry tailwinds Demand for financial advice is growing, and the independent channel is gaining share Trend towards independence expected Growing demand for advice to continue Projected Growth in US Retail Investment Market ($T) The Independent channel continues to
Slide 8: We are a leader in our core markets and have room to grow
2 Established market leader with scale advantages We are a leader in our core markets and have room to grow (4) Our Core Markets IBD Channel Hybrid RIA Bank / Insurance Channels Pure RIA (5) ~$2.3 Tr ~$1.8 Tr ~$1 Tr ~$2.5 Tr LPL LPL Rest of ~13% LPL ~14% Rest of market ~8% market ~44% Rest of ~25% T
Slide 9: Total Net New Assets continued to grow organically in Q3 2018
3 Organic growth opportunities through net new assets and ROA Total Net New Assets continued to grow organically in Q3 2018 Total Net New Assets ($ billions) Net New Advisory Assets(6) ($ billions) Net New Brokerage Assets(7) ($ billions) ◼ Total NNA (Prior to NPH for Q4 ‘17, Q1 ‘18 and Q2 ‘18) ◼ Ad
Slide 10: We expect evolution in the future profile of winning advisor practices
3 Organic growth opportunities through net new assets and ROA We expect evolution in the future profile of winning advisor practices Today: Advisor as wealth manager Tomorrow: Advisor as personal CFO • Personalized approach • Advisors have a more Client centered on complex standardized approach to m
Slide 11: We are leveraging technology and our scale to bring innovation to the front office
3 Organic growth opportunities through net new assets and ROA We are leveraging technology and our scale to bring innovation and enhanced performance to the front office Example: Development of New LPL Front Office Services LPL Virtual Admin Service launched in 2017 Reduce time LPL advisors spend ~$
Slide 12: Our business continues to shift from brokerage to advisory
3 Organic growth opportunities through net new assets and ROA Our business continues to shift from brokerage to advisory Key points Total assets are growing and shifting to advisory ◼ Total Assets ($ billions)(9) Advisory Assets % of Total Assets ▪ Our business has been shifting from Brokerage to 14
Slide 13: Centrally managed services have grown organically following pricing and capability enhancements
3 Organic growth opportunities through net new assets and ROA Centrally managed services have grown organically following pricing and capability enhancements Key points Centrally managed assets have grown ◼ Centrally Managed Assets(12) YOY SEQ ▪ Centrally managed platforms enable our advisors to Cen
Slide 14: In addition to cash sweep improvements, we have several opportunities to drive organic growth
3 Organic growth opportunities through net new assets and ROA In addition to cash sweep improvements, we have several opportunities to drive organic growth in Gross Profit ROA While cash sweep has been the recent Profit* ROA (14) … …We have opportunities to drive organic growth 28.5 driver27.9 of ou
Slide 15: We benefit from rising interest rates
4 Positively levered to rising interest rates and equity markets We benefit from rising interest rates Our ICA deposit betas have been low through Our outlook translates to annual potential ICA this rate cycle Gross Profit* benefit from future rate hikes ◼ Deposit beta after Fed rate hike ~$35M - $4
Slide 16: Cash sweep percent of total assets is currently lower than our long-term average
4 Positively levered to rising interest rates and equity markets Cash sweep percent of total assets is currently lower than our long- term average, as clients have been highly engaged in the market Cash Sweep balances ($ billions) Cash Sweep percent of Total Assets 31.3 10% 30.4 30.0 29.8 29.6 29.0
Slide 17: We also benefit from rising market levels
4 Positively levered to rising interest rates and equity markets We also benefit from rising market levels Key points S&P growth benefits our Gross Profit* Annual potential Gross Profit* benefit ▪ At the end of Q3 2018, we had ~$681B of total ~$80M+ brokerage and advisory assets invested in a mix of
Slide 18: We are focused on generating operating leverage
5 Disciplined expense management driving operating leverage We are focused on generating operating leverage Over the past 3 years, Gross Profit* ROA has been roughly This operating leverage has driven improved returns flat while Opex ROA has declined and margins ◼ Average Total Brokerage and Advisor
Slide 19: Our updated outlook for 2018 Core G&A is $810 to $820 million
5 Disciplined expense management driving operating leverage Our updated outlook for 2018 Core G&A* is $810 to $820 million Long-term cost strategy 2018 Core G&A* context ▪ Focus on delivering operating leverage ▪ First half 2018 Core G&A* averaged $197 million per quarter ▪ Prioritize investments th
Slide 20: Our capital management strategy is focused on driving growth and maximizing shareholder value
6 Capital light business model with significant capacity to deploy Our capital management strategy is focused on driving growth and maximizing shareholder value Our capital management principles Dynamic capital allocation across options • Disciplined capital management to drive long-term shareholder
Slide 21: We have positioned our balance sheet to be a source of strength
6 Capital light business model with significant capacity to deploy We have positioned our balance sheet to be a source of strength Refinancings position balance sheet to support growth We have been building capacity Credit Agreement Net Leverage Ratio* Management Target Level v (4x) 3.57x Management
Slide 22: We have consistently deployed capital to growth and shareholder returns
6 Capital light business model with significant capacity to deploy We have consistently deployed capital to growth and shareholder returns We have allocated capital across potential options Share Repurchases Shares Outstanding Since 2011, we have returned Share 97 90 92 91 ~$1.6B through share repur
Slide 23: We have increased our payout ratio over time
6 Capital light business model with significant capacity to deploy We have increased our payout ratio over time Shareholder Capital Returns ($ millions) ◼ Share Repurchases ◼ Dividends Total Shareholder returns as a % of EPS prior to Amortization 122% $500M 107% 84% 81% $139 $144 79% 75% 75% $200M $
Slide 24: We have a significant amount of capital deployment capacity ~$2.2-3.0B
6 Capital light business model with significant capacity to deploy We have a significant amount of capital deployment capacity ~$2.2-3.0B Incremental M&A Leverage Capacity Incremental capital accessible if all other capacity were deployed for M&A at a 6-8x purchase multiple(21) 3 ~$1.0-1.8B Addition
Slide 25: Our core markets are fragmented, with potential for consolidation
7 Opportunity to consolidate fragmented core markets through M&A Our core markets are fragmented, with potential for consolidation Fragmented core markets Growth potential from consolidation Share of Core Markets ▪ Our scale, capabilities, and economics give us Independent Smaller LPL (13%) arm of s
Slide 26: Our business has continued to grow and shift towards advisory
Our business has continued to grow and shift towards advisory Total Brokerage and Advisory Assets ($ billions) Advisory Assets as a percent of Total Assets 14% CAGR 44% 45% 42% $681 39% $615 $476 $509 2015 2016 2017 Q3 2018 LTM 2015 2016 2017 Q3'18 YTD Recruited Assets(2) ($ billions) Production Ret
Slide 27: We are focused on executing our strategy and delivering results
We are focused on executing our strategy and delivering results Gross Profit ($ millions) EBITDA* as a percent of Gross Profit* 12% CAGR 42% $1,843 40% $1,555 36% $1,358 $1,394 33% 2015 2016 2017 Q3 2018 LTM 2015 2016 2017 Q3 2018 LTM EPS Prior to Amortization of Intangible Assets* ($) LPLA Stock Pr
Slide 28: LPL Investment Highlights: Significant opportunities to grow and create long-term shareholder value
LPL Investment Highlights: Significant opportunities to grow and create long-term shareholder value 1 Attractive market with secular industry tailwinds 2 Established market leader with scale advantages 3 Organic growth opportunities through net new assets and ROA 4 Positively levered to rising inter
Slide 29: APPENDIX
APPENDIX 29
Slide 30: Total assets continue to increase driven by advisory growth
Total assets continue to increase driven by advisory growth Both brokerage and advisory assets have grown over time The mix of assets continues to shift towards advisory ◼ Brokerage Assets(23) ◼ Hybrid Advisory Assets(24) ◼ Corporate Advisory Assets(25) ◼ Brokerage Assets ◼ Hybrid Advisory ◼ Corpora
Slide 31: Client cash sweep balances position us for earnings growth as rates rise
Client cash sweep balances position us for earnings growth as rates rise Client cash sweep end of period balances (billions) Cash sweep product descriptions • FDIC insured sweep deposits Money Insured • Available to brokerage, hybrid advisory, Market $31 $30 Cash and corporate advisory taxable accou
Slide 32: Calculation of Gross Profit
Calculation of Gross Profit Gross profit is a non-GAAP financial measure. Please see a description of gross profit under “Non-GAAP Financial Measures” on page 3 of this presentation for additional information. Set forth below is a calculation of Gross Profit for the periods presented on page 4 and 2
Slide 33: Reconciliation of Core G&A to Total Operating Expense
Reconciliation of Core G&A to Total Operating Expense Core G&A is a non-GAAP financial measure. Please see a description of Core G&A under “Non-GAAP Financial Measures” on page 3 of this presentation for additional information. Below are reconciliations of Core G&A to the Company’s total operating e
Slide 34: Reconciliation of Net Income to EBITDA
Reconciliation of Net Income to EBITDA EBITDA is a non-GAAP financial measure. Please see a description of EBITDA under “Non-GAAP Financial Measures” on page 3 of this presentation for additional information. Below are reconciliations of the Company’s net income to EBITDA for the periods presented o
Slide 35: Reconciliation of Net Income to Credit Agreement EBITDA
Reconciliation of Net Income to Credit Agreement EBITDA Credit Agreement EBITDA is a non-GAAP financial measure. Please see a description of Credit Agreement EBITDA under “Non-GAAP Financial Measures” on page 3 of this presentation for additional information. Set forth below is a reconciliation from
Slide 36: Reconciliation of EPS Prior to Amortization of Intangible Assets to GAAP EPS
Reconciliation of EPS Prior to Amortization of Intangible Assets to GAAP EPS EPS Prior to Amortization of Intangible Assets is a non-GAAP financial measure. Please see a description of EPS Prior to Amortization of Intangible Assets under “Non-GAAP Financial Measures” on page 3 of this presentation f
Slide 37: Endnotes
Endnotes (1) Based on total revenues, Financial Planning magazine June 1996-2018. (2) Recruited Assets represents the estimated total brokerage and advisory assets expected to transition to the Company’s broker-dealer subsidiary, LPL Financial LLC (“LPL Financial”), associated with advisors who tran
LPL Financial Holdings — Q3 2018 Earnings Presentation on 6ix