GOOSEHEAD-INSURANCE Earningcall Transcript Of Q2 of 2024
Mark Miller -- Chairman and Chief Executive Officer Thanks, Dan, and welcome, everyone, to our second quarter earnings call. I'm honored to be joining for the first time as Goosehead's president and CEO. Mark and Robyn Jones founded this company over 20 years ago, and they built something unique that transformed the insurance industry by providing unprecedented product choice and building an extremely talented team that puts clients at the center of our universe. I couldn't be more excited to carry on that amazing legacy and help Goosehead reach new heights. I'd like to personally thank Mark Jones for his leadership, friendship, and continued support and Page 2 counsel. The transition could not have gone more smoothly, and the company feels well-positioned for the next phase of our journey. Over my career, I've been part of many great leadership teams, and I've seen many good business models. However, I've never been part of anything with this much potential, and I believe we have a rare opportunity to change an industry and improve the lives of millions of people along the way. So, that's why I'm here on why we're buying back our own stock and why I bought right alongside the company. Let me expand on what I mean. First, the opportunity for growth in personal lines insurance is enormous. The total personal lines industry is over $450 billion. We currently have over $3.3 billion in total written premiums, but we account for less than 1% of the total market and just 4.5% of mortgage transactions in the U.S. As a reminder, the majority of our referral partner leads are tied to mortgage transactions. With a market that large, there is obviously plenty of white space for us to grow organically for many years to come. Second, we are perfectly positioned to capture a larger and larger portion of that market because we simply have the best people in the industry and the best business model. It is our job to execute on that opportunity. Third, Goosehead has created a wide and deep moat that we believe is extremely difficult to replicate. We have over 950,000 clients, nearly 1.6 million policies in force, over 200 carrier partners, industry-leading technology, a national footprint, and more than 2,300 highly skilled and motivated agents. My team and I are relentlessly focused on being the largest personal lines insurance distributor in the country in our founder's lifetime, and that's the same mission we have had since day one. To accomplish this goal, it's critical that we reaccelerate growth, and that's exactly what we did in the second quarter. In Q2, we continue to see many of the same macro and industry challenges we Page 3 have faced for the past two years. From 1980 to 2023, the average annual number of billion-dollar insurance claim disasters in the U.S. was 8.5. 2023 marked the fourth consecutive year of 18 or more of these size events, CPI adjusted, and this trend has continued in the first half of 2024. Many carriers have taken 20% plus price increases on home insurance over the past 12 months, but those increases have not been sufficient for them to reach their target profitability levels given inflation and bad weather frequency and severity. Until carriers feel confident they can write property insurance profitably, they will continue putting significant limitations on appointing new agents and selling new policies. We're starting to see some early signs of relief on auto insurance, but it's too early to say that carrier profitability has fully turned the corner. Despite these facts, I'm pleased to report that our team of highly skilled agents and service professionals navigated the hard market extremely well, and we posted strong results that demonstrate momentum is building across the organization and growth is beginning to reaccelerate. For example, in Q2, we grew total producers for the first time in seven quarters. Total written premium increased 30% year over year in the quarter compared to 28% in Q1. Core revenue increased 20% year over year compared to 13% growth in Q1, and we reached the highest level of franchise agent productivity in company history, with same-store sales up 29% year over year. I'm incredibly proud of the way our entire team has performed in this environment. I'm also extremely grateful for the strong partnership we have with many of our largest carriers. We understand what our partners need in this environment, where growth for them is easy, but profitability is hard. To have a great partnership, both parties must be honest and be very clear about their expectations and commitments, and both sides must commit to joint goals. Page 4 We call this backing our partners' play. On our side, we deliver the highest-quality clients wherever and whenever our carrier partners need them. We're uniquely positioned to deliver this value to our partners, because of our comprehensive geographic footprint, highly skilled agents, targeted marketing approach, and superior technology capability, and in return, these great partners allocate to us scarce products that keep our agents fully utilized and our clients happy. Obviously, we can't control macro factors or the pace of product market recovery, but we can focus on being a great partner that delivers attractive clients, which tend to purchase multiple policies and have better loss experience and retention within respective geographic locations. You should expect us to continue down the strategic path we have discussed on previous calls, but we will begin to push even harder on the growth levers in the business. Let me give you a few examples of how. We have a three-pronged approach to add agents to our network quickly. First, hire more quality corporate agents with a larger, high-powered university recruiting program. Second, optimize our in-house agent staffing program, helping our existing agency owners accelerate growth by supporting their recruitment of exceptional agents. And third, increase the size and capability of our franchise development team. As of the end of Q2, we had 313 corporate agents, up from 292 at the end of Q1, and we expect to end the year with over 400 corporate agents. This summer, we're quickly adding many new high-quality agents to our corporate network. The Class of 2024 represents some of the best agents we have ever hired. The early results from the Class of 2024 indicate that we are ramping even faster than the Class of 2023, notwithstanding the very challenging macro conditions. Where possible, we want to build around our best existing agency partners and help them develop even larger businesses. As a result, our agents per franchise continued to increase. Page 5 Since the beginning of the year, we have helped source more than 150 agents that have been hired by our existing franchises. In addition, our agency owners have hired over 200 agents on their own this year. I believe the support we're providing our agency owners is building confidence within the community that they can each have the capability to grow into larger businesses with multiple agents. We now average 1.8 agents per franchise. Last year, that number was 1.5 agents per franchise. We will also be adding new franchises in key markets around the country to grow our overall footprint. To help accelerate the number of new franchises launched, we recruited Brian Slye, a senior sales executive from AT&T, to lead our franchise development team. Brian is quickly adding key resources and preparing us for more rapid expansion in the future. In addition to adding more high-quality agents to the network, we're hyper-focused on optimizing agent productivity. One of the best ways to drive agent productivity is through technology. As a company, we're making outsized investments in our technology platform to drive current agent productivity and to enable the company to scale more efficiently in the future. Over the past two years, we have built an information technology team that we believe far exceeds the capability of anyone in the industry and rivals most pure technology companies. This technological superiority has created a unique competitive advantage and is beginning to show in the numbers. For example, we've talked about quote to issue for some time now. The utilization of that technology investment has really started to take off. Our core platform has historically allowed agents to easily shop the market for the best insurance at the best price, but when it came to finding the policy, our agents needed to go into the native carrier system and reenter data. This reentry process was time-consuming and suboptimal, but our QTI technology now eliminates Page 6 much of this redundancy on carriers where we have built connections. Each quarter, increasing percentage of our policies are bound using our QTI infrastructure, and the number of binds is growing exponentially as our agents become more familiar with this new technology. We still have a lot of opportunity in this area to drive efficiency, but I'm so proud of what this team has accomplished. To my knowledge, no one in the industry is doing what we are doing at this scale. These types of ongoing technology investments will rapidly help our agents become even more efficient and deliver a superior client experience. Another adjacent benefit of our technology comes in the relationship we established with our carriers. In this profitability-challenged environment, carriers are looking for partners that can drive economic benefit for them. Our technology platform delivers our partners great clients that have been accurately underwritten to their unique specifications and subjected to rigorous quality control processes. Historically, most of our technology investments have been directed toward enabling sales productivity, but we believe there is tremendous opportunity to use the same technology to drive scale and quality in our service department. Services by far are our largest cost center, and many of the tasks they perform can be automated, freeing our agents to deliver an even better client experience. Improving quality and reducing costs with automation will help us significantly widen our competitive moat and expand margins. With this operating playbook focused on reaccelerating growth by adding more agents across the country and strategically investing in technology and service, I believe we are well-positioned to deliver strong revenue and earnings growth in the back half of 2024 and accelerating growth in 2025. There is still much to be accomplished, but the next phase of our evolution is well-mapped, and we will continue to thoughtfully focus our investments on people and technology that better serve our clients and carrier partners. In my prior experience, we would often refer to a Rule of 40 company as Page 7 an excellent benchmark for measuring success. That is to say the combination of revenue growth and EBITDA margin added up to 40%. Earlier this year, I said I believe our company can reach a Rule of 60 level over time. We're not there yet, but I still believe that statement to be true if we follow our strategic plan and focus on what we can control. I want to thank our clients, employees, carriers, sales partners, and shareholders for their tremendous support on our continued journey. With that, let me turn the call over to Mark Jones, Jr., our CFO. Mark E. Jones -- Chief Financial Officer Thanks, Mark, and good afternoon to everyone on the call. In the second quarter of 2024, we continue to accelerate on our first quarter momentum with total revenue, core revenue, franchise producer count, and corporate agent count all accelerating from the first quarter of 2024. While the carrier product market remains very tight, we've stayed maniacally focused on what we do best, delivering value for our clients, our agents, our referral partners, and our carrier partners. At quarter end, total franchise producers were 1,995, up from 1,963 as of the end of the first quarter of 2024. Our agency force is healthier than ever as our franchises continue to scale, grow in our producers per franchise for the sixth consecutive quarter to 1.8. As we have discussed in the past, each time a franchise onboards a producer, it improves the productivity of everyone in that agency, creating exponential growth opportunities. Productivity per franchise is up 54% year over year, and same-store sales is up 29% year over year, as the additional technology enhancements and management resources that focus on our largest distribution arm continue to take hold. Considering the backdrop of the personal lines carrier market, coupled with the continued cooling in the housing market, these productivity improvements are all the more impressive. Page 8 In the second quarter, the average gross paid to our franchise is increased by 62% over the previous year, further demonstrating the resiliency of the model and the health of our agencies. Corporate producers at quarter end were 313, up from 292 at the end of the first quarter, and 280 as of the end of the second quarter of 2023. The career path we're able to lay out on college campuses that includes multiple exciting options for young and hungry graduates, including the ability to progress into management to further expand our corporate team, opening their own franchise, and blazing a path to a seven-figure income, or leveraging the experience they gain on the front lines into other value-add positions like carrier management, training, or partnership positions. This value proposition is allowing us to attract top talent, which we can immediately see in the production of our June class. This should help drive future growth by lowering the attrition with an improved success rate and expanding the potential pool of future managers. We're excited to continue to grow the corporate team and now expect the headcount to be in excess of 400 by year-end. While the personal lines industry remains in the hardest cycle in our company's history, we're not waiting for the market to turn before we act. We will continue onboarding producers strategically, so that when our carrier partners reach rate adequacy, we are ready to deliver rapid growth with a larger and more productive agent force. An interesting phenomenon is happening in our business right now. Our first-year agents have no historical context of what a soft personal lines market looks like. All they know is that they have great tools at their disposal to help them win business in any market. One example is our proprietary referral partner search tool, which allows agents to be precise in their marketing efforts, targeting only those loan officers and realtors who are doing the most volume. Page 9 As our agents double down on their marketing efforts, we've seen a 29% increase in lead flow per agent when compared to the prior year period. This coupled with our improved recruiting standards has led to first-year agents in both the corporate and franchise networks delivering some all-time highs in productivity. What this means is as the market softens, it will be uniquely positioned to expand their productive capacity even further. Turning to our results. Total written premiums, the leading indicator for future revenues, grew 30% over the prior year period to $999 million. This includes franchise premium growth of 35% to $793 million, and corporate premium growth of 15% to $206 million. We continued our trend of accelerating new business premium for the third consecutive quarter with franchise new business premiums up 29%. While we are continuing to experience a temporary moderation in our client retention driven by carrier pricing actions resulting in more shopping behavior from our existing clients, we expect that this will abate as year-over-year pricing increases inevitably slow. Improving client retention coupled with accelerating new business generation, give us confidence in our intermediate-term goal of a 30% compound annual growth rate in total written premium through 2027. Total revenues for the quarter grew to $78.1 million, representing 13% growth over the prior year period, with core revenues of $73.4 million, representing 20% growth over the prior year period, both accelerating sequentially for the second consecutive quarter. The strategic decisions we've made over the last two years are beginning to bear fruit in our core revenue growth. Costs of measures we have taken to improve agent productivity, recruiting, and investments in technology impact our earnings in real time but take much longer to flow through revenue growth, as improving new business converts to renewal. We are confident, however, that these investments will drive strong growth and profitability over time. Significantly lower franchise turnover resulted in cost recovery revenue for the quarter Page 10 declining by 49% compared to the prior year period to $1.9 million, driven by a reduction in accelerated franchise fee revenue in connection with turnover. During the quarter, we terminated or transferred 52 operating franchises, compared to 115 operating franchises in the prior year period. As we consistently improve the health of our franchise network, we expect the total turnover to continue to decline. Looking forward to 2025, we expect to grow our operating franchise count, which should result in a more normalized cost recovery revenue growth rate. Contingent commissions in the quarter were $2.2 million, representing a 44% decline over the prior year period, driven by challenging carrier profitability. While we outperformed our expectations for contingent commissions in the second quarter, our outlook for the full year remains unchanged. We continue to expect approximately 35 basis points of total written premiums to be earned as contingent commissions, as we believe there remains uncertainty on end-of-year outcomes given the recent high frequency of weather events in Texas. We do believe that continued rate increases and underwriting actions taken by our carrier partners will ultimately bring the industry to improving levels of profitability, which should drive improvement in contingent commissions over time. Policies in force grew 11% versus the prior year quarter. We now believe the policies in force growth rate has bottomed and will reflect to accelerating growth in the third quarter. Client retention for the quarter was 84% compared to 85% as of the end of the first quarter. We also believe that client retention will begin to improve as homeowners' premium rate increases begin to inevitably slow. Adjusted EBITDA for the quarter grew to $24.7 million, compared to $23.1 million in the year-ago period. This included employee compensation and benefits expense growth of 14%, driven by increased headcount across the organization, and G&A expense growth of 23%, Page 11 due largely to investments in technology. We expect G&A expense growth in the remainder of the year to be lower relative to the second quarter level. We remain very focused on cost controls and expect to deliver adjusted EBITDA margin expansion for the full year, with the majority of that taking place in the fourth quarter. We continue to demonstrate the cash flow power of our organization during the quarter, generating $18.9 million in cash flow from operations, up 14% from a year ago. Because we have managed our company conservatively, our strong balance sheet gives us multiple options to enhance shareholder value. During the quarter, we utilized $63.2 million of our share repurchase authorization to invest in our own stock, retiring over 1 million shares from our public flow. We remain incredibly confident in our long-term growth and earnings potential, and will continue to be opportunistic with share repurchases and other actions to further enhance shareholder value. At the end of the second quarter, we had $23.6 million of cash and cash equivalents. Our unused line of credit was $74.8 million, and total outstanding notes payable balance was $98.1 million. Our net debt to EBITDA on a trailing 12-month basis is just over one times, providing us with significant flexibility for future capital return, as we see appropriate to drive shareholder value. We are reiterating our guidance for the full year 2024 as follows. Total written premiums placed are expected to be between $3.62 billion and $3.82 billion, representing 22% growth on the low end of the range and 29% growth on the high end of the range. Total revenues are expected to be between $290 million and $310 million, representing 11% organic growth at the low end of the range and 19% organic growth at the high end of the range. Adjusted EBITDA margin is expected to expand for the full year 2024. Thank you to our team for delivering a fantastic second quarter and continuing to make strides on Page 12 our path to industry leadership. With that, let's open up the line for questions. Operator? Questions & Answers: |
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