GOOSEHEAD-INSURANCE Earningcall Transcript Of Q2 of 2024


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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

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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

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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.

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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.

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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

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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

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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.

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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.

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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

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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%,

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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

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our path to industry leadership. With that, let's open up the line for questions. Operator?

Questions & Answers:



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