Q4 2019 Earnings Call
Greetings and welcome to be RP groups fourth quarter, 2019, 2019 earnings conference call.
All participants are in listen only mode of question answer session will follow the formal presentation. If anyone should require operator systems during the conference VSBA stores or on your telephone keypad. Please note. This conference is being recorded.
I would now let's turn to converts over to Mr., Brad Hill, Chief Accounting Officer.
Thank you you May proceed thank you operator and good afternoon.
Now everyone should have access to our earnings announcement and slide presentation, which was released prior to this call which may also be found on the Investor Relations portion of our web site at all then risk partners Dot com.
We began our formal remarks I need to remind everyone that part of our discussion. Today may include forward looking statements, which are based on the expectations estimates and projections of management as of today.
The forward looking statements in our discussion are subject to various assumptions risks uncertainties and other factors there are difficult to predict which could cause actual results to differ materially from those expressed or implied in the forward looking statements.
These statements are not guarantees of future performance and therefore undue reliance should not be placed upon that.
We were for all of you to our recent filings with the FCC.
Putting our annual report on form 10-K filed today for a more detailed discussion of the risks and uncertainties that could impact the future operating results and financial condition of the RP. Good.
We disclaim any intention or obligation to update or revise any forward looking statement.
Up to the extent required by applicable.
Also our discussion today will include references to certain non-GAAP measures.
A reconciliation of these measures to the most comparable GAAP measure can be found within our earnings announcement and earning supplement slide presentation. Both posted on our website at <unk> IR Dot Barberis partners Dot com or and RCC filings. In addition, this call is being webcast and.
Archived version will be available after the call on Investor Relations portion of our website.
I'd now like introduced cover Baldwin Chief Executive Officer of ERP Group.
Thank you Brad and good afternoon, everyone.
Welcome to our fourth quarter and full year 2019 earnings call. We appreciate your taking the time to join US and your interest MPRP group.
During today's call I'll provide some brief highlights on our fourth quarter and 2019 performance as well as our longer term growth strategy pipeline and investment.
Our Chief Financial Officer, Chris went back and Chief Accounting Officer, Brad Hail, well, then present, our fourth quarter and 2019 financial result.
Finally, well open the line for questions.
Before we go further I want to begin by saying that our thoughts and good wishes or with you our colleagues our client or partners, our investors and all of your families to stay healthy.
Thank you Denise stakeholders, and our analyst who are taking the time to join US. This afternoon, given the challenging times facing the world today. It is very much appreciate it.
2019 was a very active and productive year for us as we executed on both our near and long term growth strategy, we positioned the company to continue making progress throughout 2020, despite the current environment.
The fourth quarter, we generated revenue growth of 75% to 36.6 million and full year revenue growth of 73% to 137.8 million. This strong revenue performance was driven by our hybrid growth model, namely double digit organic revenue growth for the quarter unfold.
A year combined with contributions from new partnerships.
Most notably our entry into the future platform continues to outperform.
Consider that organic revenue growth to the fourth quarter of 2019 was 12%, but if you included revenue growth from the Mg into future platform and that number it would've been 17% the entry into the future officially becomes part of our organic growth figures beginning April 1st we expect.
It will significantly contribute toward our goal of generating sustainable double digit organic growth well into the future subject to any near term challenges in impacts that may occur due to the current pandemic.
As a reminder, India the futures proprietary renters insurance products has been built and just for short years to a portfolio with nearly 375000 policies in force it you're at.
We're eager to apply and leverage the incredibly efficient and highly scalable ngs technology and other capabilities toward developing other products that can be distributed throughout the entire be European organization.
With respect to just how effective the platform as Ben I can share that even during the week of March 15th we had numerous days, where new policies sold were over 1000 and policies in force count as of Sunday March 22nd was over 397000 meaningfully above where we ended 2019.
In addition to our solid fourth quarter and full year performance, we significantly strengthened our balance sheet at the end of 2019 upsizing, our senior revolving credit facility that 225 million and lowering our cost of capital by 150 basis point.
Just over one month ago.
While watching what was happening in Asia, we requested in the increased and our facility to 300 million, which we successfully closed two weeks ago. We believe that this leaves us very well positioned to weather the economic pressures and as prudent close on additional partner acquisitions throughout 2020, Andy.
John.
As our attention to remain thoughtful regarding our balance sheet, but given our borrowing capacity and low leverage we believe we're out well capitalized to navigate these choppy economic waters and emerge as a stronger company.
As of last Friday March Twentyth, we had approximately 16 million outstanding on that facility, but approximately 45 million an unrestricted cash on our balance sheet.
We have turned the page on 2019, and we know investors are sharply focused on the ongoing economic situation. We kick started 2020 by completing two partnerships at the beginning of the year linear upshaw and Highland risk the generated annualized revenue of approximately 20 million.
Linear has been a perfect complement par middle market operating group and Central Florida, while the Highland risk partnership with a watching point for us to rebrand our specialty wholesale platform to connected risk solutions.
We also completed to Medicare segment partnerships agency, RM, and vibrant USA, which generated annualized revenue of over 11 million and significantly enhance that's growing segment of our business.
An important note we acquired these partnerships on February while the large majority of Medicare revenue for a company that usually recognized in January that's we would not expect to see meaningful revenue contributions from these partnerships and 2020 and do not expect them to significantly add to our actual EBITDA until next year.
Anywhere, but we will begin seeing the full benefit from their inclusion and 2021.
Well in the first quarter of 2020, we've completed partnerships that generated incremental annualized revenue of over 30 million.
Ahead of our original anticipated pace.
We have also been very pleased with the number of prospects, reaching out to us directly or responding to our outreach since the IPO.
And as a result, despite the current environment, we have maintained a strong partnership and Oh, I pipeline, which we will continue to prudently monitor and evaluate in light of the current economic and health environment.
Our strategic focus remains firmly on our growth and long term success to that point, we still expect 2020 will be a year of target investment across to the RP platform to support our anticipated growth, but we will obviously constantly monitor the ongoing an ever changing economic situation.
With our focus on the future an early success and momentum on the partnership front, we accelerated leasing more space from our original timeline of 2021, and 2020 and our expanding by an additional four far new camp offices that we will occupy starting in Q2, giving up three contiguous floors.
About subleasing, we're able to get this additional four well below market rent.
We have also further invested on our partnership recruitment and integration teams. These investments were originally planned for 2021, but based on the significant activity. We're generating we decided to pull forward. These investments into both Q4 2019 and the first two quarters of 2020.
In order to generate sustained double digit organic growth beyond investing in new partnerships, we made and we'll continue to make some incremental investments in talent at our NGL the future platform to further augment its capabilities as well as adding to our sales force across our operating groups.
In particular in order to take advantage of the dislocation in the Florida home market, we'll be adding colleagues in preparation for the launch of an A.M. best way to Florida homeowners solution, which is currently in development. It's also important to note that this will be in NJ solution, where we take no balance sheet risk.
From a technology perspective, we launched guided our new Mainstreet Tech platform that Leverages cloud based technology to provide mainstreet clients with additional service capabilities as well as differentiated advice, including personalized content such as a proof pre renewal self audit.
We also remain very much engaged and looking at new partnership opportunities as well as moving forward with investments for the long term growth of our business. This crisis will pass in time and as we returned toward a sense of normalcy, we believe will be well position to accomplish our goal of becoming a top 10 broker.
We remain laser focused on investing prudently and executing on our strategic growth objectives for both the near and long term and we believe our current balance sheet capacity allows us to be flexible when we see opportunities while not sacrificing a large margin of safety for our stakeholders.
We're excited for future and believe we are well positioned to generate significant long term value for shareholders and the current environment. We acknowledge the fortunate opportunity we have put ourselves in financially to lead in the long run we remain bullish on the resiliency of our colleagues American Entrepreneurism busy.
Hi says and our collective ability to persevere through these times ultimately emerging to lead the recovery on the other side of this current prices.
With that.
Ill now turn the call over to Crescent, Brad will walk through some additional fourth quarter and full year financial highlights.
Good afternoon, everyone. This is Chris we back thank you Trevor.
For the fourth quarter 2019, we grew revenue, which is comprised of total commissions and fees by 75% to 36.6 million.
Compared to 20.9 million in the prior year period.
The increase was driven by new partnerships inorganic revenue growth of 12% from the prior year period.
Given that partnerships are an important portion of our ongoing growth strategy in our regulatory filings. We also provide revenue metrics on it on audited pro forma basis. This provides investors with a more apples to apples comparison as if our 2019 partnerships, including MSR had been acquired on January Onest 2018 for today.
The 19 unaudited pro forma revenue was 152.6 million up 75% from the prior year.
Unaudited pro forma information should not be relied upon is being indicative of the historical results that would've been obtained if the partnerships that occurred on that date, nor the results that may be obtained in the future.
$152.6 million of 2019 pro forma revenue does not include the for partnerships that we have close thus far in 2020. It only includes 2019 partnerships.
Commissions colleague compensation and benefits expenses for the fourth quarter of 2019, or 29.9 million, an increase of 16.1 million compared to the fourth quarter of 2018.
Primarily due to the Onboarding of new partners, which accounted for 8.9 million and the increase as well as 1.9 million an additional bonuses. The remainder of the increase was aligned with our year over year organic sales growth and incremental costs of operating in public company.
Operating expenses for the fourth quarter were 7.9 million an increase of 2.8 million from the fourth quarter 2018, due primarily to expenses associated with both our initial public offering and operating as a public company as well as rent professional and operating costs related to the new partnerships in 2019.
Depreciation expense for the fourth quarter of 2019 was 3.2 million an increase of 2.4 million from the prior year period.
Primarily due to the intangible assets capitalize in purchase customer accounts capitalized in accordance with new partnerships during 2019.
We also incurred 14.1 million of onetime expenses in the fourth quarter 2019 related to a contingent earn out liability at our specialty operating group.
Fourth quarter 2019 interest expense was 1.8 million a slight increase compared to the fourth quarter 2018, as we repaid the full outstanding debt and accrued interest on our subordinated debt with a portion of the proceeds from our initial public offerings and concurrently close the agreement.
GAAP net loss for the fourth quarter 2019 was 26.9 million or 48 cents per share GAAP net loss included 4.7 million of onetime expenses related to the IPO a loss on extinguishment of debt in a onetime expenses related to contingent earn out liability adjusted net income for the fourth quarter 2019 was 3.8 million or so.
Six cents per fully diluted share.
Adjusted EBITDA for the fourth quarter, 2019, rose, 128% or 3.3 million to 5.9 million compared to the fourth quarter of 2018, adjusted EBITDA margin grew to 16% for the fourth quarter 2019 versus 12% in fourth quarter 2018.
Brad will now provide a breakdown of revenue by group.
Thanks, Chris and good afternoon, everyone on the call for the fourth quarter, our middle market segment reported revenue of 14.9 million, an increase of 4.6 million or 45% compared to the fourth quarter of 2018.
For the full year middle market grew its revenue by 54% from 2018 to 56.4 million.
Our specialty group generated revenue for the fourth quarter 2019 of 12.4 million more than quadrupling its revenue compared to the fourth quarter of 2018.
Specialties revenue growth was driven by our 2019 MSR partnership completed in April 2019, which accounted for 9.5 million in revenue in Q4 2019.
Policies in force on the M. Jay of the future platform as of December 30, Onest 2019 were nearly 375000, an increase of over 18800 from the prior quarter end during the M., Jay seasonally weakest quarter of the year and it was up nearly 100000 policies from the end of 2018.
Last year emphasize on approximate 12000 sequential increase in test and the same quarter. So this year once again represented meaningful acceleration in growth.
For the full year specialty more than tripled its revenue from 2018 to 44.9 million driven by MSR revenue contribution of 31.2 million since it was acquired on April 1st 2019.
Moving to our main Street group fourth quarter 2019 revenue was 6.6 million, an increase of 1.4 million or 26% compared to the fourth quarter of 2018.
For the full year Mainstreet grew its revenue by 22% from 2018 to 25.5 million.
Finally, our Medicare segment generated fourth quarter 2019 revenue of 2.6 million up point 2 million from the fourth quarter of 2018. This was entirely due to organic business growth.
For the full year Medicare grew its revenue by 15% from 2018 to 11 million.
I'll now turn the call back over to Chris.
Thanks, Brad.
As we've noted previously we manage our business based on our long term growth objectives and focus on full year performance rather than quarter to quarter, particularly given the timing and completed partnerships can shift.
We believe our full year and pro forma results are a better barometer as to how we are executing.
Subsequent to the IPO and year end, we announced and completed for partnerships for total cash consideration of 42.8 million. These partnerships generated total annualized revenue of over 30 million in the current environment. We've continued to generate interest from and maintained a healthy pipeline for potential partners.
For the full year 2019, we grew revenue by 73% from 2018 to 137.8 million compared to 79.9 million in attributable to our 2019 partnerships organic growth of 10% in a full year contribution from our 2018 partnerships.
<unk> Mg of the future revenue growth to organic revenue growth the growth rate would have been 17%.
For the full year 2019, adjusted EBITDA rose, 78% or 12.5 million over the prior year to 28.5 million and adjusted EPS finished the year at 27 cents for the same period unaudited pro forma revenue, which assumes our 2019 partnerships had been acquired on January one 2018 was 152.6 me.
In an unaudited pro forma adjusted EBITDA was 34 million or 22%.
Turning to our balance sheet as of year end 2019, we had cash and cash equivalents of 64.9 million and long term debt at 40.4 million.
During the fourth quarter, we successfully upsize the revolving credit facility to 225 million, while improving our cost of capital by 150 basis points on March 13th being prudent with regard to the current environment and Arlo I pipeline. We closed on the accordion feature this facility and now have committed line of 300 million as of today, we have over 280 million of available.
Unrestricted cash and revolver capacity to execute on our long term strategic plans, we believe our balance sheet cash low net leverage and access to liquidity stands out in your current environment. We've always managed the business for the long term into lead in challenging times.
As we think about 2020 reminder, that our business is fairly seasonal in terms of adjusted EBITDA margin.
Our first quarter is typically the strongest quarter from a margin perspective, but we expect our margins in Q2 to be impacted just depend imec. We believe margins in Q2 will look more like a Q3 to Q4 margin given our expectation that at the country continues to practice social distancing during the quarter our segments may have lower new business than they did in prior years, we anticipate.
Lower contingent payments at our main Street segment in early 2020, as we have seen social inflation and Hurricane lost Creek impacting loss ratios for some of our carrier partners I do you want to know that we expect us to be a short term headwind as our expectation is for significant rate increases, especially in the Florida homeowners. We expect will start to show up at the end of 2020 and into two.
2021.
It was a headwind in Q4 2019 and will be a headwind in the first half of 2020 from industry contingents should drive higher Ministry Core Commission revenue as a result of higher premiums starting in late 2020.
We will prudently continue our plans to invest with an eye towards our long term growth while monitoring the current macro environment for signs that coven 19 will be more damaging to the overall economy. We are fortunate to have a very resilient business with recurring revenue streams and some of our segments. Even in the past week, we're able to generate nice new business growth are.
Turning revenue businesses, coupled with clean balance sheet and access to capital. Finally, as you know, we primarily compete for acquisitions with private equity backed aggregators to employ a much more highly levered business model.
In the market prices of their debt decreased meaningfully over the past month, suggesting much higher borrowing costs for them. If they want to access capital at this time, given the ever changing nature of the current environment, we're not providing an acquisition target range for 2020 until there is greater visibility in the timing and outcome on the economic and health environment. While the same time, we plan to prudently.
Allocate capital and continue to execute on high quality partnerships with that I. Thank you for your time, we'll now open up the call for today operator.
Thank you at this time will be conducting the question answer session. If you look this question. Please press star one on your telephone keypad confirmation. So we're in the Kilotons in the question Q.
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For participants usually speaker equipment, and maybe mystery that take advantage of before person Starkey one moment. Please as we call for questions.
Our first question comes on line of me or shifts with KBW. Please state your question.
Thanks.
If you could I think it's primarily for summer if you can give us an update about how that is being conducted in general over the past months.
Anticipates, we're not just isn't in recognition of the slowdown.
Looking for numbers just conceptually how is the playing out.
Yeah Mayor. Thanks. Thanks for the question then and appreciate you taking the time to get on this evening and hope you and your family or stand safe and healthy.
So we have gone to virtual work environment across the vast majority of our business operations and I'm pleased to share that that transition has been quite seamless as we look out across our four reporting segments I'll give you some insights into what we're saying.
Operationally.
So.
As we look at the business, we we evaluate both our renewal revenue streams and impact from the current economic events to those as well as new business revenues coming from the new client relationships that are being generated.
As we look back over the past two weeks.
And our main street reporting segment as an example.
This time, we did not anticipate any meaningful impact to renewal revenue and as we're looking at new business results, while we've seen a slowdown in activity our new business is continuing at a rate that's in 65% to 75% range of what we would have expected and.
Normalized time over the past seven days.
When we look at our specialty segment, which is comprised of our connected risk solutions business, which is a wholesale business primarily oriented towards professional liability for the healthcare sector, we've actually not seen a slowdown at this time as result of the elevated amounts of activity that are going on in that sector as it was.
Salt is the virus as well as the overall rate environment.
In addition to that in our MJ the future platform, we've seen new business results over the past seven days. There then roughly 25% you every year for the same seven days period in 2019, now with that being said for that business new business for us results were up.
Roughly 39% so the month of February so that is a slowdown but still what we believed to be really good results considering the overall economic environment. I would also caution that those new business results tend to lag or the revenue results tend to lag the.
New business results in the him Jay the future because of revenue recognition.
And our Medicare business, the vast majority of the new business. That's written occurs during the annual one Roman period from October 15th to December 7th.
That being said, we didn't do enrollments to the special enrollment periods on an ongoing basis and we've seen activity there impacted.
Roughly a 40% to 50%, but new business activities continued at a relatively acceptable level all things considered in our renewed we do not expect any impact to our renewal business there.
Lastly, as our middle market business and this is where we would potentially expect to see the most significant impact. We've spent a lot of time over the past two to three weeks really diving into our book of business and evaluating our exposure to various industry segments. When we look at some of the most exposed industry segments, including try.
Total retail hospitality and lodging, we were exposed in our renewal book to the tune of about two and half million dollars. So not an overly significant amount.
And while we do expect new business activity to slow down while the nation's practicing social distancing.
We are continuing to have new business activity and I'm pleased to say I received an email from one of our partners less than an hour ago talking about new account that was written by one of our up and coming advisors generating over $42000 with new business.
So in summary of what I would tell you is that we do expect to see an impact to new business. However, with that being said the business is generating activity at levels that exceeded our initial expectations. As this event began to unfold.
We're continuing to monitor the situation in a real time basis, because as you might expect it's very fluid and our our first priority is on the safety and health of our colleagues our clients and all of our stakeholders.
[noise] so thank you.
Tremendously so I really appreciate it.
Absolutely.
Our next question comes on line of Greg Peters with Raymond James Please state your question.
Hi, good afternoon, a couple of other questions.
You mentioned Trevor about how you were able to transition to the work from home pretty quickly.
And then in your prepared remarks, you, Chris and maybe even Brad.
Talked about making investments.
I imagine this transition over the last couple of weeks was in some regards unplanned expense. So can you talk about what kind of.
Headwinds you might see for the next couple of months in terms of margin pressure that may not ordinarily already been there.
Yeah, Greg Thanks for the the question absolutely. So first I'd want to say how fortunate we are to have an incredible technology team, how they've prepared us with the fore sight around how they've.
Constructed our technology infrastructure prepared us to rapidly move into a virtual work environment.
On less than 24 hours notice and that was a very seamless.
Occurrence.
With with regards to overall margin and expense associated with this new operating environment I'll hand, it over to Chris to provide some additional commentary.
Thanks Trevor.
Greg It's a good question those Trevor said, Fortunately being headquartered in Florida, We had done a lot of cap planning for a hurricane shutting it down. So I think we're ahead of potentially others in cloud based technology, whether it'd be zones in emails and where our data has held so there's certainly we have some incremental I think the biggest.
Difference on the margin is.
Yes, it's going to be a little harder to generate.
New outbound effort on the partnership side.
Terms of flying places to meet people and so the same really goes on the middle market side in terms of new business right. There's no. We're fortunate in a lot of our segments are able to execute well on new business, but but some of them you certainly historically have met in person with someone.
And that executive team and so what we're thinking really is.
It's probably margin that's generated from a little bit of a slowdown. So we have some investments that we've made you anticipating tranche one it would be kind of another really nice year of overall economic growth in the environment and what's the rest of the country tighter retrenching, a little bit yeah, we probably have investments, we're making that we're not going to get quite as much leverage out of its weve otherwise expected.
And that's why I mentioned kind of a more Q3 or Q4 margin. However, as what we might have otherwise expected.
It's still early for us to tell right a lot of this depends on how long were shut down the extent of that shutdown it and what how folks are are handling it but we didn't think it was worth calling out there that we do you think it would be different from our original expectations.
Right I appreciate that color and that response I'll just ask one other question and that is around you know the.
Targets around partnerships yeah.
It feels like.
There might be a pause button being hit by a lot of.
Financial buyers and maybe even some of the strategics as everyone sort of reception on tries to figure out what kind of outlook that that should incorporate in these potential deals and I just thought I'd get your impression as Youre. Obviously, you mentioned you can't travel to.
See these people, but obviously those video conferencing, what's your what's your what's your view about closing deals right now it seems like you might also be on the more cautious side hitting the pause button, but maybe maybe I'm missing something.
Hey, Greg This Trevor great Great question and.
The way, we're approaching our partnership pipeline, which by the way is the largest in the history of our organization is we're continuing to be to prudently pushed forward.
And we are making sure that we are appropriately diligencing the durability.
The revenue screens and the client base of the potential businesses that were looking to partner with and so we are continuing to move forward, but being prudent.
In cautious around how we evaluate the the risks to those potential those potential partners in light of the current economic environment.
And focusing our efforts in particular on businesses.
Defensible niches with industry segments or product lines that are going to be more resistant to the or current economic pressures, Chris anything you would add to that yeah, I think Greg.
Certainly I mentioned on the call you look at.
What's going on we re compete against a lot of other buyers and and especially the private equity it's kind of set the market.
Yes, a little bit of its wait and see right just to see but the reaction as how that how that impacts the broader market. You know again, we feel like we just are really fortunate the timing of their IPO, what we've done with our credit facility. You know, we effectively I mentioned on the cost less than one onex net leverage on the balance sheet in terms of debt. So.
We're in a really good capital standpoint.
To the extent theres opportunity over the next few months Oh, we expect to take care of take advantage of that opportunity. We're just being prudent right now and making sure. We as Trevor said, we really diligence everything and we do things that you know the shareholders would want us to do a given the fortunate position Wi Fi.
And ourselves and but we're we're optimistic.
And and certainly.
Our thankful for the position, we find ourselves and financially yeah. So Greg I guess, the kind of final thought I'd give you on that as you know for the most part you know if we thought a business was a really good business 60 days ago.
So long as there is nothing about the current economic climate that changes that viewpoint for us than you know we're focused on building a really first class brokerage platform and.
We want to take advantage of the opportunity to partner with really best in class farms and best in class individuals.
The build organization, we just are going to be particularly prudent and thoughtful.
And the construct of how those.
Partnerships get done and making sure that that were being diligent around assessing the potential downside exposures they exist inside the client base.
Great. Thank you for the answers good luck to had lost basic.
Thanks, Greg you as well.
Our next question comes on line of these Greenspun with Wells Fargo. Please proceed with your question.
Hi, Thanks, My first question on probably goes back to some of the topics discussed in the prior question.
So as we think about potential economic slowdown right now it seems like nothing directly.
Certain degree on hold for couple of months based on kind of what we hear out there, but I guess as we think about a couple of months slowed down like you just you get a little bit further and you talked about new business slowing but you put it together assuming it's you know a couple of a month slowdown.
I see that playing out it seems like organic growth could be tempered in the second quarter and then no improved to a good amount on the flip side in the back half just how should we think about the playbook to get to slow down you know last a couple of months on just which seems like at least what people calling for for the time be.
Yeah, Hey lease. This is this Trevor and Oh. So appreciate you dialing in and I hope, you're staying safe and healthy.
So as we look at the impact to our business of a slowdown of a few couple of months during the second quarter.
We believe the primary impact is gonna be on our ability to generate new business at the rate we weather otherwise would have expected to we believe and the past seven days would evidence that we will continue to be able to generate new business. The the the question that remains though.
And is at what rate and so as we look at as an example, our main street business. You know, we don't anticipate that renewals should be meaningfully impacted by the current environment. If anything you know retention rates could increase.
As a result of the focusing in other areas.
That that people have.
And so and in light of that we feel really fortunate to have made the investments in our sales leadership sales enable Matt and marketing and branding teams have who've been doing a really tremendous job of helping to reorient, our sales playbooks and develop in general rate.
Content and information in insights that our risk advisors can deliver to our clients and perspective clients in real time to ensure that we're having meaningful dialogue in conversations with them. During these trying times and as a result of that we believe we'll be able to maintain a modicum of new business.
That while.
Certainly will not be to the degree and level, we would've otherwise expected during normalize times.
Should be able to continue to allow us to focus on growing our business for the long term I think it's reasonable to expect that we would take a hit to organic growth in Q2 as a result of the current environment and you know we believe that were likely see the most significant.
An impact in our middle market segment as a result of that being the most challenging segment to continue.
Developing new business activity in particular, our proprietary prospective client engagement model is fairly involved and business leaders business owners today are very much focused on.
The the immediate challenges.
Solvency liquidity and managing the health and welfare of their colleagues and stakeholders. So you know changing in insurance brokers not necessarily top of mind, although as I pointed out earlier, we had been successful and having some of those conversations.
But overall, we believe that if theres a fast recovery in Q3 will be in a really good position to take advantage of that.
But the situation is fluid and we're continuing to reevaluate, where we said and what our strategies are in real time to ensure we are positioning our business to lead the recovery on the other side of this Chris anything you would add.
No.
Thanks, and then on in terms of your margin right. So the pro forma 2019 margin was around 22%.
Assuming there is right we did that the second quarter margin could be weaker given the slow down but it sounds like the Q1 potentially the back half way she'll improvement over the comparable period. So you put that altogether, even with you know the slowdown that and see just 2020 feel like.
I hear when on you know given the investments in the slowdown that we could see.
Some level of margin improvement on that pro forma number.
You know what I'd say right now leases certainly we think Q2 margins going to be down a little bit just because of the shutdown you know whether we see improvement you know in the back half a year or whether it ends up being a us.
A flat year I think we probably should reach reassess after Q1, when we do the Q1 call will then you know that's probably six weeks from now we'll have more information about exactly what happened in and probably a little bit more visibility.
I'm, sorry, so I would probably just want to want to hold on that you know I don't want to make too big of an assumption.
Yeah, certainly can be very fluid in next few weeks and we'll have some better data.
Okay and then my last just a quick numbers question. It seems like a tax rate was pretty low in the quarter on the.
Thank you Jackie I reported numbers will do anything.
One off in the tax rate and how should we think about modeling that going forward.
Hey lease this is Brad so.
We believe that for an extended period of time, we'd be paying something well less than a statutory tax rate.
Which is which is why we're using the effective rate of around 10% in terms of actual tax rate. We noted a full valuation allowance. So so it's effectively zero.
But in terms of an effective rate door cash rate a there's a couple of component to that which which make us believe that we're gonna be in that that 10% range for a long time one is.
Because of the FC structure, you're allocating a.
A significant portion of earnings to the partnership.
Good to see Corp.'s retain each of those earnings is is pretty minimal.
Or in that 30% range.
And to.
The historical acquisitions on which we've acted and our our go forward strategy of continuing to to acquire new partners.
What would lead us to a pretty significant taxable amortization position. So so yes that is you think about it going forward. A we believe that rate is gonna be pretty consistent for for an extended period of time as we look at ourselves on an adjusted basis.
Okay. Thanks, Thank you for the color.
Thank you really our next.
Our next question comes on line of Pablo Singzon with JP Morgan. Please state your question.
Hi, covering Chris. So appreciate your comments on the M&A pipeline I guess first question was just given your size you've seen partners' equity I was wondering how new York Eastern stock price influences are witnessing the deals and for perhaps how you end up structuring the financing for the transactions.
Sure I really put that in its into two buckets Pablo for things that are under Ela why you know I think when we put things unrealized 60 days it would go yeah.
The World was a little different and so I don't think prospective partners of ours would you view that their own business has shrunk.
If a.
I mean as the market and so you can introduce things like collars or you know it was necessarily maybe a stated no stated share count per share price.
And I think people are going to be relatively reasonable and realizing it you know if you want to close on on terms like that then we all have been impacted and there seems to be a good path toward you know I think as you think about going forward. We view equities important it provides alignment for a long term incentive we don't view that today's share price is reflective of.
The intrinsic value of the business, we're building a and so yeah, we would definitely have to make up for that other places you know about it if it's a lower upfront multiple.
Or just having them transfer into the share price, it's hard another day, but.
We're not excited about issuing shares at the current price.
Got it.
And then I guess another M&A related question can you help us think about the EBITDA contribution to the deals to close so far this year. So just focusing on higher London lean years. Since you thought as I mentioned for those and you haven't seen that yep.
Yeah, So I'm guessing about I think the book.
Go ahead.
Yeah. Yeah. So you can correct me, if I'm wrong, but I'm getting about a million of EBITDA on 20 million revenue, which implies pretty high multiples. Maybe you can stick to I guess, maybe the revenue growth or EBITDA reason, you're factoring in the needed those deals that obviously you can't just from the outside.
Yes, again I'd encourage all you'd have to go look at the earnings supplement that we posted the website.
We've done a couple of things so many investors we had in some of the analyst.
Just to provide some more disclosure, saying, Hey, you know show us disclosures, if we own the business and so on an annual basis, we have broke out organic growth by segment.
And that's in that earnings supplement and I. That's you know in response to some feedback we got after the last call firmed from some of the larger investors and so you'll find that they're one of the other things you'll find there to your question is on the last page we have a breakdown of deals we closed year to date in terms of what the annualized acquired revenue is and what are you.
<unk> estimated acquired adjusted EBITDA is and you'll see that we've we've closed on partners a little over $30 million the revenue.
It over $5 million of EBITDA, you know it generally that's based on quality of earnings work again, that's that's historical information, it's not guaranteed and they would have operated that way.
Under us, but but that's you know good visibility is kind of how we're thinking about those deals charter did note that the Medicare deal was a little different in the sense that most of our EBITDA will be recognized in January for that deal based on Red rock and so we wouldn't expect that adding meaningfully into the rest of 2020, but you'll see that show up in January of 2000.
20, Warner our Q1 to 2021, but I think that table there will probably provide some some better guidance you know one of the things when you when you think about these businesses.
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When you look at their historical actual financials, you a lot of times the owners pay themselves. The salary when you audit that it looks like they don't make much money you pull that salary out that really might have been profit distributions and you tend to see that theyre, they're running at higher EBITDA margins.
When they're part of a public company then when they are independently owned and the owner was paying himself a bonus equal to profits at the end of the year.
Got it that makes sense and then just last question for me. So fair amount of small businesses are under stress right now from the economic disruption and Trevor teams like from your comments you see here in the middle market renewable revenue came mostly in park.
Is it fair to assume then that size wise. It seems like your clients are large enough to would send them to FERC or impact on this slowdown.
Yeah, Pablo that that's exactly right you know, it's not to say that we're you know without clients that are experiencing hard times and financial the rest right now, we certainly have clients and the restaurant hospitality in lodging industries that are.
And we're working really hard with them to come up with creative ideas and solutions to mitigate insurance costs. So that they can.
Survives to continue operations on the other side of this but when we look across our our client segments in middle market, we feel really fortunate about the makeup of overall industry.
That that the clients come from we feel good about the relative size and financial strength and Weve developed a some actual real time reporting that we're getting on a weekly basis to give us a intelligence as to what's happening inside our client base.
We can really stay on top of how that's going to impact our overall business, but in summary, Pablo while we do believe there will be an impact a we feel that we're in a relatively fortunate position based on our mix of clients. They industries, they operate and and how we'll be able to where the weather.
Tough economic times.
Okay and then just final question for me, it's good to hear that we're still seeing good frozen the renters insurance business, we give any insights on where those polyester coatings on just geographically.
Thanks for answering it it you know there they're really coming from all across the country Pablo we do business in all 50 states.
Now as you think about the population mix of the United States. That's a good way to think about you know the relative.
Policy next across states.
Where do you see concentrations of of urban population, you know areas like Florida, Texas, California are going to be places, where we have a significant amounts of business.
Alright, thank you.
Thanks problem.
Once again, if you would like Ted's question. Please press star one on your telephone keypad. Once again, if you like that's question. Please press star one on your telephone keypad. Our next question comes a lot of Denton with Jefferies. Please see what's your question.
Hi, Thanks, just a follow up on on some of the previous topics most of the talk of slowdown or potentially slow down in the second quarter in third quarter has all been on the revenue side. So curious as you think internally what expenses or cost you couldn't look to offset some orbiting.
We will slow down in revenue I think in Trevor in your prepared remarks, you talked about pulling forward some cost in the fourth quarter and some elevated spending but is there a if revenues are depressed for some extended period of time beyond.
A couple of months would you at what point would you look to kinda curtail some of that spend.
Hey, Dan This is Chris I'll take that you know a couple of things some of those expenditures. We had we made in Q4 and already in Q1 before this showed up and in a large way to affect the economy. So.
Thank you have leasing more space is something that we decide to do in Q4, we did get a good deal on it to sublease, but.
It's that type of pull forward pull forward for the partnership integration team type stuff you know as far as our expense structure. We're fortunate and that you know a lot of our expenses Commission expense that we pay to advisors you know in that that's variable expense that relates to the revenue and so we kind of how natural ticked down in terms of its Rob.
Avenue, where do not show up.
Immediately you know it we're not taking 100 sensor that loss, that's being shared with our sales team and our advisor team you know just start with so so that's fortunate you know it. It gives US you know a variable cost component in ARPU, you know that allows us to to maintain some margin.
If you looked at a slow down that was you know very long you know shelter unswayed in place orders for you know three months or six months certainly we would start to look at at cost cutting you know if I look at the balance sheet today, we upsized. The commitment we we transitioned from that according to a full commitment and we drew down an extra 20 million.
We're operating day with 45 million a cash you know unrestricted cash approximately that we'll let us operate for a while it's more cash than we would normally operate within a given nature. We felt like it's prudent to time, if there's a business. If you can to operate with more cash.
You know, if it's slow down longer we'd probably pull down a little bit more though but we feel like we're in really good financial shape to kinda not have to immediately you know made tough decisions given the recurring revenue nature, given our kind of variable expense exposure.
Three months from now Yeah, we would have to look at things again.
You know we have done that analysis, we have a list of $5 million to $10 million a cost we could cut out of the business I'm pretty effectively that we don't think would you know impact that business terribly in the long term, but its things that we wouldn't want to do right away because those those costs are going to help us provide future growth assuming that we're going to have.
A recovery.
We will be in a position to lead so.
We're doing the work to be prudent, but but right now we feel like we're in a really good financial place you know I think were though the lowest net leverage in the industry compared to all of our peers, you know public and private equity backed the timing the IPO really helped us with that and so where we probably a little bit more time to see how things play out and than some others.
Understood. Thank you for that and just a quick follow up the acquired EBITDA margin based on the disclosure in the supplemental is obviously below years, it's close to 17% you highlighted that those are generally understated can you give us a sense of what that typical mark up would be.
As they get into a public.
Public realm or how these businesses you've acquired compared to your core business in terms of the margin profile as you integrate them.
Yeah, No I think you know again, it's a small sample size right. So.
You know we've seen US you know bring on businesses that might operate at a 15% margin and some that might operate well north of 30, and I think a lot of the analysts to be used 29%. You know if you look historically, that's pretty accurate one of these businesses is fairly nice and revenue it's in the wholesale space, which arch wholesale business.
It does have a little bit of a lower margin and they've been growing exceptionally quickly over the past few years and so we're going to kind of you know reward some of the faster growing businesses. We haven't say if you can keep growing it you know nice double digit high teen organic growth rates, we're going to live with lower margin you keep investing in that business and and that will.
That will pay for the shareholders and a long run so.
There probably is a little bit more margin that we could get in the existing businesses.
Just think it's probably a small sample size you know if you look back three quarters from now on and you look at the year, we'll probably be you in a situation where you found that the incremental deals were also margin accretive. Then then this sample set though but we're we're we're excited about these deals and we think they're going out a lot of long term shareholder value.
Got it thank you.
Okay.
Our next question comes on line of Pablo Singzon with JP Morgan. Please proceed with your question.
Hi, Thanks for taking my follow up so forever and Chris I just wanted to come from your comments on this call there's sort of based on I guess this current seamlessly as far as local government response to the cool. It is concerned right because I think the sponsor been implemented but the next New York and so close shut down I think in Florida that serve a mix shut down I think in Texas It might.
The summer and the mill I just wanted to serve understand like it is served the current outlook. He provided based on where things are today, and obviously things are very fluid and could change, but if he has come from that.
Yeah that that is confirmed Pablo the the current.
Feedback, we're giving you an insights we're giving you are based on kind of the real time realities were seeing our and our business as a result of the current state.
Shutdown and shelter and place orders that that are out there.
And I would add Pablo you know if you if you look at most of the state regulations, even New York.
Financial services insurance brokerage is an essential service, we're throughout helping key businesses respond to this right whether it'd be in the health care, whether it be clients of ours, who have folks on their employee benefit plans you need to know they have health care to in order to see provider and so we're very thankful to our colleagues.
Can work from home and be effective for our clients. You insurance is one of those kind of key pillars of the economy in terms of risk transfer and allowing people to go out and and get business done. So even in some jurisdictions that are more shutdown than others. We tend to find from a legal standpoint that we are allowed to have some operations.
Understood. Thanks, guys.
Thanks, Bob.
Ladies and gentlemen, we have reached the end of our question answer session and I would like to turn the floor back over to Mr., Trevor Bolton critical German courts.
Thank you operator I wanted to just take this time to thank all of our shareholders all of our colleagues and all of our stakeholders, who took the time this evening to join US for this call I. Thank you for your interest and the RP group.
I also want to give our well wishes to all of you and your families and that you stay safe and stay healthy during these difficult times and we look forward to talking with you.
Our first quarter report and hopefully being in a much more positive place for the country and all of our citizens. Thank you and good evening.
This concludes todays teleconference. You may now disconnect your lines at this time. Thank you for your participation have a wonderful day.
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