Q1 2020 Earnings Call
Since first quarter 2020 earnings call as a reminder, all participants are in listen only mode and the conference is being recorded.
After the presentation, there will be an opportunity to ask questions to join the question Q You May Press Star then one on your telephone keypad should you need assistance during the conference call you may signal and operator by pressing star and zero.
I will now turn the call over to Dan Farrell VP capital markets. Please go ahead.
Thank you and good afternoon with US today are Mark Jones, Chairman and Chief Executive Officer, who said, Michael Colby, President and Chief operating Officer, and Mark will be Chief Financial Officer by now everyone should have access to our earnings announcement, which was released prior to this call which may also be found on our web.
Site IR Dark you said insurance dotcom.
Before we begin 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 having today.
The forward looking statements in our discussion are subject to various assumptions risks uncertainties and other factors they are difficult to predict and 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 refer all of you to our recent filings with the FCC for more detailed discussion of the risks and uncertainties that could impact the future operating results and financial condition of goods that insurance, we disclaim any intention or obligation to update or revise any forward looking statements except to the extent required by applicable law.
I would also like to point out that during this call we will discuss certain financial measures that are not prepared in accordance with GAAP.
Management uses these non-GAAP financial measures when Clinton monitoring and evaluating our performance. We consider these non-GAAP financial measures to be useful metrics for management and investors to facilitate operating performance comparisons from period to period by excluding potential differences caused by variations and capital structure tax position depreciation.
Amortization and certain other items that we believe or not representative of our core business.
For more information regarding our use of non-GAAP financial measures, including reconciliations of these measures to the most comparable GAAP financial measures. We refer you to todays earnings release. In addition, this call is being webcast and archives version will be available shortly after the call and on the Investor Relations portion of the company's website.
Www Dot Goose had insurance dotcom with that I'd like to turn the call over to CEO Mark Jones. Please go ahead.
Thanks, Dan and welcome to our first quarter 2020 earnings call I'll provide an overview of our results for the quarter and the resilience of our unique growth strategy, even in the current environment.
Ill, then hand, it over to Mike Colby, our Chief operating officer to update you on actions. We've taken in response to covert 19, and some macro trends and performance metrics were currently observing.
Our CFO Mark Koby will then go into greater detail on our first quarter results and outlook.
Let me start with a little context.
We have followed a battle tested strategy that great companies adopt especially in times of economic turbulence and uncertainty.
Our teams have played offense and have been relentlessly externally focused on our clients and referral partners to demonstrate that goose hit is a reliable and stable agency in partner.
We've been using our full arsenal of tools and technology to continue to grow and prosper.
We're also proud to report that we have neither side any kind of government support nor have we reduced pay furloughed or laid off any employees.
Mike will review, our covert 19 response in more detail, but a few examples of actions. We've taken include one or both.
Focus and deployment of system wide best practices to achieve full share of wallet with our clients.
Two.
Assistant marketing to referral partners, we show up even if it's virtually well others don't.
As a result, we gained share with existing partners and add new ones will so many of our competitors sit the game out.
We have benefited from strengthens mortgage refinance activity our value proposition is equally powerful the refi clients as it is to buyers through.
Three we are enhancing our approaches to gaining client referrals elite source that is unaffected by market shocks.
We're confident that are already formidable competitive moat will only be strengthened as we come through this corona virus challenge.
The first quarter of 2020 represented a very strong start to the year that continue to validate the powerful growth platform, we've built delivering year over year growth in premium and core revenue under NSC six so five of 46% and 41% respectively.
Adjusted EBITDA for the quarter was 1.2 million down slightly as we accelerated some seasonal expenses in 2020 from Q2 into Q1, along with some onetime public company expenses.
Despite transitioning our entire team to working remotely we have had a strong finish to the quarter will fully maintaining all of our service quality metrics.
This is yet another example of the extraordinary human capital and resourcefulness that exists at all levels of the company.
We continue to drive very strong growth in April with preliminary year over year premium growth estimated.
At over 40%.
Underlying demand in our industry is very attractive and stable if you live somewhere or drive something you have to buy personal lines insurance either for musser competitor.
Our client retention remained constant at 88% in Q1.
As a reminder, our business is similar to annuity aggregation.
Roughly 30% of annual revenue is new business and the rest is recurring renewal business historically about two thirds of new business is tied to the housing market for the remainder is client referrals.
Built a unique and well tested distribution model and have invested heavily in proprietary technology to drive growth in good times and in bad.
Based on what we know today, we are reiterating our prior guidance for 2020 premium and revenue growth.
Let me remind you that our company does not play games with guidance, we do not under promise. So that we can over deliver when we give guidance. It represents our best estimates of what we expect the actual numbers to be.
If in the future our estimates change we will let you know.
But our annual expectations remain unchanged at this point.
Well, we recognize the covert 19 is an unprecedented event that will continue to negatively impact the broader economy. We're confident we will continue to perform well through these challenging times.
Sales processes and to develop best practices, which can then be rolled out across the company into the franchise channel.
Quarter, we'd highlighted the initial success of our virtual sales coaching.
Pilot program and we'll look to continue to expand this initiative through 2020 and beyond.
The corporate and franchise channels are separate on paper, we manage them as one integrated hole.
Our success and the franchise channel is in large part dependent on our continued investment in and support of the corporate channel.
The success of this integrated model is evident in the continued growth in agent productivity within the franchise channel and we continue to see significant opportunity to further leverage this into the future.
As our mix of business continues to shift more to the franchise channel. It is important to understand how premium converts to revenue.
In the franchise channel, we earn 20 per cent royalties on the first terminable policy and 50 per cent on renewal terms, so as a larger relative share of new businesses generated in the franchise channel there will be a growing gap between premium growth and revenue growth.
Given our 88 per cent client retention rate, we see approximately 120 per cent mechanical revenue growth as a policy converts from new to renewal so strong premium growth today drive strong revenue growth tomorrow.
That is why we view premium growth as the most important leading indicator of our future revenue growth.
In the first quarter of 2020 premiums placed where $214 million and increase a 46% from the year ago quarter.
In the quarter, we saw acceleration of new business growth in both the franchising corporate channels.
Franchise premiums for the quarter increased 54% with new business premium showing increasing rates of growth in each of the last four quarters.
Total corporate premiums for the quarter increased 30% with new business premium growing 42% over the prior year.
This was a substantial accomplishment given the increasing responsibilities the corporate channel bears in training and mentoring a franchise agents.
We're continuing to succeed and adding higher quality franchise recruits overtime.
Total franchises at the end of the first quarter were a thousand 12.
An increase of 45 per cent from the year ago period.
Operating franchise increase 36% and a quarter to 679.
Corporate channel ended the first quarter with sales agent headcount of 241.
An increase of 31% from the year ago period.
Our business remains on off fence investing in talent technology, and innovation with maniacal external focus and our clients and referral partners might call me will provide more detail on the current operating environment and some of our activity and keep performance metrics through April in his remarks.
I want to take a moment and thank our management team employees and franchisees, where they're incredible efforts, particularly over the last couple of months. Our success is made possible through their hardware laser like external focus and adaptability.
I could not be more excited about our long term growth prospects, we have a talented and highly motivated team industry, leading technology and a proven disruptive business model to continue to grab share of a gigantic market.
With that altering the call over to my Colby.
Thanks, Mark in Hello to everyone on the call.
Prior calls I've discussed our strategic technology initiatives focused on agent and clients 80 software application development key driver behind our ability to outperform you industry on you sales productivity client experience and retention and cost management.
Today I'd like to discuss our response to the code at 19 crisis.
Infrastructure investments, we've made over the last decade to allow for a seamless transition to a virtual operating environment.
Some insight into the business results through the month available.
Beginning the week of March 16th we reduce the workforce density at all corporate offices by asking employees, who are already mobily equipped to begin working from home.
This is represented approximately 40% of our corporate employee based primarily sales agents and recruiting team.
Additionally, we indefinitely suspend it all corporate travel build support visits in person marketing efforts and in person T. meetings.
Leveraging our cloud based technology video conferencing technology, and importantly, our mortgage activity database to continue referral partner marketing efforts.
Operations for this group to be largely uninterrupted.
The following week, we began to more challenging task of transitioning the remainder of our workforce to work from home and a virtual environments.
And also converting the two week in person components of our initial training program to be conducted virtually.
Because of early investments made to move our technology platform and voice solution to the cloud and investments made in cyber security. This was largely a logistical challenge that involved equipping the team with the proper hardware needed to be fully productive in their homes.
By March 26th our entire corporate team was seamlessly transition to a secure work from home environment and the business remains fully operational, albeit virtually.
I thought this call we've been operating the business completely virtually for five weeks, we're very pleased with how our team is performed.
Training teams successfully converted are in person training curriculum to be delivered virtually and we successfully kicked off new agent training on April 20th.
For the month of April we estimate operating franchises and corporate agents group, 38% and 37% respectively.
We plan to conduct new agent training virtually again in May.
This was a great effort from our training team, but also or Onboarding team that worked creatively with licensing bureaus and carriers to ensure that trainees were equipped to sell insurance.
Compared to 2019 April total new business production, which is not our gap revenue, but a good real time proxy is up in both the corporate and franchise channels and consolidate premium gras growth is up over 40%.
Well, we'd makes has changed slightly these low the production growth demonstrate that our agents adapted rapidly to a virtual operating environment and that they are successfully to point, our technology to grab market share at new purchase mortgage leads decline increase cross selling of other lines of business and increase client referral Lees.
The same is true for our service centres and back office functions, where we have been able to maintain it consistently gray Klein experience and he didn't grown R.M.P.S. in the month of April to 92.
Client retention remain stable at 88 per cent in April.
In addition to maintain our operational capacity, you're playing office and continuing to make strategic investments in our information systems development team growing the team 200 per cent in April compared to last year.
The strategic initiatives that we've discussed on previous calls remain on their expected timelines for the year.
Navigating through this unprecedented crisis as a monumental effort 14.
Years of preparation and making the appropriate infrastructure investments gives us the confidence that we'll be able to continue to navigate through successfully.
I look forward to welcome in our team back to their offices and resuming normal operations when it's safe to do so.
Cannot predict when that'll be we will follow C.D.C. and government recommendations.
Also like to Echo March comments, and thank our entire team for their hardwork, adaptability and ingenuity and responding to this challenge.
But that altering the call over to Mark Colby to provide color on our financial performance.
Thanks, Mike I'm, good afternoon to everyone on the call.
For compare ability purposes, my comments on our first quarter 2020 results will be discussed against the first quarter 2019, as if recognized under S.C. six so five <unk>.
Reconciliation of S.C. six so six accounting to S.C. six or five accounting for 2020 has been provided as a supplemental schedule in earnings release.
Well the first quarter of 2020 toll written premiums an important leading indicator of our future core ancillary revenue growth increased 46% to $214 million.
This included franchise premium growth or 54% to $148 million in corporate segment premium gross 30% to $66 million.
This growth is being driven by continued high retention rates strong under beds, new business generation and increasing agent productivity and the franchise channel.
The continued shift in our mixed of business towards the faster growing franchise channel imply significant embedded future revenue growth at the new business premiums convert to renewal premiums after your one.
Which time, a royalty fees increase from 20% to 50 per cent for ongoing minerals.
At quarter, and we had over 530000 policies and force a 45 per cent increase from one year ago.
Are consistent in rapid year over year growth in both premiums and policies positions as well for long term success.
Revenues were $20.4 million for the quarter compared to $23.1 million in the prior year period, which is skewed by the different revenue recognition using each period.
Q1, 2020 was reported under S.C., six or five revenue grew 8% to $24.9 million.
More importantly, core revenues increased 41% to $19.4 million, if reported under S.C. six or five.
In the first quarter are franchise channel generated core revenues of $7.9 million, if recorded under S.C. six or five.
An increase of 54% from a year ago.
The results driven by continued strong growth in new business and renewal, while t. fees from an increasing operating franchises combined with higher productivity plus sustained high levels of retention.
At the end of the first quarter, we had 1012 total franchises.
Up 45 per cent from the prior year and 679 operating franchises up 36% from a year ago.
We continue to build on our strategy of national expansion within this channel.
Non Texas franchises now represent 70% of our total operating franchises compared to 59% a year ago.
Are franchise pipeline remains very strong and we are continuing to grow our recruiting team, which currently stands at 69.
We will continue to invest in the growth of this team throughout the year to drive or clan grow.
If report it under S.C., six or five corporate channel core revenues were $11.5 million and the first quarter.
An increase of 33% from the year ago period, driven by an increasing agents and continued high levels of retention.
Corporate sales headcount at the end of the first quarter was 241, an increase of 31% from the year ago quarter.
As a reminder.
Because of our college recruiting for the corporate channel.
Summer months are historically, our largest for corporate sales onboarding.
We continue to invest in in the success of our franchise channel agents be our corporate agents.
Evidence by increased investment in our virtual sales coach program.
Additionally, we moved to group of former corporate agents into fulltime franchise support roles during the quarter.
Adjusted to you, but that's where the quarter was at $1.2 million compared to $9.5 million a year ago period.
Again skewed by different revenue recognition accounting in each quarter.
Reported or S.C. six so five adjusted to you, but that was $5.3 million with the decline due primarily to lower contention commissions earned based on calendar year 2019 versus 2018 higher investments and people in technology.
As well as timing of certain operating expenses in one time, I County, and public company expenses.
Specifically the quarter included over $300000 at one time accounting expenses.
And over $600000 of expenses that were previously incurred in the second quarter of 2019.
As a reminder, under S.C. six so six.
I expect the first quarter will now be or seasonally lowest earnings quarter of each year.
Well our business has natural operating leverage and should continue to see gradual margin improvement over the long term, we do not marriage the business on a short term quarterly basis.
We will gladly trade off near term margin pressures to take advantage of emerging opportunities to invest for future growth.
We managed to business to maximize overall profits over the long term.
As of March 31st 2020, the company had cash and cash equivalent of $10.8 million, an unused line of credit of $19.7 million.
Outstanding notes payable $46.4 million on its balance sheet.
In order to maintain inefficient capital structure on March 620, 20, the company refinanced, it's 13 million dollar revolving credit facility in 40 million dollar term no payable to a 25 million dollar revolving credit facility in 80 million dollar term no payable agreement.
The company expects to draw down there remain balance of the new term node, which is fully committed and ready to be funded in June 2020, adding over $37 million in cash to our balance sheet.
As it relates to our balance sheet planning our strategy of returning to shareholders excess cash not needed to execute our growth remains unchanged.
However out of an abundance of caution given the current economic environment.
We have decided to delay payment that'd be special dividend until further notice.
Finally, as Mark noted in his remarks based on what we know today.
We are maintaining our full year 2020 out but with respect to total read the premiums revenue.
We continue to expect total written premiums placed to be between 975 million in $1.035 billion, representing organic growth of 32% to 40%.
Toll revenues under S.C. six so six are expected to be in the range of 100 million to $105 million.
Representing organic growth of 29% to 36%.
Investments and people in technology as well certainly one time expenses will continue to have in moderating effect on margin improvement in 2020.
Yeah.
Our business remains well positioned to deliver consistent in sizable gross.
He didn't even during times of economic uncertainty.
We will continue to closely monitor the covered situation in any impact you may have in our business and we will provide an update as necessary.
Yeah.
If that I'd like to think everyone for listening and we will now open up the lines for Q. now operator.
Thank you <unk> to join the question here you may <unk> on your telephone keypad, you'll hear account acknowledging or request if you're using a speaker phone. Please pick up your handset for pressing any keys to S. try your question. Please press start tin cans.
We will pass for a moment as color is trying to <unk>.
[laughter].
<unk> S.K.P. temple yeah.
She's got ahead.
Great. Thanks, and a good afternoon, good eating everyone incredibly strong.
Little bit about the impact of which seems to be dramatically rising unemployment in terms of the ability to get more agents in in both channels and whether that increases the need for a.
Greater selectivity.
We are saying.
Very strong interest.
Particularly on the corporate side, where you.
People are very much drawn in these in these times to a strong unstable employer. So we are yeah, we're definitely seen more.
Interest we are.
Are are hiring standards have not.
Have not been compromised in any way, though effects were able to <unk> have our our pick of the cream of the crop so.
There's no there's only positive impact on the corporate side on the franchise side I think it's too soon to tell Mike would you agree with that yeah, I I would agree and echo for your comments are standards are always held at a very high level, whether it's a tight labor market or where the labor market loosens up were never compromising.
Those those evaluation standards.
Okay Fantastic second question would put a lot of insurers granting more flexibility to policy holders, becoming central financial constraints, if that like they'd have any impact on your from cash flow.
Yeah. So what we've heard so far from these carriers is that they're going to do this in a way where they're benefiting the both the clients and the the agents that sell for them. So what we've been told again is is that it's going to be kind of economically neutral for us.
Their commitment is equally as strong to the clients that they're trying to help as it is to to their agents. So there should be no no impact or economics.
Okay. Thank you kind of.
<unk>.
The next question.
As a reminder into start one to ask a question.
The next question <unk> R.P.C. capital markets. Please go ahead.
Yeah good afternoon.
Your first question that I had related to the employee compensation and benefits expense.
I mean, it was up fairly substantially in a little bit greater rate of increase then I probably would have expected just talking a little bit more detail about you know what some other drivers were there.
Yeah, well for one you know is just continued hiring and it's also Q1 at the time of year, where we're most of our employees will see there anywhere raises kicking.
And the other thing was as I mentioned on the call. We had some employee development expenses of over $500000 related to our annual meeting that last year, where where Q2 between 19, However, and this year that meeting was held in February so I'm kind of fast forward. It does in comparison.
Okay.
Incurring any yeah. This is maybe lessen the quarter, but more perspectively are you incurring incremental no sales and prospecting costs, just and you were kinda modified way that you need or to approach approach customers.
No you know to be honest, we'd rather be out in the field shaking hands and making introductions if anything it's the opposite we're having to do it virtually so we can't host those get Togethers, that's happy hours. Those lunches. So you know what we're looking for ways to reinvest those funds into other places that can help drive growth in you know quite referrals.
In other ways, but anything I think you'll see some slight decreases in in those types of marketing expenses and Q. too.
Okay.
Then I mean, you you had mentioned you know that a lot of the renewals her new business that you've been able to prospect. You know has been driven by refinance transactions are you seeing any change in customer behavior as far as Ah changes in Dr.
Bulls or changes in in you know policy.
Or what have you.
Just people trying to now.