Q2 2020 Goosehead Insurance Inc Earnings Call
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Thank you for sending borrow the conference operator, welcome to the goods heading shirt second quarter 2020.
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As a reminder, all participants are in listen only mode and the call contains all recorded.
After the presentation, there will be an opportunity to ask questions to join the question Q <unk> Press Star then one on your telephone keypad.
Sure do you need assistance during a conference call you may signal it operated by pressing star and Phil.
I would now like to turn the conference over to done Phil <unk> capital markets. Please go ahead.
Thank you and good afternoon with us.
Builds chairman and Chief Executive Officer, who said, Michael Colby, President and Chief operating Officer, and more Colby 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 website.
You said insurance Dot com.
To 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 today.
The board looking statements in our discussion are subject to various assumptions risks uncertainties and other factors that 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 them.
You refer all due to our recent filings with the FTC for more detailed discussion of risks and uncertainties that could impact the future operating results and financial condition abuse 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 gap.
Management uses these non-GAAP financial measures when planning monitoring and evaluating our performance. We considered 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 difference is caused by variations in capital structure tax position depreciation emerged.
Nation and certain other items that we believe or not representative of our core business.
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.
You W. W. Dot goose hadn't sure dotcom with that I'd like to turn the call over to CEO Mark Joe's.
Okay.
Thanks, Dan and welcome to our second quarter 2020 earnings call I'll provide an overview of our results for the quarter as well as our strategy and outlook for the full year ill, then hand, it over to Mike Colby, our president and Chief operating Officer.
Update you on some of our technology in human capital investments as well as an update on actions around October 19, our CFO Mark Koby will then go into greater detail on our second quarter results and outlook.
Before reviewing our results for the second quarter I would like to share our business philosophy.
Adherence to this philosophy has allowed us to deliver exceptional results even during a global pandemic.
What we view and manage the business through the lens of long term owners.
Every member of our senior management team has the vast majority of their net worth tied up and you said star.
We think like long term owners, because we are long term owners and are deeply committed to reaching our collective full potential which is achieving market leadership during my lifetime.
All of our decisions are geared to create value over the long term and drive toward our full potential.
Number two.
We are successful because we create value for others, which means we are minaya flea externally focused.
This external focus has been particularly powerful well the world grapples with Covance 19.
Well, others, where wringing their hands with worry and experiencing paralysis to a greater or lesser degree we were in the market, making things happen and our results are a testament to this.
And three our business was built with the client at the center of our universe.
And we are heavily tech enabled.
The guiding objectives for our technology investments are creating a better experience for each of our clients, which includes consumers agents and our business partners.
This is a very different approach than we see with so many companies start with technology, then try to find a use for it.
And by the way when you're a hammer everything looks like a nail.
Our tech investments are focused disciplined at economically rational and they incorporate input from all levels of our organization all people connected to the market.
Our approach produces strong sustained organic growth.
With a highly retentive book of business Leverages, our human capital and drives actual profitability.
Our investments are very powerful and follow the immutable law of a free market that you always start with the client.
Now, let me turn to our second quarter results.
I'm very pleased with our exceptional second quarter, wherein we continued to demonstrate use has differentiated platform and strengthen and extend our formidable competitive moat.
We made tremendous progress in a number of areas, which position us well for future success.
First and perhaps most importantly, our recruiting team has been plate aggressive offense, adding a significant amount of high quality talent to our organization with corporate sales agent headcount and total franchise count growing 49% and 48% over the prior year respectively.
Additionally, we continue to expand our referral partner network and rolled out new proprietary technology to improve the client an agent experiences.
During these unprecedented times, we remain laser focused on best practices, which drive our high level of client service improve the overall productivity of both our sales agents and back office functions.
And allow us to achieve full share of wallet with our clients I.
Im extremely proud of our ability to deliver these accomplishments in an almost entirely virtual operating environment during the quarter.
Our whole organization is relentlessly externally focused on our clients and business partners utilized in our industry, leading tools and technology to demonstrate that goose head is a reliable and stable agency partner, regardless of economic turbulence and uncertainty.
The benefits of these efforts are most evident in our continued strong premium growth a key leading indicator of future revenue growth.
Total premiums placed for $274 million, an increase of 41% versus the second quarter of 2019.
Driven by strong new business growth and continued high levels of retention.
Approximately 70% of our second quarter premiums were in the franchise channel compared to 67% a year ago.
As our mix of business continues to shift more to the franchise channel. It is important to keep in mind helped premiums convert to revenue.
In the franchise channel, we earned 20% royalties on the first term of a policy and 50% on renewal terms.
Given our 88% client retention rate, we see approximately 120% mechanical revenue growth.
As a policy converts from new to renewal.
So strong premium growth today spring loads, a strong revenue growth tomorrow.
Our revenue growth during the quarter was the result of our efforts over the past several years.
During the quarter revenues were 29.9 million up 54% well core revenue increased 41%.
We achieved this impressive organic topline growth will deliver in EBITDA of $9.8 million in the quarter and expanding our EBITDA margin to 33%.
We ended the quarter with 1100, 32 total franchises and increase of 48% from the your go quarter, we'll operating franchises increased 36% to 730.
We experienced a record number of signed agencies in the quarter and our significant pipeline of signed in operating franchises with less than one Europe experienced bodes well for future growth.
Franchises with two or more years of experience currently account for only 41% of total franchises, but represented 96% of our royalty revenue last year.
We expect that our new franchises will fuel powerful growth for many years to comp.
Sales agent count the corporate channel at the end of the quarter was 317 up 49% versus the year ago period.
The net increase of 76 corporate agents represented a record number of added agents in a quarter a truly remarkable feat under the circumstances.
During the quarter. We also opened offices in Charlotte, North Carolina, and Houston, Texas that being our third office in the Metro Houston area.
And began planning for Denver, Colorado Office.
The growth and expanded footprint of our corporate channel plays a significant role in driving growth and profitability in the franchise channel.
Corporate channel as a testing ground for new technology and development of best practices as well as training and mentoring resources for the franchise channel.
Last year, we highlighted the initial success of our virtual sales coaching pilot program and have continued to expand this effort through the first six months from 2020, helping drive a 32% increase in productivity among franchise participants.
We continue to manage the corporate and franchise channels as one integrated hole.
Hertz and investments in the corporate channel are integral to our overall success as an organization.
In addition to strong agent recruiting in the quarter, we have added impactful talent across the broader organization.
Our recruiting team currently stands at 83 compared to 60 individuals at the end of 2019.
Over the last year, we have more than doubled our information systems development team, which is enabling significant progress on our technology innovation roadmap.
Our service team transition seamlessly to a virtual environment and are continuing to provide unrivaled service to our clients.
Over 35% of our clients are now using our online client portal, which was implemented in the fourth quarter 2019.
The combination of the online portal with our World Class service team is having a meaningful positive impact on the overall insurance buying and service experience as clients on the portal.
So an average net promoter score of 94.
As a reminder, our net promoter scores are higher than any company that we've been able to identify while our cost to deliver this extraordinary level of service are roughly one quarter of industry best practice.
Additional investments, we're making to our proprietary comparative rater platform and further carrier integration projects will continue to enhance the overall client and agent experience going forward and strengthen our competitive advantage, Mike will provide you with more detail on our current technology platform and enough.
Nation efforts in his remarks.
Based on the results of the first half of 2020 and strong ongoing momentum we are raising guidance for the year, the details of which Mark Colby will cover in his section.
We're also announcing at this time, a special dividend, which mark again will detail.
I'm extremely excited about the future prospects for our business.
We are staying on off fence, and we'll continue making the important investments in people and technology needed to continue our industry, leading organic growth and grab share of the enormous addressable personal lines market.
I want to thank our entire do said team for the incredible efforts over the first half of 2020 that have enabled us to deliver for our clients, our referral partners and our shareholders.
And with that I'll turn the call over to make Colby.
Thanks, Mark and Hello to everyone on the call.
Over the first half of 2020, we've continued to see our strategy surrounding technology investment create substantial competitive advantage for our business.
This was demonstrated in several key areas one our seamless transition to a virtual operating environment in response to decode 19 pandemic to the continued progress on our technology development roadmap and three new talent acquisition within our development team.
I will elaborate on these three areas.
First our response to the Cobot 19 pandemic.
As mentioned on our first quarter earnings call, we transitioned all operations to a virtual environments and mid March.
This includes all marketing and business development efforts, new business sales activity client service and back office functions and recruiting and Onboarding efforts for new corporate employees and new franchise partners.
As of the state our team continues to operate in this virtual environment and we continue to see strong performance results across the entire business.
Our team has delivered or outperformed our internal expectations for all key performance indicators set at the beginning of the year, including agent recruiting and Onboarding in both channels, new business sales productivity and client retention.
Additionally, we've been able to meet or exceed our expectations on qualitative metrics, such as NPS and cross selling percentages.
This is a testament to our remarkably talented and agile team and the years of investment in technology infrastructure, such as our cloud based voice solution and our referral partner marketing tool, which provides complete business continuity.
We're very proud to be a stable employer to our team partner to our agents and referral sources and service provider to our clients. During this time a crisis.
We look forward to bringing our team back together in our offices when it's safe to do so and we'll continue to follow CDC recommendations and government requirements.
Next we have continued to make strong progress on our technology development roadmap uninterrupted by the current environment.
As we've discussed our technology investment strategy is focused on improving the tools, we provide to our agents that allow them to compete effectively in the market improving the way in which we engage our clients and the experience, we provided them and creating margin opportunity by driving efficiency across the business.
Over the course of this year, we've continued to build the foundational components that will allow us to provide a complete quota issue experience to our agents into our clients directly online.
This includes progress on development efforts on our platform and carrier integration efforts required to accomplish this last mile integration.
We've also made big enhancements to our comparative rating tool to provide agents within more simple and intuitive experience and additional product lines, such as flood insurance and property insurance for landlords.
Early results from the deployment of flood insurance rating capabilities, and new Omnichannel client engagement opportunities have been very encouraging but flood insurance policy sales up 65% this year.
As a reminder, creating a more streamlined flood insurance rating process allows us to provide this important coverage to more of our clients, but also provides substantial retention advantages.
Over the course of the year, we rolled out our client facing portal to over 35% of our clients and have made enhancements that make the port a more intuitive for the user.
Additionally, we've made progress on backend carrier integrations that allow us to provide more robust self service capabilities.
This is an important effort that allows us to engage our clients on their terms and provide enhanced purchase and service experience.
As Mark mentioned earlier, our MPS is 94 for clients engaging on the portal.
One of the more important areas of development that should not be overlooked or the smaller enhancements, we make throughout the year, which are overwhelmingly based on feedback from agents and clients.
Theres not one of these enhancements that isn't material to the overall user experience the cumulative effect is very powerful.
Through multiple version releases this year, we've already rolled out close to 2000, new features and enhancements to our technology platform.
Lastly, we've made accelerated investments in our technology development team, having grown the size of the team by 160% over the prior 12 months.
The current employment environment has created opportunities for us to play offense and further enhance our development capabilities with the addition of new high quality developer talent.
I'd like to echo market sentiment and thank our entire team for demonstrating their commitment to excellence adaptability encouraged in the face of uncertainty.
They have delivered extraordinary results and the most challenging environment and we couldn't be more proud of them.
Our team remains enthusiastically committed to our goal of industry leadership and have demonstrated that their capabilities remains unmatched in our space.
With that I'll turn the call over to Mark Colby to provide color on our financial performance.
Thanks, Mike and good afternoon to everyone on the call for comparability purposes. My comments on our second quarter 2020 results will be discussed against the second quarter 2019, as if recognized under assay six so five.
A reconciliation of 86 of six accounting assay six of five accounting for 2020 has been provided as a supplemental schedule in our earnings release.
For the second quarter of 2020, total written premiums and important leading indicator of our future core ancillary revenue growth increased 41% to $274 million.
This included franchise premium growth of 47% to $191 million in corporate segment premium growth of 29% to $83 million.
This growth is being driven by continued high retention rates strong new business generation and increasing agent productivity in the franchise channel.
The continued shift in our mix of business towards the faster growing franchise channel imply a significant embedded future revenue growth as new business premiums convert to renewal premiums after year one.
At which time or royalty fees increased from 20% to 50% for ongoing renewals.
At quarter end, we had over 590000 policies in force a 45% increase from one year ago.
Our consistent in rapid year over year growth in both premiums and policies positions us well for long term success.
Revenues were $29.9 million for the quarter compared to $19.4 million in the prior year period, an increase of 54%.
Q2, 2020 was reported under assay six so five revenues grew 42% to $27.6 million in core revenues increased 41% to $24.8 million.
During the second quarter, our franchise channel generates core revenues of $10.4 million if reported under assay six so five an increase of 51% from one year ago with the results driven by continued strong growth in new business and renewal royalty fees from an increase in operating franchises combined with higher Chris.
Activity for sustained high levels of retention.
At the end of the second quarter, we had 1132 total franchises up 48% from the prior year and 730 operating franchises up 36% from a year ago.
We've continued to build on our strategy of national expansion within this channel.
Non Texas franchises now represent 72% of our total operating franchises compared to 62% a year ago.
We are continuing to grow our recruiting team, which currently stands at 83 and our franchise pipeline remains very strong.
Our value proposition also continues to resonate with franchise candidates from outside the insurance industry.
We will continue to invest in the growth of our recruiting team and are excited to take advantage of our momentum to further says no planned growth.
If reported under FC six so five corporate channel core revenues were $14.4 million in the second quarter, an increase of 35% from the year ago period, driven by an increase in agents and continued high levels of retention.
Corporate sales headcount at the end of the second quarter was 317, an increase of 49% from a year ago quarter.
As a reminder, because of our college recruiting for the corporate channel. The summer months are historically, our largest for corporate sales onboarding.
And cope it has had little impact on our ability to successfully recruit onboard large volumes of exceptional candidates.
For example, our June corporate agent class B Tran virtually.
At a record for the most revenue per agent during their training month.
We also to continue to invest in the success of our franchise agents via our corporate agents through our virtual sales coach program.
As Mark mentioned, our corporate agents virtually coaching franchisees helped drive a 32% increase in productivity among the franchise participants.
This is a highly leveraged area of investment not only for productivity gains, but for the retention impacts from both our franchisees be more successful in our corporate agents, having additional coaching opportunities leading to attractive career path in management.
Adjusted EBITDA for the quarter was $9.8 million compared to $4.7 million in the prior year.
If reported under 86 or five adjusted EBITDA was $7.3 million, an increase of 56% versus a year ago quarter with growth being driven by strong core revenue higher contingent commissions and margin improvement.
As a reminder, our business has natural operating leverage and should continue to see gradual margin improvement over the longer term.
But we do not manage the business on short term quarterly basis.
We focused on maximizing profits over the long term.
We're continuing to make investments for future growth that will have a moderating impact on near term margin growth.
As of June Thirtyth 2020, the company had cash and cash equivalents of $54.3 million.
Unused line of credit of $19.7 million.
In June the company drew down the remaining balance of $37.9 million on the term loan payable, bringing the outstanding term note payable balance to $79.5 million as of June Thirtyth 2020.
Today, our board of directors approved a special cash dividend totaling $42 million or a $1.15 per share which will be paid on August 24th 2022, all holders of record as of the close of business on August 10th 2020.
Based on the strength of our results through the first half of the year in the confidence in our business platform, we're raising our full year 2020 out with respect to total written premiums grew revenue.
Total written premiums placed for 2020 are now expected to be between $1 billion $1.05 billion, representing organic growth of 35% on the low end of the range and 42% on the high end of the range.
Total revenues for 2020 under 86, so six revenue accounting are expected to be between $104 million $109 million, representing organic growth of 34% on the low end of the range, 41% behind the range.
As a reminder, unlike most companies.
Our guidance remains an estimate of actual results. We believe we will deliver as opposed to overly conservative estimate that can be easily achieved.
We're pleased with the current trends in our business, we believe we remain well positioned to deliver consistent sizable growth.
Even during times of economic uncertainty.
We will continue to closely monitor the covert situation in any impacts it may have on our business and we will provide an update if necessary.
With that I would like to thank everyone for listening we will now open up the lines culinary.
Operator.
Thank you well now begin the question answer session to join the question can you May Press Star then one on your telephone keypad, we're here to tell acknowledging a recall.
Okay.
Please pick up your Hancock.
Cool.
As a giant question. Please press Star then cool.
For a moment I call is cool.
The first question is from Mark well with RBC capital markets.
Hi, Paul your line.
Yes, good afternoon, I'm never first on the summary surprise to make it to go first.
Just first question that I had.
Really just kind of.
General business condition question.
Obviously, the second quarter was one that was constrained by.
Recession and other.
Other considerations are you seeing anything in customer behavior.
Terms are changing policies or cancellation policies.
You know that might have had a factor in the quarter.
Hey, Mark this is Mike Colby no we haven't seen any any change in consumer behavior. That's that's notable.
I think the the rebate premium rebates that a lot of the carriers really all the big National carriers are doing are helping with that.
Helping to keep those policies in force in providing some type of relief to customers, who who need it. So we havent, we havent seen the change in behavior I think the early part of the quarter, we did see.
Some housing.
Activity decline.
Which really honestly rebounded for us in May and June as we looked at our our lead flow per agent.
So weve any do I think it's also worth reminding the group our market shares so small as in terms of total premiums in the U.S., but also in Canada, our involvement and new home sales. So in a situation, where you do see dramatic and sudden decline.
And in housing activity, we have a data we have the tools to where we can refocused our efforts on activating new relationships backfilling that lead flow and that's definitely what we saw taking place in the early part of the quarter, which led to really good momentum into the back half the quarter into into the new quarter.
That's helpful. You actually anticipate one of my other questions related to the housing market in general.
Turning over to the you discussed at some length some of the technology initiatives.
Just as you accelerate the I T program. There is that anything is there any contemplated charger uptick in expense or that you're youll will absorb that just within the ordinary growth of the business over the near term.
Yes, there is an up tick in expense you know, but.
As opposed our total revenue and how fast is growing it won't be like a big step function increase in our in our technology spend.
Unfortunately is not proportional to the revenue and we're making these investments either.
Through technology consultants and programmers that that we're hiring or internal developers that we started to make a big push towards hiring so.
And in most cases, both of them you run through where piano immediately so again I don't expect any kind of huge step function increase its kind of normal course of business for us to continue these investments and continue to have our spend each year.
Okay, Great, Florida markets created a.
Sorry, Mark as environment is created some opportunities for us to pick up some.
Really high quality high quality talent. So yeah, we're fortunate to be in a position to play off fence and take advantage of those opportunities as they rose.
Definitely makes sense.
In the I guess in a somewhat similar contacts.
Were there any particular expense savings in the quarter associated with perhaps reduced travel entertainment or.
Other things related to just the change in the work environment over the course of the quarter.
We definitely saw some.
Kind of more reallocation of where we spend where we didnt have any travel during the quarter right no mileage expenses from from our employees going out and visiting shops no flights from from our franchise sales team going to meeting with potential agents all that was done virtually during the quarter.
However, rather than just just taking that accepting it we re purpose that to certain.
Incentives for our service team to increase cross selling and referral generation and those sorts of things. So we wanted to reinvest that where we thought it would be useful and we definitely saw some good result, primarily around you know incentives to keep people engaged mark.
Working virtually.
It's very important that we're doing things to keep people engaged through.
Throughout the to the weeks the months the quarter and that's where we really re purpose that spend.
Makes sense I appreciate the answers so I'll rejoin the queue. Thanks.
Yeah.
Thanks once again if anyone has a question. Please press star then one.
The next question is from Meyer Shields with KBW Meyer Shields. Your line is helpful on level.
I like.
And I Associates. Your line is open now [laughter].
Hi can you hear me.
Yes, Hey, maybe my how's it going.
Great Good luck.
Very well.
Two quick numbers question, and then a couple of bigger picture issues.
The equity based compensation stepped up in the quarter.
Is that a function of any of the other line items.
In terms of growth or recruitment.
No no how we think about the stock options you know we awarded some stock options at the IPO.
You are managing director team.
Dia there is that it's not going be something that we award every year, it's kind of every two years when to reevaluate.
No as those start to vest, we went to extend the time out.
The vesting schedules for the new options to keep people motivated to keep them here keep them driving I think it's a great tooling sole reason we went public is two to award those.
From opportunities to our to our folks and so.
That's what it was it just kind of a re read out both the stock options for our managing director team.
Okay. So we should go back to proceeding level for the next few quarters.
No no it'll be at this level you know fruit in perpetuity until we are awarded some more.
Oh, Okay got it.
The a clear expense quarterly right you take the black Shoals valuation expense quarterly over the vesting period right.
Got it okay. Another very helpful. Also contingent commission I know that that meet tough to predict but so that's a function of current quarter profitability or proceeding here.
Yes, so we've talked in the past not from a quarterly perspective of how we think about contingent commissions and.
If you asked me three months ago I wouldn't have expected to book a lot of contingent commissions. This quarter. However, the data we've been getting from the carriers on the contingent commissions that or loss ratio driven has been so positive that we felt very comfortable looking something in Q2 and still being very conservative on those contingent commissions and so six.
Thats, a really obligated to you but.
I would say in any normal year I wouldn't expect a ton of contingent commissions in Q2, but.
A lot of into due to covert people on driving our auto loss ratios are looking very good and so.
Decided to books and contingent commissions in Q2.
And now we expect some some positive results as we continue throughout the year, but we'll keep you guys updated anything changes.
Okay, Thats ethic, and then I wanted to dig a little bit into recruiting of agents that come from other industries.
In terms of.
I'm trying to think directly at the question what do you learning from them how is that performance different from the legacy agent side.
Yes.
No there. It's this is Mike.
You are presented with a different set of challenges when your recruiting.
From outside the industry, but but candidly I think teaching the insurance components.
The fundamentals that's the easy part so you know what what I see is the opportunity in a lot of these kind of outside of the industry recruits is that you know these folks come in and they don't have bad habits that they need to.
Unwind and they're really.
More apt to really embrace the system in its totality and be a lot lot more coachable, whereas you know if you're if you're working out the bad habits. If you really having to change the way you've done business for a decade, it's a slower I think a slower process to really getting burns into our system and fully adopting the tools that we make it.
Well so.
We look at that is very encouraging.
Opportunity for us and it really does broaden our talent pool as well outside of just the you know the traditional agents.
Okay.
On a month to month basis is there any.
No I don't know great need on like individual regions and.
Economic growth or shutdowns, but are you seeing any difference on a month to month basis in terms of people that are available.
I'm, sorry, as far as recruiting candidates in the different regions.
Yes.
No I mean, our growth would be really would be a function of where.
Our the recruiters focused.
And we're not seeing any one region.
Any recruiter in one region be disadvantage compared to recruiter and another region I mean, we're seeing a healthy.
Recruiting pool across the country.
Okay. Thanks ethic very helpful and a good results.
Thank you.
This concludes.
Todays question and answer session I'd now like turn the conference back over to Mark Jones for closing remarks.
Just like to thank everybody for participating with us.
And.
I hope you have addressed the good day, good rest of the day.
Thanks.
This concludes today's conference call. Thank you for participating and have a pleasant day.
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