Q3 2021 BRP Group Inc Earnings Call
Greetings and welcome to the B R. P Group, Inc. Third quarter 2021 earnings Conference call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation.
Anyone should require operator assistance during the conference. Please press star zero on your telephone keypad. Please note. This conference is being recorded I will now turn the conference over to your host Bonnie Bishop of director of Investor Relations you may begin.
Thank you welcome to the ERP groups third quarter 2021 earnings call. Today's call is being recorded third quarter 'twenty 'twenty. One financial result, supplemental information and Form 10-Q were issued earlier. This afternoon and are available on the company's website at IR Baldwin risk partners.
Dot Com. Please note that remarks made today may include forward looking statements, which are based on the expectations estimates and projections of management as of today, including certain expectations related to COVID-19, and other matters.
Forward looking statements are subject to various assumptions risks and uncertainties and a variety of factors that are difficult to predict and which may cause actual results to differ materially from those contemplated by such statements.
A more detailed discussion of those factors. Please refer to the company's earnings release for this quarter and to our most recent SEC filings, including our most recent Form 10-K, all of which are available on the <unk> website during.
During the call today. The company May also discuss certain non-GAAP financial measures for a reconciliation of these measures to the most closely comparable GAAP measures. Please refer to the company's earnings announcement and supplemental information both of which have been posted on the company's website at IR Dot Baldwin risk partners Dot com and can be.
Found in the Companys SEC filings.
I'll now hand, the call over to Trevor Baldwin Chief Executive Officer of ERP Group.
Thank you Bonnie good afternoon, everyone and thank you for joining us for our third quarter earnings call.
A brief remarks, followed by Brad who will cover select financial and business highlights from the quarter then Bryan.
Brian Chris and I will take questions.
We're excited to announce another strong quarter highlighted by organic growth of 26% and total revenue growth of 106%.
The future demonstrated strong growth at 48% during the quarter continuing to execute in multifamily now with over 670000, Egypt Port policies in force, while also making continued progress.
In homeowners, which we believe will be important contributors to our growth in 2022 and beyond we.
We were also excited to announce two important promotions the co founders of business. Jim Roche is now in the newly created role of Chief Insurance Innovation Officer, where he is responsible for driving continued insurance product and technological innovation, both within our MGA business and cross PRP group more broadly.
Brian Schultz is now president multifamily in emerging markets for our NBA business, where he is responsible for driving continued growth of our multifamily product suite for the creation and execution of new MGA products to be distributed both within the ERP group internal distribution network with external.
Some partners their vision and leadership have resulted in fantastic results for the MGA since partnering with US in April 2019, and we look forward to continued transformation in our business.
<unk> industry.
In September we announced the addition of Jacobsen Goldberg and Scott our largest partnership this year.
Fifth top 100 partnership since the beginning of Q4 2020, as well as CNS insurance, which provides immediate scale in Dallas and adds to our middle market presence in Texas, the fastest growing state in the U S. We believe that these partnerships further showcase <unk> unique position as the partner.
Joyce because some of the most well respected.
Highest quality firms in the industry.
In early November we also announced the addition of wood and Boger, our sixth top 100 partnership, bringing deep property and casualty expertise, our California operations, we welcome them to the DRP family and look forward to their contributions to our continued success, including all.
13 partnerships announced year to date, our total annual revenue from 2021 announced partnerships stands at $165 million.
Looking across the balance of the year and into next year, our pipeline remains very strong.
We currently anticipate acquired revenue towards the upper end of the $175 million to $200 million range, we've communicated for the full year 2021.
Finally, as a business, whose most valuable asset its talent, we are proud of our success in attracting and retaining the best and the brightest in the industry in 2021.
The third quarter, we have added 569 colleagues via partnerships and 676 colleagues do organic hiring bringing our total head count at the end of the third quarter to approximately 2450 colleagues our brand recognition is the leading.
Home for our industry very best professionals has never been stronger we are capitalizing on this momentum and pricing are advantages with deep investments into our client capabilities to continue rapidly scaling and winning market share in.
In closing we're proud of the performance we have delivered through the third quarter of 2021, and the significant momentum we're carrying into the fourth quarter. The combination of creating a great home for industry, leading talent and ongoing thoughtful investments in our technology platforms has set the foundation for our momentum in <unk>.
Ability to continue innovating and executing for our clients and stakeholders at a high level to all of our colleagues a huge. Thank you you are the reason our business continues to be in the strongest position. It has been in the firm's history.
With that I will turn over the call to Brad to go into more detail on our Q3 results.
Thanks, Trevor and good afternoon to everyone joining us today for.
For the third quarter, we generated revenue growth of 106% to $135 6 million we.
We generated organic growth of 26% on a year over year basis. Thanks, not only to strong performance from our specialty segment, but also robust growth across all of our operating segments and in particular middle market, which grew 20% during the quarter.
We recorded a GAAP loss for the corn for the third quarter of $24 2 million or a loss of 28 per share.
Adjusted net income for the third quarter of 2021, which excludes share based compensation amortization and other one time expenses was $11 5 million or <unk> 11 per fully diluted share a table reconciling GAAP net loss to adjusted net income can be found in our earnings release, and our 10-Q filed with the SEC.
Adjusted EBITDA for the third quarter of 2021 rose, 79% to $19 6 million compared to $10 9 million in the prior year period.
Adjusted EBITDA margin was 14% for the third quarter of 2021 compared to 17% in the prior year period.
For the fourth quarter, we anticipate an adjusted EBITDA margin of 13% to 14%.
Third quarter and fourth quarter margin movement versus the prior year is timing related as a result of seasonality of the business changing given our success in M&A.
For the full year, we continue to expect to achieve the high end of our previously communicated 150 to 200 basis point increase in adjusted EBITDA margin relative to last years, 18%.
For the fourth quarter, we currently anticipate organic growth in total to be the mid teens as.
As many of you will recall due to the timing of contract execution and accounting nuances related to the master product, we launched in the MGA of the future late last year, we effectively recorded two quarters' worth of Master revenue in Q4 2020.
Despite this we still anticipate master revenue will be roughly flat compared to the fourth quarter of last year. However, because of the higher Q4, 2020 comp we expect a onetime accounting driven deceleration in the organic growth of the MGA to roughly 20% year over year.
On the capital front, we took advantage of the strong capital markets backdrop to raise $281 million in gross proceeds, making us well positioned to execute on M&A for the remainder of this year and to achieve our target of $100 million to $150 million in acquired revenue next year.
As we just passed our two year anniversary as a public company. We are extremely proud of what we've accomplished in a short period of time, particularly in light of the Covid environment. We have operated through during most of our 10 years of public company.
At the time of our IPO annual pro forma revenue was $137 million.
Paired to 446 million pro forma through only nine months today in.
In addition, we have consistently reported organic growth on an annual basis above our long term stated goal at the time of the IPO of 10% to 15%, while maintaining profitability and meaningfully increasing free cash flow.
We are well positioned to continue executing on our goal of generating consistent outsized organic growth attracting the industry's top talent and partnering with the very best independent firms with that I. Thank you for your time and we'll now open up the call for Q&A.
Operator.
At this time, we will be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May press star two if you'd like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys, one moment, please while we pull for questions.
<unk>.
Okay.
Our first question is from Meyer Shields with <unk>. Please proceed with your question.
Great Day Hercules, we can get a little bit more details on the impact of economic growth and P&C pricing in this quarter as organic growth.
Yeah, Hey, Matt absolutely so.
As we think about the 26% organic growth and consistent with prior quarters, the combined impact of rate and exposure on our growth was four 1%.
That's consistent with what the impact has been overall on a year to date basis as well so while certainly a relative tailwind not the kind of the overall driver of the results that you are saying.
Okay, that's helpful and very clear.
Can you give us I know we've talked about this in the past, but just wanted to get a sense of the anticipated productivity ramp up particularly of the newer recruits as opposed to the people that came via partnerships in the quarter.
Yes, so as you as you heard in our remarks, there, we're having tremendous success, adding talent into the business with over 650 organic new hires on a year to date basis, which represents more than 50% of our.
Roughly 50% of our total head count as of year end 2020. So you can really think about those investments spring loading our business for continued outsized organic growth into the future as we think about ramp time, it really depends on role in the business.
On the longer side in some of our more complex.
Longer sales cycles, you can think about it two to three year ramp period from taking someone kind of green off the street to making them highly effective and productive in a manner consistent with our overall results, which as a reminder would be multiples of where industry productivity is from a new business generation standpoint.
In other parts of the business, we can bring folks in and have them highly productive in around 90 days. So it is just relative to what parts of the business there and then and kind of what that ramp period is.
Okay fantastic. Thank you very much.
Thanks Mark.
As a reminder, if you'd like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue.
Our next question is from Elyse Greenspan from Wells Fargo. Please proceed with your question.
Hi, Thanks.
Good evening My first question.
I just wanted to flush through the organic growth outlook for the fourth quarter.
He said I believe mid teen and that reflects I think 20% growth.
In the NGL business.
Can you do that timing that you pointed out with last Q4, but are you still assuming kind of will be double digits in the businesses away from and yes that is implied within that guide as well right.
Yeah, Hey, Elyse this is trevor so.
A couple of things one yes, that's still implies a healthy double digit organic growth rate in the business away from the MGA and what I would just point out is this is in no way pointing to a deceleration in the growth profile of the business. This is last year.
As a result of accounting nuances tied to win the Master program. We launched contract was signed we effectively reported two quarters worth of revenue for the master product in the MGA in the fourth quarter and so we're lapping that comp despite that we still expect master revenue for the quarter to be flat on a year over year.
<unk>, even though we have.
Compared to two quarters worth of revenue last year, and we expect the MGA overall still to generate 20% organic growth despite that that kind of accounting related headwinds. So we feel really good about the overall growth trajectory of the business as I think about the EMG overall, new business trends remain.
Incredibly strong as <unk>.
You look at the months of June July and August.
We are setting new records sequentially every month from a new policies issued perspective.
And as we think about our pipeline, we have a pipeline of enterprise software distribution providers.
That we're at.
A really good stage at that represent over 2 million units that we expect to go online over the course of 2022. So our pipeline has never been stronger and that part of the business frankly, our pipeline across.
All of the ERP is really strong and we feel really good about how we're positioned to continue generating outsized organic growth.
And given that we're one quarter away from the end of the year.
In terms of.
2022 could shake out relative to that kind of the normal 10% to 15% or so organic revenue growth that you guys typically target.
Yes, so we're not going to share updated guidance on 'twenty, two until our year end call but.
What I would share is.
The performance Youre seeing in the business this year with year to date organic growth of <unk>.
Of 24%.
And full year organic growth, including the MGA as if we'd owned it for the full 12 months periods in the prior two years of 17%.
Every single year, we've been public we've effectively exceeded that 10% to 15% guidance.
And then one last one so you guys said that now you'll be at the upper end of that acquired revenue that you expected for this year.
This year of the 175 to 100 I know you had put out 100 to 150 for next year or so.
Is this is it 2021 are you pulling forward some M&A from 2022 or so.
It's just a better pipeline in 2020 Dolby.
In the range that you previously provided.
Hey, Elyse, we're just seeing a better pipeline in 2021 that is not a pull forward of our previously communicated 2022 expectation.
Okay. Thanks for the color.
Thanks Louise.
Our next question is from Josh Shanker with Bank of America. Please proceed with your question, yes, good evening everybody.
First question I mean, maybe you said it already what was organic growth.
The business, excluding MGA of the future.
We didn't disclose that Josh.
I'm, Kevin was about 18% of that sound approximately correct.
Hey, Josh It's Chris I think we gave a specific number for middle market and then three of the four segments were double digits in the one that wasn't it was one point away.
I don't think we've detailed detail organic by segment, yes, we usually do that on an annual basis.
And when we look at like the deep <unk> 'twenty one.
Growth rate was there.
Any COVID-19 I guess.
<unk> because of the weak <unk> and to what extent do we see that also in <unk> that there was some lift from the prior year comps being difficult.
Being difficult a year ago, and creating a tailwind this year.
Hey, Josh this is Trevor our organic growth in <unk> in <unk> of 'twenty was 19% and 20% so I'm not sure I necessarily view those as easy comps.
With that being said I think sure there is certainly a little bit of a COVID-19 recovery.
That you are seeing reflected in the overall results, but if you're thinking about that relative to kind of the uptick in underlying client level of exposure units the combined impact of rate and exposure on organic growth for the quarter was four 1% and on a year to date basis. It's four 9%. So it's not the draw.
<unk> of the overall organic story here.
No no of course, not I'm, just trying to figure out how much of it is if I'm trying to model forward.
As that goes away.
Is that a 500 basis point tailwind of 200 basis point tailwind I'm trying to think about that has it goes forward.
Yes, I mean, I would certainly expect it to be south of 500 points.
It would need to be inside that combined impact of rate and exposure, which I would.
To both be kind of pulling us up right now.
So as you think about four 1% during the year to date number.
It's something inside of that.
I'd say the more kind of relevant topics is what's going to be the kind of relative impact of.
The economy and growth into 2022, how does inflation impact that and as we're kind of thinking about the coming year, we're relatively bullish on the overall economic environment.
While we certainly expect some continued inflation pressures on the economy.
Do you think about our business, we're setup to capitalize on that with our our product effectively re pricing on a monthly basis, and so positioning us well to continue.
Capturing growth in helping our clients navigate the challenges associated with the current environment.
Okay. Thank you very much.
Thanks, Josh.
Our next question is from Greg Peters with Raymond James. Please proceed with your question.
Hi, This is Alex Bolton, calling in for Greg Peters I was wondering if you can give an update on the master product in its traction.
And how <unk> plays into that.
As well as how that might play into unit penetration.
Yes, so the master product continues to perform really well Alex.
The.
The stat I would point to is the fact that Q4 of last year, we effectively recognize two quarters worth of revenue in the master product for the MGA and we expect revenue this quarter to be flat.
Despite that.
Our this coming quarter to be flat. So the growth has been really good that is being powered by the software that lease track brought to us and so they are a key ingredient to that overall success that we're seeing.
And that's certainly contributing to.
Favorable uptick in penetration across the units that are alive in our system today.
Okay, Great and then I was wondering if you can provide any update on future homeowner from blood products.
Thinking out into them.
Here's to come.
Yeah, absolutely. So we continue to make good progress on our both our home and our flood product and we expect that on a combined basis, they will be meaningful contributors to the organic growth of the MGA in 2022.
Okay, great. Thank you.
Our next question is from Michael Phillips with Morgan Stanley. Please proceed with your question.
Sure. Thanks, Hey, good evening.
I guess would you be willing to parse out that $4 one into the two components how much of it was <unk> of the closure.
Hey, Mike This is Trevor so we don't break it out.
<unk>.
It just it gets tough to really.
Detail out some of the nuance differences there. So that's why we reported on a combined basis, but as you think about the building blocks of organic growth. There is really four drivers. So first is whats the relative retention of prior year revenue as we've communicated in the past.
We tend to be in line to slightly better than industry average as a result of our service model and specializations. So you can think about that being a slight.
Benefit to us relative to our peers, but not a meaningful driver our outsized results.
<unk> can think about the combined impact of that rate and exposure so exposure being the relative.
Expansion or compression of the underlying rating factors in our clients relative that being head count.
Values of inventory revenues and things of that nature, and then certainly the impact of rate, which is reflective of the pricing environment on the insurance product side, both our tailwind to us today and on a combined basis, yielding that four 1%.
I think you would naturally assume based on the news you're hearing in the economy and the relative rate, we're seeing in the market that that number would be higher however, I think.
What you would've heard from me in the past as our clients tend to alter their insurance buying behavior. So.
Maybe they are taking larger deductibles or buying less limits.
But there is continuing to work inside certain budgetary constraints relative to what they can spend on insurance and so thats why youre going to see some downward pressure on what you would otherwise expect to see there, but then after you take that retention.
You add in rate and exposure the balance that's bridging it up to the 26% for the quarter and the 24% organic growth for the year. So far is all new business that continues to be the most notable driver of our outsized organic growth.
Yes, no I appreciate it.
Details of that.
What I was asking because I thought before sort of a little low but.
It makes sense on what youre seeing from the changes in what Theyre doing with deductibles and limit small so it did come a little on the surface, but thank you for that.
Longer term kind of question I guess as you think about the.
The MGA of the future business.
Out five plus years or whatever.
Do you still see the bulk of that coming from its current base in terms of renters or are there other ways to use the skills.
You guys have there too.
Other areas where would that look.
Kind of longer term I guess is what I'm kind of asking.
We expect revenue to be coming from a plethora of new product five years out and renters to be.
One small piece of the overall business.
Okay.
Alright, thanks, guys.
Thanks, Mike.
Our next question is from Pablo <unk> with Jpmorgan. Please proceed with your question.
Hi, Thanks. So my first question is about the specialty business I was wondering if you could talk about what the biggest component.
That business is X MGA and what drove I guess relatively weak growth in there.
Looking at sequential quarters.
I think by my numbers that business to grow about ex MTA grew about 40%, 46% in the second quarter and in the third quarter it slowed down to 19%.
Yes, Hey, Pablo this is Trevor so I mean, we wouldn't view 19% to be.
Yes.
A weak result, we're really excited and pleased with that relative to what we're seeing broadly across the industry that business is.
Specialized E&S wholesale business. So you can think about their largest areas of specialization being <unk>.
Professional liabilities, such as medical professional cyber liability management professional liability lines.
And we had an exceptional quarter in the second quarter with the 40 plus percent organic that you referenced and 19% in the third quarter.
<unk> is really strong.
Okay.
And then second question. So I appreciate your.
Comments on organic growth into Mg for the course for the fourth quarter.
It'd be interesting to hear your thoughts on.
What could potentially happen with the middle market given that you grew 20% this quarter I think often 11% growth comp last year and four <unk>, you'll be lapping against a much easier comp I think it was down 3% last year.
We expect strong organic growth in the middle market business for the fourth quarter.
Alright.
Next one I had was so coverage the following on your comments regarding the organic hires.
Are the expense associated with those hires fully showing up in the P&L or in other words I guess another way of asking the question is did the margins now Felicia that burden and if anything as they become more productive.
I would expect some margin accretion from those I guess.
Investments in hiring.
So.
Pablo as we said on the call.
Given the outperformance in the business.
We continue to expect the high end of our previously communicated 150 to 200 basis points expansion.
We were making meaningful investments in the business, which we expect to spring load future revenue growth and that that will lead to margin expansion in the future.
Okay and last one for me. So I think it's fair to say in general that multiples for deals have been going up for everyone, including the ERP.
I'm wondering how that changes how you evaluate potential partnerships right. This is rich.
Threshold in terms of.
Returns do you expect our growth or margin accretion just sort of fall.
I guess the price of your environment to date changes how you evaluate partnerships. Thanks.
Hey, Pablo it's Chris I mean, we're really pleased where we're positioned.
We really do think we're a partner of choice and I think it's evidenced in the organic growth that we continue to publish quarter after quarter that we're focused on what we think are the best businesses in the best partners.
And we're happy to be very competitive in prices for those select businesses and to have those partners join us and we expect our shareholder returns to continue to be fantastic.
Got it thank you guys.
Thanks Pablo.
Our next question is from Adam Klauber with William Blair. Please proceed with your question.
Yes, a follow up on the margin question it sounds like you.
Do you expect the margin to continue to go up in the future. If you had.
Not asking for numbers, but if you add that like.
Give us two factors why the margin should go up in 2022.
What's going to drive margin expansion going forward.
Hey, Adam this is Trevor.
Biggest note.
Or factor I would put out there is the overall investment we're making in the talent in the business ahead of the revenue coming on and Thats fully reflected in the margin that you see today. So we've hired organically over 650 people into the business through the third quarter on a base that reflects raw.
50% of where we started the year.
And so you can think about those significant investments powering the organic growth that we're going to see in the business for years to come going forward and as those people come online and become productive inside our system and generating revenue they are going to be higher.
<unk> accretive to where we sit today fully absorbing the cost of those folks on our business.
Okay. Okay. So thats the main factor, we should look at going forward.
Yes, I mean, if you look at this business, 80% of our expense base is payroll.
The only way impact margin as payroll we have the belief that you invest deeply in talent and ultimately thats going to lead to continued outsized execution for our clients. Our clients will continue to honor us with their renewals and future business and we will continue to win and take share from our competitors growing our topline and <unk>.
Zorba those investments that we've made into the business.
Okay. Thanks, and then as far as cash provided by operating activities, obviously part of free cash.
That's sort of flat with last year.
Lot of Thats being driven by change in.
Operating assets and liabilities.
Flow through quarter in quarter out.
Do you expect fourth quarter two to be better.
Cash provided provided by operating activities.
Yes, So let me just nail down the numbers Adam from page 10.
Cash flow of our 10-Q.
So as you pointed out we look at operating cash flow net of <unk> because of the fact that we hold fiduciary cash we pointed that out before so if you do that we actually generated $54 million this year compared to $20 million last year, so pretty substantial increase both of those represent.
60% free cash flow conversion.
From year to date adjusted EBITDA in this quarter, we incurred some more material prepaid expenses as well.
Brought that conversion ratio down a little bit.
So we do expect continued expansion.
Of that free cash flow in the fourth quarter in relation to the prior year.
Okay, great. Thanks, a lot guys.
Thanks, Adam.
We have reached the end of the question and answer session and I will now turn the call over to CEO Trevor Baldwin for closing remarks.
Thank you all for joining us this evening and your interest in our results and we look forward to speaking with you again at year end.
This concludes today's conference and you may disconnect. Your lines at this time. Thank you for your participation.
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