Q4 2021 BRP Group Inc Earnings Call
Greetings and welcome to the P. R. P group fourth quarter 2021 earnings call. At this time all participants are in a listen only mode. A brief question and answer session will follow the formal presentation.
Once you require operator assistance during the conference. Please press Star zero on your telephone keypad as a reminder, this call frequency recorded it is now my pleasure to introduce your host Bonnie Bishop. Please go ahead.
Thank you operator welcome to the B R. P group's fourth quarter 2021 earnings call. Today's call is being recorded fourth quarter 2021 financial results supplemental information and Form 10-K were issued earlier. This afternoon and are available on the company's website at IR Dot Baldwin risk partners dotcom.
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.
Adding certain expectations related to COVID-19, and other matters.
Forward looking statements are subject to various assumptions risks and uncertainties.
Variety of factors that are difficult to predict and which may cause actual results to differ materially from those contemplated by such statements.
For 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 ERP website.
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 earning 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.
And the company's SEC filings.
And lastly, we're pleased to have published our inaugural ESG report today, which is also available on our IR website.
I'll now hand, the call over to Trevor Baldwin Chief Executive Officer of ERP Group.
Thank you Bonnie and good afternoon, everyone and thank you for joining us for our fourth quarter earnings call I will share a brief remarks, followed by Brett who will cover select financial and business highlights from the quarter and fiscal year, and then Brett Chris and I will take questions I want to start by thanking the amazing colleagues and partners.
<unk> PRP and another tumultuous year, you continued to deliver for our clients at the highest level, which couldnt be more evident in our results.
Q4 was another excellent quarter to finish a record 2021 highlighted by organic growth of 18% and total revenue growth of 129% for the year, we achieved organic revenue growth of 22% and total revenue growth of 135% we increased our margin for the.
A year by 200 basis points, while investing significantly in the business to drive continued outsized future growth in 2022 and beyond.
Our partnership strategy again exceeded our expectations as we announced 16 new partnerships during the year contributing more than $206 million of acquired revenue.
The MGA of the future demonstrated strong growth of 36% during the quarter. Despite a 2020 comparable quarter in which we recorded effectively five months of revenue related to our master tenant legal liability product. We continued to execute multifamily now with over 700000 H O four policies.
As in force, while also making continued progress on both blood and homeowners, we launched our Florida admitted homeowners product last week with launches in additional states are both admitted E&S products to follow over the course of 2022, we expect flood in homeowners will be important contributors to our growth in <unk>.
<unk> thousand 22 and beyond on the partnership front, we had another active quarter to wrap a third consecutive year of outperformance.
In November we announced the addition of two more top 100 brokers and wood, <unk>, and Bogart, which added important property and casualty capabilities and relationships in southern California, and construction risk partners, which newly establishes our national construction risk management practice.
These two partnerships mark the completion of seven top 100 partnerships since the beginning of Q4 2020, which makes be RP. The partner of choice for roughly one third of the top 100 firms that have transacted over the last two years.
We're also excited about the additions of Brush Creek partners, which strengthens our expertise in several verticals, including cyber and technology and Arcana insurance services, which enhances the MGA single family real estate offerings. We remain extremely proud of the reputation we have achieved as the partner of choice.
For some of the most well respected and highest quality firms in the industry. We welcome our new partners to the <unk> family and are confident they will contribute meaningfully to our continued success.
Looking to 2022, our pipeline remains robust, including active discussions with firms across a range of sizes geographies and specialization importantly, our reputation as a destination employer is also being validated on the organic hiring front during the year, we added more than 800.
Colleagues through organic hiring representing over a 50% increase to our 2020 year and colleague base combined with the new colleagues added from 'twenty to 'twenty one partnerships. Our total head count at year end was approximately 2800 colleagues.
At the leadership level, we were pleased to name Raj Tallahassee, as our Chief Digital information officer to oversee our enterprise technology organization build out our strategic capabilities and help drive Tech enabled innovation Raj has over two decades of IP leadership.
<unk> with a history of helping companies navigate through intense periods of transformational growth and change. We also promoted Seth Cohen to general Counsel and corporate Secretary Seth is an accomplished legal strategist and his broad expertise will be valuable as our firm continues to grow and execute on its long.
Term objectives.
Finally, we are particularly excited about the appointment of four new professionals to our board of directors. They exemplify our ability to attract exceptional talent to our business with a diverse range of experiences perspectives and skill sets.
Finally, I want to again extend a huge thank you to all of our amazing colleagues and partners who have been the driving force behind another fantastic year of performance. You are the reason our business is in the strongest position in the firm's history with that I will turn the call over to Brad to go into more detail.
Our fourth quarter and full year results.
Thanks, Trevor good afternoon to everyone joining us today for.
For the fourth quarter, we generated revenue growth of 129% to $159 million and for the year, we delivered revenue growth of 135% to $567 million.
We generated organic growth in the fourth quarter of 18% with all four segments hitting double digit organic growth for the quarter.
Organic growth was 22% for the full year with three out of four segments Middle market main street in specialty in double digits.
We recorded a GAAP net loss for the for the fourth quarter, a $44 million or a loss of 41.
Per fully diluted share.
GAAP net loss for the full year was $58 million or <unk> 64 per fully diluted share.
Adjusted net income for the fourth quarter of 2021, which excludes share based compensation amortization and other one time expenses was $12 million or <unk> 10 per fully diluted share for.
For the full year adjusted net income was $81 million or <unk> 80 per fully diluted share.
Table reconciling get GAAP net loss to adjusted net income can be found in our earnings release, and our 10-K filed with the SEC.
Adjusted EBITDA for the fourth quarter of 2021 rose, 91% to $20 million compared to $11 million in the prior year period.
Adjusted EBITDA margin was 13% for the fourth quarter of 2021 compared to 15% in the prior year period.
Adjusted EBITDA for the full year grew 157% over the prior year to $113 million.
Adjusted EBITDA margin was 20% for the full year at the upper end of our March 2021 expectation of 100 to 200 basis point improvement over the 18% margin in 2020.
Additionally, as we do every quarter in the earnings supplement available on our IR website, we have updated the quarterly pro forma financial statements to reflect the partnerships. We closed in the fourth quarter as if we had owned those businesses since the beginning of the year, which increases the revenues in quarters, one through three versus what we <unk>.
Resenting in previous quarters in.
In addition, we want to point out 2021 pro forma revenue and EBITDA of $719 million and $175 million, respectively. A significant partnership activity at the end of the year makes our business going into 2022 very different from just rolling actual 2021 results forward.
On the capital front, we took advantage of risks of a receptive market backdrop to complete an upsized term loan b add on of $350 million in December we are well positioned to execute on M&A and to achieve our expected completion of a $100 million to $150 million in acquired revenue in 2022.
A few items regarding expectations for Q1, and the full year 2022.
First for the first quarter of 2022, given the strong performance across our business in January and February to start the year, we expect to generate organic growth between the midpoint and top end of our long term, 10% to 15% double digit organic growth goal. Additionally.
Additionally, we anticipate adjusted EBITDA margins for the first quarter, approximately 200 to 300 basis points lower than first quarter 'twenty, one because of the run rate on investments made in the back half of the year and changes to the seasonality of our business as a result of 2021 partnership activity.
As a reminder, our adjusted EBITDA margins are seasonal in nature with Q1 being the strongest quarter.
For the full year of 2022 on the back of significant investments made in the business last year and thus far in 2022. It is our current expectation that organic growth for the year will be modestly above our 10% to 15% target.
Like last year, we continued to identify high return opportunities that will boost organic growth over a long period of time.
On adjusted EBITDA margin, we currently anticipate investing nearly $50 million back into the business with a concentration in our MGA of the future and main street businesses, primarily in head count and technology.
These investments will create new products and teams that should be contributors to 2022 organic growth an important catalyst for 2023 organic growth record.
Recall, we executed a similar strategy last year that has worked out exceptionally well as you saw in the last three quarters of 2021, and so we expect we will earn an attractive return on the capital. We are deploying and then it will have a long lasting compounding effect on growth.
Despite this large investment in new teams and solutions, we still expect an additional 50 to 100 basis point increase in the adjusted EBITDA margin for the full year above last year's 20%.
In summary, we are excited about our results during the quarter and for the full year with the momentum we have carried into 2022 and due to the prospect of another very strong year in partnerships and organic growth I Echo Trevor. Thank you to our colleagues who have been the driving force and propelling us to new Heights and positioning us for continued strong.
With that I. Thank you for your time, and we'll now open up the call for Q&A operator.
Thank you we will now be conducting a question and answer session.
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Your first question comes from.
Greg Peters with Raymond James.
Well good afternoon, everyone.
I guess I'd like to start off with the growth results.
You know.
In your guidance.
For fiscal year 'twenty two.
With organic doing really strong in all segments I'm curious as we think about.
This upcoming year.
Is there any particular segments that you expect to do better than the others or I guess put it another way can you give us some.
Ideas on where you think organics going to breakout by segment.
Hey, Greg This is Trevor good afternoon. Good it's good to talk with you and great question. So as you articulated we do we have seen strong performance across all of our segments. As we exited 21 and have entered 'twenty. Two we expect that we will see.
Meaningful organic growth contributions from all four segments and the fiscal year 2022.
Similar to prior years.
The MGA of the future in our specialty segment will continue to be at.
At the top end of organic growth for our business and we would expect meaningful double digit organic growth in the balance of the the operating segments.
Just as a point of clarification on the MGA of the future.
I think lease track.
Becomes.
Part of organic calculation in 'twenty. Two can you can you just clarify how the rollout of that is going with your customers.
Yes, I mean lease track has been just a fantastic success story Greg.
Not only has kind of the core of that software platform revenue base grown meaningfully under our ownership. It has also unlocked the significant growth that you've seen over the course of the year and our master tenant legal liability solution that was launched in the fourth quarter of 'twenty.
In 'twenty and we would not have seen the growth in that new product line without the incremental software capabilities that we were able to add into the business from lease track so far.
I all accounts a success.
Standing on its own the software on its own it's been a great success, but then when you think about the combined contributions it has enabled.
The broader business.
It could be.
I would characterize it as a homerun.
Excellent My other question was just on margins.
There's been a lot of rhetoric in the marketplace around.
You know wage inflation.
And specifically the ability to retain and attract talent <unk>.
<unk> added a lot of people.
And I did note your compensation ratio was a little bit higher than than maybe what we were looking for in the fourth quarter, maybe you can speak to.
Your expectations around the commission component.
Our compensation component of the margin assumption for 'twenty two in the context of that.
The comments I just made.
Yes, Greg another great question and the headline is we feel fantastic about our ability to continue to add talent retain talent and do so in an effective and efficient manner that supports profitable growth in our business. When you specific to the fourth quarter and the compensation ratio you saw.
There that's not necessarily reflective of the overall comp ratio for the business on a full year basis because of the seasonality of our revenue streams as you know.
And so when you look at full year compensation ratio for the business in 2021, it was actually down year over year compared to 2020, as we continued to scale up the business gain efficiencies and improved productivity in our business operations as I think about the impact.
Or potential impacts of wage inflation I think we're best positioned among our peers to be able to grow through that without feeling real pressure for a number of reasons, one if youll recall and the depths of uncertainty of Covid back in March of 2021.
Many organizations, we're freezing pay halting bonuses and putting a stop to hiring activity. We paid raises we paid bonuses and we kept tiring.
And so we didn't fall behind relative to keeping our colleagues' pay pacing with the increases in CPI during that year. Additionally, when you look at our overall head count it's up nearly a 100% over the course of the past 12 months.
And so as we've added in many of those people through organic hiring theyre coming in at market wage rates already and then lastly, when you look at our overall compensation mix approximately half of it is variable in nature, where it's tied directly to the fortunes of our revenue streams that those individuals are being compensated.
<unk>.
Got it thanks for the answers I'll, let others ask questions.
Thanks, Greg.
Your next question comes from Michael Phillips with Morgan Stanley .
Hey, Thanks, good evening.
Can you talk about the MGA, you talked about a little bit about before I kind of want to get an update on kind of the priorities, where you see the biggest priorities for <unk> outside of renters.
Absolutely, yes, so I mean, the MGA of the future business is performing exceptionally well we have terrific momentum not only in our legacy <unk> business, but also with the recent launch last week of our inaugural homeowners product with the admitted Florida solution going live.
In addition to that we expect to rollout.
Both admitted and E&S product across the U S over the course of the remaining months and quarters in the year.
With a plan to have a 50 state solution live.
On an E&S basis, and a multi state solution live on an admitted basis by the end of the year, we think that that homeowners initiatives going to be a meaningful driver to organic growth.
At the MGA. In addition to the continued momentum we see in the renters space. In addition to that we've stood up.
A new product team, who is in the process of developing and launching incremental products and we expect those will be significant contributors to continued organic growth in 2023 and beyond we could not be more excited about the position of the MGA of the future. The significant investments we've made in that plant.
Form and the ultimate growth that bill going to yield and the value creation that that will generate for our shareholders.
Thanks, Trevor I'm, sorry, if you said this just quickly.
Florida home product is admittedly.
The product we launched last week has admitted and best a rated paper.
Okay.
Thanks.
I want a clarification, Mike we do not take any balance sheet risk on that product or any of the embedded products.
Okay.
What impact do you think there could be on maybe not just for you guys in particular, but just maybe the industry or whichever one you want to comment on.
On the impact of rates as they rise.
Pre acquisition multiples and is there a certain point where.
I don't know if there's a certain threshold, you think where rates rise enough that there could be a stalling or too much.
Too high of a multiple for it maybe the industry to look at.
Yeah, Mike Great question.
Our perspective is that multiples likely peaked last year as we anticipate.
A raising rate environment over the balance of 2022 and potentially into 2023.
I suspect that we'll have.
A impact on valuation multiples.
Where you will see them pull down ever so slightly.
I do not believe youre going to see a wholesale shift in valuation in this space.
But we've certainly seen some signs of modest softening in overall valuation.
Okay, great. Thanks very much.
Okay.
Next question Yaron Kinark with Jeffrey.
Thank you good afternoon everybody.
My first question.
Because of the some of the underlying assumptions behind the organic growth estimate for 22 can you maybe talk about.
How you foresee the U S economy developing over the course of the year and the rate environment as well.
Yeah, you're wrong, great question and good to talk with you. So as we think about the impact.
Above GDP growth in the overall rate environment on our overall organic growth.
They're not meaningful contributors to the overall results.
So as we sit here today.
What I would say is there is likely going to be some economic choppiness.
As theirs.
Geopolitical instability supply chain challenges wage inflation that are impacting businesses broadly.
We expect that we'll continue to see a hardening rate environment.
One that is up slightly from the rate action that we saw in 2021, and when you kind of blend the impact of rate and an economic growth together.
It's modest a modest tailwind to the overall organic growth profile of the business just as a frame of reference as you think about the building blocks of organic growth for our organization, there's really four drivers to that.
<unk> got the retention of the prior year client revenues.
Our client retention is likely modestly better than our peers, but not driving a meaningful difference.
You then plug in the impact of rate and.
And exposure unit expansion and contraction, which as I mentioned, we expect that to be a modest tailwind in 2022.
The impact of that on our business for fourth quarter was two 3% tailwind and the impact for the full fiscal year of 'twenty. One was a three 5% tailwind again, the combined impact of rate and exposure.
But the largest driver of the overall organic growth is our ability to go out and win new client relationships at a rate that meaningfully exceeds what our industry peers do on average.
Got it.
And then.
How long by your estimate does it take a new producer because somebody that you've hired.
To full capacity.
Yes, so that is that answer varies somewhat depending on the segment that they are in your own I would say kind of broad brush as we think about the impact of adding new people to our business and the timeline for them to become fully productive it's about three years on average.
And that so as you think about the 803 people that we organically added into the business last year.
And you think about our business is generating roughly $257000 of revenue per colleague you can think about those 800 colleagues roughly yielding $200 million of incremental revenue growth into the business over the course of the next three years Theres other parts of our business. However, all on our mains.
Great operations, where we're making significant investments this year, where we can have a risk adviser up to speed and meaningfully contributing to new business growth within three to six months.
Got it that's very helpful.
And then maybe one final question on my end.
I realize today is a little bit of.
A different day with the 10 year moving down.
But I think overall expectations are that the interest rate environment will creep upwards in coming months.
Does that impact your sort of approach to the debt load too.
Funding acquisitions through debt or no.
Your own as we sit here today, we feel like we're well hedged through interest rate caps.
That are layered out effectively across multiple years to protect our existing debt position.
Additionally, as I sit here today and look at our share price.
I believe that we are seeing the largest gap between the share price and the intrinsic value of our business since we've been public and so.
Even with increasing interest rates, we believe that debt.
Capital will be the most efficient funding source for continued M&A growth in our business.
Great. Thanks for the answers.
Thank you.
Next question Elyse Greenspan with Wells Fargo.
Hi, Thanks, Good evening My first question.
We have found that $100 million to $150 million.
On the revenue side.
For 2022.
<unk>.
You expect to be.
Okay.
Okay.
2022.
Transactions when they might be.
Hey, Elyse, it's Chris it's a great question.
As you saw we did a lot in Q4, we thought Q1 would be quiet has been quiet.
We would expect that as you're building models, you would start to see revenue flowing in from new 2022 partnerships starting in Q2, and then Q2 Q3 Q4.
Okay, and then in terms of the organic.
Hi.
Thank you Todd.
10 to 15.
Fine.
Then it sounds like.
That target.
Organic growth.
Jonathan.
Is that a statement like would you expect that to be.
All of your segments.
Alright.
Alan in response.
Prior questions.
Okay.
Some of the hiring quicker to that segment.
It might be better or how should we think about the segments and how much incremental growth.
Yeah.
Yeah, so at least broadly speaking.
Q1 represents historically, the seasonally lowest organic growth quarter for our business as a result of the seasonality and timing of when new business tends to come online and into the organization. In addition to that we've made meaningful investments in the <unk>.
Number of growth initiatives that are coming online now and that we expect to have a growing impact and contribution to organic growth as the year goes on in particular and both our MGA and mainstream businesses.
And then lastly, you guys called out.
Incremental.
We will invest back in the business.
How should we think about the future.
Sorry.
When you set your investments at this time.
Okay.
Thank you.
Yeah.
When we think about 2020 and beyond.
Okay.
Right.
Next year.
Yeah.
I would say is this is not an expectation of an every year type event, we're making significant investments in our proprietary technology platform and MGA platform and.
In order to position it to scale up broadly in support of multiple product launches this year and next year and beyond.
I suspect.
No.
My sense is the investments we're making.
We will be fully absorbed in into kind of a mature productivity state over about a three year timetable and we expect those investments to yield.
At least about five acts.
Return on invested capital from a value creation standpoint over that time period.
Okay. Thanks for the color.
Thanks Louise.
Next question, Josh Shanker with Bank of America.
Yes, thank you very much.
If we think about the capital raise that you guys have done over the past 18 months.
It's kind of a treasury that you are putting money into do acquisitions. Obviously, you did some larger ones and they spurred on your desire to do a capital raise is there anything.
Left over in the Treasury per se or is all the capital that we put forward for acquisitions going forward internally generated and.
Were being done with future capital raises.
Hey, Josh it's Brad so.
We are very pleased in hindsight to have taken advantage of an upsize to our term loan b in December which freed up our revolver capacity gives us flexibility as we look at 2022 as Trevor mentioned earlier on the call.
We will both focus on our internally generated operating cash flow and the debt capital markets to execute on our 2022 strategy.
And so given the comments that you think the stock price relative to intrinsic value.
<unk> is lower than it's ever been.
But you would be very very hard for us to raise capital in the equity markets under these conditions would be is that reasonable.
Yes that is accurate.
Okay, Alright, thank you very much.
Thanks, Josh.
Next question Pablo <unk>, Zhang with Jpmorgan.
Hi, So I just had a question about your <unk>.
Hello, Yes, you're right.
For 'twenty two.
I'll ask it this way.
In February you had sort of touched on it already but.
How much of that growth right. So it's busy above trend will come from the new products like <unk> and.
And I think what you're how to sort of frame it right, but to what extent is beating your long term range dependent on.
A very successful rollout of the new products, specifically, the MGA and Dmitry.
Yes. This year, we expect the investments we made last year to yield 200 to 400 basis points of incremental organic growth that otherwise would not have occurred.
Yeah.
Alright, that's pretty clear and then.
A numbers question I guess, so the $50 million of investments you're making this year that it will be excluded from the adjusted EBITDA margin or will that flow through.
It's real expense in our P&L that suppresses our actual EBITDA margin. So what you heard Brad say on the prepared remarks is that.
We will expand margin in our business modestly.
While investing an incremental $50 million above kind of regular run rate trend reinvestment in the business, which speaks to got it the margin accretion that exists in our business and the mature margin profile that we can ultimately operate at.
Got it.
And then last one for me.
It's not the largest business for you, but as Youre aware theres been a fair amount of disruption into the Medicare market, especially among the online platforms. I guess, just sort of your general thoughts there and how your particular Medicare business disposition. If you see an opportunity just given sort of the broad disruption in the market. Thanks.
Yes, Great question Pablo as you know and as we've talked about in the past we recognize revenue in our Medicare business differently.
And then the other pure play publicly traded Medicare brokers that exist.
What that means specifically is we have fully constrained under 606 revenue recognition principles. The revenue we recognized in the Medicare business to one year of the expected cash revenue received on a Medicare policy.
As you've seen in the results Covid certainly had an impact on our Medicare business as a result of our community based go to market strategy. What I will say is as we've been coming out of the Covid environment and the most recent annual enrollment period in the fall of 2021, we saw a meaningful up.
Tick in activity.
We are very encouraged.
The business model and go to market strategy that we have and expect to see a meaningful rebound in the organic growth results of that business in 2022 as a result.
Alright, thanks for your answers.
Thanks Pablo.
Next question Meyer Shields with VW.
Thanks, too I think pretty simple questions first when we talk about $50 million, that's not incremental to the 2021 investments right that the same way that lets say 30 with above normal rate is 50, so it's like a $20 million chip.
No it's incremental above the 30 million mayor the way you should think about the $30 million from last year that was kind of in year investment above normal trend as we grow into that investment which again.
I had articulated earlier, it's about three years.
Before that investment becomes fully productive in operating at a more mature margin profile, so that $30 million ends up being probably a.
$10 million to $12 million drag in the year of 2022.
And then becomes effectively neutral in 'twenty three the 50 million is an incremental new reinvestment program above that but that will have a similar three year trajectory to becoming fully productive in our operating model and mature margin profile.
Okay, great. So I had it wrong so thanks for clarifying.
Second question I was just hoping for an update on.
The Florida homeowners market, we keep on seeing companies that are getting downgraded or just giving up on growth and.
I assume that you're much closer to it and I just wanted to get a sense as to how much.
Capital is out there writing homeowners now that the MGA can access.
So.
There is a bifurcated answer to that question may or the Florida homeowners market places in the worst shape, it's ever been in my 15 year career in this industry.
There is a real need for regulatory reform that has not yet occurred.
In the current state, it's not a sustainable functioning going concern market.
With that being said, we believe there is an opportunity with the appropriate risk selection strategy to have a very profitable homeowners book of business in the state as a result of our unique and shelter distribution strategy and how we're able to have superior risk selection and as a result of that strategy.
<unk>, we've been being able to source significant risk based capital in support of our homeowners product. We launched our first admitted product in Florida last week, we will actually be launching a second admitted product in Florida in the coming months as well as E&S products.
R R.
Opportunity in the state is significant and there is a meaningful tranche of good profitable business here, but you've got to really understand the nuances of operating <unk>.
In Florida, and what can get you in trouble fast.
Okay perfect. Thank you so much.
Thanks Meyer.
I will now turn the call over to Trevor for closing remark.
Thank you everyone for joining us for our fourth quarter and year end 2021 earnings call and we look forward to interacting and speaking with you all in the coming weeks and months take care.
This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
Okay.
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