Q3 2022 BRP Inc Earnings Call
Greetings and welcome to D. B R. P Group, Inc. Third quarter 2022 earnings conference calls.
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I'd now like to turn the conference over to your host Bonnie B shop.
Executive Director Investor Relations.
Go ahead.
Thank you operator welcome to the B R. P group's third quarter 2022 earnings call. Today's call is being recorded third quarter financial results supplemental information and Form 10-Q were issued earlier. This afternoon and are available on the company's website at IR Dot Baldwin risk partners Dot Com. Please note that remarks made today.
They may include forward looking statements.
Back to various assumptions risks and uncertainties. The company's actual results may differ materially from those contemplated by such statements.
For a more detailed discussion please refer to the note regarding forward looking statements in the company's earnings release for this quarter and to our most recent 10-K and subsequent periodic filings, including our most recent Form 10-Q, all of which are available on the P. R. P website.
During the call today. The company May also discuss certain non-GAAP financial measures for a more detailed discussion of these non-GAAP financial measures and historical reconciliation to the most closely comparable GAAP measures. Please refer to the company's earnings announcement and supplemental information.
Which have been posted on the company's website at IR Dot Baldwin risk partners dotcom.
I will now turn the call over to Trevor Baldwin Chief Executive Officer of ERP Group.
Thank you Bonnie good afternoon, everyone and thank you for joining us on our third quarter of 2022 earnings call I will start with a few remarks, followed by Brad Who'll address select financial and business highlights from the quarter and Brad Chris and I will take questions.
Before I get into our results I would like to take a moment to talk about hurricane in a storm of significant proportionate impact to a number of the communities in which we live and work.
The categories for strength low pace of movement and sheer scale of the storm led to a severity of loss that will likely make hurricane in the costliest insured loss a bit in Florida history, and among the costliest our industry has seen.
I'm incredibly proud of the response from our colleagues across the country, who have been working tirelessly with our clients insurers and community stakeholders to facilitate much needed support for the recovery and rebuilding.
Beyond the obvious and severe impacts to individuals families and communities there will be meaningful reverberations across our industry relative to availability cost in terms of insurance capacity. This is the type of market in which we excel where a depth of expertise breath of market access.
And innovative solutions can solve real challenges for prospects and clients positioning us to take share.
This was demonstrated in our third quarter results with the accelerating financial performance on top of exceptionally strong prior year results highlighted by organic growth of 28% with all four of our segments, achieving record or near record organic growth, including 80% organic growth in the MGA. It's Beth.
Quarter ever.
Adjusted EBITDA for the quarter was up 118% compared to the third quarter of 2021 as a result of our strong topline growth and margin expansion of nearly 200 basis points evidence in early signs that the investments we have made in our business are beginning to show a return.
In addition to the outsized financial performance, we generated during the quarter and year to date, we continue to be even more encouraged by the positive underlying momentum we're seeing across all segments of the business.
In middle market sales execution, and new client wins continued to accelerate as a result of our investments in advisor talent and deployment of go to market capabilities and expertise across our national footprint.
And the MGA, our pipeline of new distribution partners remains incredibly strong our home insurance product rollout continues to meaningfully impact our organic growth results and we're seeing solid results from our newer MGA partner firms that have started to roll into our organic growth numbers and will fully be in our.
Our results in the fourth quarter and over the course of 2023.
And main street. The early success of our National rollout has been a driving factor of two consecutive quarters of organic growth in excess of 20% and Westwood, while not yet in our organic results grew revenue over 20% during the quarter. Despite a meaningful erosion in housing market fundamentals.
And Mark and Medicare we've seen a solid start to the annual enrollment period as a result of growth in agent count and increased efficiency being driven by an improved digital enrollment platform. We launched in early October .
The prudent investments we've made into the business and the overall durability of our business model should result in strong organic growth through the fourth quarter and into 2023.
While global economic conditions are certainly challenged and are likely to continue to be so for the foreseeable future our business remains incredibly resilient and well positioned, especially given the mandatory nature of insurance purchasing and largely domestic footprint of our client base as I mentioned earlier.
We believe our unique approach and breath of solutions positions us well to take share during times of insurance market stress and economic volatility our colleagues have been delivering exceptional value to our clients with advice counsel and purpose built solutions to help navigate the growing complexity.
And ever changing risk environment of today's world.
I want to thank our clients our trading partners and in particular, our outstanding colleagues, who propel our continued outperformance and with that I'll now turn the call over to Brad.
Thanks, Trevor and good afternoon, everyone for the third quarter revenue grew 91% to $259 million organic growth in the third quarter was 28% with all four segments, achieving double digit organic growth. The strength of these results on top of strong prior year organic growth of 26% highly.
The growing momentum we have in our business today and early signs of success, we are seeing and the growth investments we've been making.
We recorded GAAP net loss for the third quarter of 47 million or a loss of 43 per fully diluted share adjusted net income for the third quarter of 2022, which excludes share based compensation amortization and other one time expenses was $28 million or <unk> 18 per fully diluted share a table reconciling GAAP net loss to us.
Adjusted net income can be found in our earnings release, and our 10-Q filed with the SEC. The largest reconciling items were amortization of $23 million. The change in fair value of earn outs of $22 million and onetime partnership and integration costs of $12 million largely tied to significant integration costs associated with the Westwood partnership.
Adjusted EBITDA for the third quarter of 2022 rose, 118% to $41 9 million compared to $19 2 million in the prior year period, adjusted EBITDA margin was 16% compared to 14% in the third quarter of 2021.
Adjusting for the change in accounts receivable and accounts payable related to our holding fiduciary cash as well as earn outs flowing through operating cash flow free cash flow from operations improved by approximately $2 2 million compared to year to date 2021.
Next I'll summarize a few items regarding expectations for the fourth quarter and the full year of 2022 first for the fourth quarter of 2022, we expect to generate organic growth in the high teens, which should equate to organic growth for the full year of approximately 20%.
In addition, we expect adjusted EBITDA for the fourth quarter of approximately 35% to $37 million and adjusted EPS of approximately 10 to 12.
We now expect full year 2022, adjusted EBITDA of $192 million to $194 million, which based on better than anticipated fiscal year revenue growth represents roughly flat margins to 2021 levels.
Note that in the back half of 2022, we have seen an acceleration of new client wins, which comes at a higher level of variable compensation that will normalize and be accretive to margin as those clients renew in the following year.
We do not plan to regularly give guidance for the following year during our Q3 call, but in advance of our inaugural Investor Day next week, we want to provide a preliminary look at 2023.
At this time, we expect 2023 organic growth at the high end of our 10% to 15% range revenue of 1.14 to 1.1 dollars 7 billion and adjusted EBITDA of $250 million to $260 million. We also expect to bring net leverage down near the high end of our three and a half to four five times.
Long term range through organic growth and free cash flow generation.
In developing our expectations, we anticipate slightly negative GDP for the broader economy, but remain confident in the strong economic resilience of our business and our runway for growth ahead. We'd also note that these expectations conservatively assume no acquired revenue in 2023.
We will continue to engage with prospective partners, but given the combination of much much higher cost of capital, which has not worked its way into pricing and return models industry wide and still buoyant private market valuations, we are entering the year with measured expectations.
In summary, we had excellent performance across all of our business and carry strong momentum into the fourth quarter I want to thank all of our colleagues, whose grit and tenacity powers. These result, and has enabled us to deliver exceptional outcomes for our stakeholders.
With that I. Thank you for your time and your interest in <unk>. We look forward to speaking with you again on November 15th at our inaugural Investor Day, We will now open up the call for Q&A operator.
Yeah.
Thank you.
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One moment, please why do we pull for questions.
Okay.
We have our first question from the line of Greg Peters.
With Raymond James Please go ahead.
Hey, good afternoon, everyone.
The first question will be on organic revenue growth results.
Specifically in middle markets and specialty.
For Middle market, you know I'm intrigued that you're reporting.
Relatively strong results compared to the peer group and you mentioned some client wins, maybe you can unpack some of the detail that's going on to that result, and then in specialty.
Trevor you talked about.
The headwinds are the challenges of the property market in Florida is I'm, just curious how that might manifest itself with organic as we think about that going forward.
Yeah, Good afternoon, Greg and I appreciate the question so.
To start with middle market, one we're exceptionally proud of the results and we believe it showcases the value that our colleagues are delivering the clients every day and the reality is those are results are being driven by an acceleration of new client wins. That's a result of the investments that we've been making in national resources.
Building out depth in client industry sector capabilities and risk product centers of excellence that enable us to bring the best of our organization to our clients no matter, where they reside and how they access us and that's showing through and showing up and newer and new wins, it's showing.
Up in larger wins and broad based strength across our footprint as.
As we think about the specialty business.
We're pretty market in particular, we're anticipating is going to enter a period of dislocation that that the industry hasn't seen in decades.
But as I mentioned, that's the type of market, where we excel, where our depth of expertise our breadth of market access.
And the uniqueness of the solutions that we're developing and bringing to market enable us to solve real problems for our clients ultimately positioning us to take more share specifically in the specialty business. We believe the responsible job we've done managing capacity and delivering.
Profitable underwriting results to our capacity providers is going to position us uniquely in what's setting up to be a very difficult reinsurance marketplace. So that we'll be able to access capacity more nimbly and at more scale than many of our competitors and bring that capacity to market.
But for our clients.
Yeah.
Alright.
There's a lot to unpack in that answer I'll, probably take that offline I I'm going to take that offline.
I'm going to pivot to the guidance for next year.
And I'm trying to crunch, the numbers pretty quickly, but the revenue guidance for the full year and the adjusted EBITDA guidance for the full year.
I was wondering if you could talk Brad for a minute about what the implied adjusted EBITDA margin is.
With that guidance and how that compares with what your guidance is for this year.
Yeah. Good afternoon, Greg. So if you look at the range, we put forth and you know I will note that we're continuing to to work through the budgeting process and fine tune that as we finished Q4 here, which is why we provided a relatively broad range, but it.
It would look at about 200 basis points of margin expansion next year and that's in in light of still absorbing.
A significant amount of investments that we've made in the business in the last two years we've.
We've said before it takes approximately three years for those to roll in and be sort.
Sort of fully funding and in our results. So we're continuing to see the growth really impact. The organic numbers. You are seeing you saw that in Q2, you saw that again in Q3, we expect that to have even more impact in 2023.
But we are continuing to absorb those investments as they mature and the business.
Got it thanks for the clarification.
Thanks, Greg.
Thank you we have next question from the lineup Mayor Shields with K B W. Please go ahead.
Thanks, two questions and again I guess on the guidance going forward.
But when you talk about a GDP contraction is that real or nominal in terms of the expectations and.
I'm wondering.
Specifically.
Whether there's a consideration of maybe more distracted clients that are less inclined to shop. In addition to just attrition.
Hey, there.
I'll, let Brad take the.
Question on GDP, but then I'll add in some commentary around.
Around the client distraction, so what were anticipating relative to client buying behavior next year is that it's going to be a real opportunity for us to pick up share as a result of the difficulty of securing.
Limit of securing.
The type of terms and conditions that clients are seeking and just the general kind of dislocation we're anticipating in the insurance marketplace. As I mentioned earlier, that's the type of market, where we tend to really excel where.
Our breadth and depth of expertise and capabilities enable us to really stand out take share and also deliver a fantastic solutions to existing clients.
So that they don't feel like they need to look for for advice.
Our outcomes from others.
That's real GDP mirror.
Okay. Thanks, that's helpful. And then just one final question on that if I can is.
Is there any explicit debt paydown in the debt leverage guidance.
Yes. They are so if you if you step through that conservatively on a 250 or 260.
Million dollar adjusted EBITDA number.
You know, we we generate let's call it $100 million $125 million of free cash flow.
So we are assuming that we'll be generating.
Again, a conservative amount of free cash flow to contribute to.
Our net leverage coming down.
Alright, perfect. Thanks, so much.
Thanks, Matt.
Uh huh.
Thank you we have next question from the lineup.
Are these.
Greenspan with Wells Fargo. Please go ahead.
Hi, Thanks. Good evening. My first question is on the organic guide for 'twenty 'twenty to me like you guys are you know I've had a string of curious right, where you've been coming in better than your expectations and you know you said the high end of that 10% to 15% range, but now it sounds like we could get a really strong pricing environment.
Next year, especially in the lines impacted by Ann So you're trying to conservatively guy like is there a chance that you could come in above that range and what color can you maybe give us a sense of the baseline pricing expectations that support the 10% to 15% target.
Hey, Elyse good afternoon. So you know this.
There's a lot of puts and takes to the type of an insurance environment, We're anticipating next year.
And so all of that is contemplated in the organic guide what I would tell you is while we're expecting pretty meaningful rate, particularly in cat property that tends to also change client buying behaviors and so youll see them take larger deductibles youll see them buy less limit.
And so you wouldn't expect a straight kind of pass through or a correlation from the level of rate, we're expecting into the organic growth overall.
And so we feel you know appropriately conservative in how we're thinking about the results and expectations for next year and feel like we're well positioned to continue to drive fantastic outcomes to all of our stakeholders.
Also within that organic guide I guess another question right you talked about starting to see an impact of the new hires and the investments you made this quarter. But then you also said right that it takes about three years for those just fully well in so what what's the revenue impact that you were assuming on from the new hires.
Embedded within that 10% to 15% full year guide for next year.
Yes, so at least I'm not going to break out specifics relative to kind of new hires versus the ongoing business, but what I can tell you is.
You saw a meaningful acceleration in growth for our business, both quarter over quarter and year over year and third quarter and part of that acceleration is a result of the success from the investments we've been making over the past couple of years being beginning to earn through and show up in an actual results end client.
Wins, and we expect that to continue to be a meaningful contributor to our results next year.
So we're we're feeling really good about how the business is positioned.
And the strength of our business model is going to enable us to deliver consistency and strong execution for our clients. Despite what we are expecting to be a relatively volatile insurance marketplace and somewhat difficult economic environment.
We started out and just to clarify.
High end of the 10% to 15%.
Yes, and then within that high end of 10% to 15% do you expect all of your segments.
We will be within that range or any color you can give us well on the segments relative to the guide.
We're not going to get into the segments at this point at least but we'll plan to provide some more color around segment level performance during our Investor Day next week.
Okay, and then one last one on the M&A side, you said it didn't the guy right Youre not assuming any acquired revenue next year. As you were kind of you know get your leverage down.
What could cause you I mean, if there is deals that come along is that what's going to determine whether or not there is.
Acquired revenue or are you just on the sidelines until you get your debt within that range or are you just trying to put out a conservative guide I'm just trying to get a sense of you know when when the acquisitions could start to ramp up again.
Yeah. So at least a few things one the the pulling M&A out of expectations for next year is not a overwhelmingly as a result of where leverage sets its a broader a broader and.
But then that so as a management team what I would tell you is we view part of our role to be allocating capital and as we assess the overall environment today.
The you know the pricing and the external environment has not changed to reflect the increasing cost of capital.
And in conjunction with that we're having tremendous success in fantastic results on the investments, we've been making into the business and so from a capital allocation perspective, that's what we're prioritizing today and focusing on strengthening our balance sheet during a period of volatility with that said.
We remain opportunistic we continue to have dialogue with a number of high quality opportunities and for the right opportunities. We will responsibly look to get things done based on today's backdrop, we don't expect that next year, but that can evolve.
Thank you.
Thanks Luis.
Thank you we have next question from the line of Josh Shanker with Bank of America. Please go ahead.
Yeah. Thank you for taking my question.
You know I don't imagine you would give us kind of detail in most quarters, but given some of the noise in the third quarter can you talk a little about how much revenue was generated from the QB relationship you picked up with Westwood, obviously, 80%.
The future growth is significant but I assume some of that growth is onetime in nature.
Yeah, Great question Josh.
A few things to clarify.
One the MGA growth.
And the Q V E program administrator agreement was 44% so it's still incredibly strong.
And.
The other thing to clarify is that the 36% growth youre seeing from the <unk> program administrator agreement.
Contribution to the MGE as organic growth for the quarter I wouldn't necessarily characterize as one time, because while that program is rolling into our results and that kind of overall uplifted somewhat one time in nature. That's a reoccurring book of business that has growth built into it in the 36% result that you see.
And so if you had just taken a flat line of the book at the start of the program administrator agreement. The contribution wouldn't have been 36% it would've been something less than that but because of the growth that we're driving into that program. We're seeing accelerated results and we would expect that to continue.
Hey, Josh I'd also add.
Tried to provide some additional disclosure on organic growth with the with the PAA with the interplay between Westwood.
And MSI.
And the intercompany and consult elimination in calculating organic growth. So I think it's page seven of the supplement you can walk through that calculation because I think there's been some confusion and you know clearly we were backing out intercompany transactions and calculating organic growth.
That's great and then you sort of start long haul my interest was 36% growth in the <unk> relationship 20 per cent of Westwood can you give us any color you can give them a lot there John what is the organic growth within the acquisitions that you did over the past 12 months.
Yeah. So if you look at the page three of the supplement Josh.
Bottom line there you'll see total revenue business owned as of 12, 31, 21 and that gives you a sense of the growth of the overall business and including acquired businesses or proxy for organic growth for the business for everything that was acquired last year.
<unk> those parts of the business not yet today contributing to our organic growth calculation and you can see it's actually higher than the 28% and 36%, which highlights. The fact that the businesses that we partnered with last year are actually growing faster than <unk> as a whole, which I think is a testament to the capital allocation.
That that you saw from our team last year and the focus on partnering with businesses that make us better and that we can help make better as well.
We're certainly seeing that play out.
And one more please and I may not get an answer I mean, you've always been very careful about giving a margin information out about MGA of the future, but could you maybe look into the future and talk about how many years out do you think it will be.
When the Mg of the futures EBITDA margin is greater than the.
<unk> as a whole is that three years four years out it doesn't have to be the exact.
Number, but how far out should we be thinking.
Josh I think we'll we'll shed some light on that would be next week at the Investor day.
Alright, I'll take that thank you very much.
Thanks, Josh.
Thank you we have next question from the line of Weston Bloomer with UBS. Please go ahead.
Hi. Thanks. My question is on your margin and the investments you're making your business I may have missed this but did you disclose how much of the $50 million.
Has been put to work year to date and then what are your expansion expectations for 2023, as well I'm just trying to get a sense of kind of year over year comps on those investments.
Yeah Western.
So yes, we did not give that update but as far as the investments. We're making this year you can think of those as basically ratably rolling into the year. So we are on pace with the commitment we made.
Earlier this year.
I believe it was the $60 million, we were going to make in year.
We look to next year. We are currently not specifying any other de novo investments outside of normal course for the business, but what I would say as I described before we continue to get you know rollover impact of the significant investment we've made over the last two years is that.
Sort of matures in the business.
Got it and I think last quarter, you had said 850, new hires in the first half of the year do you have that number for the <unk> and do you expect most of the investments to be hires as you move forward as well or will it be kind of other investments in technology and things of that nature.
Yeah, Western so we hired a approximately 450 people in the third quarter or so.
Basically on trend with the first half of the year and what I would tell you is our investments in the business are largely talent related even you know the investments that are technology oriented they tend to be in the technologists, who come and build technology and into and for our business.
Great. Thanks for taking my questions.
Watson.
Thank you we have next question from the line of Pablo <unk> with JP Morgan. Please go ahead.
Hi, Good afternoon, I was hoping you could provide perspective on your expectations for I guess interest expense next year, just given where rates are and the beat on your planning for your debt.
Yes, so Pablo we already are experiencing pretty significant cash interest increases we were able to increase year to date free cash flow, even in light of 170% increase and what we're paying in cash interest we.
We do outline in the earning supplement our exact debt outstanding and we effectively used the forward curve to build our expectation as to what our variable rate debt will look like going.
Going into next year.
And Pablo I'd add Brad Brad talked about it earlier and you know we think we can get a 100 $125 million of free cash flow next year after paying interest from that EBIT guide, we provided so still significant capital created.
To manage the debt levels down to closer near our three and a half to four and a half long term range that we've talked about.
Got it and then my second question is.
I just wanted to get your guys perspective, and I guess, you know the trajectory of free cash flow so far.
And.
BT the bridge from where we are due to a 100 to 125 next year right because as I look at.
You've done year to date $59 million, that's about 30% of adjusted EBITDA.
And I think last year cash was actually negative in the fourth quarter. So I guess, just sort of probably the single.
Habitual regard.
We think you got pretty good result for next year.
Just given the pattern from here on.
What do you guys have planned for the next year. Thanks.
Yeah, I can give you a really high level bridge Pablo and again, we're continuing to work through our 2023 finalization on budget, but the way we're thinking about a high level is if you take our range of adjusted EBITDA I provided that $2 50 to $2 60, if you.
Late somewhere in the range of $100 million to $110 million of cash interest next year as well as we've been at a run rate of about $20 million to $30 million of partnership and integration related costs.
You know that's how we're backing into.
Our range, we provided on free cash flow because you know the main adjustments for us and in bridging from adjusted EBITDA to free cash flow or are those two elements.
Pablo I'd also add when you're comparing the year to date free cash flow to prior year.
Theres, a pretty big timing mismatch and partnership expenses between this year and last where they are very much front loaded.
With the Westwood partnership this year, whereas last year. It was very much Q4 weighted.
And so.
There's not kind of a perfect year over year comparison. There in addition to that because <unk> E or because the Westwood business is being absorbed.
Absorbed out of Q V, there's pretty significant integration and Transurban transition services expenses that are onetime in nature.
That are in the the partnership expenses bucket this year, which we would not expect to reoccur over.
Got it that makes sense. Thank you.
Thanks Pablo.
Thank you ladies and gentlemen, do we have reached the end of the question and answer session and I'd like to turn the call back to Trevor Baldwin CEO for closing remarks over to you Sir.
Thank you all for joining us for our third quarter 'twenty two earnings call and we look forward to speaking with you next week at our inaugural Investor Day presentation take care.
Thank you ladies and gentlemen. This concludes today's conference you may disconnect. Your lines at this time. Thank you for your thoughts.
Yeah.
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