Q4 2022 Goosehead Insurance Inc Earnings Call

February 22, 2023

Thank you for standing by this is the conference operator.

Welcome to the Goose had insurance fourth quarter of 2022 earnings conference call.

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I would now like to turn the conference over to Dan Farrell VP capital markets.

Please go ahead.

Management as of today forward looking statements in our discussion are subject to various assumptions risks uncertainties and other factors that are difficult to predict and which could cause the 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.

We refer all of you to our recent SEC filings for more detailed discussion of the risks and uncertainties that could impact future operating results and financial condition of <unk> sure, we disclaim any intentions or obligations to update or revise any forward looking statements except to the extent required by applicable law.

I'd also like to point out that during this call we will discuss certain financial measures that are not prepared in accordance with GAAP.

Management uses these non-GAAP financial measures when planning monitoring and evaluating our performance. We consider these non-GAAP financial measures to be useful metrics for management and investors to facilitate operating performance comparisons procured period by excluding potential differences caused by various variation and capital structure tax position depreciate.

<unk> amortization and certain other items that we believe are not representative of our core business.

More information regarding the use of non-GAAP financial measures, including reconciliations of these measures to the most comparable GAAP financial measures. We refer you to today's earnings release. In addition, this call is being webcast an archived version will be available shortly after the call and on the Investor Relations portion of the company's website at Www dot.

You said insurance dot com with that I'd like to turn the call over to our CEO Mark Jeff.

Thanks, Dan and welcome everyone to our fourth quarter and 2022 earnings call.

I will provide an overview of the key strategic accomplishments in 2022, and how they help position us for our next phase of top and bottom line growth.

President and CEO Mark <unk> will then take you through some greater detail around driving operational excellence across the organization.

And Mark Jones Junior our CFO will review, our financials and outlook for 2023 and beyond.

I'd like to start by sharing that Q4 of 2022 gave us another opportunity to demonstrate the strength and resiliency of our business model.

We overcame housing market headwinds delivering premium growth of 44% and revenue growth of 43% compared to Q4 2021.

Core revenue growth for 2022 was 41% and EBITDA grew 76% as we gained nearly 400 basis points of EBITDA margin.

2022 was a year of substantial change that we believe was critical to sustaining future high levels of profitable growth as we become a much larger organization.

These many efforts included an upgrade of the management team across the organization.

We've now completed a repositioning of corporate sales to enable us to return to profitable growth in that segment of the business.

Early results have been excellent with December new business productivity growing 44% from a year earlier in January 23, new business productivity also up 44% year over year.

What's most exciting for me and but bodes so well for our future growth is that January 2023, new business productivity.

First your corporate agents was up 77% from January 2022.

We've begun implementing the program to facilitate migration of select corporate agents.

To the franchise network very successfully.

We market this to recruit as a form of paid apprentice ship.

So far in 2023, we've climbed six two agencies corporate and expect to launch its total of at least 30 this year.

Thrilled with the operating result to date.

Mark Miller will provide more details in his section but to give you a preview. These corporate conversions have been six times as productive as an average new franchise.

So if this remains consistent launching 30 this year has the potential to drive similar production growth.

As adding roughly 180, new operating franchise.

This opportunity is proving very popular in the talent pools from which we recruit driving strong demand for few said as an employer of choice.

<unk> talent.

We've also reset recruiting expectations to our historical standards of quality.

And anticipate cheerios corporate producer growth beginning in Q3.

The next crop of new college graduates drawing.

We continue to rationalize our franchise system, focusing on removing underperforming franchises and reallocating resources towards high performing ones that are in the scaling phase of their businesses.

Our experience has shown that adding producers who are most productive franchisees is a powerful growth driver on average these agents to deliver about one seven times, the new business is adding an incremental franchise.

Accordingly, we've created a dedicated team at corporate to support franchise hiring efforts and expect our franchisees to add.

150 to 200 producers to the system this year.

Based on precedent, we believe the capacity of these new producers could equate to roughly 250 to 350 new franchise.

Our franchise producer recruiting efforts combined with the conversion of corporate agents and franchisees represent powerful opportunities to turbocharge the growth of our franchise business.

Rationalizing the franchise system takes a little longer than corporate because of constraints in our franchise agreement that being said we believe these efforts will be largely complete by the end of the second quarter.

We've continued to strengthen our service capacity focused on setting and achieving strong kpis and service delivery to support and enhance the most profitable piece of our business.

Our growing Myrtle Park.

This has been accomplished by serving Asia service agent hiring reducing turnover and leveraging lower cost offshore resources to handle non client facing clerical work.

We're expanding our channels of distribution through partnerships.

The previous announced partnerships with the National Association of mortgage brokers and the association of independent mortgage experts are good first steps.

We are in discussions to partner with several large mortgage lenders and servicers to provide insurance to their new and in force blocks of business.

Also in discussions with several national real estate organization.

Implementation of digital marketing efforts around cross selling and other referral business contributed significantly to growth in 2022 and is showing further momentum as we progress into 2023.

We're also building on our previous investments to create a world class technology organization that enhances the client experience delivering on our potential with quote to issue and accelerates the accomplishment of other key strategic priority.

While we benefited from pricing tailwind. So it will likely continue through 2023, we've also faced macro headwinds, including the historically low.

Commission levels and declines in housing activity across the country.

We have never allowed the macro environment is a primary factor driving our result.

We remain externally focused on our clients in the market.

<unk> to adapt and evolve so that we can deliver strong results.

In any environment.

The future of our business continues to be very bright.

We believe that our unique business model provides us with a powerful competitive mode.

Replicating our accumulated experience technological leadership.

Buyer massive investment in both dollars and time and can't be achieved quickly through acquisitions.

The good news is we believe that people who have the money for legitimacy challenge us don't.

Have the patience to wait for years and years for return.

We remain focused.

On investing in and expanding our core business to strengthen our competitive position and our aspiration remains steadfast on becoming the number one distributor of personal lines P&C insurance in the country during my lifetime.

With that I'll turn the call over to our President and COO Mark Miller.

Thanks, Mark and Hello, everyone.

I'm extremely pleased with the progress we made in 2022.

We are very well positioned to drive high levels of revenue and earnings growth moving forward.

During the year, we sharpened all aspects of our operations across sales service and technology.

We did this by upgrading talent and tightening our most critical operating levers.

Growth remains our highest priority.

Now relentlessly focused on quality and operational excellence in all areas of our business. So.

So we can also optimize profitability.

Let me be clear about our priorities for 2023, we're focusing on increasing productivity across both distribution networks.

Improving our recruiting function to drive strong and sustainable growth of total producers across corporate and franchise distribution.

Continuing to invest in our service function to protect our client base and support our growing renewable.

Expanding our digital marketing efforts to drive more cross selling and other referral business and improving our technology platform to support our core business and expanding distribution through partnerships.

Let me take a few minutes to expand a bit more on some of these priorities.

I'll start with our corporate sales function over the past couple of years, we saw a deterioration.

Agent productivity levels.

In mid 2022 took swift and decisive action to remove underperforming agents.

Strengthened our sales leadership team and redesigned our recruiting processes with greater emphasis on quality.

By year end. This strategy resulted in corporate sales agents returning to their historically high levels of productivity.

In the fourth quarter corporate agent productivity increased 24% year over year.

This momentum continued in January with average agent productivity up 44% in first year agent productivity up 77% year over year.

We expect to begin ramping up corporate sales head count again in Q3 after a new class of college recruit starts this summer.

Until then we will continue to optimize productivity selectively hire experienced sales professionals to bolster the team.

But under no circumstance, where we substitute quantity or quality.

Although we intentionally reduced our agent count by 37% in 2022, our total new business premium for corporate increased 11% in Q4.

This premium growth was driven by the large increase in productivity per agent, which helped fuel margin expansion.

We're still targeting more corporate productivity improvement in 2023, and I'm very confident that the changes we made will allow us to deliver strong year over year corporate sales growth in the back half of 2023.

On the franchise side.

We have aligned management and recruiting compensation to incentivize quality signings and faster launch it.

Focused franchise sales in specific geographies and established a dedicated recruiting team to source producer talent for our scaling franchises.

While we have driven strong results in franchises overall.

There have been a why there's been a wide disparity of performance among our existing franchise.

To give you some additional color the top half of our franchises accounted for around 90% of our new business production and the franchise network in 2022.

We continue to put the bulk of our resources into supporting the organic growth would be successful franchises and identifying new franchise owners with the best probability of joining this elite group.

Our efforts around franchise recruiting are already starting to take hold with improved launch time and increased productivity of our less than one year franchises.

We have also made great strides in improving the quality of existing franchise and <unk>.

'twenty two we called over 280 underperforming franchises from our network.

The vast majority of which failed, but not implementing our model or putting in fulltime effort.

This had minimal impact on our growth as these franchises accounted for approximately 2% of our new business production are consumed a high percentage of valuable resources.

Our higher than normal coding slowed operating franchise unit growth by approximately 10 points in 2022, but had almost no impact on our new business generation.

We will continue to eliminate low performing franchises that are higher than historical rate during the first and second quarters of this year.

But expect our coding to be complete around midyear after which point, we expect operating franchise growth to accelerate.

We're also increasing our efforts to launch successful corporate agents into franchises in 2022, we had 12 corporate agents transfer and open franchise.

There are new business productivity was nearly <unk> the first year franchise productivity.

Productivity has been even stronger but more recently launched franchises from corporate those converting from corporate so far this year are tracking at six times the average first year franchise productivity.

These ex corporate sales agents not only strong producers, but they also have the skills necessary to build their own multi agent franchises.

We believe we will be able to convert a significant number.

<unk> 30 of high performing corporate agents to franchise partners in 2023.

Just offer one example in January 2023 blamed broadly a highly successful corporate agents opened a franchise.

This new business productivity in January was over seven times higher than the average new franchise.

Going forward you will hear me talk more about the number of agency producers rather than the number of agency or.

Our financial results are much more correlated to the total amount of our agents and their production not the number of agencies we.

We ended the year with 2101 franchise producers this was up 15% from a year ago.

We expect overall franchise producer growth significantly accelerate in the back half of 2023.

This growth will be driven by the addition of net new agencies as well as organic agent growth from our enhanced recruiting efforts.

Now switching to the service function, we made substantial progress in 2022.

We grew our service agents, 50% to around 600 and materially improve service agent turnover through the year. This investment has resulted in substantial reduction in our call wait times and has sustained our NPS of 90 or.

Our service team is now well positioned to support our growth as we continued to deliver high NPS and retention in a tough operating environment.

We're now also focused on driving automation and reducing cost per policy in force.

Last year, we also made substantial progress on various digital marketing efforts driving higher cross sell and other referral business from our existing book, increasing new franchise leads to our recruiting team and increasing our brand recognition.

While we have made quick and substantial progress through our marketing efforts I feel like we are only beginning to scratch the surface of our potential in this area.

On the technology front, we're continuing efforts on direct quote to issue with a number of carriers and I'm looking forward to giving you more detailed updates on our progress as we move through the year.

With our existing capabilities and new investments, we are in an enviable position to lead the digital transformation of our industry for the benefit of our clients agents and carriers.

I see no other company with the opportunity we have shaped the direction of the industry and to drive strong profitable growth for sustained period of time.

Couldn't be more excited to help drive the next phase of its already incredible organization with that I'll turn it over to Mark Jones Junior.

Thanks, Mark and Hello to everyone on the call are.

Our strong results in the fourth quarter further demonstrate the embedded strength and consistency of our business model and insurance is a necessary product for the majority of the population and our ability to gain increasing market share is enormous.

Our choice product platform expert agents and industry, leading technology provide an easy seamless shopping experience for clients.

Our client value proposition is even more powerful as consumers navigate the challenges posed by the current Florida insurance market.

We are in a unique position in the marketplace is a fast growing disruptive model with strong and expanding profitability and cash generation with limited balance sheet.

We did not see appear in the market that matches our abilities. We believe our competitive moat will only continue to expand.

2022 was a year of significant change as we address challenges emerging in our business we.

We saw an increasing disparity of performance among our agents, both corporate and franchise, where the most successful producers drove the majority of our growth.

We also identified a significant number of underperforming producers theres low productivity was eroding profitability and consuming valuable corporate resources, while creating management distraction.

We took decisive steps in 2022 to improve the quality of our recruiting process and manage out unprofitable agents, leaving us with a much stronger and more efficient sales force.

While executing these strategic improvements we continue to drive strong results.

For the fourth quarter of 2022 total written premium the key leading indicator of future core and ancillary revenue growth increased 44% to $585 million.

Performance of our renewable book, which represents the majority of our underlying profit has been exceptional.

This was driven by investments in execution and servicing high client retention of 88% and benefit from P&C pricing with the net effects being premium retention of 100%.

As we progressed through the year, we expect a gradual slowdown in premium growth as lower new business growth from 2022 impacts growth of our renewal book in 2023.

However, we are already seeing improved agent productivity that should allow us to pivot back to stronger producer growth in 2023.

We believe this productivity improvement and expected growth in producers will have a greater benefit in overall premium in 2024 and beyond.

Increased calling of underperforming franchises is continuing to moderate overall operating franchise unit growth and we expect this to continue through the first half of 2023.

At the end of the fourth quarter operating franchise count was 1413 up 18% from a year ago.

Fourth quarter agency turnover was approximately 6%.

We expect franchise churn to be high relative to history and the first half of 2023. However, we anticipate the calling of weak agencies to be offset by improved productivity our efforts to add producers to scaling franchises and launching of new franchises from corporate producers.

As a reminder, these terminated franchises have virtually no impact on premium and revenue growth as they account for approximately 2% of our new business production.

We will continue to focus our resources on our most successful franchises, which drives the vast majority of our growth and remain diligent and demanding high standards of production from our producers.

Our 98 launches in the quarter were up 11% from a year ago. As we are balancing our robust franchise pipeline with increasing standards of quality for recruiting new franchisees, which we expect maximize their probability of success.

To give some perspective on the range of performance among franchises the top 25% of franchises accounted for about 70% of new business production and the top 50% account for about 90% of our production.

Experience has taught us that differential management investment and resource allocation to these agencies moves the needle materially on productivity and you will see more of that.

Operating franchise unit growth will be a little slower than our historical rates as we rationalize our portfolio of agencies. However, we expect increasing growth of total franchise producers in the back half of 2023, which were 2100 to one at year end.

We are very excited with our newly dedicated recruiting resources to help scaling franchises source talent.

Adding new producers to existing franchises continues to be about one seven times more beneficial new business and adding a new franchise and.

And we have early indications that the producers we are sourcing for our existing franchises are performing at a higher level on average and the producers the franchises are sourcing separately.

Additionally, we are having early success in launching new franchises from our strongest corporate agents.

These franchises that launched this year are six times, the new business production on average of new franchises and importantly, it will be well positioned to quickly scale their own operation as many of these new owners previously managed teams of producers and Corp.

We have reduced our corporate sales team from 503 at the end of the second quarter to 320 at year end.

While the reduction in corporate sales head count was significant it was necessary to restructure the corporate network for profitable growth in the future and results overall have been exactly what we were striving to achieve.

We have produced meaningful and sustained improvement in productivity for agents that are already showing improved profitability that naturally follows.

Our overall corporate new business premium in the fourth quarter grew 11%, despite a 37% reduction in head count from a year ago as.

As we mentioned we are beginning to add head count back to corporate sales strategically for optimal growth without sacrificing profitability and to create the capacity to see corporate agents converting into franchise.

We expect material head count growth to begin in Q3 with the next big wave of recruits joining us upon graduation from college this summer.

Total operating expenses for the fourth quarter of 2022, excluding equity based compensation and depreciation and amortization were $45 5 million up 30% from a year ago.

Compensation and benefits expense, excluding equity based compensation was $30 5 million for the quarter up 30% from the year ago period.

The increase in compensation and benefits is being driven by increased overall head count, particularly in the hiring of service agents to manage our largest revenue stream renewables.

Recruiting and Onboarding functions to continue our growth trajectory and system developers to ensure our technology is on the cutting edge for our client and internal users.

General and administrative expenses for the quarter $13 5 million, an increase of 33% from a year ago.

Growth in general and administrative expense was due to investments in technology systems, and marketing efforts to drive growth and continue to improve the client experience.

Our bad debt expense was $1 4 million compared to $1 2 million a year ago with the increase largely driven by our calling up signed franchises that have yet to launch.

Total adjusted EBITDA in the quarter grew 123%.

$11 9 million compared to $5 3 million in the year ago period.

EBITDA margin was 21% versus 13% a year ago excluding.

Excluding contingent commission EBITA margin expanded 12 percentage points over the previous year quarter.

Adjusted EPS was <unk> 11.

Versus six in the year ago period.

Tax expense for the quarter was $2 6 million versus 354000 in the year ago period, with the increase being driven by changes in state deferred taxes and changes in deferred taxes related to management departures.

Going forward, we expect to drive annual margin expansion, excluding contingent commissions for the next several years and continue to scale our operations.

Our expectation is over the medium term. The next three to five years, we can grow premiums in the range of 30% annually and achieve EBITDA margin in the range of 30% over that time period.

Over the long term, we expect a normalized EBITDA margin for this business is north of 40%.

As of December 31, 2022, the company had cash and cash equivalents of $28 7 million we.

We had an unused line of credit of $49 8 million at year end and total outstanding term notes payable balance was $94 4 million at the end of the quarter.

Our guidance for full year 2023 premium and revenue is as follows.

Total written premiums placed for 2023 are expected to be between $2 83 billion and $2 $96 billion, representing organic growth of 28% from the low end and 34% of the Hyatt.

This assumes slower growth in premium pricing in the back half.

No material benefit from our new distribution partnerships or direct to consumer efforts and the continued challenging housing market in 2020.

Total revenues for 2023 are expected to be between $258 million and $267 million, representing organic growth of 23% and the low end of the range of 28% of the Hyatt.

Driven by continued high levels of core revenue growth offset by an assumption are still historically low contingent commission around 40 basis points as a percentage of premium.

The gap between revenue growth and premium growth will be larger in the near term due to our strategic effort to productivity improvement and corporate however, overtime premium will remain the best indicator of future revenue growth.

We expect to grow total EBITDA margin in 2023 with more meaningful growth of margin excluding contingencies.

Our business is continuing to exhibit significant momentum. Despite some short term challenges we are positioned for sustained high levels of profitable growth going forward.

We look forward to continuing to deliver on our goals in 2023 and beyond.

Want to thank everybody for their time and with that let's open the lineup for questions operator.

Thank you.

Now begin the question answer session.

To join the question queue. You May Press Star then one on your telephone keypad you broke your tone acknowledging your request.

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We will pause for a moment as callers join the queue.

And the first question comes from Meyer Shields with K B W.

Go ahead.

Alright.

Alright. Thanks.

Good afternoon, everyone. One I guess Big picture question, you talked I think several of you in your prepared comments talked about a wide range of productivity is that only in the newer recruits are you seeing that.

Variant and productivity.

Long longer tenured agents as well.

I will take the smart Miller.

I would say, it's predominantly in the less than two year agencies, but there have been some in the.

Beyond two years agencies, but mostly newer ones.

Okay, and do you have the ability to sort of identify.

Where some of the longer tenured agents might also be.

Productivity challenges going forward.

I'm not sure I quite understand the question today.

Yes, I think merits Mark Jones I think.

I understand you correctly are we able to identify productivity down to the agency level. So that we can help support those that may be facing productivity challenges. The answer to that is yes, we've got kind of all the data down to the agent agent level, not just agency level cut by.

And line of business and geography.

Every other way that you got it yes.

And we're taking all the steps that we can to continue to drive productivity through the <unk>, we have all kinds of training programs and they continue to go through not just in their first year, but in years, two three and four as they develop their business to make sure that theyre on boarding their hiring and they know what the carrier portfolio looks like in the region today helped.

Maximize their time, so they can drive higher levels of productivity. Some of that is still just working its way through the system like we talked about in Q3, right. We're still churning out some of those underperforming agencies.

We just want to drive more productivity out of fewer agents to maximize profitability.

Okay. That's helpful and if I can follow on one last question I guess is for Mark Junior It sounds like you are still cautious on 2023 contingent commissions.

Despite the.

Rate related tailwind that you're seeing in written premium productivity, hoping you could talk us through that.

Yes, we're continuing to see rate maintain.

<unk> maintained very high levels I still think carriers have a decent amount of work left to do to recover.

Some of the 2000 22020 in 2021 rate give backs.

I think loss ratios have remained very high for a lot of carriers, we're seeing a very hard P&C market right now.

There may be potential for upside in that in 2023, but I don't want to promise something that's outside of my control.

I would rather tell you a number that's 40 basis points and maybe we can outperform.

Okay fantastic. Thank you so much.

The next question comes from Matt <unk> with JMP Securities. Please go ahead.

Hey, Thanks, good afternoon.

<unk>.

And a couple of questions on the first one.

This will be high level I know you can drill down into numbers on it but maybe I'm just looking for more of a gut feel.

You referenced a number of times on the call kind of the housing market headwinds and also in the release on the call kind of the.

The benefit from auto and home rates and kind of expecting those tailwind to persist and so the question is kind of.

You put those two together where do you think you'll land is.

Pricing thats coming through on auto and home a bigger benefit than the housing headwind.

Other way around or just can't tell.

Yes, Matt I would say housing initially when we were still trying to figure out how to get agents.

The pavement more developing more RP relationships and trying to recover that lead flow.

Six or eight months ago, maybe that was a little bit of a different story now we are seeing agents hit all time highs still every month.

Even in a more deteriorated housing environment, and so I really like we've been messaging for the last six or eight months is housing is not impacting us as much as I think the market is expecting it to our agents are still out there being very productive we're seeing huge productivity increases on a year over year basis.

Especially with our corporate agents and we've got the P&C.

P&C pricing tailwind to boot on top of that so my expectation is is when that pricing tailwind starts to slow down we get product.

Better product on the shelf across the nation, and that's going to allow us to drive even higher levels of productivity. So it's kind of two sides of the same coin and I think we're well positioned to win in either environment.

Okay great.

And then just a follow up on.

Some of the partnerships that you mentioned that you've already announced and I think you mentioned there should be some other ones coming.

Just high level.

How do you look at those in terms of how big a contributor they could be to your growth.

Over over several year period look out three to five years.

And just functionally if you.

I figured it out yet kind of how how would that kind of.

How will that work in terms of flow going to the agents and in commissions and things like that if they come back as a referral from one of those partnerships.

Yes, Matt This is Martin lore, I don't really want to go into specifics on how it's going to flow yet because each one of these relationships is different I can talk to you about.

The ones that we've done so far with the mortgage broker associations. So those are two of the largest mortgage broker associated I think they are the two largest mortgage broker association the United States.

<unk> analysis as their exclusive agency partner, it's still early innings, but some really nice wins there. So it's cracking the door open and some large mortgage brokers that we've been trying to get insider for quite a while we had one really good thing.

Austin This last week.

<unk> opened up a whole bunch of referrals.

I am very optimistic about what it can do for the future until we get one of the major partners that we're talking to right now in the boat I don't really want to speculate on how big it could be but I think it is upside it's not built into our models at this point, yes, Matt. These these two that we've just announced a really hardening. Our current go to market strategy that should help drive additional lead flow and cut it.

Maximize agent productivity some of the other ones that we've kind of got in the hopper for mortgage services companies and real estate organizations those could have the potential to be.

Brand new channel of distribution for us outside of what we're doing today. So I think theres very material upside in future partnerships and we just kind of continue to work at those.

Throughout the year.

I will just add I appreciate some of the margin I'll describe that some of the mortgage smart Jones.

The mortgage companies that were.

In discussions with right now.

We're talking to them about not just helping them with kind of inbound deal flow that will go up or down based on what's going on in the housing market, but also their in force block of business that they're servicing. So if you think about it every year that escrow payment come.

Up for review.

And.

When theres a significant increase in an escrow payment because of insurance we can.

We can provide a clean simple solution to them that is completely decoupled from the housing market.

It's just it's it's coupled with the calendar, but not the housing market. So we're pretty excited about that.

Great. That's really helpful color I appreciate all the answers.

Thanks, Matt.

The next question comes from Paul Newsome with Piper Sandler.

Please go ahead.

Good afternoon, thanks for the call.

So just to maybe step back a little bit on the.

Commentary about.

Productivity and continuing to call a little bit.

Mutation for a resumption acceleration.

Thanks, John its growth in the back half of the year should we expect that the revenues should be pretty smooth.

All these things together should also be a little bit more back end loaded because of the continued.

Where should we expected to have some.

Sure.

Now to what we've seen last year or so.

Yes, Paul I would expect probably similar seasonality because when you think about what a franchisee begins to add to revenue when they onboard somebody and they are very heavy new business bias as opposed to having anything in their renewal book were only getting 20% of that but I would point you to the gap between premium guidance in <unk>.

<unk> guidance for the year and so that can help show the difference of how we are transitioning some corporate agents into franchise and where that revenue split. So we're still keeping those policies on the book.

But now we're recording at 20%.

New business revenue as opposed to a 100%.

And then Sanjay.

Feeling I think existing agencies as well as they continue to add producers throughout the summer months.

New business is going to come in in the second half of the year, but again, it's a 20 <unk> on the dollar type deals that you would expect that if all the kind of the normal seasonality, but really starting to take hold in the renewable block in 'twenty four 'twenty five but with our corporate agents, we should see correct.

The kind of recruiting cycle place that we are in the recruiting cycle.

Right now is that we're not going to have a lot of incremental corporate agents really before the start of the third quarter, but once we hit the start of the third quarter, We've got our new college graduate classes coming in and so 100% of that revenue.

As recognized so we should.

That will help us in the back half of the year, yes.

Okay. That's it for me.

Thanks, I appreciate the help.

The next question comes from Andrew Quail, Goldman with Credit Suisse.

Please go ahead.

Hey, good evening.

First question is around the retention ratios so we calculated.

78, 5% for.

Franchise, and I guess prior to Covid it would seem like the low mid eighty's.

During Covid 2021 period, it was like 90% to 92, so could you kind of anticipate getting back to that sort of.

Mid <unk> retention and would that timeframe.

B as soon as the second half of the year.

Yes, Andrew I would say we are we're focused on driving success out of the existing operating agencies, but as well as adding total producers less totally focused on the operating agent to see number more totally focused on the total number of producers out there, but our expectation is the culling of underperforming agents.

These will be largely complete by the end of the second quarter, which is when you would start to see the turnover rate start to slow down.

You might not see the growth rate in operating agencies as high as you would have historically, but that's because we're funneling those resources into the agencies that are producing a disproportionate amount of our new business growth. So that we can work with more scale individual franchises and maximize the total producer count not necessarily the total operating agency count.

So some improvement.

I can say at this stage in the game and more focused on productivity I got you and.

And then and then with respect to kind of the.

I would say kind of reading the press release and you increased terminations of signed franchises that have yet to launch and then I think about this <unk> 180, <unk> franchises that didn't work out, but they only generated 2% to volumes.

Could you talk to quite to this question one.

Was it in the recruiting of these franchises that didn't work.

And what is the solution.

That's going to fix it.

I think I heard that you were saying youre going to you hired more servicing people and so forth, but but very curious as to kind of what went wrong with this group and what exactly is the fix.

I'll take that.

We had this weird.

Market phenomenon.

The COVID-19 pandemic that none of us really knew with certainty how we were going to manage through it recruiting became very easy.

CZ franchise recruiting became very easy, particularly early on in the pandemic because people thought they were going to lose their corporate jobs and they were looking for another way to.

Earn a living as things progress.

They signed up.

But they didn't really commence.

And so we had a bunch of people on our on our books that we hoped would launch.

But their lives changed.

They realize they could go back to their corporate jobs, and so we had a number of them.

That sort of just just didn't materialize so there.

There is a few things that we're doing to make sure.

That doesn't happen again, so one is.

We are increasing.

Increasing our quality thresholds we're letting.

Much fewer many fewer fran potential.

Franchisees through.

We're trying to make sure that we're very comfortable that theyre going to actually be able to build on agency.

We have changed compensation for both the recruiting team and the team that manages those franchises so that they're sharing in the success.

The new business Thats being generated by those new franchises that tends to sort of focus everyone on what we need them to do but importantly.

We're really kind of doubling down on investing where it is going to really move the needle and that is.

Helping.

Scale agencies that are in the at.

At this stage of their maturation, where that's possible and we.

We indicated that we have that dedicated recruiting group in corporate each agent that we add to a successful franchisee.

<unk> been generating about one seven times, the new business of an entire new franchise. So.

Getting a lot of leverage out of that the other lever that we're pulling there is opening the aperture for corporate agents to convert into franchisees and that is really.

That's recruiting on steroids, because those guys have been gen.

<unk> generated so far the ones that we've opened this year have been generating six times, the new business that and other the average new new franchise with so you think about it.

The impact of us recruiting into agencies the impact of US doing just the planned corporate conversions this year could get us the impact of in the ballpark and the ZIP code of another 500 launches.

And we are being just like I said much more careful about where we can.

Louis let through so there is basically there is that's a long.

Answer to a short question, but it's there's a bunch of levers that we're pulling.

Excellent answer Thats very helpful and maybe just one last quick one.

In terms of who you're recruiting into the franchises.

Are they predominantly coming from these.

Exclusive agent channels or are you getting people that are not necessarily insurance producers at the time.

This morning, I'll answer that question I would say probably at least 75% of them come from our captive sort of environment, where they were in insurance agents, where they weren't independent agent at one point in time, it's one of the things. We look forward. When you were asking how do we quantify these people thats one of the qualifications that we look.

At his prior insurance experience, but not exclusively we've got some excellent agents that never sold insurance before when they entered our model. So it's both but more heavily weighted towards people that have sold insurance before.

Very helpful. Thanks, a lot.

And the next question comes from Mike Zaremski Guillermo go.

All ahead.

Hey, good evening.

Hoping you could help.

To help unpack.

Yes.

The margin expansion guide for full year 'twenty three over 'twenty, two maybe it'd be helpful. If you could offer any color on what kind of drove some of the margin.

Gains in <unk> and <unk>, maybe that's some of the momentum we should be thinking about it.

Into 'twenty three because it sounds like contingents isn't.

It isn't a big driver based on on the commentary that maybe there's some upside there.

Anything a lot of positive momentum you guys have kind of given color about on the call anything specifically you'd want us to think through.

Yes, so productivity, especially with corporate agents drives a significant amount of earnings.

You have an agent that's producing below what we would expect from a breakeven perspective that it makes it really challenging to drive really high margins and what we've seen in Q4 of 24% increase in corporate agent productivity. That's very helpful for driving margin expansion and the other thing is our renewal book is performing extremely well at 88% client reach.

Tension layer that on top of P&C pricing I think we should take credit for where we are in the value chain.

To the tune of 100% premium retention.

Renewal business is far more profitable than new business. So that was also very helpful from a margin perspective and on top of that we've got a lot of cultural shifting.

It really creates smarter and tighter controls and the way we're investing capital. So people are making better decisions from an expense perspective today than we have.

In the past.

Okay. Thank you very much.

The next question comes from Mark Dwelle with RBC capital markets. Please go ahead.

Yes, good evening.

Just building on that last quarter.

<unk> related to the margin guidance.

Just to be clear the baseline guidance, we're starting with is 18%.

Adjusted EBITDA margin that you achieved for for 'twenty two that's the baseline.

You will grow off of that base.

Correct.

Okay and then in some of your comments you suggested getting to sort of 30%.

EBITDA margin over say, a three to five year timeframe.

Would it be right to assume any linearity between the 18 that were at now and.

30 in say five years that would be two or three points a year.

Is it going to be more.

Yes.

Non linear than that.

Yes, Theres puts and takes in any given year contingencies can swing that number relatively wildly, but if you normalize for all of that that would not be an unreasonable assumption.

Relatively linear fashion.

Our contingency year in excess of historical average could make that happen faster a contingency year. That's below what we've seen this year could cause that to slow but in general we're expecting to scale, our G&A and our compensation expense on core revenue growth.

Okay. Thanks.

And then on that topic of contingencies, if im doing my math right.

Mid point of your premium guide range that would be contingent for.

For the year and the $11 $5 million range again kind of just at the midpoint using 40 basis points is that right.

And am I thinking about that the right way.

Yes, you've got that ballpark about right.

Got it.

And then the other question.

One other quick two other questions. One question can you just talk through again.

Indicated some.

Increases that impacted the tax rate in the quarter and I couldnt write that fast so could you talk to any of those real quick again.

Yes, so some some noncash deferred tax asset changes related to management.

<unk> as well as a couple of effects state effective tax rate changes.

Impact of deferred just a flip from deferred to current.

So I.

That would explain it without having to have that tax degree.

So the sort of the management departures part that would be hopefully unlikely to be a recurring component.

The other part would be presumably somewhat ongoing.

Right.

Got it.

And then the last question that I had.

This apropos of all of the things that have already been previously discussed about.

How you plan to.

Kind of.

Repositioning your franchise.

In take rate and so forth.

Would it be right then to assume that the initial franchise fee component of revenue.

That would also probably see a lower growth rate than it has in the past.

Potentially be a little bit more backend loaded this year relative to <unk>.

The more linear than it has tended to be or is my over interpreting map.

No I think thats about right I mean really what's what's driving that level of increase in this year with some of the increased call innovation sees because from a GAAP perspective, you fast forward the franchise fee revenue to the extent you have cash when you terminated agency. So there's no cash flow impact.

But theres just regular P&L impact.

By the time, we get through the second quarter of that termination rate should slow down which would then cause that franchise fee revenue piece to slow down from a growth perspective put it also the offset of that is you should not see as much bad debt expense to be flowing through from.

Pulling up the signed but yet to launch franchises, where we're getting relatively close to being done with that pipeline as well. So you may see franchise fee revenue not growing as quickly but in reality that is just a cost recovery mechanism. That's not what we're trying to do to drive long term profitability of the business, we're focused on adding new business and retaining the existing clients.

And then the other side of that as Youll see bad debts slowed down in the second half of the year as well.

Yeah.

Understood. Thank you very much.

The next question comes from Pablo <unk> with JP Morgan.

Please go ahead.

Hi, Thank you most of my questions have been asked already but I just wanted to I guess follow up on comments you can give on the corporate side, because you sort of discuss the changes youre, making on the franchising side, but.

Maybe talk through changes that youre going to make in the corporate <unk>.

Regards to maybe recruiting or even compensation or how to think about what you're doing differently now versus what you did the past couple of years.

Sure Hey, Pablo this is Brian for Colo. So as you know we had been seeing kind of a lower productivity and corporate sales. So we took aggressive action this past quarter to really get that turned around so to your point. The first thing is we had to raise the bar on recruiting and make sure that we're slowing down hiring.

To make sure we have just absolutely top quality talent coming into the team and then we managed out bottom performers and really those things combined.

Combined really shifted the culture to create a culture of excellence, where does mediocrity isn't tolerated.

Led to significant productivity gains that we saw in December and January but.

Most importantly, the fact that we were able to produce more new premium in Q4 with significantly fewer agents. So thats a much more profitable business and really just a stronger foundation to grow on in the future that I think now we have stronger absorption capacity, because we're plugging in new agent to a highly successful highly productive team.

Have a great culture that is ready to win so it's across the board, it's changing recruiting managing out.

Forming agent.

Moving to the quarter.

Just getting back to a point, where we're seeing productivity, where we want to be.

And Pablo just to piggyback off of that for the future of corporate sales, we should be looking at this as a awesome feeder program into very successful franchisees that we know we're going to grow in scale.

It's not necessarily like we want to hold onto a corporate sales agent for 10 years, we want them to turn into a business owner and multiply themselves and create an army of producers underneath them.

Understood. It sounds like you didn't change much in the compensation side and the corporate channel.

We made a couple of little tweaks.

Changing to manual things to monthly type thing.

So no than wholesale.

Understood and then last one for me just a quick numbers question.

Revenue retention above 100, I might have misheard, but do you expect that to persist.

In the first half of 'twenty three are through most of 'twenty three.

Pablo I didn't quite get your cash question could you repeat.

Yes, the revenue retention overall, Henry right, so basically renewal premiums being.

More than <unk> growth last year.

Like for like because of pricing you expect that positive comp to persist through most of 'twenty. Three are just through the first half right because you do.

Bumping against that yet.

We expect premium rate to continue to be a tailwind through at least the second quarter. There is a potential that that could continue through the back half of the year I am not counting on that our guidance doesn't include continue acceleration to the back half of the year.

But it will really depend on how successful the carriers are on generating underwriting profitability.

Understood. Thank you.

The next question comes from Ryan Todd.

MS Research please.

Callahan.

Hey, thanks.

Yeah.

Yes, just I guess listening to.

I guess two issues are sort of the disparity of productivity in the franchise channel some of that in the corporate channel as well and you.

Corporate agents selling.

I guess, just like looking at the results surprising a little bit to me that.

It's difficult to really see that much of a <unk>.

Negative impact from a new business standpoint.

And.

I guess for whatever reason, what youre describing it.

Seem to me like maybe a key renewal royalty fees down quite a bit more than they actually are so I'm just wondering.

Are there headwinds associated with just from a new business perspective that we should expect to see in the coming quarters and we haven't yet.

So we talked about in the prepared remarks that a 2023 youre going to see that premium growth gradually decline as the lower new business for 2022 converts to lower new business and lower renewals in 2023.

But we plan on pivoting that new business growth back to accelerating now by the second half of 2023, as we add producers into existing agencies that we've talked about a one seven times as productive as a new agency as we launch corporate agents into franchises that are six access productive is a new agency. So theres a lot of levers we're pulling to.

Jews productivity and get the new business are growing again faster, but we had to take all of those actions in 2022 to make sure that we can maximize profitability and get a foundation.

To drive productivity and the right culture and the entire organization.

Got it.

And then.

I guess just.

I mean, it's pretty interesting that you're finding that you are actually more productive with so many fewer corporate agents.

And yet it still sounds like there's a strategy to continue to accelerate growth later on in the year.

I guess.

Are you rethinking that.

Why is that the solution rather than try to figure out what the right size of the business should be in and continue to I guess right sizing. The cost base has continued to grow at a decent clip.

Yeah.

So we're going to grow corporate sales, but not indefinitely and forever to an infinite number.

We have the productivity now to where it can sustain growth at a reasonable and responsible level and we would be foolish to not take advantage of that and we're creating a pipeline of future highly successful franchisees as well as creating a pipeline of talent that can manage.

Things like initial partnership.

<unk> lead flow, we don't have a force of well trained and highly talented corporate agents. Some of the economics on partnerships, maybe a little bit more challenging and so it's important that we have is this W. Two workforce that we know we have high quality and we have good control of that we can move.

Move around so corporate is not just a source of new business policies, it's a great lead flow and to the rest of the organization as well.

Thank you.

With that I would now like to turn the conference back over to Mark Jones for any closing remarks.

Just wanted to thank everyone for your participation and good night.

Okay.

Today's conference call.

Connect your lines. Thank you.

Okay.

Paul.

Yes.

[music].

Hum.

Yeah.

[music].

Thank you for standing by this is the conference operator, welcome to the Goose had insurance fourth quarter of 2022 earnings Conference call.

As a reminder, all participants are in listen only mode and the conference is being recorded.

After the presentation, there will be an opportunity to ask a question.

To join the question queue you May Press Star then one on your telephone keypad.

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I would now like to turn the conference over to Dan Farrell VP capital markets.

Please go ahead.

Thank you and good afternoon before we begin our formal remarks I need to remind everyone that part of our discussion. Today may include forward looking statements, which are based on the expectations estimates and projections of management as of today forward looking statements in our discussion are subject to various assumptions risks uncertainties and other factors.

Got to predict and which could cause the 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.

We refer all of you to our recent SEC filings for more detailed discussion of the risks and uncertainties that could impact future operating results and financial condition of <unk> insurance, we disclaim any intentions or obligations to update or revise any forward looking statements except to the extent required by applicable law.

I'd also like to point out that during this call we will discuss certain financial measures that are not prepared in accordance with GAAP.

<unk> amortization and certain other items that we believe are not representative of our core business.

You said insurance dot com with that I'd like to turn the call over to our CEO Mark Jones.

Thanks, Dan and welcome everyone to our fourth quarter and 2022 earnings call.

I will provide an overview of the key strategic accomplishments from 2022, and how they help position us for our next phase of top and bottom line growth.

CLO Mark Miller will then take you through some greater detail around driving operational excellence across the organization.