BRP Group Inc. Q1 2023 Earnings Call

Greetings and welcome to the ERP Group, Inc. First quarter 2022 earnings call.

At this time, all participants are in listen only mode.

A brief question and answer session will follow the formal presentation.

If anyone should require operator assistance during the conference. Please press Star then zero on your telephone keypad.

As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host plenty Bishop Executive director of Investor Relations. Please go ahead maam.

Thank you operator welcome to the B R. P. Group's first quarter of 2023 earnings call. Today's call is being recorded first 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 dotcom.

Please note that remarks made today may include forward looking statements are subject 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.

To our most recent Form 10-Q, both of which are available on the ERP 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 release and supplemental information both of which have been posted on the company's website.

And I, our dot Baldwin risk partners dotcom.

Also I would like to remind everyone that effective January one 2023 and as reflected in our reporting for the quarter. The ERP now operates with three segments versus before we have reported on historically as our legacy Medicare segment was merged into mainstream insurance.

Solutions. Additionally, our legacy metal market segment has been rebranded to insurance Advisory solutions and our legacy specialty segment has been rebranded to underwriting capacity and technology solutions I will now turn the call over to Trevor Baldwin Chief Executive Officer of ERP Group.

Thanks, Bonnie and good afternoon, everyone and thank you for joining our first quarter earnings call I will start with a few remarks, followed by Brad Who'll address select financial and business highlights from the quarter, then Brad Chris and I will answer questions.

We had a strong start to the year highlighted by organic growth of 23% building on 16% organic growth in the first quarter of 2022, and representing the highest first quarter organic growth since our IPO driven by outstanding performance across our business.

We achieved total revenue growth of 36% year over year showcasing the continued strong client demand for our advice and solutions across the platform.

Adjusted EBITDA was $79 million in line with our expectations.

Market.

Through the end of April which represents their first full year with PRP Westwood generated approximately 112 million of annualized gross revenue up 36% from the 82 million run rate that we underwrote at the time of the closing last year.

You're one of the Westwood partnership has been a significant success and is a testament to the strength of the franchise Allen and his team are built we believe the Westwood team has a very bright future ahead.

Over the past three years, we've invested heavily in building capabilities that will power longterm organic growth and free cash flow generation. These.

These investments included the addition of many talented colleagues and a significant technology build out to position us for a more digital and tech enabled future to.

To frame the significance of the scale of these investments we more than doubled the size of our colleague base over the past two years, adding approximately 1000 net new colleagues per year.

As I share during our call in February .

We have concluded this major reinvestment cycle in our business and shortly will have fully absorbed the run rate payroll from prior year headcount growth.

While we're just beginning to see the benefits of these investments in our organic growth. We expect to begin seeing these investments, earning into our margin and earnings profile. This year and believe that the structural advantages. These investments have enabled will yield sustainable revenue growth and operational efficiency.

Over the long term to.

To give you a sense for the more normalised rate of growth and head count necessary to sustain our top line growth momentum through the first four months of 2023, we added a net total of approximately 40, new colleagues, which represents the rate that we believe is sufficient to support our current <unk>.

Top line growth trajectory for the next 18 to 24 months.

Additionally, we continue to remain opportunistic with respect to the M&A marketplace, but reaffirm that we did not currently expect to execute any material partnerships in 2000 twenty-three as we remain committed to deleveraging and continue to expect the market to soften over the balance of 2023.

A trend we are starting to see.

Price transparency takes time and it is our current belief that if we were patient we will see a better environment into which we can put shareholder capital to work.

In summary, we once again delivered high organic growth a direct result of the value our colleagues continued to deliver clients day in and day out.

Despite stress in certain areas of the insurance marketplace or diversified and resilient business model continues to allow us to exit cute for all our stakeholders I'd like to thank our clients for the trust and confidence in our colleagues for tirelessly driving the positive client outcomes that result.

All in our strong performance with that Brad will detail our financial results.

Thanks, Trevor and good afternoon, everyone for the first quarter, we generated revenue growth of 36% to $330 million, we generated organic growth in the first quarter of 23% with all three reporting segments generating double digit organic growth in the quarter.

In Q1, we paid down the revolver by $20 million looking through the balance of the year. We expect the combination of our organic growth and continued free cash flow generation will reduce leverage to four and a half times or less back within our stated longterm range.

We recorded a gap net loss for the first quarter of $25.9 million or 24 cents per fully diluted share.

Adjusted net income for the first quarter of 2023, which exclude sure based compensation amortization and other one time expenses was $49.2 million or 42 cents per fully diluted share.

A table reconciling GAAP net loss to adjusted net income can be found in our earnings release, and our 10-Q filed with the SEC.

Adjusted EBITDA for the first quarter rose, 8% to $79 million compared to $73 million in the prior year period ajar.

Adjusted EBITDA margin was 24% for the quarter compared to 30% in the prior year period.

This margin decline was due to the change of season Ality in our business and recognizing a significant proportion of the approximately $46 million of incremental annualized payroll expense from prior year head count growth that had not yet been fully absorbed.

The changes in seasonality are primarily due to the Westwood partnership as well as large partnerships closed in the fourth quarter of 2021 that have resulted in adjusted EBITDA margin that is now approximately six points lower than Q1 in which we expect to be higher for the remaining quarters, resulting in full year margin expansion.

For the full year 2023, we now expect organic growth in the mid teens higher than our previous guidance of the high end of 10% to 15% and which based on the performance we're seeing across our business year to date includes an expectation for mid teens organic growth in queue to.

Additionally, we now expect full year revenue of 1.16 billion to 1.19 billion higher than the previously stated range of 114 billion to $1.17 billion <unk>.

And we are raising our adjusted EBITDA expectations to $255 million to $265 million.

From $250 million to 260 million stated previously.

For the second quarter of 2023, we expect adjusted EBITDA to be between 55% to 60 million and adjusted EPS of 27 to 29 per share.

These expectations reflect strong growth despite our anticipation of a continued challenging macro backdrop, which includes the potential for ongoing dislocation in the banking system and potential for pull back and credit from impacted institutions as well as higher interest rates relative to recent years.

Despite these headwinds we delivered record first quarter of 2023 results, which reinforce our confidence that the investments of the last few years, we will drive operating leverage revenue growth and durable cash flow for years to come we will now take questions operator.

Thank you Sir.

He will not be conducting a question and answer session.

He would like to ask a question. Please press time in one on your telephone keypad.

A confirmation tongue.

<unk> you are in the Christian Q <unk>.

Participant using CK equipment, it may be necessary to pick up your handset before pressing the stocky.

<unk>, if you would like to move your question.

Again, if you would like to ask a question. Please press star and then one now.

As far as Christian.

May a shield from T. B W. Please go ahead.

Great. Thank you.

If I could start you talked about expectations of continued softening and I was hoping you could push that out a little bit.

Because while some of that seems to be manifesting in let's say do you know.

They're also sort of widespread expectations of a re accelerated hard market and properties I was looking at the breakdown, what you're seeing right now in that context.

Yeah. He may have good evening. So the softening was a comment specific to pricing and the M&A marketplace relatives to evaluation and so what I would say about that is that a while headline multiple as being paid have not really come down meaningfully.

What we have seen is that pro forma EBIT margin that deals or transacting off of his compressed approximately 300 basis points based on the data that we've seen and so while not a headline multiple compression. It does you know that that is a reduction in price.

I think to your your point on insurance pricing.

I'd say, there's there's some limited pockets of softening public piano, you know workers compensation, but broadly speaking I'd say the.

The property insurance market places the most challenging are professionals who've seen in their career and you know insurance lines generally speaking.

All seeing positive pricing pressure.

Okay, I completely misunderstood what you'd <unk>, thanks for the clarification.

Okay. I was hoping you could help a little bit about the potential for market share gains because of the complexity of the property market.

The concept a lot and I was hoping that you could.

Talking about what's actually going on in the marketplace.

Yeah, that's a great question mayor and this is exactly the type of market.

That we really do exceptionally well and complexity and challenges in the market. They lend themselves to the benefit of larger more sophisticated platforms and so the depth and breadth of our talent.

Make a bigger difference today than they would in a more benign market and that's showing tune our results I mean, obviously, the headline Oh G. A 23% up meaningfully year over year from the prior quarter, you know, but as I breakdown the underlying components of that organic growth it becomes an even better story.

And so as we've talked about in the past, we really view there to be kind of four drivers organic growth and from my perspective, the first and the most important is new business, how <unk>, how many new clients did you win what's the market share your taking and when you look at the building blocks of organic growth of 23.4% $21.

Four of that twenty-three came from winning new clients. So the vast majority of organic growth is being driven by net new client logos and that's up from 16.4% in the prior year period other than that the persistence. He continues to be strong and in line with you over a year you know the.

The impact from growth and contingent is relatively nominal and the impact from right and exposure was plus 4.1% up nominally from 4.1% in the prior year period. So I think it's a good story and speaks to you know this is the type of market, where we can really take care.

Alright that was phenomenal. Thank you so much.

Thanks <unk>.

The next question, we have is how many creams that sound around Chicago. Please go ahead.

<unk> good afternoon, My first question so.

You mentioned you guys hired 40, new colleagues disappoint you gloss over the next 18 to 24 months. So does that mean that you don't expect incremental hiring from here cause you kind of comment meant to imply that you frontloaded. The hiring you know given the calls that you see in front of you.

Yeah. So let me parse through that Elise. So what I chaired is through April we've hired net 40 colleagues into the business and that is a good run rate expectation of the ongoing higher in need of the business in order to support the continued high level of organic growth and the con.

Fast as that is you know we're not hiring the net 1000 plus colleagues a year that we have been for the past two and a half years and so you know as you know we went through a three year period of significant reinvestment program and the talent and technology <unk>.

Building the platform for the future and so our platform is built our infrastructure is ready we've been building the solutions to product sets the capabilities and the intelligent automations throughout our go to market and business processes, and we're ready to scale effectively and efficiently from here.

That's helpful and then you buy <unk>.

18, gigantic little patterns for the second quarter can you give us a sense of you know what.

Let somebody calls on my thigh qualified for your you know three seconds.

Yeah, I mean, we're we're not gonna we don't provide guidance segment level at least but what I would tell you that you know what's implicit in the guide has continued you know high level performance across all three of our segments.

Right into that guide is the expectation of a continued challenging macro backdrop, I think everybody's aware of the dynamics relative to the banking industry credit capacity, drawing app interest rates, having moved 500 basis points over the course of the past year.

And you know, there's none impacts and there's some unknown impact largely our clients are still performing well there's pockets of softness.

And a couple of industry sectors, but all that is built into that the expectations. We have for the balance of the year and you know I think that just speaks to the remarkable resiliency of this industry and then more specifically how well positioned our platform is to take chair and continue to add value for our clients.

And you guys mentioned you pay down by 20 million in the corner I think you guys, Brad usually will give us like a sentence, you know where interest rate interest expansion trend at current rates.

Do you have a Samsung did you wanted to kind of set expectations there.

Yeah. So there's been obviously, a slight pick up and in the right environment since our last call. So now we would project net cash interest expense of approximately $105 million to $110 million at the current base rates.

Thank you.

Just a reminder, if you would like to ask a question can you fix dot and then won the.

The next question you can get Ya Adam <unk> from William Plan. Please go ahead.

Thanks, and sorry to keep you mentioned earlier, but.

Yeah, No Adam happy too so as I mentioned earlier in the call through April Westwood generated approximately 112 million of of gross revenue.

About 37% from what we underwrote when we closed on that transaction you know a year ago. So nothing I mean, just absolutely exceptional performance from Alan and the team there.

More specifically to how's that business performing today and how do we expect it to continue to perform over the balance of the year and the short answer is we feel really good about how we're positioned in their ability to continue to deliver double digit growth for the balance of the year as we look at kind of you know the dynamics.

And play there Wow, new home closings are down slightly are new policies sold his up mid single digits largely as a result of an increase in our attachment right to the new homes that are being sold through our fire build their partners.

As well as new premium new business premium, which is up in the mid single digits. You know for for that same reason as well as right that's being taken in the book. So you know we feel well positioned based on what we're seeing from a lead flow standpoint, you know we would expect the business to continue to perform.

<unk> very strong through the balance of the year. So I I think again it just speaks to the resilience of our industry. The Westwood platform more specifically in the value. They are able to add a point of transaction, which is you know <unk>.

Represented in the increased attachment rates were saying to this new home sold.

<unk> and you mentioned you know raised obviously <unk> homeowners.

I think you mentioned.

Is that a nice Helen on the renewal broken even just a ballpark how much is that you know is it helping on the <unk>.

Chris Chris premium rates on renewable.

Yeah, there's no doubt it's half it's helping Adam so.

We're seeing policy level persistence C. In the mid to high eighties, and then we're saying kind of low teens rate impact on the book and when you put that in a blender premium attention on a renewal books hovering around 100 per cent.

Great. That's a great time uhm switched over the margin for a second and I know, there's a lot of seasonal variations so sort of total at all.

We expect him back of course any way you can give us direction on which quarters. We can expect to be stronger over the next couple of quarters are margin standpoint.

Yeah. It's Brad you know will continue to give a total EBITDA guide and each of the subsequent quarters similar to what we did on this call I would just say largely we do expect margin expansion on the full year and to cover up the the degradation.

And we saw because of the seasonality in Q1.

Okay, Okay sorry.

Sorry. This is a real real I guess small question, but and net income of EBITDA <unk>. Other other add back of 12 million. Other and then someone last last cruise 14 million, what what sort of items are going in there.

Are you referencing the combination of transaction related and other Adam.

It's it's the item that's 12 by 12.3 million this quarter.

So I have other add back and adjusted EBITDA $7.3 million.

<unk> yeah yeah.

And EBITDA, Yeah, I think I think I've got but yeah, yeah, I think that that's the same one got it too much yeah. What's captured there is one time costs. We continue to work on advanced theater strategy. We've got some outside temporary help them there as well as some recruiting fees on some significant hires we made.

Throughout Q1, as well as some one time legal fees and other one time cost.

Okay. Okay. That's that's helpful and then as far as cashing crashed first quarters in the industry. It's always it's always more challenging for cashless, though that makes sense. So I guess.

[noise] related questions do you think castle is gonna be start turning positive in the next couple of quarters.

Yeah I just wanted to direct you to page three of our supplement and walk through the free cashflow calculation a little bit. So yeah. You mentioned the first quarter's always a little challenging we've got you know bonus payouts from prior year in a dish.

<unk>, we recognize large a R for our employee benefits renewals that occur in Q1, but the associated a P doesn't show up because a lotta times those are directly bill by the carrier. So you do get a bit of a timing impact Q1, and as you said you see that across our competitors.

If you look and that's one of the reasons, we calculated adjusted free cash flow and you can see the adjusted is down about 70% year over year that that's really entirely interest driven and you can see we we added a calculation this quarter just to show the impact of cash interest in our business you can see if you if you back out out where.

Actually up about 17%. So you know we are from a business standpoint, seeing expanded cashflow, but as I mentioned there are some timing differences there in Q1.

And then again your network for exact guidance, but.

Should that should that begin turn around you know second third quarter you think.

We we do expect for the full year two to be generating as we said previously between 100 $120 million of free operating cash flow.

Okay. Okay, and then next question related but.

You know first quarters weeks are always looks looks a little more if this portion, but you know caches cash and cash equivalents, if I'm right around 80 81 million [noise], what's the minimum that you would like to operate with as far as cash and cash equivalents.

Yeah, So our minimum would be about 60 million that we could operate with comfortably.

Okay. Okay.

<unk>, well I'll, just ask but I'm, assuming well I'll I'll I'll ask are you expecting that come up as cash flow turns positive or are you looking for looking out outside sources.

No I mean, we'll manage working capital and utilize that free cash flow to the extent, we can to to pay down the revolver and reduce our interest expense will be opportunistic about that yeah, I'm looking forever I think the point to take their as we can run super officially from a working capital standpoint, and so our intent is to continue to.

Sweep access free cashflow onto the revolver to reduce outstanding debt and that can you know we can come in and out of that working capital line as needed.

Sure. Okay. That's that's super helpful. Thanks, guys.

Thanks, Adam.

The next question, we have those kind of <unk> J P. Morgan. Please go ahead.

Hi, Thanks. So first question for Trevor I, just wanted to follow up on your comment about hiring I was hoping you could flesh off the leverage implicit in with the smaller today, you know I presume compensation to subtract Avenue in Brooklyn for one and I was hoping you could provide more context at that point and I guess more broadly do you expect leverage and the.

<unk>. Thanks.

Yeah. The the short answer Pablo's, we do expect leverage in both the cartoon Opex line and you know as we've talked about we kind of at the conclusion of a three year reinvestment cycle that was significant as we built out the talent base in the technology infrastructure to propel us forward in our vision of delay.

<unk> double digit organic growth and significant free cash flow and earnings leverage and we are you know in the beginning early days of kind of earning in that significant reinvestment, which you know will earn in over approximately three years and we expect to see meaningful.

Now margin accretion and productivity enhancement as we continue to grow the business onto that platform that we built.

Okay and then the second question is for bread just to fall, but Adams question about I guess other expenses right. So other expenses and and many expenses or integration expensive.

Should we assume that persist through 2023, and if you have a you and how much those expenses would be.

Yes. So if if you look we are meaningfully down from Q4, but the Q1 amount I think is a good expectation of the run rate.

Four 2023 in terms of both integration and other type one time expenses.

Okay No problem and then the last time, I calmed down pretty pretty meaningfully next year, that's largely tied to the.

You know the the transition of Westwood out of the T V platform.

Yep understood.

And then the last question for me I guess for Brad.

How much cash or not do you expect to pay out in 2023. Thank you.

Yeah. So the the pure kasher now that we'd expect to pay in 2023 would be somewhere between 45 and $50 million.

Got it thank you.

Thanks, Bob.

Thank you.

Just a reminder, if you would like to ask a question <unk> and then one now.

The next question, we have is from Josh Shinko. Some bank of America. Please go ahead.

Yeah. Thank you I'm Gonna try Adams options again I'll. Just you know you guys have better information than I do is the seasonality playing out the exact way you thought.

Thought it would in terms of adjusted operating margins at the beginning of the year I got it wrong, but you guys probably got it right. It is everything going according to plan.

Yes. It is.

And so we can look at the one Q twenty-three seasonality and.

<unk> moved at 421 Q24.

Everything about how it's gonna it's role in the in the play out about you earn the expenses and the and the revenues.

Yes.

And and and given that and and the the lateness of the margin Q1is that because expenses are heavier westwood or expenses are heavy and revenues are lighter than the rest of the year.

It is both.

It's both okay.

And so and is there any I.

I guess everything forward, which quarter do you expect to have the highest I guess just emergency in the ear.

Yeah, Josh we're not gonna provide quarter by quarter of guidance, yet is Brad shared will continue to share an EBITDA and growth expectation for the following quarter on each call.

Okay I've I've tried my best Thank you [laughter].

Thank you.

Last question, we have is from with a new Malcolm UBS. Please go ahead.

Hi, Thank you I was hoping you spend on the growth that you saw in specialty this quarter I'm not sure if you're giving organics specifically for M. G a or other lines, but maybe could you break out how much of the business is currently renters today versus you know from other lines of business I think at your Investor Day, you said the umbrella.

Helen residential was around $300 million premium any updates there would be great. Thank you.

Yeah, Hey, listen.

So what I would tell you is I mean renters is you know a certainly represents a minority of the premium and revenue that we're generating and the M. G. A.

And you know, while it's still continuing to grow exceptionally well. The good news is some of the recent products with brought online or growing even faster, which is you know really proving out our strategy of building that conveyor belt of new products that we can be launching.

Launching each and every year to continue to drive a growth factory as we build more and more proprietary products. So I would expect renters to continue to become you know a smaller proportion of the overall premium we place and the revenue we generate but continue to be a meaningful and important source of of <unk>.

And and value in the M J overall.

Great and then on your comment the 21 per cent of the organic was from winning new clients does that pretty broad based by segment or is it a specialized one segment or any geographic focus.

No. That's that's pretty broad base. So if you look at kind of new business, you know and its contribution to O G. As a relative kind of proportion that's fairly consistent across the segments. So.

That's that's really the story of how we drive the outsize organic growth. We do is we take market share and we just we win more new business then or appears to.

Got it and I I know Medicare is within the broader mainstreet segment, now, but with one Q being having the active enrollment season can you just give an update on the success of that business.

They had a good you know a real solid annual enrollment period, and we continue to expect a strong results out of that part of the main street solution segment.

Great. Thank you.

Thank you Sir.

There are no further questions at this time.

No I'd like to <unk> the travel bullet for closing comments. Please go ahead Sir.

I'd like to thank everyone for joining us on the call. This evening I want to thank our 4000 colleagues to their commitment their hard work and dedication of Bolton was partners I look forward to speaking with all of your next quarter.

Thank you Sir.

That's gonna come to today's conference. Thank you for joining US give me now disconnect your lines [music].