Goosehead Insurance Inc Q1 2023 Earnings Call

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Speaker 2: Welcome to the goods head insurance first quarter 2023 earnings call.

Speaker 2: As a reminder, all participants are in listen-only mode and the conference is being recorded.

Speaker 2: After the presentation, there will be an opportunity to ask questions.

Speaker 2: To join the question queue, you may press star then 1 on your telephone keypad.

Speaker 2: If children need assistance during the conference call, you may signal an operator by pressing star and zero.

Speaker 2: I would now like to turn the conference over to Dan Farrow, VP Capital Markets. Please go ahead.

Speaker 3: 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 that are difficult to predict and which could cause a

Speaker 3: 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 FCC filings for more detailed discussion of the risks and uncertainties that could impact future operating results and financial condition of goosehead insurance.

Speaker 3: We disclaim any intentions or obligations to update or revise any forward-looking statements except to the extent required by applicable law. I would 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.

Speaker 3: We consider these non-GAAP financial measures to be useful metrics for management and investors to facilitate operating performance comparisons from period to period by excluding potential differences caused by variations in capital structure, tax position, depreciation, amortization, and certain other items that we believe are not representative of our core business.

Speaker 3: For more information regarding the use of non-GAAP financial measures, including reconciliations of these measures to the most recent comparable GAAP financial measures, we refer you to today's earning release.

Speaker 3: In addition, this call is being webcast. An archived version will be available shortly after the call ends on the investor relations portions of the company's website at goosehead.com. With that, I'd like to turn the call over to our Chairman and CEO , Mark Jones.

Speaker 4: Thanks, Den, and welcome to everyone on the call.

Speaker 4: to upgrade much of the senior and middle leadership teams, and manage the business in a smarter, more sophisticated and scalable way. I'm really proud of how well our team is working together with singular focus on winning and creating value.

Speaker 4: We delivered an exceptional first quarter of 2023 with strong top and bottom line growth.

Speaker 4: Total revenue increased 40% compared to the prior year quarter. Core revenue grew 42%. And premium, the best indicator of future revenue growth, increased 41% during the quarter.

Speaker 4: Our adjusted EBITDA margin expanded approximately 1,500 basis points.

Speaker 4: While we expect to see some continued headwind in the housing market, we have more than overcome this with better, more focused execution, taking advantage of industry turbulence to gain market share.

Speaker 4: Additionally, premium pricing will likely remain a tailwind for us throughout most of 2023 as carriers take rate to try and restore their underwriting profitability.

Speaker 4: We are very fortunate to have chosen a business with stable demand across virtually all economic backdrops.

Speaker 4: If you live somewhere or drive something, you need the product we sell.

Speaker 4: We've been thoughtful in where we play in the value chain of our industry.

Speaker 4: In the segment, we believe has the greatest potential for consistent, strong economics, and we operate among a competitor set that cannot adequately meet the needs of insurance buyers due to lack of one or more critical elements. Product choice, industry leading technology, and knowledgeable and professional sales and service agents.

Speaker 4: In addition to being in the right place in the value chain, our results are the product of a number of very deliberate decisions.

Speaker 4: Our clear focus on upgrading our human capital to the team needed to profitably scale our business as we transition into large corporations.

Speaker 4: relentless, disciplined execution against our strategy.

Speaker 4: proactive management to take advantage of economic turbulence.

Speaker 4: For example, our ongoing efforts to gain share have allowed us to grow lead flow by 55% despite the housing market slowdown of more than 20% over the last year.

Speaker 4: We're being much more strategic about utilizing and optimizing company resources and doing more with less. A great example is this of this in the current quarter was in corporate sales where we grew new business premium by 3% year over year. Well at the same time we're rationalizing headcount by 40.

Speaker 4: innovation, teamwork, exceptionalism, and an integrity in delivering for our clients' needs.

Speaker 4: All of this is enabling us to drive strong top and bottom line growth with expanding margins. We continue to see a strong rebound in performance in corporate sales.

Speaker 4: Q1 New Business Productivity per agent was up 55% from the same period last year with new business productivity for agents.

Speaker 4: with us less than one year up 88%.

Speaker 4: strong high quality classes that will be joining us in June and throughout the rest of the summer and early fall.

Speaker 4: The quality threshold is very high with only about 5% of people interviewing with us receiving an offer.

Speaker 4: and our close rates on offers have more than doubled.

Speaker 4: Our value proposition to campus hires is truly extraordinary with a key clear path to becoming a business owner as a goose head franchisee with very significant wealth creation opportunities after what is essentially a pay to apprenticeship at corporate.

Speaker 4: We expect this to drive strong and high quality growth over time in the development of seasoned agents eligible to become franchise owners.

Speaker 4: The retooling of our franchise business to focus on quality agencies is progressing.

Speaker 4: We continue to rationalize the base to remove unproductive franchisees that consume resources but don't contribute meaningfully to revenue or follow our model.

Speaker 4: We anticipate the turnover to peak by the end of Q2 and for franchise turn to begin to normalize again at that point.

Speaker 4: Franchise Recruiting has been reorganized to focus tightly on an ideal candidate profile. In specific geographies, we believe represent the most attractive opportunities for us, leveraging sophisticated digital marketing campaigns with a leaner, more cost effective and productive sales force. We're focusing our investment of our intellectual capital to support...

Speaker 4: so as our partners.

Speaker 4: A key area of support we're providing is the system with recruiting producers for franchisees. This began in the third quarter of last year when we placed five producers.

Speaker 4: ramped up to 11 producers in Q4, 18 in Q1 of this year and we anticipate placing at least 40 producers with franchisees in the second quarter of this year and roughly 150 to 200 for the year.

Speaker 4: Historically, each of these producers have been generating equivalent revenue to launching 1.7 new agencies.

Speaker 4: producers that have started this year tracking above historical productivity closer to what we expect from corporate account executives.

Speaker 4: We continue to execute on our plan to convert at least 30 corporate sales agents into franchisees this year. We launched seven in Q1 and continue to see very strong demand from top producing corporate agents.

Speaker 4: One of these agents to recently launch a franchise is Jessica McNally, a former corporate sales manager.

Speaker 4: Jessica launched in January and is personally producing over $20,000 a month in new commissions.

Speaker 4: She's already hired two producers.

Speaker 4: who completed training in March and were among the most productive agents in their training class.

Speaker 4: Remember that franchisees who convert from corporate perform like they are in steroids and are approximately six times as productive as an average new franchise. In Jessica's case, it's more like adding eight to ten new agencies.

Speaker 4: Over time, we plan to ramp up the number of corporate conversions.

Speaker 4: We anticipate they will drive a large portion of our growth in the franchise business.

Speaker 4: anticipate they will drive a large portion of work growth in the franchise business, which we expect to be highly profitable.

Speaker 4: Mark Miller will discuss our digital marketing and technology progress in more detail, but just to share a couple of highlights.

Speaker 4: We have added significant talent, the team is now executing with much higher velocity and quality.

Speaker 4: Quote to issue remains the top priority and we're tracking.

Speaker 4: to our plan to have several major carriers fully operable on QTI this year.

Speaker 4: Tech improvements to Aviator, our proprietary comparative rating application, has driven strong productivity gains with both higher close rates and package rates, which we also expect to help strengthen retention.

Speaker 4: We are pleased with the results of our digital marketing efforts, which are now producing a substantial volume of high-quality cost-effective leads.

Speaker 4: And we're excited to further leverage these capabilities later this year to take full advantage of our emerging QTI capability.

Speaker 4: Finally, it is with mixed emotions that we announce that Ryan Langston, our longtime chief legal officer, will be transitioning out of his full-time role with BUSED to become president of N5B Capital, my family's investment arm.

Speaker 4: Ryan has been with us since 2014 and has played a major role in our development as first a private and then a public company and has able to serve as our corporate secretary. We are very grateful for his service and we are pleased that he will continue to support you said in an advisory role to the board.

Speaker 4: We added John O'Connor, our general counsel, about a year ago. He's been working closely with Ryan in all facets of our legal department.

Speaker 4: John is a 10-year veteran of Wavavachal and extremely well-qualified prepared to take over our legal team and become corporate secretary.

Speaker 4: Overall, we're very happy with our starts in 2023 and what we expect to be a strong year for profitable growth for you said. I'd like to thank our incredible team for their efforts and turn the time over to Mark Miller.

Speaker 5: Thanks Mark and good afternoon everyone.

Speaker 5: Last quarter I outlined our strategic priorities for 2023, which included improving overall corporate and franchise new business productivity.

Speaker 5: upgrading and recruiting and talent development for both corporate and franchise distribution.

Speaker 5: Investing in our service function to protect our profitable renewal base.

Speaker 5: expanding digital marketing efforts to drive cross-selling and other referral business and improving our technology platform to support core business growth and expanding distribution through partnerships.

Speaker 5: I'm very pleased with the progress we've made around these strategic priorities and I'm excited about the positive energy these initiatives are generating across the organization.

Speaker 5: Currently, a significant portion of my time is focused on recruiting and building a high performing franchise business.

Speaker 5: We believe thoughtful expansion of our franchise business represents one of the greatest opportunities to create outsized returns as we build high-quality scale franchises in every city in America.

Speaker 5: We've done a good job attracting many talented and successful franchise owners over the years.

Speaker 5: Today, many of these owners have thriving businesses with strong revenue and profitability growth.

Speaker 5: However, going forward, we are adjusting our recruiting approach to improve the long-term health of the entire franchise community.

Speaker 5: For the next phase of our franchise evolution, we have resized, refocused, and restructured our franchise development team and aligned it with our marketing and franchise operations.

Speaker 5: Together, their goal is to target the right type of franchise owners and the right geographies.

Speaker 5: We're recruiting prospective owners with the passion and perseverance to build long-term growth assets.

Speaker 5: We're also directing franchise launches toward areas with favorable product and demographic characteristics.

Speaker 5: Today, five states account for roughly 65% of our franchise revenue.

Speaker 5: And we have a huge untapped potential in many states where Goosehead currently has low penetration such as Arizona, Colorado, Georgia, Minnesota, North and South Carolina, Utah and Washington state just to name a few.

While we have highly successful existing franchises in states like California, Florida, New York, and Texas, we have been slowing launches and these geographies' current product access challenges have made it difficult for new franchises to thrive.

We believe that over time market forces will self-correct and these geographies will once again represent excellent opportunities for franchise ownership.

I see a point in the future where we could have up to 50 or more mega franchises across the US with many producers in each one and thousands of smaller growing franchises.

The large part of this expansion strategy will be driven by our dedicated recruiting efforts for franchises.

additional business operations training and support, and the increasing launch of corporate agents into franchises that have demonstrated the ability to ramp new businesses and scale at accelerated paces.

During the quarter we launched 83 new franchises and cold 109 underperforming franchises that were not following our model.

Importantly, these underperforming franchises only accounted for about 1% of new business.

We're also seeing early signs of improvement from this quality of a quantity approach.

Our first quarter franchise launches are pacing 33% better on new business production than franchises launched in the first quarter a year ago.

While all of these efforts are slowing operating franchise growth from historical levels, I'm confident that this will be more than offset over time by higher productivity and higher franchise success rates. Today, our top corporate and franchise agents generate similar levels of productivity.

However, our average franchise agents with greater than one year of tenure are roughly 40% less productive than equivalent corporate agents.

We will strive to meet closely close that gap over time.

Turning to other areas in the business, on the corporate side of the business we're seeing the highest agent productivity levels in recent company history.

Total corporate agent productivity in Q1 increased 55% year-over-year.

For agents less than one year, we are seeing 88% year over your growth.

These exceptional levels of productivity are allowing us to generate 95% of last year's production with 44% less head count and helping fuel a rapid margin expansion.

We've seen a pronounced cultural shift in corporate sales over the past several months that gives us confidence to adding significant number of high-quality college graduates back to the business this summer.

Overall, I couldn't be more pleased with the rapid transformation of the corporate sales function and the trajectory of this team for the rest of the year.

When I joined a year ago, our service agents were delivering high quality experiences for clients as evidenced by our industry leading net promoter scores.

but we've fallen behind on headcount and are called wait times and reach unacceptable levels.

Today, I'm pleased to report that our average service call wait times are down 70% from the peak in the middle of 2022.

Now we're beginning to optimize the cost structure through ongoing technology initiatives and increased outsourcing on non-client facing service functions. One of our most significant differentiators continues to be our technological advantage. During the quarter we added 15 engineers to our technology team significantly increasing our output capabilities.

The cornerstone of this advantage is our proprietary aviator platform.

which drive significant productivity improvements for our agents. While QTI remains our most notable technology investment in the first quarter, we delivered a number of additional enhancements to Aviator, which are driving increased bind and package rates.

We continue to relentlessly focus on the agent interface to provide efficient tools that allow our agents to deliver the best client experience in the industry.

In the second quarter, we expect to fully integrate a large language artificial intelligence chatbot with Aviator.

We believe this integration will allow our agents to rapidly access vast amounts of insurance-related information and quickly answer client questions.

In future quarters, we anticipate expanding this integration to our digital agent so that our clients can access to the same resource.

On QTI, we remain confident that we will have a number of meaningful carriers with quote-to-issue capabilities this year.

The momentum in our partnership organization is building rapidly.

and our business development pipeline continues to grow. Earlier this week, we announced the strategic partnership with Vivint Smart Home, a leading smart home security company with 1.9 million customers.

This partnership demonstrates how Gooseheds geographic reach, innovative technology, and choice model differentiators from the competitors, and allow our partners to embed adjacent high-value ad services into their existing go-to-market motions.

We believe this partnership will further simplify the process of protecting and securing homes for clients, and help to reduce claims and losses for the benefit of both clients and carrier partners. We continue to be in various stages of discussions with several potential partners across a variety of industries.

I'm extremely excited about the potential of our partnerships with Vivint and our other continued technology and partnership progress.

Our digital cross-selling efforts are also driving revenue lift and we expect further benefit as we leverage our new quote-to-issue capabilities.

Cross-sold new business to digital marketing's up double digit sequentially and quickly becoming a powerful level lever for new business consistency and lead diversification.

We also know this cross-selling motion is also a critical initiative in lifting client retention rates as adding an additional line of business increases customer attention by several years.

I'm extremely happy with the operational improvements we have achieved over the past year.

I'm even more excited about the improvements to come that we believe will allow us to drive significant and sustained revenue and earnings growth as we become a larger company in the personal lines universe. With that, let me turn it over to Mark Jones Jr. Thanks, Mark, and hello to everyone on the call. We are very pleased to be seeing continued improvement in productivity and earnings power.

This includes franchise premiums of $491 million, up 44%, and corporate premiums of $147 million, up 33% from a year ago.

We are operating in a segment of the value chain that is naturally hedged, which creates strong and consistent results and insulates us from the challenges that carriers or captive agencies face.

Pricing in the first aligns market continues to accelerate as we saw premium retention in the first quarter of 102% versus 100% in the fourth quarter and 94% a year ago compared to our strong client retention of 88%.

As carriers recover their underwriting profitability through premium increases, we should see premium retention trend back towards client retention.

However, as pricing stabilizes, more carrier product becomes available in the most challenging markets, which we believe will further power growth and contingent commissions should return to historical averages.

Our policies in force at quarter-end was 1.4 million, up 23% from a year ago, as our actions to improve productivity have a near-term impact on TIF growth.

We would expect some slowing of the PIF growth rate in the second quarter, but we expect that the growth rate will stabilize and begin to re-accelerate as we move to the back half of the year.

Total revenue for the quarter was $58 million and increased a 40% compared to the prior year period.

This includes core revenue of $52 million, up 42% in the quarter, driven by high level decline retention, increasing productivity, and pre-PNC pricing momentum.

Contingent commissions in the quarter were $1.9 million compared to $1.8 million a year ago. We continue to expect contingent commissions to be about 40 basis points of premium for the full year, with the majority hitting in the third and fourth quarter as carrier profitability challenges persist and prevent significant contingency growth. We are continuing to improve the quality of our operating franchise force.

We expect churren to remain high in the second quarter before beginning to trend down gradually towards our historical levels of 10 to 15%.

Importantly, this turn of underperforming franchises remains a de minimis piece of new business generated at about 1%.

Operating franchise count at quarter end was 1,387 as our polling actions for quality are impacting the overall unit growth.

We could see some further near-terms slowing in the growth rate of operating franchises due to expected calling efforts in the second quarter and higher recruiting standards.

However, we believe total franchise producer growth and increasing productivity will more than offset this over time. Our total franchise producer count at quarter end was 2,098, up 10% from 1,912 a year ago and down slightly from the 2,101 a year end.

Our expectation is for growth in the total franchise producers to accelerate, particularly in the back half of the year, as our franchise recruiting team places producers with our most successful agencies, more corporate conversions launch and begin hiring, and our calling of underperforming franchises normal.

We are beginning to see some new business productivity improvement from the actions of our franchise development force.

However, this is being partially offset by the challenging product environments which are slowing growth in a number of our larger franchise states, including Florida, California, Louisiana, and New York.

We expect pricing actions by underwriters will gradually improve in the operating environment in these states and improve product availability for our agents.

Turning to our corporate distribution, we are extremely pleased with the production we are generating with significantly fewer agents.

Our corporate headcount at the end of the quarter was 276, down 44% from a year ago, and also down from the 320 a year end. The sequential decline in corporate headcount was partially due to the seasonality of hiring, which is negligible in the first quarter but ramps in the second and third quarter during the on-campus recruiting season. We believe the improvements we have made to management, culture, and productivity are the most important.

While the addition of new agents may temporarily impact the less than one year agent productivity, we will be closely monitoring new agents' success rates to ensure they are meeting our high standards.

We believe there is significant room for further expansion in the greater than one year age of productivity over time as we continue to invest in our Aviator platform, execute successful marketing campaigns, and enter into strategic partnerships to add incremental lead flow. Moving to our expenses.

We performed well in the quarter as we continue to balance expense discipline with reinvestment study to try to youth grow.

Total expenses excluding equity-based compensation were 47.8 million and increase of 19% from a year ago. Compensation and benefits increased 18% as we invest in top level talent in our partnership, technology, marketing and service functions, partially offset by headcount declines and corporate sales. Other GNA expense of 15.9 million was up 17% for the quarter.

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Adjusted EBITDA in the quarter was $10.2 million, up from $1.3 million in the year-ago period. Adjusted EBITDA margin improved approximately 1,500 basis points to 18%. While we expect margin improvement for the remainder of the year, we do not expect it at the pace of the first quarter given the timing of expenses through the year and seasonality of quarterly earnings.

As of March 31st, 2023, we had $24.6 million of cash and cash equivalence. We had an unused line of credit of $49.8 million and total outstanding term notes payable balance of $93.1 million.

We are raising our guidance for the full year 2023 as follows. Total written premiums placed for 2023 are expected to be between 2.85 billion and 2.98 billion, representing organic growth 29% in the low end of the range to 35% on the high end of the range.

Total revenues for 2023 are expected to be between 260 million and 267 million representing organic growth at 24% on the low end of the range and 28% on the high end of the range.

We expect full-year adjusted EBITDA margin to expand over the full year 2022.

We believe that our strong and disciplined execution of our strategy positions us well for the remainder of the year and beyond.

I want to thank our team for all of their dedicated efforts and making use of one of the most amazing personal lines growth companies in the industry. With that, let's open the line up for questions. Operator?

Certainly, we will now begin the question and answer session.

If you enjoyed the question, if you may press star then one on your telephone keypad. You'll hear tone and knowledge in your request. If you're using a speaker phone, please pick up your handset if you're pressing any keys.

So we draw your questions please press start then to.

We'll pause for a moment as colors join the queue. The first question comes from Matt Karletti from D-D-M-P.

as colors join the queue. The first question comes from Matt Karletti from D.J.M.P.

Thanks. Good afternoon. Hey Matt, this is a couple. Hey how are you? Maybe I'll start with, you know, obviously you touched a bit on the VIVA partnership that was just announced. But it's hoping you could go back to the couple of Louis, potentially bigger partnerships, mortgage-related partnerships.

and now it's in January and maybe just give us an update. I know it's early days still in terms of implementation, but with...

You know three going on for months of look back just kind of what kind of where we stand Maybe what the reception's been you know amongst amongst the agents Just any color you can provide now that we have a few more months of look back Let's say those first couple early. I mean some some good signs and we definitely bought it

a few days of it so far and it's only a partial sample but it's been tremendous the uplift so I feel great about about that one.

I would think that the thing, though, just from the standpoint is, you know, we've seen a big slowdown in housing market activity and yet we've been able to generate the leads that we need to drive strong growth and it's hard to draw a straight mathematical line between...

the credibility that these mortgage partnerships give us and the willingness of people to work with us, but that certainly would be one tertiary benefit.

Now, it just opens doors for us in general. As our agents go out and call on these referral partners, it gives us credibility that's hard to measure directly, like you get from the Vivint relationship where it's a direct lead flow that you can measure.

That makes sense. I'll stick it on Vivint for a moment. I think I caught in the press release that part of it is you'll be acquiring their agency or plan to. How big is that existing book of business? Is it anything we need to think about in terms of thinking about as we model or is it small enough that it's...

not material. Yeah, Matt, I would say it's a creative to us, sure, but it's really not the biggest piece of the partnership. I think most important is lead flow back and forth and helping clients get the most value out of both their home alarm system as well as their insurance policy. We really took on that to help service the clients.

There will be more information about that in the future. Great. If I could speak in another one, a similar update question. You spoke in the past about as you build out the digital agent, your efforts to get more carriers working on a direct buying basis. Can you give us an update where that stands and what progress has been made?

Yeah, this is smart Miller. I think we've made a ton of progress. Remember a quarter ago, maybe it was two quarters ago, we talked about Justin Rickets joining the team. He came in and looked at the way we had architected it up to this point and we decided there was easier, better ways to...

If you think about going forward, how do we add more carriers at a more rapid pace? And we redesigned the platform so that the carriers could plug into it more easily. And so we wouldn't have to recode every time. We're making great progress. We've got a list of about 10 carriers that are in different levels of activation at this point.

Our pipeline right now looks like towards the August timeframe we would start adding more carriers on, and it's pretty heavy all through the rest of the fall into the end of the year.

And there will be some significant carriers in there between now and the end of the year. But we're a bit dependent upon the carriers at this point, so we've built out everything we need to do on our side of the platform. Now it's availability of resources on the carrier side.

Thanks for the color and congrats on a very nice art theater.

Thank you, Matt. Thanks, Matt. The next question comes from Mark Hughes.

Thank you, Bob. X-Men. The next question comes from Mark Hughes from Trost.

Certainly in places like California where carrier product is really not available if you're a new agent trying to launch there. I think that has a significant headwind for growth, specifically with franchisees. That's why we're being more targeted with where we are placing agencies with our recruiting efforts.

So I also think of that yields in a future growth as the product market opens back up and premium rates start to normalize and carriers get profitability back. And that's the kind of beautiful thing about our business. Like we said in our prepare remarks, it is very naturally hedge. So as soon as premium rates start to stabilize.

and carriers are making money again. The environments where we're seeing the most challenges will become extremely favorable, and we will be the best partner for any carrier out there. A question on the renewal royalty fee.

pretty steady sequentially between the fourth quarter and the first quarter. Historically you've had a step up between Q4 and Q1. You've got a very strong pricing that is helping you out. What's the other thing in that number? Again, taking the progression from Q4 to Q1.

that it was unique or different this quarter.

No, I mean we have strong client retention again at 88%. You're seeing the impact of the calling efforts to make sure we've got the right quality of agencies in there. So it's a new business generation in the previous year, the growth rate that over the previous year, so 2021, 2022 over 2021.

that shows up in renewal royalty fees this year. So there's nothing of note in there. Yeah. And when you call those agents that.

You still retain those that renewal book is that correct? Yeah, sometimes they'll sell it to another franchisee. And if there's not a buyer out there that they hit to our corporate book, yeah.

retain those that renewal book is that correct? Yeah, sometimes they'll sell it to another franchisee. And if there's not a buyer out there that hits to our corporate book, yeah. OK, great. Thank you.

The next question comes from Michael Zierunski from BMO. Please go ahead. Okay, thanks. Really digging into some of the positive dynamics that you talked about.

in terms of the, well, I guess maybe not to think about positively, but like the calling of some of the agents and also the franchisees converting from corporates are on steroids in terms of productivity. Just curious if some of these actions or is there any things you want to call...

just thinking about the dynamics and the margin improvement as future quarters come on.

Yes, I would say we've had nice margin expansion the last four quarters in a row. We expect to continue to improve and have margin expansion on a quarterly basis, probably not at the same rate that we had in Q1. That was a pretty substantial step function increase, and there's several reasons for that.

One of the main drivers is improving productivity, actually generating profitability on new business, where if you're in the insurance industry, you really don't make a lot of money on new business, all in the renewals. But also expense discipline, and that's not something that changes year over year. And if you look at some of the expenses we had in Q1 of 2022, we did a better job of managing those and finding more efficient uses of resources in Q1 of 2023.

and we're going to continue to hold agencies to a very high standard so you shouldn't see

the behavior of margin changing dramatically between 2023, 2024 and beyond.

That's helpful. I guess going back just to follow up on to make sure, because you told, when your prepare remarks, you did make a number of comments about reduced product access, you know, but in regard to Mark Hughes' question, you talked about kind of there's a natural hedge too, because you're getting a tailwind from I think from...

from pricing, rates being high. Net net is the hard market for auto and to Luster's home. Is that a net benefit still, even though you're having some product access challenges, or is it kind of a wash?

It's probably a wash. It prevents us from adding as many policies onto the books as we possibly can. But then you do get the raise from the entire book of business. And then on the other side of the point, you're not getting as much contingency revenue, which is 100% profit. That's part of the strategic advantage of being where we are in the value chain.

But we certainly look forward to a time period where there is better product availability in some of the most populous states. And so we can have a lot more agents that are being extremely successful and hyper growth. Mike, this is Dan. One other thing too, in a lot of these states that have product challenges and we still have franchises and agents that are very successful. It's just sometimes harder.

Maybe lastly, Mark Miller talked about you can envision a day with 50 and more mega franchises. How many mega franchises are there today? Would you be able to shed light on what internally you view the EBITDA margin to be on those mega franchises? So we've got I think our largest agency.

The margin on somebody like a mega agency is outstanding, and it's a great relationship for both parties. We're 50-50 partners in the long term on the renewal book, so I think that could have a very meaningful impact to the future trajectory of both the top line and bottom line growth.

Thank you. Next question comes from Mark Duell from RBC Capital Markets. Please go ahead.

Yeah, good afternoon. Mark Jones, I think in one of your comments, I think you had suggested that there'd be slower pif growth in the second quarter. I guess the first question is why do you think that and what's going to make it be better in the second half?

Yeah, so we've talked about before, kind of the reduction in corporate sales, headcount does cause some slowdown in the total amount of production, and the productivity out of that group has been outstanding. So credit to the team, they're doing a fantastic job. But the year over year comparisons.

get a little bit easier in the back half of the year. We have called out a large number of franchises in the last, you know, six to eight months. We expect that to begin to normalize. They're still working to do in Q2, but we expect that to begin to normalize in the back half of the year. And as we add more producers into agencies and spend on more corporate agents, then they begin hiring, you know.

We expect PIF growth will bottom out in the second or third quarter and then begin to reaccelerate after that.

I would just add one thing. I mean, I think we mentioned it in the prepared remarks, but the college class that we're adding that will start in June and then every summer month is fairly large. Once those get burned in and ramped up, we'll see productivity coming from those again. So we're not quite at the low for the corporate headcount, but pretty close to it.

to deliver that is going to be more dependent upon productivity improvement or more dependent upon just maintaining a strict expense control. I realize it's obviously going to be a little bit above, but as you envision it, which of those levers is the more vital one in delivering?

productivity is, the better the profitability is. But in reality, keeping the clients on the books for as long as we possibly can and delivering an outstanding service like our team does every day is really the differentiator in what's gonna drive long-term margin. Maintaining expense discipline is obviously critical and we're seeing good benefits from that so far in 2023 and I would expect that to continue. But far and away the biggest factor is retention.

Thanks for that. I think those are all my questions.

Okay, thanks for that. I think there's all my questions. Okay.

The next question comes from Layershoots from KBW. Please go ahead.

Great, thanks. I know we're sort of talking about the same issue of fifth growth going forward. But I'm a little unclear about whether these are issues stemming from internal changes or, well, I should say, and or carriers that are just less interested in growth.

because of profitability pressures. And I was hoping you could clarify that for me. Can you repeat the question? We, you cut out. Look up a little bit, sorry.

I'm sorry, no, it's my phone I think. I'm just trying to understand, you talked about slowing tip growth and it sounds like a lot of that is in the states where you've got a significant presence and I'm trying to sort of disentangle how much of it is just looking for better growth opportunities because the market has fewer do said agents, how much of it is carriers in these states just less.

welcoming of policy count growth. Yeah, it's certainly both of those things, but in reality, we are not saturated in any market that we're in. Houston, for example, is our deepest market that we have agents in and there is extremely productive agencies and corporate agents in the city of Houston.

system under strong and good management that has discipline controls over productivity will also have a very meaningful impact. We should be naturally seeing productivity improvement as we continue to accumulate experience every year.

Mayor, I would point out that the product challenges with carriers are different in different regions.

We have a lot of agents in California that have been there for a while and they have a good product portfolio. What we don't have the ability to do because...

of the political environment in California is none of the carriers are able to get much in the way of much needed rate. So they're not adding new appointments for new agencies. So what we've done is we've just said, okay, well, if we can launch...

So we're just trying to be smarter. In most markets, I would say other than California, there is a top priority for U.S. consumers to haveHA...

There is some sanity for the regulators and you know they will always go through the sort of

hard cycle, soft cycle, and you know, adjust rates accordingly. California is just a very complicated.

If it's not in an optimal product situation now, it will get there. So what we're really trying to do with our franchise recruiting efforts is really focus on where we can put people that will maximize their probability of success.

in an optimal product situation now, it will get there. And so what we're really trying to do with our franchise recruiting efforts is really focus on where we can put people that will maximize their probability of success. Okay, that's tremendously helpful.

I think Mark Jones Jr. had also commented on, I just want to jump a little bit more into the timing of, let's say, the corporate headcount bottoming and piscount bottoming, because it sounds like those are close to simultaneous. Is that accurate? Is it the same thing in terms of whenever you've got any headwind from franchise selling?

Yeah, we should be onboarding a significant amount of corporate agents during the second half of Q2 and in Q3 over the summer as kind of college campus recruiting hires start. And that is a contributing factor to the PIF growth bottoming out in the middle of the year. So yes. Okay, perfect. We have just to give you a.

to get an offer. So we're being highly selective.

We're almost going back to the old date. We're using a model that is the one that built the business successfully in the first place.

I'm not able to do this myself anymore, but it wasn't that many years ago when Robin and I Robin or I interviewed every single person that was going to be starting with us. So now, you know, Brian Patillo that runs

corporate sales. I think you, Brian , you interview almost everybody that ends up getting an offer. The standards are really, really high. So we're really bullish on...

the group that's starting this summer. Okay, fantastic. Thank you very much for the color.

Once again, if you have another question, please press star then one on your telephone keypad.

The next question comes from Pablo Singdon from JP Morgan. Please go ahead.

Hi, thank you for squeezing me in. So the first question I had was just on compensation at stock comp. It's been roughly flat at about 30, 31 million for the past three quarters. And obviously it's an effect of the various things you're doing, but I was wondering, would it be reasonable to assume that SIR stays at that level, I guess, until the second half where maybe you ramp up a bit on corporate hiring? you

Yeah, I would expect to see huge swings in compensation expense. Obviously, we need to continue to add people into the service function. They scale really nicely into the revenue bar. We will be adding as we've talked about significant amount of corporate sales agents.

A lot of the back office scales very, very well, so we don't really need to add a ton of headcount. I wouldn't be expecting to see massive increases in employee content benefits. You will see some of the normal onboarding and hiring as we go throughout the year, but nothing crazy.

Okay. And then just as a follow-up to that, the equity comp line, which is 6.6 this quarter, I guess, you know, for the rest of the year, it would be reasonable to assume that it stays at that level, right, until sort of the next reload? Is that the correct way to think about that? Yeah. So, we do our annual option awards in January . And so, there are a number of

One last question for me is a little broader. So just thinking about your comments and building up the mega franchises. Is there a certain size of franchise where the current economic arrangement you have in the mid-50s, 50s, 50s becomes less attractive for these bigger partners? And so is that source? Yeah, you're not anywhere near there yet, right? But at some point is that source something that might come up as a...

manage a service organization, to manage the finance and accounting when you have an independent agency. It's very complex.

Those are very, very different things than hiring and managing salespeople. And we have had.

no pressure from anyone, all of our largest agencies, they're the people that we work the closest with. And there's a lot of intangible value that they get, a lot of which is we work with them and consult with them on how to build a huge agency because we've done it.

And so there's a lot of value there. We feel like the economic arrangement is fair and that's not something that is front and center ever weak.

We agree at the beginning and that's it. That's the arrangement.

We agree at the beginning and that's it. That's the arrangement. Understood Mark, thank you so much.

Next question comes from Paul Newsome from Piper Sunler. Please go ahead. Good afternoon. Thanks for the call. A couple, maybe one or two follow-up questions. There's been lots of

buzz around the investment community that Progressive and maybe a few others have yanked back their marketing costs very recently And fairly significantly particularly in the digital area I Guess my question you guys are you seeing that and there's something like that have an impact on your business either positive or negative

We're not seeing any impact from that. Presumably there's some serve secondary impact from all the things they do for the intended agents I was supposed but I don't know if it's either way. All is a bribe for Tillo and I can just say that yeah as a corporate agent I think the Forgive me.

And then completely separately, just wanted to see if there was any updates thoughts on

So the balance sheet and capital management you're obviously producing a little bit more actually a lot more even dot and does that you know

There's a plan there to use it just for pure investment in the business or you thinking about changing the debt structure or anything like that

perspective. Yeah, we've talked about being comfortable at kind of the four terms level of debt as a ceiling. I wouldn't expect to see anything in 2023 related to leverage or comfortable investing in the business with excess cash flow today and paying down debt to the extent that makes sense to kind of reduce interest expense given the interest rate environment. Well, whatever. I'll say he sits at one of the highest finances in his slice of debt. I'll say he sits at one of the highest finances in his slice of debt.

Yeah. Well, I mean, we'll look at it. We'll look at it once, once kind of the economy is more stable and there's less uncertainty in the general economy, and also interest rates come down, then we'll look at our debt situation, but we're not about to to

add any additional data at this point. It's not that we're strapped. It's just that there's no need to take unnecessary risk. Well, appreciate the help as always. Thanks, Peter Kaul. Appreciate it. Thanks, Paul.

Please conclude the question and answer session. I would like to turn the conference back over to Mark Jones, CEO for any closing remarks. Just like to thank everybody for their participation on the call and let you know that we're going to be working very hard for.

all of our shareholders. Thanks.

Thank you for participating and have a pleasant day.

You got a dog and a dog