Q2 2023 BRP Group Inc Earnings Call

Okay.

Greetings and welcome to B R. P group incorporated second quarter 2023 earnings call. At this time, all participants are in a listen.

Only mode.

If anyone should need operator assistance during the conference. Please press star zero on your telephone keypad. Please note. This conference is being recorded I will now turn the conference over to Bonnie Bishop Executive Director of Investor Relations. Thank you you may begin.

Thank you operator welcome to the B R. P. Group's second quarter 2023 earnings call. Today's call is being recorded second quarter financial results supplemental information and Form 10-Q were issued earlier. This afternoon and are available on the company's website at IR Doc Baldwin risk partners Dot Com. 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 earning release and to our most recent Form 10-Q.

Both of which are available on the B R. P website.

During the call today. The company May also discuss certain non-GAAP financial measures for a more detailed discussion of these non-GAAP financial measures and historical reconciliation to the most closely comparable GAAP measures. Please refer to the company's earnings release and supplemental information both of which have been posted on the <unk>.

<unk> web site at IR Dot Baldwin risk partners dotcom.

I will now turn the call over to Trevor Baldwin Chief Executive Officer of V. R. P grip.

Good afternoon, and thank you for joining our second quarter earnings call I'm joined this afternoon by Brad Hale, Our Chief Financial Officer, Chris We back our Chief strategy Officer, and Bonnie Bishop Executive director of Investor Relations.

<unk> had an excellent second quarter with broad based strength on both the top and bottom lines across our segments. The power of our colleague and client franchise continues to show through in our results with organic revenue growth of 22% on the back of a difficult prior year comp of two.

4% driving adjusted EBITDA growth of 45% to $61 6 million and representing a year over year margin increase of approximately 240 basis points towards 21%.

Total revenue grew 28% and adjusted earnings per share of 27 cents was up 17% in the face of an approximate $13 million or 101% year over year increase in our cash interest expense in the quarter.

Insurance Advisory solutions achieved strong organic growth of 15% continuing to benefit from outsized new business wins and rate and exposure tailwind in certain areas new.

New business revenue wins increased 28% and net new business revenue wins increased 50% for the quarter compared to the prior year.

In June and July we officially launched and announced three new centers of excellence and private equity venture capital and government contracting. These centers of excellence are built around insurance experts with deep experience in their field their talent and expertise can be tap across the entire.

European platform to provide specialized and differentiated solutions to our clients, we expect specialization to be a key and growing component of our sustained organic growth.

Underwriting capacity and technology solutions grew 36% organically with the MGA of the future platform again, performing exceptionally well up 45% with broad based strength across the business and building underlying momentum that should accrue to continued outperformance.

On a go forward basis, and renters growth was robust we had our largest day ever for new business policies in June which was already surpassed again in July and our pipeline of new distribution partners remains incredibly strong and homeowners our builder program with <unk>.

Continues to outpace expectations and the non builder portfolio had its largest quarter ever with net written premium up 40% versus the first quarter and over five that's what we generated in the second quarter of 2022.

Our commercial umbrella business also saw strong growth in the quarter as it continues to benefit from strong new business renewal and rate trends.

On the new product front, we successfully secured capacity for our new high net worth focus homeowners program, which launched last week.

And we also anticipate launching a new commercial habitation all property product by the end of the third quarter.

Main Street insurance solutions delivered organic growth of 20% driven.

Driven by continued strong performance at Westwood, our personal insurance platform embedded with many of the top homebuilders in the U S, which has grown revenue rapidly since joining <unk> last April on the back of durable new business trends higher attachment rates to new homes sold and favorable rates.

Dynamics.

Overall, our business continues to perform exceptionally well with broad based top line strength and growing margin accretion trends that should accelerate in the coming quarters as we fully lap. The previously concluded three year talent and technology reinvestment cycle.

Like to spend a minute focusing specifically on our investments in talent, we more than doubled our number of colleagues in 2021 and 2022, adding approximately 1000 net new colleagues per year by the end of the third quarter of this year, we will have largely absorbed the incremental run rate.

Payroll expense from last year's hiring growth and as these newer colleagues are ramping on our platform. Their contributions are now beginning to show up in new business wins.

We have now settled into a more normalized hiring pattern as evidenced by our higher and through July adding fewer than 100, net new colleagues year to date compared to more than 600 net new colleagues in the prior year period.

We expect our normalized hiring pace growing contributions from colleagues on boarded in the past two years and the completion of our three year cycle of infrastructure investments will deliver significant operating leverage and greater scalability for our platform and will begin to contribute materially.

Two accelerating margin accretion over the next few quarters and into the first half of 'twenty 'twenty four.

Lastly, I'm pleased to welcome southeast move to Chris <unk> to our board of directors.

His extensive experience in digital and technology transformation of ally financial where he serves as chief information data and digital officer will add tremendous value to be ERP southeast chairs, our newly created technology and cyber risk Committee.

I also want to thank Phil Casey, who recently retired from the board for his contributions to <unk> ERP as a board member and as Audit Committee chair since our IPO.

We are grateful for Phil's guidance counsel and dedication of the ERP group and our shareholders.

I am incredibly proud of the continued strength of results our colleagues have delivered for our stakeholders the grit and perseverance our colleagues exhibit day in and day out has enabled outstanding results for our clients during a time of real challenge in pockets of the insurance Mark.

Place I want to thank our clients for their continued trust and confidence the rate at which our clients continue to honor us with their renewals and the rate at which new clients choose to hire PRP over our competitors is the number one indication that the talent technology.

And platform, we have invested in building over the past few years is enabling sustained outlier results with that I will turn it over to Brad who will detail our financial results.

Thanks, Trevor and good afternoon, everyone for the second quarter, we generated revenue growth of 28% to $297 million as Trevor mentioned, we generated organic growth in the quarter of 22% with all three reporting segments generating organic growth of 15% or higher in the quarter.

In Q2, we paid down our revolver by $15 million as we continue to generate cash flow from operations and manage working capital to combat rising interest rates, we made more progress in de levering the business and still expected organic growth and free cash flow generation will reduce our net leverage to approximately four and a half times.

By year end 2023 within our stated long term target range.

We recorded a GAAP net loss for the second quarter of $43 7 million or <unk> 40 per fully diluted share.

Adjusted net income for the second quarter of 2023, which excludes share based compensation amortization and other one time expenses was 32 million or <unk> 27 per fully diluted share.

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 second quarter rose, 45% to $61 6 million compared to $42 5 million in the prior year period.

Adjusted EBITDA margin was 21% for the quarter compared to 18% in the prior year period.

This margin expansion can be attributed to our organic growth offset by absorbing the rollover impact of 2022, new hires we made significant investments in 2022 that we are now one quarter away from largely absorbing therefore, our continued organic growth will be more accretive to margin in the back half of 2023 and then.

Into 2024.

For the full year 2023, we now expect organic growth in the high teens based on the performance, we're seeing across our business year to date, which includes an expectation for mid teens organic growth in Q3.

Additionally, we now expect full year revenue of 1.18 billion to $1 2 billion higher than the range of 1.1 dollars 6 billion to 1.19 billion as we stated on the first quarter call.

Finally, we are reaffirming our adjusted EBITDA expectation to between 255 million to $265 million and for the third quarter of 2023, we expect adjusted EBITDA to be between <unk> $62 million to $66 million and adjusted EPS of <unk> 27 to 29 per share.

We will now take questions operator.

Thank you Andy we'd like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue ebay Press star two if he would like to remove your question from the queue.

For participants using speaker equipment, it may be necessary to pick up the handset before pressing the star. He is one moment, while we poll for questions.

Our first question is from at least Greenspan with Wells Fargo. Please proceed.

Hi, Thanks, My first question you guys did it.

You guys didn't raise the EBITDA margin at the EBITDA target for the year, but you do expect revenue to be higher and I know from the prepared comments a couple of times, you mentioned tailwind to margins in the back half of the year. So.

I guess why wouldn't that EBIT to target the higher revenues higher and if there was a tailwind to your margins right from no employees that youre hiring might be.

Closer to full potential.

Yeah, Hey, Elyse, it's Brad.

Well, we're really pleased with the margin expansion. We saw in Q2 of 240 basis points. If you look through the guidance. We gave for Q3 are at a minimum we're expecting 400 basis points of margin expansion in Q3. So we really are living that story that we port.

Trade in Q1, where we're lapping the significant investments we made in 2022 and are really starting to see margin expansion in the business and you know as we find operating leverage across the really the service and admin burden and calm.

We did raise the revenue guidance based on performance year to date, we continue to see strong organic trends in the business that make us confident we can hit that guidance.

And in terms of the full year EBITDA.

We've got a certain amount of conservatism in that number which which we always portray.

But you know if we can if we can hit those results its going to show meaningful organic growth for the year and it's going to show a meaningful margin expansion going into 2024, where we anticipate we can get even further margin expansion.

So maybe building on that right you guys did say right that you expect.

Now to operating leverage on the hires to benefit your margin right over the next two quarters and into the first half of next year. So do you have a view of your margin profile for the next 12 months' fights for the next four quarters and you know once we get through Q2 of 24, where do you think the margin of DRP could be.

You know once we reflect on all the upcoming tailwind.

Yeah, Hey at least since forever, we're not going to get into projecting margin for 'twenty four yet will start providing guidance at the normal time period. There what I would tell you is you know what I've said in the past as the mature margin profile of this business is in excess of 30%.

And and we believe you know based on the amount of kind of technology and automation, particularly in our M. G. A mature margin profile was meaningfully higher than our peers.

You know, we've been pulling pretty hard on the margin lever over the past six months or so and you're going to begin saying that really flow through in the back half of the year in the first half of 'twenty four but that by no means means that that margin accretion story will be done then.

You know, we're also continuing to focus on thoughtfully investing in talent in the business and a more kind of normal course way to ensure that we sustain the outlier organic growth results that you've grown accustomed to seeing from our business.

And then one last one right. So you guys said, you'll be at that leverage target at the end of this year. So should we think about you know then you'll obviously have some more capital flexibility should we think about a return to M&A activity in 'twenty four and just you know just.

Overall like an update on on M&A would be great. Thank you.

Yeah. So you know we continue to kind of remain active and opportunistic around our pipeline of opportunities are and keep that that live.

You know our priority remains delevering the business down below our long term range of four five turns and we've got earn out liabilities you know that will be funded through free cash flow over the course of the next 18 months.

At that point the business is going to be in a very different position from a financial flexibility perspective will likely have delever materially you know without absent any further M&A materially below kind of our target range of call. It three.

Three to four and a half turns of leverage and so I would expect us to begin thinking about you know being more intentional around M&A.

Towards the end of 'twenty, 'twenty, four and certainly into 2025.

It's gonna be very situational depending on the environment, we find ourselves in the quality of opportunities and deal flow that we're seeing.

And the value that those opportunities present for the business based on you know where where.

Deals are trading.

And just to add to that at least we are on the leverage trajectory that we projected.

We're at a 5.19 times down from approximately five and a half in Q1.

Based on the guidance I provided for Q3, I believe will be in the 4.7 times range as of the end of Q3 with a path there.

Being at four and a half by Q4 like we've communicated previously so we're meeting those those targets as the year progresses.

As Trevor mentioned, we've got you know earn out liabilities, we've got to address over the next 18 months, but certainly in terms of getting to the leverage profile.

We've talked about to the market, where we are on track to get there.

Yeah.

Thank you.

Our next question is from Meyer Shields with <unk>. Please proceed.

Thanks, I had a couple of questions about some expenses that are adjusted out in calculating EBITDA I guess, because we saw an uptick in severance expense and transactional related partnership and I guess it was a little surprise at least on the latter one because.

You haven't been doing M&A recently, I was hoping you could walk us through what's going on there.

Yeah. This is a this is Brad we did have a severance line item. This quarter. We took actions primarily in our back office administrative function, where we were post a lot of the integration work.

We've been working on in the I S a business.

And we looked at those colleague basis, primarily in accounting and finance and HR and and you know had had some excess resources that they post integration really werent necessary as we had migrated to.

A single agency management system.

It's Trevor point previously we've redeployed some of that capital into customer facing roles as we continue to be aggressive about organic growth and funding that for the future, but we did take an opportunity to have a reduction enforce their amongst some of our back office colleagues.

In terms of the transaction related.

We have continued to experience our integration related costs, primarily in the MGA side of the business and particularly with Westwood.

No Westwood was a carve out as a public company, we anticipated that that integration would be expensive. It has been even more expensive than we anticipated.

Albeit 100% worth it given the fantastic performance, we continue to see in the Westwood business.

I'd say the positive side. Our Mer is that were you know by the mid point of next year.

We believe we'll be largely through those integration expenses associated with Westwood in the in the TSA, but it has been more expensive than we anticipated throughout the integration period.

Okay. That's very helpful. Thank you so much.

As a reminder, this star one on your telephone keypad, if he would like to ask the first question.

For a brief moment to poll for any final questions.

Our next question is from Pablo <unk> with J P. Morgan. Please proceed.

Hi, Good afternoon can you please remind us of the earn out do you expect to pay out in cash this year.

Did you say this year Pablo I'm, sorry, you broke up.

Yet this year.

Yeah in year, it's about $35 million to $40 million and anticipated earn out payments are and theres about another $75 million to $80 million that we anticipate paying in Q1 of 'twenty four.

Okay.

Okay.

I think year to date and my numbers might be off here, but I'm looking at about 14 million of payouts right.

Implying a pick up in the second half of the year.

Yeah.

Yes, that's correct.

Okay.

And then.

A question along the same lines of.

I guess the preference.

And they expand so I think.

Or the.

There's this line other than I think most of it next month.

Do you expect and I think year to date, it's running at about.

Gulfport Milan.

We expect that to be mostly done by the end of this year or do you think that spills over into plentiful.

Yes, I expect that to be mostly done by the end of this year again, that's some outside temporary health and folks that are largely focused on integration as well, but as we as we come on the back of a lot of the MGA related integration of Westwood integration, we're doing I do expect that line to decrease substantially going into 'twenty four.

Yeah.

Alright, thank you.

And it is star one if he would like to ask a question. We will just pause for any final questions.

There are no more questions at this time I would like to turn the call back over to Trevor Baldwin for closing remarks.

I want to thank you all for joining us on the call. This evening in closing I want to thank our 4000 colleagues for their grit and dedication to delivering for our stakeholders I also want to thank our clients for their continued trust and confidence. So thank you all very much and we look forward to speaking with you next quarter good evening.

Thank you. This will conclude today's teleconference. You may disconnect. Your lines at this time and thank you for your participation.

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