Q2 2024 Hagerty Inc Earnings Call
Operator: Greetings and welcome to the Hagerty second quarter 2024 earnings call. At this time, all participants are in a 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 zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Jay Koval, Senior Vice President of Investor Relations. Please go ahead.
Greetings and welcome to the Haggerty second quarter 'twenty 'twenty four earnings call. At this time all participants are in a 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 zero on your telling.
Phone keypad.
As a reminder, this conference is being recorded.
Jay Carvell: It's now my pleasure to introduce your host Jay Carvell Senior Vice President of Investor Relations. Please go ahead.
Jay Carvell: Thank you operator, and good morning, everyone and thank you for joining us to discuss <unk> results for the second quarter of 2024.
Jay Koval: Thank you, operator, and good morning, everyone, and thank you for joining us to discuss Hagerty's results for the second quarter of 2024. I'm joined this morning by McKeel Hagerty, Chief Executive Officer and Chairman, and Patrick McClymont, Chief Financial Officer.
Speaker Change: I'm joined this morning by Mckeel, Haggerty, Chief Executive Officer, and Chairman and Patrick in the climate Chief Financial Officer.
Speaker Change: During this mornings conference call, we will refer to an accompanying presentation that is available on Haggard East Investor Relations section of the company's corporate website at Investor Dot Hagrid Dot com.
Jay Koval: During this morning's conference call, we will refer to an accompanying presentation that is available on Hagerty's Investor Relations section of the company's corporate website at investor.hagerty.com. Our earnings release slides and letter to stockholders covering this period are also posted on the IR website as well as in our 8K filing. Today's discussion contains forward-looking statements and non-GAAP financial metrics, as described further on slide 2 of the earnings presentation. Forward-looking statements include statements about our expected future business and financial performance and are not promises or guarantees of future performance.
Speaker Change: Our earnings release slides and letter to stockholders covering this period are also posted on the IR web site as well as our 8-K filing.
Speaker Change: Today's discussion contains forward looking statements and non-GAAP financial metrics as described further on slide two of the earnings presentation.
Jay Koval: They are subject to a variety of risks and uncertainties that could cause actual results to differ materially from our expectations. For a discussion of material risks and important factors that could affect our actual results, please refer to those contained in our filings with the SEC, which are also available on our investor relations website and sec.gov. The appendix of the presentation also contains reconciliations of our non-GAP metrics to the most directly comparable GAAP measures that are further supplemented by this morning's 8K filing. And with that, I'll turn the call over to McKeel.
Speaker Change: Forward looking statements include statements about our expected future business and financial performance and are not promises or guarantees of future performance.
Speaker Change: They are subject to a variety of risks and uncertainties that could cause the actual results to differ materially from our expectations.
Speaker Change: For a discussion of material risks and important factors that could affect our actual results. Please refer to those contained in our filings with the FCC, which are also available on our Investor Relations website, and the Sec's Dot Gov.
The appendix of the presentation also contains reconciliations of our non-GAAP metrics to the most directly comparable GAAP measures that are further supplemented by this morning's 8-K filing.
Speaker Change: And with that I'll turn the call over to Mikael.
Mikael: Thanks, Jay and good morning, everyone.
McKeel Hagerty: Thanks, Jay. And good morning, everyone.
Mikael: We appreciate you taking the time to join Haggerty second quarter 2024 earnings call.
McKeel Hagerty: We appreciate you taking the time to join Hagerty's second quarter 2024 earnings call. First half profitability improved significantly over the prior year period, with operating margins up 840 basis points. We now expect revenue to come in between 1.16
Speaker Change: As most car lovers know summer is our Golden time, the breezes are warm and curvy roads back in their car shows in auctions in abundance, including our Greenwich Conn core in June and car week in Monterey, California, starting next week.
Speaker Change: <unk> is built for these moments with our entire business model carefully curated around a shared passion for cars.
Speaker Change: The singular focus executed by our amazing team of professionals has allowed us to deliver high rates of compounding growth in revenue and profit.
Speaker Change: The rate and durability of that growth is powered by a great value proposition with excellent customer service from our team of 1700 Haggerty employees.
Speaker Change: This team's strong execution allowed us to exceed expectations for the sixth straight time, this quarter and to upgrade our full year outlook as our business model begins to hit its stride delivering written premium growth of 18% in the first half of 2024.
Speaker Change: This increase is on top of the prior year's first half gains of 17%, which was on top of 'twenty 'twenty. Two is first half growth of 15%.
Speaker Change: Sustain mid teens growth positions us to double our revenue every four to five years.
Speaker Change: This process improvements cost discipline, and smart technology investments should allow us to efficiently convert incremental revenue into increasing profits driving margin expansion in the quarters and years to come.
Jeff Reilly: One team Haggerty has never been better align and is only getting stronger including the recent hiring of Jeff really as our president of insurance.
Jeff Reilly: Jeff has a proven track record of strategic change management across a variety of business areas, including insurance product development claims distribution marketing sales and customer service is 22 years of experience and leadership will help us to identify additional opportunities to further improve our value proposition for auto enthusiasts.
Speaker Change: Leveraging haggerty has decades of data.
Speaker Change: We also announced last week that we have hired Sean Mcmillan from Amazon to become the S V P of our digital marketplace and valuation.
Speaker Change: How are these online marketplace has enormous potential and Sean will help us to create an industry, leading user experience for customers and to scale critical elements of the business.
Speaker Change: Let me share a few key highlights from our first half results shown on slide three.
Speaker Change: This includes <unk>.
Speaker Change: Commission and fee revenue gains of 18% during the first six months in line with written premium growth and fueled by 8% growth in vehicle count.
Speaker Change: Earned premium for our risk taking entity haggerty reinsurance jumped 26% due to written premium growth in last year's increase in quota share.
Speaker Change: Membership marketplace and other revenue grew 16% powered by 41% growth in marketplace due to higher revenue from live auctions and financing streams and a methodical ramp of hagrid ease online marketplace.
Speaker Change: First half profitability improved significantly over the prior year period with operating margins up 840 basis points.
Speaker Change: This margin improvement resulted in a $50 million improvement in net income and a 39 million dollar jump in adjusted EBITDA.
Speaker Change: First half G&A declined, 3% and salaries and benefits grew only 5% as we maintain a strong focus on cost discipline and driving operational efficiencies.
Slide four is a reminder of our 'twenty 'twenty four priorities, including first improving loyalty to drive renewals and referrals.
Speaker Change: Billy profitable way for aggregate to grow.
Speaker Change: Second and.
Speaker Change: Enhancing the member experience in a cost effective and efficient way leveraging technology to reduce variable costs as we scale up.
Third building haggerty marketplace into the most trusted and preferred place to buy sell and finance collectible vehicles, and fourth increasing our flexibility and control over our underwriting profits, including D C and I see insurance company acquisition.
Speaker Change: We are proud of the great results, we are delivering so far this year and would point out that this growth in margin expansion is on top of the gains we delivered in the first half of 2023.
Speaker Change: On a two year basis since 2022 we have increased first half net income by $41 million and adjusted EBITDA by $70 million.
Speaker Change: Slide five shows some examples of how we are positioning haggerty for a sustained multi year operating leverage and high rates of flow through beyond 2024.
Speaker Change: <unk> continued to utilize our marketing team to efficiently acquire new customers.
Speaker Change: Second of all of our member service center to serve our members more effectively reducing handle times and freeing up resources for high rates of member growth and third identify potential savings within our claims organization to maintain our historically low combined ratio.
Speaker Change: Yeah.
Speaker Change: Given the excellent results during the first six months and strong business momentum that has carried over into the third quarter. We have increased our full year outlook for revenue and profit growth.
Speaker Change: We now expect revenue to come in between 1.16.
Speaker Change: And 1.1 dollars 8 billion with net income of $76 million to $84 million.
Speaker Change: And adjusted EBITDA of $130 million to $140 million.
Speaker Change: Improved margins and cash flow generation will enable us to continue reinvesting in our members and to create value for shareholders over the coming years.
Patrick: Let me now turn the call over to Patrick to go through the second quarter results in 'twenty 'twenty four financial outlook in more detail.
Thank you and good morning, everyone. Let me walk you through our results for the three months ended June 32024 shown on slide six and seven.
Patrick: In the second quarter, we delivered 20% growth in total revenue to $313 million.
Patrick: Written premium grew 16% due to robust new business count and retention that improved to 89% <unk>.
Patrick McClymont: Commission and fee revenue jumped 17% to $129 million.
Patrick: Commission and fee revenue jumped 17% to $129 million.
Patrick: Slightly higher than written premium growth on strong underwriting results.
Patrick: Membership marketplace and other revenue increased 14% to $27 million or brought arrow team of automotive specialist is delivering strong and growing revenue across our lives and private party sales as.
Patrick: As well as higher financing revenue from our dedicated collateralized facility.
Patrick: Membership revenue grew in the mid teens offset by lower garage and social revenue due to the fewer locations, whose dissolution of the joint venture last fall.
Patrick: Earned premium grew 24% to $158 million and loss ratio came in at 41% a point below last year's second quarter we.
Speaker Change: We produced stable and highly predictable underwriting results, thanks to decades of experience ensuring customers special vehicles.
Speaker Change: Turning now to profitability shown on slides eight and nine we reported a second quarter operating profit of $38 million.
Speaker Change: An improvement of $21 million versus the prior year period of 121%.
Speaker Change: Operating margins expanded by 550 basis points to more than 12%.
Speaker Change: We held G&A flat in the quarter salaries and benefits grew 8% as merit increases took hold in the second quarter, along with higher accruals for incentive comp given strong year to date results.
Speaker Change: Adjusted EBITDA increased $19 million year over year to 53 million.
Speaker Change: This is on top of the $18 million improvement in EBITDA delivered in the second quarter of 2023 resulted in a two year stacked improvement of $37 million.
Speaker Change: On the bottom line, we delivered second quarter net income of $43 million compared to $16 million a year earlier.
Speaker Change: <unk> improved operating margins drove the $27 million improvement in net income along with higher interest income and the absence of last year's 3 million restructuring charge.
The change in fair value of our private and public warrants in the quarter was minimal and will no longer be an issue going forward. Following our successful exchange offer.
Speaker Change: Net income attributable to class a common shareholders was $9 million after attribution of earnings to the Noncontrolling interest and accretion on the preferred stock.
Speaker Change: GAAP basic and diluted earnings per share was <unk> <unk>.
Speaker Change: Based on 86 million weighted average shares of class a common stock outstanding.
Speaker Change: Adjusted earnings per share defined as consolidated net income before the change in fair value of warrants divided by fully diluted shares of $360 million came in at 12 cents for the quarter and <unk> 16 for the first half of 2024.
Speaker Change: Operating cash flow in the first half of the year jumped from 71 million to $122 million, resulting in an end of June unrestricted cash balance of $121 million versus long term debt $98 million.
Speaker Change: $41 million of which is back leverage for broad arrow capital's portfolio loans collateralized by collector cars.
Speaker Change: We took some additional actions during the last few months to further simplify our business and focus precious resources on our highest and best use first in July we successfully exchanged the $19 5 million outstanding warrants for $3 9 million shares of class a common stock.
Speaker Change: This should help remove the noise in our net income and EPS going forward and eliminate the cost of valuing an accounting for the warrants given the warrant exchange our fully diluted share count, including preferred shares and Unvested equity awards is now $360 million.
Speaker Change: We also expanded the borrowing capacity of our credit facility by $75 million with the addition of a new Bank Wells Fargo.
Speaker Change: Finally, we sold Motorsport Reg are motorsport event calendar and online management platform and created a long term marketing partnership with the strategic buyer Gorilla Motorsports, who owns and operates motorsports events such as the sports car Vintage Racing Association, the Trans Am series Formula Regional Americas.
Speaker Change: And formula for in the U S.
Speaker Change: Let me wrap up with our 2024 outlook shown on slide 10, as Mikael mentioned, we increased our outlook for total revenue growth to a range of 16% to 18% powered by 14% to 15% growth in written premium.
Speaker Change: High rates of top line growth combined with operational efficiencies and the benefits of scale should continue to drive operating leverage.
Speaker Change: Now expect net income of $76 million to $84 million up roughly $15 million from the outlook, we shared on our first quarter call and.
Speaker Change: And equating to year over year growth of 170% to 198%.
Speaker Change: Adjusted EBITDA is now expected to be $130 million to $140 million representing growth of 47% to 59%.
Speaker Change: In summary, we are executing well on our plans to deliver high rates of compounding revenue growth margin expansion and cash flow production.
Speaker Change: And we are on track for 11% to 12% adjusted EBITDA margins in 2024.
Speaker Change: But we believe the best is yet to come as the investments in our people and technology should result in 30 plus percent incremental margins from 2022 to 2024 and position us to drive margins significantly higher over the ensuing years.
Speaker Change: With that let US now open the call to your questions.
Speaker Change: Thank you we will now be conducting a question and answer session.
Speaker Change: I'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. You May Press Star two if you would like to remove your question from the queue.
Speaker Change: For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
Speaker Change: Your first question comes from Mark Hughes with true Securities. Please go ahead.
Mark Hughes: Yes, Thank you and good morning.
Mark Hughes: Hey, good morning, guys Hi.
Mark Hughes: Hey, good morning, Mark.
The hiring of Sean Mcmullin to Oh run the digital marketplace anything you can say about kind of his early priorities what you envision there.
Speaker Change: As he takes over.
Mark Hughes: Yeah.
Speaker Change: Well hey, thanks, It's a great question, we're really excited to have Sean joined the team.
Speaker Change: His his experience at Amazon He was responsible for a lot of different areas in the Amazon. Most recently the Amazon Music Division has been to knit together a lot of the <unk>.
Speaker Change: <unk> have a big platform like Amazon and one of the things. We're excited about is we know digital marketplace in and of itself is is an important thing for US. We have we think it has a lot of promise and we're looking forward to it continuing to expand but the secret sauce for us is going to be how it knits together with all the other tools in our toolbox.
Speaker Change: So valuation our speed digital acquisition those types of things so he's going to be looking at both of those things how do we how do we continue the March of the core underlying growth and then how do we net the pieces together.
Speaker Change: Understood about thinking about are you you've just got this very strong consistent growth in written premium as you think about it now versus 12 24 months ago, just the kind of price pricing are.
Speaker Change: Impact in the market.
Speaker Change: You know your strategic relationships with our with other carriers kind of what are the is that evolving and changing what what is have you observed over the last 12 24 months.
Speaker Change: Hey, Mark its Patrick I'll handle the price one and then we can talk about where things stand with our partners.
Mark Hughes: Overall market pricing.
Speaker Change: We think this year is going to end up something for daily drivers something like up 10% or so as companies continue to take rate and that compares to us that we think will end up being something like up 3%. So we are taking rate and then there's a benefit for us and that continues in 2024, what we're just doing it at a much lower rate.
Speaker Change: And we think that that's part of why we're able to grow so quickly the value prop for our customers because we understand the risks and how to price it is really compelling.
Speaker Change: And I guess, I guess I would add to that what we're hearing from our partners as we all know there it's regulated business they have to get everybody has to get their pricing right.
Speaker Change: Are they required to make sure that we're delivering profitably.
Speaker Change: And a lot of that action is working its way through the industry. Although early indications are that it's starting to level off maybe on an industry wide basis. The benefit we've had over the last year or 18 months or whatever it is is just the.
Speaker Change: Rate increases in general push people out there to shop, and we've definitely benefited from that and you know so because where.
Speaker Change: And when it comes to well you know Gee I'm I'm someone who might have three or four or five cars and one of those is a special car that maybe its better insured by us we get we get a benefit from that one there's a lot of rate taking going on out in the market.
Speaker Change: So as it levels off you know for us, it's sort of back to business as usual do we do well communicate about the value proposition and keep celebrating the cool cars that people own and and the agents who need to bring them to us.
Speaker Change: Patrick you talked about the 30% incremental margin you've had a tremendous expense leverage.
Patrick: Is that a kind of a good target on a go forward basis. You said, you think you're positioned to drive significantly higher profitability as the.
Patrick: 30% a good ratio.
Speaker Change: I think what we've communicated so far is we'll be at that kind of level, we think for full year 2024, and that's consistent with the guidance.
Speaker Change: We do expect there to be continued margin expansion on a go forward basis.
Speaker Change: In terms of where that shakes out for next year, you know that we will communicate that early next year, when we give guidance.
Speaker Change: But as we've talked about on these calls we.
Speaker Change: We've turned the corner and we've gotten to profitability in the aggregate a little bit last year and more meaningful this year.
Speaker Change: But we're not where we need to be right. We think that the overall business should end up being something in the high teens, maybe getting close to 20% overall operating profit margin.
Speaker Change: That'll take us another couple of years.
Speaker Change: Two to three years to get there. So we do expect to be continued expansion.
Speaker Change: Thank you very much.
Mark Hughes: Thanks, Mark Thanks, Mark.
Speaker Change: Once again, if you would like to ask a question. Please press star one on your telephone keypad.
Operator: The next question comes from Pablo Singzon with J.P. Morgan. Please go ahead.
Speaker Change: Next question comes from Pablo <unk> with Jpmorgan. Please go ahead.
Pablo: Hi, good morning.
Pablo: The actual came in at.
Pablo: Good morning, the tax rate came a bit below what we were expecting was there anything unusual this quarter and how should we think about the go forward tax rate.
Speaker Change: No nothing unusual this quarter.
Speaker Change: And I think on a go forward basis, it should be consistent with where we've been.
Speaker Change: There's nothing quirky that I could point to.
Speaker Change: Okay.
Speaker Change: And then on it.
Speaker Change: Interest and other income right. So I think there its interest expense and then there's the actual investment income.
Speaker Change: Did that line you know it improved pretty strongly on a sequential basis.
Speaker Change: Right from about $7 million to $12 million sequential well what drove that and how should we think about that contribution to the P&L going forward.
Speaker Change: Okay.
Speaker Change: So we have started producing a lot more cash.
Speaker Change: A lot of that is just the expansion of the margins a lot of it is the renegotiation of our arrangement with Mark Hill, where we now get paid or see you see we shifted it from being all paid in arrears. The following year to now it's paid for the most part on a monthly basis. So that's been a big positive cash flow swing so.
Speaker Change: The amount of cash we have to invest within the MGA and within Haggerty REIT continues to build and so a big driver as we just were talking about more invested cash and then the other is just the rate environment and so.
Speaker Change: Relative to where we were in previous years, we've been able to get around five sometimes north of 5% earnings on those cash balances. We did implement a new investment strategy and that kicked off April one so the results of that aren't really reflected much in the numbers yet it will be going forward and to put it simply previously were.
Speaker Change: Entirely invested in cash and now we've moved to a strategy, where we're invested overwhelmingly in investment grade bonds. We have some exposure to other asset classes, but the simple way to think about it is before we were we were essentially entirely exposed to short term interest rates because we are invested in cash we've now pushed out.
Speaker Change: Our duration a bit kind of two to three years versus being.
Speaker Change: Cash like.
Speaker Change: So we think that we've we simply moved onto the efficient frontier, where we're actually taking less risk, but should be able to produce better returns going forward.
Speaker Change: That makes sense and then just a quick follow up on that point, Patrick So kooky was 12 billion of income.
Speaker Change: Would it be fair to assume that you don't back off of that level, just thinking about the cash balance that's where rates are right. There shouldn't be any reason why you sort of go back from the 12 minimum baseline into Q right.
Speaker Change: No. That's yes, as we sit right now obviously the interest rate environment is pretty volatile right now.
Speaker Change: So things may move around but I think it's a reasonable assumption for the balance of the year.
Speaker Change: Gotcha. Thank you.
Speaker Change: Thank you I would like to turn the floor over to mckeel Haggerty for closing remarks.
McKeel Haggerty: Thank you operator, and thanks to all of you for your continued support and interest in Haggerty, we've carefully curated a haggerty brand over the last four decades for car lovers, and we have a long runway ahead of us as we help members to protect buy sell and enjoy their prized vehicles.
McKeel Haggerty: We have multiple legs to our profit growth, including high growth distribution business and evolution in our control over underwriting profits, our membership offering that drives engagement and retention with excellent net promoter scores and a growing marketplace that is fast becoming the trusted and preferred platform for people to buy and sell collector cars.
McKeel Haggerty: Bring them all together and we have the recipe for success that positions us well to further penetrate the 46 million collector car opportunity in the United States delivering durable profitable growth year after year.
McKeel Haggerty: Next week, we will be in Monterey, California, one of the largest automotive events in the world, where the stars and the cars all come together for.
McKeel Haggerty: For those that haven't yet been it's an incredible opportunity to enjoy the auctions, including our own broad arrow to day sale at the Monterrey Jet Center car racing at Laguna Saker and of course, the signature Pebble Beach Concord elegance on August 18th we hope to see you there and until then never stopped driving.
Speaker Change: This concludes today's teleconference. You may disconnect your lines at this time and thank you for your participation.
Speaker Change: Okay.
Speaker Change: Yeah.
Speaker Change: [music].
Speaker Change: Yes.