Goosehead Insurance Inc (GSHD) 2018 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Goosehead Insurance second-quarter 2018 earnings conference call. (Operator Instructions). As a reminder, today's conference may be recorded.

I'd now like to introduce your host for today's conference, Mr. Garrett Edson, Senior Vice President, ICR. Sir, please go ahead.

Thank you and good afternoon. With us today are your hosts, Mark Jones, Chairman and Chief Executive Officer of Goosehead; and Mark Colby, Chief Financial Officer. In addition, Michael Colby, President and Chief Operating Officer, will be available during Q&A. By now everyone should have access to our earnings announcement, which was released prior to this call, which may also be found on our website at ir.gooseheadinsurance.com.

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. The 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 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 filings with the SEC for a more detailed discussion of the risks and uncertainties that could impact the future operating results and financial condition of Goosehead Insurance. We disclaim any intentions or obligations to update or revise any forward-looking statements except to the extent required by applicable law.

In addition, this call is being webcast, and an archived version will be available shortly after the call ends on the Investor Relations portion of the Company's website at www.gooseheadinsurance.com.

With that, I'd now like to turn the call over to CEO, Mark Jones. Please go ahead.

Thanks, Garrett, and welcome to our second-quarter 2018 earnings call. Thank you to everyone for participating on our call, and for your continued interest in Goosehead. Today I will provide an overview on the quarter and our long-term strategy. Our CFO, Mark Colby, will then follow and provide some details about our second-quarter results.

Overall, our second quarter saw us follow through and continue to build upon our strong start to the year. We continue to generate strong organic growth across both our corporate and franchise channels; and excluding the one-time, non-cash equity compensation charge in the quarter related to our IPO, we recorded another quarter of strong profitability. For the quarter, we recorded $14.8 million in revenues; and adjusted EBITDA, which is a metric on which we focus closely, of $4.0 million.

We continue to win new business at strong levels, with total written premiums growing over 50%, and policies in force up nearly 50% from the prior year while maintaining industry-leading retention and Net Promoter Scores. All in all, it was another quarter of robust, high-quality growth.

That said, on our last call, I noted that we are building Goosehead to become an industry leader over the long-term. While we want to make sure that we're executing in the near term, our strategic focus is trained on execution over the entire year; and, more importantly, ensuring that we are investing wisely in our human capital and technology.

While we're certainly pleased with our second-quarter results, the most important aspect of our second quarter from a long-term perspective was the acceleration of corporate channel hiring and the addition of 44 net new operating franchises to our platform by the end of the quarter.

A critical aspect of our business is ensuring we are staffing the right people in each of our departments. In our corporate channel, that typically means young, hungry, well-educated agents who are typically recent college graduates. This quarter, given the pipeline of talent we were seeing, we made the decision to accelerate our hiring in this channel.

Once onboarded, we walk our new recruits through our proprietary training program, teaching them how to utilize our industry-disrupting technology platform and our sales blueprint to become quickly highly productive. We then set them on the path to success, which in turn positions us to drive long-term sales growth as well as expanded margins and profitability.

At the end of the quarter, we had 148 corporate agents, an increase of 74% from June 30 last year. While the current investment in our human capital causes some margin pressure in the near term, it positions Goosehead to generate long-term growth and margin expansion as we further scale out our business. Meanwhile, on the franchise side, we are pacing well ahead of where we expected to be from an operating franchise perspective.

I would like to acknowledge the excellent work being done by our franchise recruiting team in finding the most capable and motivated agents who are ready to make the switch to the Goosehead platform to become more successful than they've ever been. We maintain a robust pipeline of growth opportunity in this channel, and the market demand for our value proposition continues unabated.

I just want to provide a brief reminder about one of the key reasons the franchise channel is so compelling to us. When a franchisee wins new business, we receive a royalty fee of 20% of revenue in the first term of the policy. When the policy renews, our royalty fee grows to 50% from 20%. This springloads a mechanical revenue increase of 120% from the first term to the second term of the policy just by retaining business at historical rates and assuming no increase in premium. Thus, we can generate revenue growth and higher margins through policy renewal before we write any new additional business.

Of course I'd be remiss if I didn't mention the backbone of Goosehead: our service team, whose world-class performance allows our agents in both our corporate and franchise channels to focus their entire energies on winning new business and rapidly growing their books of business. As of June 30, we continue to maintain a Net Promoter Score of 87, helping ensure we are retaining our clients, and ultimately positioning us to drive increased renewal revenue and margin expansion over time.

Continued success in attracting the best and brightest people to our organization and delivering an exceptional client experience that drives the highest level of client retention requires us to provide our people with cutting-edge tools and capabilities with which to conduct business.

Our technology is a key enabler of our competitive differentiation, and a place where we continue to make consistent investments. These investments allow for future sales productivity increases, back-office efficiencies, and robust data and analytic capabilities that make us smarter in how we compete and ultimately more profitable over the long-term.

In addition to our operating performance in the second quarter, we were pleased to announce yesterday that we refinanced our debt with a new $40 million term note payable and a $13 million revolving credit facility. Under the new structure, we improved our interest rate by a minimum of 300 basis points. We significantly lowered our overall cost of capital, and we will save considerably on interest expense moving ahead, further evidence of the strength of our business and our balance sheet.

As we look toward the remainder of 2018, our growth plans remain fully intact. While we accelerated our corporate hiring this past quarter, and we will continue to invest considerably in our growth in this channel, our overall corporate hiring plans for the year remain unchanged. We are continuing to roll out our franchise channel in a strategic and disciplined manner. And we are continuing to determine ways to further innovate our client service function, our productivity, and our technology in order to enhance our growth.

We see an open runway ahead of us. There is nothing in our path slowing us down from achieving consistent and significant top-line growth as well as considerable margin expansion over time and ultimately creating long-term value for our shareholders.

I'll now turn the call over to Mark Colby to provide some color on our second quarter.

Thanks, Mark. Good afternoon to everyone on the call. Let's go right into our second-quarter results. For the second quarter of 2018, we produced a 36% increase in revenues to $14.8 million compared to $10.9 million in the prior-year period, driven once again by growth in both our corporate and franchise channels from new and renewal business.

As we noted on our prior call, revenue growth was impacted slightly by the timing of contingent commission payments received as an annual contingent commission payment from one of our larger carriers paid during the second quarter of last year was paid during the first quarter of this year. Adjusting revenue growth to account for this timing, we would have generated year-over-year revenue growth of approximately 40%.

Total written premiums during the quarter, which is a good proxy for the growth of our business, grew 52% year-over-year to $132.6 million. At the end of the quarter, we had over 282,000 policies in force, a 49% increase from one year ago, and a 12% sequential growth from the end of the first quarter of 2018. Assuming we can maintain our current retention rates, the growth in both metrics bodes well for our long-term prospects.

Total adjusted EBITDA grew 27% year-over-year to $4 million, while we recorded adjusted EBITDA margin of 27% compared to 29% in the prior-year period. Adjusted EBITDA growth was driven by higher margin renewal revenue in both channels, while adjusted EBITDA margin in the second quarter of 2018 was affected by the timing of contingent commissions, additional employee compensation and benefits related to planned increases in hiring, as well as additional rent expense incurred as a result of our corporate headquarters relocation in July 2017.

As we noted on our prior call, we accelerated our hiring in the corporate channel in the second quarter to take advantage of a high-quality pipeline of recruits. As a result, we incurred more employee compensation expense, which, along with the timing of contingent commissions, impacted our margin. We are making these opportunistic investments now to position ourselves to win an even greater amount of new business and ultimately fuel our growth over the long-term.

Breaking down our results by channel, in the second quarter of 2018, our corporate segment generated revenues of $8.5 million, a 31% increase over the prior-year period. This increase was driven by a 64% increase in new business revenue, primarily due to a larger corporate agent headcount; as well as an 18% increase in renewal revenue as the number of policies in the renewal term grew over the past year.

As of June 30, 2018, we had a headcount of 148 corporate sales agents, up 74% from one year ago and up 22% since March 31, 2018. As I noted, we accelerated our hiring in the second quarter, given the opportunities we are seeing to grow the business, and buoyed by a strong class of recruits. However, we continue to maintain our overall 2018 corporate hiring plan for this segment that we established at the beginning of the year.

Adjusted EBITDA for the corporate channel of $1.9 million was comparable with the prior-year period, while adjusted EBITDA margin was 22% versus 29% in the prior-year period. We noted previously that we expected margin pressure in this channel in the near term, given our significant investment.

As a reminder, when new sales agents are hired, they receive a base salary, and it typically takes several months before an employee's commission outpace their base salary. As a result, adjusted EBITDA margins in the near term are impacted by the ramp in corporate headcount. But we expect the investments will pay off handsomely and translate into long-term margin expansion in both the corporate and franchise channel.

Having a strong corporate agency is key to the overall growth of the Company, as corporate agents contribute to building and disseminating best practices among our franchise channel.

Our franchise channel generated revenues of $6.3 million, a 44% increase from the prior-year period, driven by higher royalty fees from the larger amount of operating franchises, as well as the greater royalty fee generated on renewal business versus new business. As of June 30, 2018, we had 385 franchises operating, up 58% from one year ago, and up 13% since March 31, 2018. As with our corporate channel, we continue to have a robust franchise pipeline and expect to further grow this channel.

Adjusted EBITDA for the franchise channel was $2.2 million, up 75% from the prior-year period; while adjusted EBITDA margin was 35% versus 29% in the prior-year period. This increase in adjusted EBITDA margin was driven by higher margin royalties related to policies in their renewal terms.

As a reminder, we also have seasonality to our margins where we typically experience larger margins in the first quarter due to the contingent commissions we receive during the period. That said, over time, the benefits from renewal revenue should lead us to achieve considerable annual long-term margin expansion.

Net loss in the second quarter of 2018 was $23.9 million compared to net income of $5.8 million in the prior-year period. The second quarter of 2018 included $26 million in one-time equity compensation costs related to the IPO, while the prior-year quarter included $3.5 million in one-time income related to a transaction with a former franchisee.

Excluding the equity compensation costs, net income in the second quarter of 2018 would have been $2.3 million or $0.06 per diluted share. Going forward, regarding earnings per share, you should use the 36.3 million outstanding shares of Class A and Class B common stock, plus the dilutive effect of stock options, as the basis for per-share results.

As Mark noted, on August 3 we refinanced our debt with a new $40 million term note payable, and a $13 million revolving credit facility. The Company has the right, subject to approval, to increase the commitments under the credit facilities an additional $50 million. Borrowings under the new arrangements initially accrue interest on amounts drawn at LIBOR plus 2.5%, which is a 300 basis point improvement from the LIBOR plus 5.5% interest rate we paid on the now-retired debt.

Past the initial period, interest rates are based on our leverage ratio for the preceding period but are capped at LIBOR plus 2.5%. Through refinancing our debt, we expect to achieve significant ongoing interest expense savings which ultimately will drive additional earnings.

We are now well positioned with the credit facilities that immediately create a more efficient capital structure, allowing us to continue to efficiently utilize our balance sheet. As of August 3, we had $50 million of debt outstanding which encompasses the $40 million term note payable and $10 million drawn on the new revolving credit facility.

With that, I thank you for your time, and we'll now open the call up for Q&A. Liz?

(Operator Instructions). Jay Cohen, Bank of America.

Let me start on the franchise side. You obviously had a successful period of recruiting people. On the corporate side, you said the plan for the year hasn't changed. Has the plan for the year on the franchise side gone up, given the first-half results?

No, Jay. This is Mark Colby. Thanks for joining today; and that's a good question. On the franchise side, too, again, we're keeping our projections for the year consistent with where we thought they'd be at the beginning of the year. We budgeted in 15% unit attrition counts in that channel; and again, that's unit, not contribution to revenue.

So far we've seen a little bit lower than that as far as the terminations go. But again, it's too early to call it a trend. So again, for now, we're keeping the forecast consistent with where we thought we'd be at the beginning of the year.

It seems on the corporate side, there's going to be some notable seasonality because you're hiring from school when the kids graduate -- young people graduate. You're going to have a weighting towards the second quarter. But on the franchise side, that should be -- should that be a bit more even, over the course of the year?

Yes. So we have our -- historically our largest signing period is Q4 every year. And so, there's some slight seasonality there. But again, we -- it's a little more spread out throughout the year on the franchise side.

Got it. One other question -- it sounds like leaving your plans for the year constant sounds a little conservative to me, but I'd guess you'd rather be conservative. Just maybe taking a step back on the franchise side, it feels as if the traction you're getting in recruiting people is somewhat better than you might have expected. First, is that true? Secondly, if it is true, why do you think that's the case?

Hi, Jay, this is Mike Colby. I think we are -- recruiting efforts continue to excel and accelerate, but we have planned for that. It's in large part due to our investment in our franchise recruiting team. And our value proposition to agents continues to resonate in the markets that we're going after. So going into this year, we expected to see growth and new franchise -- operating units and new franchise contract signings. And again, we're seeing those targets met, and leave our annual plans unchanged.

Okay, good color. Last question for me and then I'll re-queue. Contingent commissions -- we are hearing from the insurance companies that the profitability in the auto line has improved quite a bit this year versus last year. And I know auto is only half of what you do, roughly, but does that bode well for your contingent commissions, that improvement in profitability?

Yes it does, Jay.

Okay.

Our contingency commission plans are a combination of growth-related targets and profitability, and that the profitability with our auto carriers would certainly help our likelihood of qualifying for those in 2018.

Got it. Not a huge number, but it helps, so -- thanks for that. I'll re-queue if people don't have any other questions. Thanks.

(Operator Instructions). Christopher Campbell, KBW.

I guess my first question is that -- kind of more on the franchise side, like Jay was asking. But are you seeing any slowdown in any of your franchise leads? Just as you are seeing more of the bigger competitors, like State Farm and those guys, are starting to drop rates, is that impacting your ability to recruit those types of franchises?

No, it's not, Chris. Our value proposition is kind of multi-faceted to these agents, not just driven on the competitiveness of their product, wherever they're at. The choice model platform that we bring to the table certainly is a big part of that value proposition. But also what really resonates with these agents is their ability to offload all of the back-office work and get back to what they're best at and what they enjoy doing, which is the sales and marketing component.

And not to forget, our technology platform is a huge selling point for agents, as well. So when you take all those things into consideration, we continue to see our value proposition resonate, and demand for our franchise offering to be very strong.

Okay. And then do you have a sense -- what are your average rates? So the auto market has been hardening for a while; homeowners in -- especially in some of your markets that are more catastrophe-prone have been rising as well. What are the average rates that you're seeing in those markets? And are you seeing any kind of change in those?

I'm just trying to think, if you're getting like X percent of a commission, the -- when the carriers are charging higher rates, that's definitely a tailwind. So just trying to understand a little bit more how those underlying auto and homeowners rates are trending.

Certainly the hard market, increasing premiums, helps us, is a tailwind to us. What we're seeing with carriers, Chris, is that their preference is to do business with fewer large-scale distribution partners. And we're starting to see some of that consolidation with a lot of our carriers. And the way they're doing that is by either limiting new appointments or by reducing commission rates for those subscale shops, which for us, doesn't impact us negatively, but it also helps us differentiate our value proposition to agents.

Got it. But no -- there's been no pressure on Goosehead's commissions, correct?

Correct.

Okay. And then just one final one. G&A spend -- or the G&A expense was up about $1 million year-over-year. Just any color on that? I mean, I get the comp and benefit should be up with the hiring; just anything going on with G&A?

Yes, Chris, the majority of that, in July of 2017, we relocated to our current headquarters, and so that's going to be the majority of that increase year-over-year.

Okay, got it. And so would the $3 million be -- would that be a good run rate? Or how should we think about that?

Yes, I think so.

Okay.

But nothing unusual happened in the first half of the year on G&A that -- wouldn't expect to continue.

Well, great. Thanks for all the answers. Best of luck in the third quarter.

Jay Cohen, Bank of America.

Yes, just a quick numbers question. I probably could do the math; I haven't had a chance to do it yet. But the tax rate, if we adjust for the stock compensation expense, can you give us a sense of what the underlying tax rate was?

Yes. I believe it was -- it's a little bit less than 25% of the controlling interest income, excluding obviously the one-time $26 million expense that was not tax deductible.

Okay, that's helpful. Thanks.

(Operator Instructions). I'm showing no further questions in queue at this time. I'd like to turn the call back to Mark Jones for closing remarks.

Just I wanted to -- on behalf of our management team and our people, I wanted to thank you for your interest in Goosehead. And we look forward to continuing to manage the business for growth and profitability. Thank you.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program, and you may now disconnect. Everyone, have a great day.