BRP Group, Inc. (NASDAQ:BRP) Q3 2023 Earnings Call Transcript
BRP Group, Inc. (NASDAQ:BRP) Q3 2023 Earnings Call Transcript November 7, 2023
Operator: Greetings and welcome to BRP Group, Inc. Third Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce Bonnie Bishop, Executive Director, Investor Relations. Thank you. You may begin.
Bonnie Bishop: Thank you, operator. Welcome to the BRP Group’s Third Quarter 2023 Earnings Call. Today's call is being recorded. Third quarter financial results, supplemental information, and Form 10-Q were issued earlier this afternoon and are available on the company's website at ir.baldwinriskpartners.com. Please note that remarks made today may include forward-looking statements subject to various assumptions, risks, and uncertainties. The company's actual results may differ materially from those contemplated by such statements. For a more detailed discussion, please refer to the note regarding forward-looking statements in the company's earnings release and to our most recent Form 10-Q, both of which are available on the BRP website.
During the call today, the company may also discuss certain non-GAAP financial measures. For a more detailed discussion of these non-GAAP financial measures and historical reconciliation to the most closely comparable GAAP measures, please refer to the company's earnings release and supplemental information, both of which have been posted on the company's website at ir.baldwinriskpartners.com. I will now turn the call over to Trevor Baldwin, CEO of BRP Group.
Trevor Baldwin: Good afternoon, and thank you for joining our third quarter earnings call. I'm joined this afternoon by Brad Hale, our Chief Financial Officer; Kris Wiebeck, our Chief Strategy Officer; and Bonnie Bishop, Executive Director of Investor Relations. The robust underlying health, momentum and operating leverage in our business was evident in this quarter's results as we generated, organic growth of 19% and approximately 480 basis points of margin accretion versus the third quarter of 2022 on the back of continued execution, growing contribution from prior investments and ongoing efforts to drive greater free cash flow from the business. Adjusted diluted earnings per share was $0.29, up 61% from the third quarter of 2022.
Adjusted EBITDA grew 53% to $64 million resulting in an adjusted EBITDA margin of 21% for the quarter and free cash flow from operations grew by 29% to $76 million for the year-to-date period, despite a $36 million increase in cash paid for interest year-over-year. Additionally, as a result of the growth in adjusted EBITDA during the quarter, leverage now sits at approximately 4.8 times, representing meaningful progress over the last 12 months toward our goal of rapidly reducing leverage. From an operating segment perspective and insurance advisory solutions, we generated organic growth of 11%. In the quarter, we saw increased client sensitivity to the significant insurance rate increases they have faced over the last two years, and we've experienced softer new business from project-related work, and interest rate sensitive areas like construction, and mergers, and acquisitions.
In other sectors, where we have a significant presence, such as healthcare we are seeing far less impact and overall solid new business trends continue to drive outsized organic growth for our IS platform relative to our peers. In August, we added a fourth center of excellence to our IS platform. Our new international center of excellence leverages our deep expertise to provide risk advisory and insurance solutions to clients with international operations and those exploring international expansion. The addition of this important capability enhances, our overall value proposition to multinational businesses, and along with increased levels of specialization from the launch of other centers of excellence and industry practice groups, meaningfully expands the aperture of opportunities our risk advisors can confidently pursue.
Underwriting capacity and technology solutions grew 25% organically during the quarter with strong performance from the MGA of the future platform, which grew 29% and achieved record new business for the renters product line in July, typically, the seasonally strongest month of the year. Homeowners also continues to exceed expectations with premium from our E&S and non-builder admitted products up over 200% from the third quarter of 2022. We also launched two new products during the quarter, high net worth home and commercial property, both of which are starting to gain momentum. The significant investments we have made in UCTS over the past 24 months are continuing to drive further diversification and new revenue streams into the MGA, which we expect will drive durable and profitable growth long into the future.
MainStreet Insurance Solutions delivered organic growth of 29%, driven by strong results in both the legacy MainStreet business and Westwood. Despite some pressure in the housing market due to mortgage rates, new home sales have been resilient and we continue to see strong attachment and insurance rate pull through Westwood. Additionally the MainStreet team has shown tremendous growth and navigating very challenging, personal lines markets in large states such as Florida, Texas and California where the personal lines insurance space continues to see significant rate increases. We continue to be focused on delevering our balance sheet and on expanding margin across the business. To support those goals and enabled by the completion of our partnership integration work, we've began executing on organizational alignment and cost savings initiatives aimed at rationalizing and simplifying our growth services support structure to more fully align with our distinct go to market models and enable more nimble and effective client execution.
We expect that these initiatives will provide greater operational efficiency and accelerate margin expansion and free cash flow growth beginning in 2024, and more fully into 2025. On October 17th, we announced the launch of Juniper Re, our new reinsurance broking platform. Juniper Re is a natural complement to our retail brokerage and MGA business and helps round out our capabilities as a full service broker. Juniper Re will be led by reinsurance broking veteran, Jeff Irvin who has more than 25 years of global reinsurance broking experience. Reinsurance brokerage is a capability we have long had on our strategic roadmap because of its superior financial returns, an integral position in the insurance ecosystem and we jumped at the opportunity to launch this with a seasoned leader and team.
We expect Juniper Re will begin contributing to revenue as early as the first quarter of 2024. Lastly, we announced in our 10-Q that Chris Wiebeck, our Chief Strategy Officer and former Chief Financial Officer and John Valentine, Our Chief Partnership Officer will be retiring at the end of this year. Chris will step down from our Board as part of his retirement. Their retirements align with a strategic roadmap that has been in place for a long period of time, and included achieving our first set of post-IPO goals related to the scale and maturity of our business. Chris and John have made enormous contributions to BRP and have mentored scores of colleagues who are now key contributors. On behalf of BRP, I'd like to thank Chris and John for their tireless work through the years and building BRP from a small, Tampa-based agency to the national firm that it is today.
In summary and as this quarter's results once again proved out, BRP remains a diversified well-balanced business that is built to perform and deliver industry-leading growth to the various economics and industry rate cycles. As you saw this quarter, our business has meaningful operating leverage and as we continue to earn into the past investments, and maintain our committed focus on targeted expense efficiency actions, we expect margins will continue to expand meaningfully over time. I'd like to thank our colleagues for their tenacious efforts to deliver innovative solutions for our clients helping them navigate a challenging insurance marketplace. I also want to thank our clients for their continued trust and confidence in us. With that, I will turn it over to Brad, who will detail our financial results.
Bradford Hale: Thanks, Trevor, and good afternoon everyone. For the third quarter, we generated organic revenue growth of 19% and $306 million of total revenue. As Trevor mentioned, we generated organic growth in the quarter of 11% at IAS, 25% at UCTS and 29% at MIS. We recorded a GAAPnNet loss for the third quarter of $32 million or GAAP diluted loss per share of $0.29. Adjusted net income for the third quarter, which excludes share-based compensation, amortization and other one-time expenses was $33.8 million or $0.29 per fully diluted share. A table reconciling GAAP net loss to adjusted net income can be found in our earnings release and our 10-Q filed with the SEC. Adjusted EBITDA for the third quarter rose 53% to $64 million, compared to $41.9 million in the prior year period.
Adjusted EBITDA margin was 21% for the quarter, compared to 16% in the prior year period. This margin expansion highlights the significant operating leverage that exists in our business, which we've achieved through our continued organic growth against the backdrop of our ongoing absorption of prior year investments, which continue to earn in and perform as expected. Additionally, as Trevor mentioned, we have begun executing on organizational alignment and cost savings initiatives aimed at the rationalization and simplification of our growth services support structure to more fully align with our go-to market approach and drive enhanced client execution. Specifically, we expect a $10 million in-year benefit from these initiatives in 2024. In the third quarter, we paid $36 million in earn outs and our remaining estimated undiscounted earn out obligations total approximately $332 million.
In September, we opportunistically executed a fungible add-on to our term loan B with proceeds used to pay down our revolver, leaving us with approximately $270 million of capacity on our $600 million revolving credit facility. After Q1 2025, when we have finished paying the vast majority of our earn outs, we expect significantly higher free cash flow generation and the potential for more rapid delevering. As Trevor stated, delevering is a critical component to increasing free cash flow and we remain committed to doing so. We expect our net leverage will continue to decrease through the end of 2023 and our goal is to delever to four times by the end of 2024, a target which includes 2024 estimated earn out payments of approximately $135 million.
In addition, given the current interest rate environment, we are adjusting our target net leverage range to three to four times, down from three and a half to four and a half times, which implies incremental delivering into 2025. For the fourth quarter of 2023, we expect revenue of $275 million to $285 million. Organic growth of 12% to 14% and adjusted EBITDA between $40 million and $45 million and adjusted EPS of $0.10 to $0.12 per share, bringing expectations for the full year of 2023 to revenue of $1.21 billion to $1.22 billion, organic growth of high teens and adjusted EBITDA of $245 million to $250 million. The update to our prior full-year guidance is primarily a result of startup costs related to the launch of Junipe Re, a conservative view towards loss ratio sensitive contingents and the continuation of lower project-based insurance revenue in IAS, which began to manifest in Q3.
We expect Q4 to include compensation expense for portions of our maturing earn outs that the prior shareholders at their full discretion allocate to non-shareholders of the previously sold businesses. This is an accounting nuance whereby only prior owners can receive portions of the earn out that would be characterized as consideration for the business acquired. This expense if applicable will be a direct offset to the change in contingent consideration and neutral to the Q4 income statement. We are highlighting the matter because any compensation charge related to this will be included in our reconciliation of net income to adjusted EBITDA, so that the impact on adjusted EBITDA is also net neutral. For partners whose earn out matures in Q4, the compensation expense is a maximum of $15 million subject to the full discretion of the former shareholders.
Given that we are not hosting an Investor Day in late November as we had last year, we are sharing an initial view for 2024 financial expectations. We expect revenue of $1.38 billion to $1.42 billion, which implies organic growth towards the upper end of our long-term range of 10% to 15%. Adjusted EBITDA of $320 million to $335 million and expected free cash flow from operations of $170 million to $200 million. In closing, I would echo Trevor's comments regarding the state of our business heading into 2024 and beyond. The capital we have prudently allocated into our operating groups over the last three years has positioned us for continued outsized growth at scale and to more meaningfully drive margin accretion, free cash flow expansion and continued deleveraging.
We will now take questions. Operator?
Operator: [Operator Instructions] Our first question comes from the line of Greg Peters with Raymond James. Please proceedwith your question.
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