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Edited Transcript of GSHD.OQ earnings conference call or presentation 30-Apr-20 8:30pm GMT

Q1 2020 Goosehead Insurance Inc Earnings Call

May 21, 2020 (Thomson StreetEvents) -- Edited Transcript of Goosehead Insurance Inc earnings conference call or presentation Thursday, April 30, 2020 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Daniel D. Farrell

Goosehead Insurance, Inc - VP of Capital Markets

* Mark E. Jones

Goosehead Insurance, Inc - Co-Founder, Chairman & CEO

* Mark S. Colby

Goosehead Insurance, Inc - CFO

* Michael C. Colby

Goosehead Insurance, Inc - President & COO

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Conference Call Participants

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* Mark Alan Dwelle

RBC Capital Markets, Research Division - Director of Insurance Equity Research

* Meyer Shields

Keefe, Bruyette, & Woods, Inc., Research Division - MD

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Presentation

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Operator [1]

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Thank you for standing by. This is the conference operator. Welcome to the Goosehead Insurance First Quarter 2020 Earnings Call. (Operator Instructions) And the conference is being recorded. (Operator Instructions)

I will now turn the call over to Dan Farrell, VP, Capital Markets. Please go ahead.

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Daniel D. Farrell, Goosehead Insurance, Inc - VP of Capital Markets [2]

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Thank you, and good afternoon. With us today are Mark Jones, Chairman and Chief Executive Officer of Goosehead; Michael Colby, President and Chief Operating Officer; and Mark Colby, Chief Financial Officer. 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.

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. 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. For more information regarding our use of non-GAAP financial measures, including reconciliations of these measures to the most comparable GAAP financial measures, we refer you to today's earnings release.

In addition, this call is being webcast. 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 like to turn the call over to CEO, Mark Jones. Please go ahead.

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Mark E. Jones, Goosehead Insurance, Inc - Co-Founder, Chairman & CEO [3]

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Thanks, Dan, and welcome to our first quarter 2020 earnings call. I'll provide an overview of our results for the quarter and the resilience of our unique growth strategy even in the current environment. I'll then hand it over to Mike Colby, our Chief Operating Officer, to update you on actions we have taken in response to COVID-19 and some macro trends and performance metrics we are currently observing. Our CFO, Mark Colby, will then go into greater detail on our first quarter results and outlook.

Let me start with a little context. We have followed a battle-tested strategy that great companies adopt, especially in times of economic turbulence and uncertainty. Our teams have played offense and have been relentlessly externally focused on our clients and referral partners to demonstrate that Goosehead is a reliable and stable agency and partner. We've been using our full arsenal of tools and technology to continue to grow and prosper.

We are also proud to report that we have neither sought any kind of government support nor have we reduced pay, furloughed or laid off any employees. Mike will review our COVID-19 response in more detail, but a few examples of actions we have taken include: one, focus and deployment of system-wide best practices to achieve full share of wallet with our clients. Two, consistent marketing to referral partners. We show up even if it's virtually, while others don't. As a result, we gain share with existing partners and add new ones, while so many of our competitors sit the game out. We have benefited from strengthened mortgage refinance activity. Our value proposition is equally powerful to refi clients as it is to buyers. Three, we are enhancing our approaches to gaining client referrals, a lead source that is unaffected by market shocks. We are confident that our already formidable competitive moat will only be strengthened as we come through this coronavirus challenge.

The first quarter of 2020 represented a very strong start to the year that continued to validate the powerful growth platform we have built, delivering year-over-year growth in premium and core revenue under ASC 605 of 46% and 41%, respectively. Adjusted EBITDA for the quarter was $1.2 million, down slightly as we accelerated some seasonal expenses in 2020 from Q2 into Q1, along with some onetime public company expenses. Despite transitioning our entire team to working remotely, we have had a strong finish to the quarter while fully maintaining all of our service quality metrics. This is yet another example of the extraordinary human capital and resourcefulness that exists at all levels of the company. We continue to drive very strong growth in April, with preliminary year-over-year premium growth estimated at over 40%.

Underlying demand in our industry is very attractive and stable. If you live somewhere or drive something, you have to buy personal lines insurance, either from us or a competitor. Our client retention remained constant at 88% in Q1. As a reminder, our business is similar to annuity aggregation. Roughly 30% of annual revenue is new business, and the rest is recurring renewal business. Historically, about 2/3 of new business is tied to the housing market, while the remainder is client referrals. We've built a unique and well-tested distribution model and have invested heavily in proprietary technology to drive growth in good times and in bad.

Based on what we know today, we are reiterating our prior guidance for 2020 premium and revenue growth. Let me remind you that our company does not play games with guidance. We do not underpromise so that we can overdeliver. When we give guidance, it represents our best estimates of what we expect the actual numbers to be. If, in the future, our estimates change, we will let you know. But our annual expectations remain unchanged at this point. While we recognize that COVID-19 is an unprecedented event that will continue to negatively impact the broader economy, we are confident we will continue to perform well through these challenging times. Historically, we've demonstrated our ability to quickly pivot to add referral partners when existing ones experience a softening of demand. This is enabled by our extraordinary human capital and our proprietary technology that allows our people to be laser-focused and highly productive in their marketing efforts.

Our Corporate Channel functions as an incubator to test and refine new technology and sales processes and to develop best practices, which can then be rolled out across the company into the franchise channel. Last quarter, we highlighted the initial success of our virtual sales coaching pilot program, and we'll look to continue to expand this initiative through 2020 and beyond. While the Corporate and Franchise channels are separate on paper, we manage them as one integrated whole. Our success in the Franchise Channel is, in large part, dependent on our continued investment in and support of the Corporate Channel. The success of this integrated model is evident in the continued growth in agent productivity within the Franchise Channel, and we continue to see significant opportunity to further leverage this into the future.

As our mix of business continues to shift more to the Franchise Channel, it is important to understand how premium converts to revenue. In the Franchise Channel, we earn 20% royalties on the first term of a policy and 50% on renewal terms. So as a larger relative share of new business is generated in the Franchise Channel, there will be a growing gap between premium growth and revenue growth. Given our 88% client retention rate, we see approximately 120% mechanical revenue growth as a policy converts from new to renewal. So strong premium growth today drives strong revenue growth tomorrow. That is why we view premium growth as the most important leading indicator of our future revenue growth.

In the first quarter of 2020, premiums placed were $214 million, an increase of 46% from the year ago quarter. In the quarter, we saw acceleration of new business growth in both the Franchise and Corporate channels. Franchise premiums for the quarter increased 54%, with new business premiums showing increasing rates of growth in each of the last 4 quarters. Total corporate premiums for the quarter increased 30%, with new business premium growing 42% over the prior year. This was a substantial accomplishment given the increasing responsibilities the Corporate Channel bears in training and mentoring of franchise agents.

We're continuing to succeed in adding higher-quality franchise recruits over time. Total franchises at the end of the first quarter were 1,012, an increase of 45% from the year ago period. Operating franchise increased 36% in the quarter to 679. Our Corporate Channel ended the first quarter with sales agent head count of 241, an increase of 31% from the year ago period. Our business remains on offense, investing in talent, technology and innovation with maniacal, external focus in our clients and referral partners. Mike Colby will provide more detail on the current operating environment and some of our activity and key performance metrics through April in his remarks.

I want to take a moment and thank our management team, employees and franchisees for their incredible efforts, particularly over the last couple of months. Our success is made possible through their hard work, laser-like external focus and adaptability. I could not be more excited about our long-term growth prospects. We have a talented and highly motivated team, industry-leading technology and a proven, disruptive business model to continue to grab share of a gigantic market.

With that, I'll turn the call over to Mike Colby.

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Michael C. Colby, Goosehead Insurance, Inc - President & COO [4]

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Thanks, Mark, and hello to everyone on the call. On prior calls, I've discussed our strategic technology initiatives focused on agent and client-facing software application development, a key driver behind our ability to outperform the industry on new sales productivity, client experience and retention and cost management. Today, I'd like to discuss our response to the COVID-19 crisis, the specific infrastructure investments we've made over the last decade to allow for a seamless transition to a virtual operating environment and provide some insight into the business results through the month of April.

Beginning the week of March 16, we reduced workforce density at all corporate offices by asking employees who are already mobilely equipped to begin working from home. This represented approximately 40% of our corporate employee base, primarily sales, agents and recruiting team. Additionally, we indefinitely suspended all corporate travel, field support visits, in-person marketing efforts and in-person team meetings. Leveraging our cloud-based technology, video conferencing technology and importantly our mortgage activity database to continue referral partner marketing efforts allowed operations for this group to be largely uninterrupted.

The following week, we began the more challenging task of transitioning the remainder of our workforce to work from home in a virtual environment and also converting the 2-week in-person components of our initial training program to be conducted virtually. Because of early investments made to move our technology platform and voice solution to the cloud and investments made in cybersecurity, this was largely a logistical challenge that involved equipping the team with the proper hardware needed to be fully productive in their homes. By March 26, our entire corporate team was seamlessly transitioned to a secure work-from-home environment, and the business remained fully operational, albeit virtually.

As of this call, we've been operating the business completely virtually for 5 weeks, and we are very pleased with how our team has performed. Our training team successfully converted our in-person training curriculum to be delivered virtually, and we successfully kicked off new agent training on April 20. For the month of April, we estimate operating franchises and corporate agents grew 38% and 37%, respectively. We plan to conduct new agent training virtually again in May. This was a great effort from our training team but also our onboarding team that worked creatively with licensing bureaus and carriers to ensure that trainees were equipped to sell insurance.

Compared to 2019, April total new business production, which is not our GAAP revenue but a good real-time proxy, is up in both the Corporate and Franchise channels, and consolidated premium growth is up over 40%. While lead mix has changed slightly, these levels of production growth demonstrate that our agents adapted rapidly to a virtual operating environment and that they are successfully deploying our technology to grab market share as new purchase mortgage leads decline, increased cross-selling of other lines of business and increased client referral leads. The same is true for our service centers and back-office functions, where we've been able to maintain a consistently great client experience and even grown our NPS in the month of April to 92. Client retention remained stable at 88% in April. In addition to maintaining our operational capacity, we are playing offense and continuing to make strategic investments in our information systems development team, growing the team 200% in April compared to last year. The strategic initiatives that we've discussed on previous calls remain on their expected time lines for the year.

Navigating through this unprecedented crisis is a monumental effort for our team. But years of preparation and making the appropriate infrastructure investments gives us the confidence that we'll be able to continue to navigate through this successfully. I look forward to welcoming our team back to their offices and resuming normal operations when it's safe to do so. We cannot predict when that will be, but we will follow CDC and government recommendations. I'd also like to echo Mark's comments and thank our entire team for their hard work, adaptability and ingenuity in responding to this challenge.

With that, I'll turn the call over to Mark Colby to provide color on our financial performance.

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Mark S. Colby, Goosehead Insurance, Inc - CFO [5]

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Thanks, Mike, and good afternoon to everyone on the call. For comparability purposes, my comments on our first quarter 2020 results will be discussed against the first quarter 2019 as if recognized under ASC 605. A reconciliation of ASC 606 accounting to ASC 605 accounting for 2020 has been provided as a supplemental schedule in our earnings release.

For the first quarter of 2020, total written premiums, an important leading indicator of our future core and ancillary revenue growth, increased 46% to $214 million. This included franchise premium growth of 54% to $148 million and corporate segment premium growth of 30% to $66 million. This growth is being driven by continued high retention rates, strong new business generation and increasing agent productivity in the Franchise Channel. The continued shift in our mix of business towards the faster-growing Franchise Channel implies significant embedded future revenue growth, as the new business premiums convert to renewal premiums after year 1, at which time our royalty fees increase from 20% to 50% for ongoing renewals.

At quarter end, we had over 530,000 policies in force, a 45% increase from 1 year ago. Our consistent and rapid year-over-year growth in both premiums and policies positions us well for long-term success.

Revenues were $20.4 million for the quarter compared to $23.1 million in the prior year period, which is skewed by the different revenue recognition used in each period. If Q1 2020 was reported under ASC 605, revenue grew 8% to $24.9 million. More importantly, core revenues increased 41% to $19.4 million, if reported under ASC 605.

In the first quarter, our Franchise Channel generated core revenues of $7.9 million if reported under ASC 605, an increase of 54% from a year ago, with the results driven by continued strong growth in new business and renewal royalty fees from an increase in operating franchises, combined with higher productivity, plus sustained high levels of retention. At the end of the first quarter, we had 1,012 total franchises, up 45% from the prior year and 679 operating franchises, up 36% from a year ago. We continue to build on our strategy of national expansion within this channel. Non-Texas franchises now represent 70% of our total operating franchises compared to 59% a year ago. Our franchise pipeline remains very strong, and we are continuing to grow our recruiting team, which currently stands at 69. We will continue to invest in the growth of this team throughout the year to drive our planned growth.

If reported under ASC 605, Corporate Channel core revenues were $11.5 million in the first quarter, an increase of 33% from the year ago period, driven by an increase in agents and continued high levels of retention. Corporate sales head count at the end of the first quarter was 241, an increase of 31% from the year ago quarter.

As a reminder, because of our college recruiting for the Corporate Channel, the summer months are historically our largest for corporate sales onboarding. We continue to invest in the success of our Franchise Channel agents via our corporate agents, as evidenced by increased investment in our virtual sales coach program. Additionally, we moved a group of former corporate agents into full-time franchise support roles during the quarter.

Adjusted EBITDA for the quarter was $1.2 million compared to $9.5 million in the year ago period, again skewed by different revenue recognition accounting in each quarter. If reported under ASC 605, adjusted EBITDA was $5.3 million, with the decline due primarily to lower contingent commissions earned based on calendar year 2019 versus 2018, higher investments in people and technology as well as timing of certain operating expenses and onetime accounting and public company expenses. Specifically, the quarter included over $300,000 of onetime accounting expenses and over $600,000 of expenses that were previously incurred in the second quarter of 2019.

As a reminder, under ASC 606, we expect the first quarter will now be our seasonally lowest earnings quarter of each year. While our business has natural operating leverage and should continue to see gradual margin improvement over the long term, we do not manage the business on a short-term quarterly basis. We will gladly trade off near-term margin pressures to take advantage of emerging opportunities to invest for future growth. We manage the business to maximize overall profits over the long term.

As of March 31, 2020, the company had cash and cash equivalents of $10.8 million, an unused line of credit of $19.7 million and outstanding notes payable of $46.4 million on its balance sheet. In order to maintain an efficient capital structure, on March 6, 2020, the company refinanced its $13 million revolving credit facility and $40 million term note payable to a $25 million revolving credit facility and $80 million term note payable agreement. The company expects to draw down the remaining balance of the new term note, which is fully committed and ready to be funded in June 2020, adding over $37 million in cash to our balance sheet.

As it relates to our balance sheet planning, our strategy of returning to shareholders excess cash not needed to execute our growth remains unchanged. However, out of an abundance of caution given the current economic environment, we have decided to delay payment of a special dividend until further notice.

Finally, as Mark noted in his remarks, based on what we know today, we are maintaining our full year 2020 outlook with respect to total written premiums and revenues. We continue to expect total written premiums placed to be between $975 million and $1.035 billion, representing organic growth of 32% to 40%. Total revenues under ASC 606 are expected to be in the range of $100 million to $105 million, representing organic growth of 29% to 36%. Investments in people and technology as well as certain onetime expenses will continue to have a moderating effect on margin improvement in 2020.

Our business remains well positioned to deliver consistent and sizable growth, even during times of economic uncertainty. We will continue to closely monitor the COVID situation and any impacts it may have on our business, and we will provide an update as necessary.

With that, I'd like to thank everyone for listening, and we will now open up the lines for Q&A. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question is from Meyer Shields of KBW.

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Meyer Shields, Keefe, Bruyette, & Woods, Inc., Research Division - MD [2]

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This is incredibly strong. I was hoping you could talk a little bit about the impact of what seems to be dramatically rising unemployment in terms of the ability to get more agents in both channels and whether that increases the need for greater selectivity.

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Mark E. Jones, Goosehead Insurance, Inc - Co-Founder, Chairman & CEO [3]

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We are seeing very strong interest, particularly on the corporate side where people are very much drawn in these times to a strong and stable employer. So we are definitely seeing more interest. We are -- our hiring standards have not been compromised in any way, though. In fact, we're able to have our pick of the cream of the crop. So there's no -- there's only positive impact on the Corporate side. On the Franchise side, I think it's too soon to tell. Mike, would you agree with that?

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Michael C. Colby, Goosehead Insurance, Inc - President & COO [4]

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Yes. I would agree and echo your comments. Our standards are always held at a very high level, whether it's a tight labor market or whether the labor market loosens up. We're never compromising those evaluation standards.

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Meyer Shields, Keefe, Bruyette, & Woods, Inc., Research Division - MD [5]

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Okay. Fantastic. And second question, we've heard a lot of insurers granting more flexibility to policyholders because of potential financial constraints. Is that likely to have any impact on near-term cash flows?

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Mark S. Colby, Goosehead Insurance, Inc - CFO [6]

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Yes. So what we've heard so far from these carriers is that they're going to do this in a way where they're benefiting both the clients and the agents that sell for them. So what we've been told again is that it's going to be kind of economically neutral for us.

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Mark E. Jones, Goosehead Insurance, Inc - Co-Founder, Chairman & CEO [7]

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Their commitment is equally as strong to the clients, but they're trying to help, as it is to their agents. So there should be no impact to our economics.

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Operator [8]

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The next question -- (Operator Instructions) The next question is from Mark Dwelle of RBC Capital Markets.

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Mark Alan Dwelle, RBC Capital Markets, Research Division - Director of Insurance Equity Research [9]

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The first question that I had related to the employee compensation and benefits expense. I mean it was up fairly substantially and a little bit greater rate of increase than I probably would have expected. Can you just talk in a little bit more detail about what some of the drivers were there?

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Mark S. Colby, Goosehead Insurance, Inc - CFO [10]

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Yes. For one, it's just continued hiring. It's -- also, Q1 is a time of year where most of our employees will see their annual raises kick in. And the other thing was, as I mentioned on the call, we had some employee development expenses of over $500,000 related to our annual meeting that last year were in Q2 in 2019. But however, in this year, that meeting was held in February, so kind of fast-forwarded those in comparison.

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Mark Alan Dwelle, RBC Capital Markets, Research Division - Director of Insurance Equity Research [11]

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Okay. Are you incurring any -- I mean this was maybe less in the quarter but more prospectively. Are you incurring incremental sales and prospecting costs just in view of kind of the modified way that you need to approach customers?

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Mark S. Colby, Goosehead Insurance, Inc - CFO [12]

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No. To be honest, we'd rather be out in the field shaking hands and making introductions. If anything, it's the opposite. We're having to do it virtually. So we can't host those get-togethers, those happy hours, those lunches. So we're looking for ways to reinvest those funds into other places that can help drive growth in client referrals in other ways. But if anything, I think you'll see some slight decreases in those types of marketing expenses in Q2.

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Mark Alan Dwelle, RBC Capital Markets, Research Division - Director of Insurance Equity Research [13]

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Okay. And then, I mean you had mentioned that a lot of the renewals or new business that you've been able to prospect have been driven by refinance transactions. Are you seeing any change in customer behavior as far as changes in deductibles or changes in policy limits or what have you, just people trying to navigate the current environment?

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Mark E. Jones, Goosehead Insurance, Inc - Co-Founder, Chairman & CEO [14]

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Mark, we're not seeing it that way. I mean we're seeing new purchase business. We're also -- we're seeing refinance business. But our agents are focused on, first and foremost, making sure that the client is properly covered with the right insurance policy. And because we're working with so many different companies across the country, we can usually accommodate that at a fair price, at a competitive price. So, so far, we have not seen any type of savings effort by reducing coverage for our employees. In fact, our quality control processes would prevent that.

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Operator [15]

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This concludes the question-and-answer session. I would like to turn the conference back over to Mark Jones for any closing remarks.

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Mark E. Jones, Goosehead Insurance, Inc - Co-Founder, Chairman & CEO [16]

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I would like to just thank everyone that joined us today. We're very proud of the results. We are working very hard for you, our shareholders, and we'll continue to do so. And thank you for your time today.

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Operator [17]

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This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.