BRP Group, Inc. (NASDAQ:BRP) Q4 2023 Earnings Call Transcript

BRP Group, Inc. (NASDAQ:BRP) Q4 2023 Earnings Call Transcript February 28, 2024

BRP Group, Inc. beats earnings expectations. Reported EPS is $0.14, expectations were $0.11. BRP isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Greetings and welcome to the BRP Group Inc. Fourth Quarter 2023 Earnings Call. [Operator Instructions]. As a reminder, this conference is being recorded. It’s now my pleasure to introduce your host, Bonnie Bishop. Thank you. You may begin.

Bonnie Bishop: Thank you, operator. Welcome to the BRP Group’s fourth quarter 2023 earnings call. Today’s call is being recorded. Fourth quarter and full-year financial results, supplemental information, and Form 10-K 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-K, 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, Chief Executive Officer of BRP Group.

Trevor Baldwin: Good afternoon, and thank you for joining us to discuss our fourth quarter results reported earlier today. I’m joined this afternoon by Brad Hale, our Chief Financial Officer; and Bonnie Bishop, Executive Director of Investor Relations. For the fourth quarter, the contributions from the significant investments we made in 2021, and 2022 continued to manifest themselves in a meaningful way. As we generated organic growth of 15%, our 15th straight quarter of double-digit organic growth as a public company. For the year, we achieved industry-pacing organic growth of 19%, including double-digit organic growth across all three of our segments. Grew adjusted EBITDA by $54 million, a 27% year-over-year increase, and expanded our margin by approximately 50 basis points.

As a result of the investments we’ve made over the past few years, our business remains well-positioned to continue delivering double-digit organic growth, ongoing margin expansion, rapid growth of free cash flow from operations and continued strengthening of our balance sheet. In IAS, we generated organic growth of 9% in the fourth quarter. In line with expectations we previewed on our third quarter earnings call. As forecasted, while growth was robust in most areas of our IAS platform, we saw select weakness in profit sharing revenue and project-based work in sectors such as construction, where increased client sensitivity to continued higher interest rates and insurance rate increases had an impact in Q4. Despite the headwinds in Q3 and Q4, IAS organic growth for the full year was 12% in line with our long-term target of 10% to 15%.

There will always be puts and takes to the underlying momentum of our in-client industry sectors, but early signs are pointing to an ebbing of these negative impacts that persisted during the second half of 2023. Job starts in our construction practice or seeing a normalization as we start the year, and our clients in general across the IAS business are exhibiting resiliency consistent with the continued growth seen in the broader U.S. economy. Our UCTS segment grew organic revenue 22% in the fourth quarter due to continued strength in our multifamily homeowners and commercial umbrella programs, which has persisted into the first quarter and the commercial property and high net worth homeowners’ products we launched in late 2023 continue to gain momentum.

UCTS organic revenue growth through the year was 31%, thanks to broad-based strength across our platform, and due to the significant growth in our homeowner’s platform in 2023. Our MIS segment grew revenue 21% organically for the quarter and 23% for the year, thanks to continued strength from Westwood and a growing contribution from our national mortgage and real estate operation. Additionally, investments in our sales and distribution capabilities at Westwood have led to three more top 35 builders signing with us in the last six months. We expect sustained strength in new business along with higher attachment rates and meaningful insurance rate to drive continued momentum for Westwood in 2024. As a part of our efforts to streamline operations, increase margin, and focus on our core businesses, we have executed a definitive agreement for the sale of our wholesale brokerage platform connected Risk Solutions to Amwins.

We expect the transaction to close on March 1st, generating cash proceeds of approximately $59 million. In addition, this transaction is expected to be neutral to 2024 adjusted EPS and a creative to both 2024 organic growth and adjusted EBITDA margin as the nation’s largest independent wholesale broker, Amwins has been one of our trusted and preferred trading partners for many years, and they will be an outstanding home for connected clients and colleagues. Brad will cover the anticipated financial impact of this transaction in a few moments. As we move forward with our strategic roadmap, we are deepening our focus on efficiency and execution through our recent work to simplify and optimize our operating model and business operations. To that end, in January, we announced the promotions of Dan Galbraith’s, formerly Chief Operating Officer and Jim Roche, formerly Chief Insurance Innovation Officer to co-presidents of BRP Group with shared firm-wide responsibility for BRP’s continued performance and operations.

Dan will also serve as CEO of Retail Brokerage Operations, which includes the Insurance Advisory Solutions segment and the Medicare and Main Street Personal Insurance Businesses in the Main Street Insurance Solutions Segment. Jim will also serve as CEO of the businesses in the underwriting capacity and tech technology solutions segment as well as of Westwood, which resides in the Main Street insurance solution segment. Dan and Jim have delivered exceptional results and made significant contributions to BRP’s growth and evolution since joining the firm. I’m excited for their contributions in these roles as they broaden their responsibilities to drive our continued success as we build the transcendent broker of the future. In summary, we are proud of the strong results we delivered in 2023.

We are executing daily on numerous strategies to drive continued industry-leading organic growth, expanding margin and growth of our free cash flow, all while building on our unique culture and status as a destination for our industry’s most talented professionals. I want to thank our nearly 4,000 colleagues for their unwavering dedication to all our stakeholders during a challenging year in the insurance marketplace. While growth across the economy still appears resilient, dislocation persists in large portions of the insurance marketplace impacting many of our clients. I extend my gratitude to our clients for their continued trust in our ability to help them navigate these conditions and deliver innovative and thoughtful solutions. With that, I will turn it over to Brad.

We’ll detail our financial results.

Bradford Hale: Thanks, Trevor, and good afternoon everyone. For the fourth quarter, we generated organic revenue growth of 15% and total revenue of $285 million. For the full-year, organic revenue growth was 19% and total revenue was $1.2 billion. We generated organic growth in the quarter of 9% at IAS, 22% at UCTS and 21% at MIS. We recorded a GAAP net loss for the fourth quarter of $62.5 million or GAAP diluted loss per share of $0.56. GAAP net loss for the full year was $164 million or $1.50 per fully diluted share Adjusted net income for the fourth quarter, which excludes share-based compensation, amortization, and other one-time expenses was $16.2 million or $0.14 per fully diluted share. For the full year adjusted net income was $131.1 million, or $1.12 per fully diluted share.

A table reconciling GAAP net loss to adjusted net income can be found in our earnings release and our 10-K filed with the SEC. Adjusted EBITDA for the fourth quarter rose, 16% to $45.6 million, compared to $39.2 million in the prior year period. Adjusted EBITDA margin was 16% for the quarter flat versus the prior year period. Adjusted EBITDA for the full year grew 27% over the prior year to $250 million. Adjusted EBITDA margin was 21% for the full year, and expansion of 50 basis points. Net cash provided by operating activities in our statement of cash flows was $44.6 million for the full year 2023, compared to negative $2.5 million in 2022. Free cash flow from operations was $60.6 million for the full year, an increase of 6% from the prior year, even in the face of a 68% or $42.7 million increase in cash paid for interest.

For the fourth quarter, free cash flow from operations was negative $15.4 million compared to negative $2 million in the prior year period. We incurred $15 million of severance expense in the fourth quarter and took meaningful steps around selling and operating expense management to achieve the $10 million of run-rate savings for 2024 that we highlighted on the third quarter earnings call. We expect these expense management efforts, our continued growth of the business, coupled with a decrease in one-time integration costs and flattening interest expense to yield greater than a 100% expansion of free cash flow from operations in 2024. As a result of our strong organic growth in the absorption of prior-year investments, our business is well-positioned to accelerate the realization of significant operating leverage in 2024.

As a reminder, we absorbed significant expense headwinds in Q1 and Q2 2023 from the roughly 1000 net new colleagues that joined BRP in 2022. The absence of this headwind as well as the cost savings initiatives we executed in the fourth quarter to align the growth services support structure with our approach and integrated platform will continue to have a positive impact on margin in 2024 and beyond. In addition, we have completed a substantial portion of our partnership integrations, as a result of which we anticipate meaningfully lower one-time expenses in 2024, which should drive increased free cash flow conversion. In the fourth quarter, we paid $2.8 million in earnouts and our remaining estimated undiscounted earnout obligations total approximately $309 million as of December 31st, 2023.

As discussed on the Q3 earnings call, several agreements pursuant to which we executed on partnerships contain provisions related to earnouts that permit the former selling shareholders to allocate portions of the earnout proceeds to partner colleagues who are not selling shareholders, but who meaningfully contributed to the partner firms achievement of the earnout. When this determination is made, it results in compensation expense being recorded as an offset to the change in contingent consideration, which is net neutral to net income. As a result of this practice, we added back $8 million of compensation expense in Q4 associated with colleague earn out pools and expect to add back approximately $7 million in Q1 2024 for earnouts coming due.

The vast majority of the earnouts will be paid by the end of the first quarter of 2025. Thereafter, we expect to generate significantly higher free cash flow. We expect our net leverage will continue to decline through the end of 2024, and our goal is to delever to approximately 4 times or lower by the end of this year. This target includes 2024 estimated earnout payments of approximately $135 million, of which roughly $80 million will be paid in the first quarter. As a reminder, last quarter, we revised down our target net leverage range to 3 times to 4 times from 3.5 times to 4.5 times. Also a few incremental details with respect to our sale of connected risk solutions our wholesale brokerage business. Connected finished 2023 at approximately $34 million of gross revenue and $5 million of adjusted EBITDA.

As Trevor mentioned, we expect cash proceeds from the transaction to be approximately $59 million. We anticipate the transaction will be neutral to 2024 adjusted EPS and accretive to both 2024 organic growth and adjusted EBITDA margin. For the first quarter of 2024, we expect revenue of $370 million to $380 million in organic revenue growth. At the high end of our long-term range of 10% to 15%, we anticipate adjusted EBITDA between $95 million to $100 million and adjusted EPS of $0.51 to $0.55 per share. As we project 2024 results, I’d like to reiterate our guidance from the third quarter earnings call, but make an adjustment for the divestiture of connected risk solutions for the full year 2024. We expect revenue of $1.35 billion to $1.4 billion, which implies organic growth towards the upper end of our long-term range of 10% to 15% adjusted EBITDA of $315 million to $330 million, and expected free cash flow from operations of $165 million to $195 million.

In closing, we are very pleased with our results for the fourth quarter and the full year of 2023 are immensely proud of our colleagues for their grit. In a year of continued difficulty in the insurance environment and grateful to our clients for their continued trust and confidence, we will now take questions. Operator?

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Q&A Session

Operator: [Operator Instructions]. The first question we have is from Greg Peters of Raymond James. Please go ahead.

Unidentified Analyst: Good afternoon, this is [indiscernible] to Greg. I know you guys called out some headwinds in the IAS segment for the last couple of quarters, and just curious if your 2024 guidance assumes those headwinds persist or if you’re expecting some improvements there.

Trevor Baldwin : So, a few things. One specific to the ‘24 guidance, it incorporates our expectation for a normalization of the impact of rate and exposure, which is where we see those headwinds show up relative to some of the project revenues mentioned earlier in my prepared remarks. I think it to contextualize the underlying performance of the IAS segment, it’s important to run through a handful of stats. When we look at the impact of rate and exposure on our organic growth in the IAS segment for the first half of 2023, it was a 6.6% tailwind. And when we look at the impact of rate and exposure on the IAS segment in the second half of 2023, it was a negative 0.5% headwind. In the fourth quarter specifically, it was a negative 2% headwind.

And so, if you look at the underlying organic growth and you normalize for the amount of transition we saw in impact from rate and exposure, the organic growth from the IAS segment, apples to apples would’ve been mid-teens for the second half of the year and the fourth quarter. When you look at the underlying momentum that we’re seeing in that segment, I would tell you that it’s growing. We track a metric called sales velocity, which is how we measure new business revenue being generated or won from new clients, as a measure of prior year commission and fee revenue. And for the full year of 2023 IS sales velocity was 17%, and more specifically for the fourth quarter IAS sales velocity was 21%. A notable uptick as we saw the growth and momentum in new client wins as a result of the investments we’ve made in talent and capabilities.

And as that compares to industry average, there’s a consulting firm in the industry, Reagan Consulting, they perform a quarterly study called the growth and profitability study. For the full year 2023, the industry median sales velocity was 11.6% and to be in the 75th percentile, it was 15.7%. And so, a long-winded way of saying we feel like momentum in the IAS business continues to be very strong. We had some idiosyncratic drivers of rate and exposure compression in the back half of 2023 tied to some specific dynamics with particular clients in client industry sectors. We believe that’s largely behind us. And we’ve seen that as through January with a return or more normalization of rate and exposure in that part of the business.

Unidentified Analyst : Thanks. I appreciate it. And then I was hoping maybe, I know it has touched on the prepared remarks, but hoping you can discuss a little bit more in detail the drivers of the margin expansion embedded in your guidance. And I think last quarter, Trevor, you mentioned Juniper Re is expected to be negative adjusted EBITDA in 2024. And hoping maybe you could quantify that and confirm if it’s still expected to be EPS accretive in 2025?

Trevor Baldwin : Yes, so let me just take those kinds of one by one. From a margin accretion standpoint, it’s driven by broad-based discipline, and operating effectiveness around payroll, operating expenses, and travel and entertainment expense. But notably it’s driven by us kind of growing into a normalizing the investments that were very significant that we made into talent in our business in 2021 and 2022. If you look at what’s the magnitude of that difference, when we started 2023, we had added a thousand net colleagues to the business in 2022 and had over $40 million of payroll, they did not yet earn through our P&L that was going to be running through the 2023 P&L that we fully absorbed. When we look at the net hiring into the business in 2023, we net added just a here over 40 colleagues into the business, while still adding over $187 million of revenue on an organic basis.

And that’s not because we stopped investing in the client-facing and talent side of the business, it’s because we were able to rationalize our footprint and talent investments as we wrapped up the integration work across the vast majority of the partnerships we’ve completed over the past few years. Specific to Juniper, we’re very pleased with the progress we’re making there. Jeff has recruited in a fantastic team and we fully built out capabilities across reinsurance, broking, actuarial services, cap modeling and operations. And we expect that business to begin contributing to revenues in the first quarter. We do expect that business to have a net loss for the fiscal year 2024. And our base plan is that that business will be EBITDA and EPS positive in 2025.

However, we continue to evaluate talent investments and opportunities. But in summary, I’d say we have a lot of trust and confidence in Jeff and the team that he’s been able to assemble. We’re super excited for the contributions they’re going to make, both this year and beyond. Thanks, Ed. Next question from the next analyst, please.

Operator: The next question we have is from Josh Shanker of Bank of America. Please go ahead.

Josh Shanker : Good afternoon everybody. Higher end of 10% to 15% long-term organic revenue guidance is very strong, but it’s also lower than it’s been the past. Can you talk about some of the drivers of your outsized organic growth and in retrospect, and what’s changing about the outlook to the broader economy that makes you a little more conservative looking forward?

Trevor Baldwin : Hi, Josh this is Trevor. As we’ve talked about in the past, we view there really to be four building blocks to organic growth. And it starts with how much of the prior year revenue did you retain? What’s the impact from rate and exposure on either expansion or compression of that prior year revenue that that renews. And then most importantly, how much new revenue, do you win from new clients that you’re bringing into the organization? And what’s been consistent from us is that the preponderance of our organic growth is driven by our new business generation. Our retention tends to be in line to slightly better than industry average. The impact we have from rate and exposure actually tends to be a bit lower than the industry average.