Ladies and gentlemen, thank you for standing by. Welcome to Goosehead Insurance Fourth Quarter 2023 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would like now to turn the conference over to your first speaker today, Dan Farrell, VP, Capital Markets. Please go ahead.

Thank you and good afternoon. 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 the management as of today. 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 you to all of our recent SEC filings for more detailed discussions of risks and uncertainties that could impact future operating results and financial condition of Goosehead. We disclaim any intention or obligation to update and revise any forward-looking statements except to the extent required by applicable law. I would also like to point out that, during the 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 including potential differences caused by variations in capital structure, tax position, depreciation and amortization and certain other items that we believe are not representative of our core business. For more information regarding the use of non-GAAP financial measures, including reconciliations of these measures to the most recent 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 An archived version will be available shortly after the call ends on the Investor Relations portion of the company's website at goosehead.com. Now, I'd like to turn the call over to our Chairman and CEO, Mark Jones.

Thanks, Dan and welcome, everyone, on the call. By now, you should all have had a chance to read the 2 press releases that went out prior to this call. I will address our management transition plans at the conclusion of our prepared remarks. Before getting into our 2023 results, I'd like to share some background context on the master plan that we've been executing against for the last 18 months. The basics of that plan were to refocus our efforts and resources around profitable growth, remove any barriers to profitable growth and protect and strengthen our competitive mode. We are pleased with both the pace of execution of the master plan and the results we are seeing and are right on schedule. Much of our time, effort and resources were focused on revamping our sales networks, yielding dramatic gains in agent productivity. During Q4, we reorganized our sales management functions into one consolidated team that works across both corporate and franchise under the leadership of Brian Pattillo. This has enabled us to better leverage our intellectual capital and is delivering great productivity growth. As a reminder, Brian took over the corporate sales function in late 2022. Corporate productivity was up 27% in 2023 relative to the prior year. Even more exciting, we saw first year corporate agent productivity grew 46%. Productivity per franchise was up 30% in Q4 following our management realignments even in the context of some pretty heavy industry headwinds. During the year, we also right-sized our cost structure in a way that continued to support high levels of growth but, at the same time, allowed us to deliver much better margins. We invested and continue to invest, aggressively in our quote-to-issue technology which has profoundly expanded our competitive moat, unlocking productivity of our sales agents, simplifying…

Thanks, Mark and good afternoon, everyone. As Mark mentioned, 18 months ago, we thoughtfully architected a master plan that included a list of initiatives designed to improve quality and execution across the organization. Our goal was to transform Goosehead into an even better company, one that could grow faster and more profitably at scale and expand our already wide competitive moat. We knew that, by executing our plan, we would slow the revenue growth in the short-term but we believed these actions will build a stronger foundation to deliver sustained high levels of both revenue and earnings growth in the future. In some areas, we were able to move quickly and start realizing benefits in the P&L within a few quarters. In other areas, we need to invest in people and processes and develop new business capabilities. Even when executed with precision, these types of growth initiatives can take multiple quarters to bear fruit. I'm pleased to report that, in 2023, we executed exceptionally well against these initiatives. We restructured our corporate and franchise agent force to drive higher levels of productivity. We doubled down on our recruiting function and raised our hiring standards to bring in significantly more high-quality talent. We drove cost discipline across the organization. We built a new enterprise capability that widens our distribution aperture to work more effectively with inbound lead flow from our online digital agent and partnerships. And we built a world-class technology team that has successfully developed what we believe is the best agent shopping platform in the industry and we have proven we can directly integrate that technology with the largest carriers in the industry to bind and manage policies. With strong execution in 2023, we are now ready to start pulling the levers to accelerate PIF growth in 2024. We…

Thanks, Mark. Mark Senior and Mark Miller have both referred to our master plan. Let me take a minute to provide more details of that plan, what we've accomplished to date and what you expect in 2024. First and foremost in our plan was to refocus on profitable growth and remove any barriers to future profitable growth. When we kicked off this plan, corporate sales headcount was just over 500 but we were not delivering the productivity that could drive the level of margin we know this business should produce. We evaluated our management resources, our recruiting practices and our incentive structure and ultimately decided that the best step we could take would be to reset the size of the team with total productivity being the guidepost for the appropriate team composition, essentially a shrink-to-grow strategy. We reached our productivity targets, a 56% increase at a headcount of around 250 and have been adding back productive capacity, with the only limiting factor being our absorptive capacity. We took a similar approach in the franchise network. The business was carrying too many underproductive agencies that were blocking other successful agencies from onboarding new referral partners, hurting our brand in the market and clogging up management resources. We shifted our focus from the number of operating agencies to what we view as the true measure of productive capacity, the number of producers and begin healing that network by investing in additional management resources, fostering engagement and incentivizing monthly goals where possible. We began aggressively culling underperforming agencies early in 2022 and have made great progress to date. Through the combination of franchise culling and new producer onboarding, we transitioned from a peak of just over 2,100 producers to a much healthier 1,957 at year-end while seeing fourth quarter productivity gains of 30%.…

As Goosehead marks 2024 as our 21st year in business, I'd like to take a moment to reflect on a few of our important milestones to date. After I spent 14 years at Bain & Company, my wife, Robyn and I founded Goosehead in October 2003. My view of the personal lines insurance industry was that it was irredeemably broken. It was old, slow moving, not client-centric and, honestly, quite boring. So we started with a fresh approach. Conceptually it wasn't complicated, just put the client at the center of our universe and build the business around them. We didn't start with someone else's business model and try and improve it. We started from scratch, a blank sheet of paper. My experience at Bain taught me that smart people will figure out great solutions to the most complex problems if we apply ourselves. So I set out to build a team of really smart, albeit inexperienced people, all committed to doing something really special, to create one of the truly great American business success stories. After launching the business in 2003, we opened our first satellite office in Houston in 2009. In 2012, we sold our first franchise to JC and Patti Harter. In 2018, we took Goosehead public in one of the most successful IPOs of that year. Since then, our stock is up approximately 800% versus returns for the S&P 500 of a little more than 100%. In 2020, we generated over $1 billion in premium for the first time and expect to be well north of $3 billion this year. As the company grew, we invested in our management team with an eye to the future needs of the company, trying to have the right team in place to manage the business when it was 2x or…

[Operator Instructions] The first question comes from Paul Newsome with Piper Sandler.

Congratulations on the transitions to both of you. And I wanted to ask maybe and I know you guys touched on this through the prepared remarks but a little bit more on the disconnect between written premium growth and revenue growth in your expectations. I would expect some of that has to do with the contingents, obviously but it looks like there's maybe something else in there as well to get you substantially slower revenue growth than written premium growth. Maybe you could just talk about that a little bit.

This is Mark Jr. So looking at 2024, as a reminder, when we write new business on the franchise side of the business, we only recognize our royalty as the revenue which is $0.20 on the dollar compared to the corporate side. And a lot of our investments are going into placing producers and launching new, highly successful franchises and driving productivity on that side of the business. That shows up in premium before it shows up in revenue growth. So then, you look forward to 2025 to see that spring-loading function as that 20% new business converts into 50% renewal.

And then relatedly, I'm surprised that the amount of contingent commissions as a percent of premium is expected to fall. I kind of think of personal lines results being about as bad as they could get in the last 2 years and we've seen some companies make the transition to profitability in the fourth quarter. So is that essentially a lag effect from what's happened with the personal lines profitability? Or is there something else in there that is reducing contingent commissions that isn't related necessarily to the profitability of the personal lines providers [ph]? Is there a mix?

Looking at where carriers are having more success, now you're starting to see the auto side of the business start to unthaw a little bit as loss ratios improve. 2023 on the home side was just about as bad as it has ever been. And so, when you think about our go-to-market strategy and how much of our book is made up of home which is a much more preferred client but this was a really bad loss year for carriers on the home side. We're not expecting that to get materially better in 2024, so I don't want to overpromise on contingencies. We're going to be conservative on that outwardly. And I would love to see that home side thaw but we're going to see the auto side come around first.

2024 contingencies are based on 2023 loss ratios, so there is that lag effect.

[Operator Instructions] The next question comes from Brian Meredith with UBS.

I had a couple of them quickly here for you. First one, just looking at the commissions and agency fees, really slowed from a growth perspective in the fourth quarter and it looks like a lot of that is because of what was going on with renewal commissions. Was there anything unusual in that number, any kind of reversals or something that may have happened to cause that to really slow?

No. When you're looking at the commissions and fees line, really agency fees, because that's probably the least important line in our revenue as it doesn't renew and a lot of that gets paid to the agents anyway and as we diversify our footprint outside of Texas into more states where the Department of Interest does not allow you to charge fees; naturally, that slows from a growth rate perspective. But also remember, on the corporate side of the business, we went through a lot of cutting starting in 2022 and through the middle of 2023. And so you saw that new business productivity increase but the aggregate amount of production remained relatively flat. So that had a really nice positive impact on the earnings. The secondary effect of that is you have less flowing into renewal than next year. So looking at the growth rate in that number, you need to go back and look at the growth rate in new business commissions in 2022 to see what happens to renewals in '23. And we do expect to see that reaccelerate very early in 2024.

And then, second just a quick question here. What is your kind of expectations with respect to leads from mortgage originators as you look into 2024?

This is Mark Miller. Brian Pattillo, who leads the sales organization, is here with me. I think our expectation is that the housing market continues to stay challenging but we've found a way to power through it. And we're just literally going out and just making more referral partner relationships out there which increases our lead flow. So I think we can continue to see our lead flow at least as strong as it is now and continue to work on our sales process. Brian, anything you want to add?

Yes. I would argue, obviously, the 2023 housing results were not good but we were able to power through that and drive productivity. And it's really just about managing the activity. We have such a low percent market share of new purchases still. There's lots of business out there. We just have to go hunt, go develop new relationships and we're able to power through it. So our intention is to continue on with those additional investments going into this year. It's hard to say exactly what housing does this year but I feel very confident we can power through any challenges or headwinds on housing.

[Indiscernible] the proprietary RP search tool -- just refresh everyone on that.

Yes. We have a proprietary kind of referral partner database that allows us to know exactly who is doing the transactions and which ones we're working with and which ones we're not. So every month, we're looking at, okay which realtors which loan officers are doing the volume that are not working with us currently and our agents proactively go out and build relationships with those. So that technology has been a huge help and we have stayed extremely proactive and aggressive during this time. Many insurance agents have sat back and dealt with all of the reshops and renewal activity. Our agents have gone out and aggressively built more relationships during this time to counteract the slowdown in housing.

And I'll just add one thing. I think we're also expecting to see lead flow pick up from some of our new lead sources. We mentioned kind of the mid-market business and also our partnerships are starting to take hold. So I think all of that leads to, like, solid expectations for lead flow next year, or this year.

[Operator Instructions] The next question comes from Andrew Kligerman with TD Cowen.

So just talking onto Paul and Brian's questions, just following up on the contingent, then, if I'm taking a very optimistic view about the return in auto underwriting performance, homeowners underwriting performance, I could see a material move when you're citing contingent commissions in 2025, if I'm taking that optimistic view, right?

Yes. That's exactly how I would look at it Andrew. I mean, I think, in 2025, we would expect to see some kind of regression back towards the mean of historical average of 80 basis points of total written premium. And I would be surprised if we get all the way back there in 2025 but it's a very big premium number by that point. And any move in that makes a pretty big difference at not only the top line but the bottom line, because that is effectively 100% profit.

And then, per what Brian was asking about the new business commissions, I guess it makes sense in the context of the corporate agents being down to 300 versus 310 year-over-year. And then the franchise producers, even though they're more productive, they're down 5%, 10%. So I guess the question then would be you've got 300 corporate agents. Where can that get to at the end of this year? And same thing on the 1,957 franchise agents. How are you thinking about growth in both of those channels in terms of numbers of agents?

This is Mark Miller. I'll take that one. On the corporate side, we've had a very successful recruiting season which kind of for us starts in the fall on college campuses. They're not all signed up yet but, like I mentioned in my comments, we feel really good about the class that we've signed up so far. So there's still more work to go but we would expect to see a significant increase in the corporate producer headcount this year by the end of the year. But I'm not going to peg an exact number, because we're not done with the recruiting cycle yet. On the franchise side, we're more focused on making the agencies that we have stronger and adding producers to those franchises. So I think what you'll see is the number of producers per agency go up over time. And we're really focused on closing the gap between the productivity of a corporate agent and a franchise agent and I think we can meaningfully move that up. So what I'm trying to say is that the end goal here is a productive output across both channels and I think we can meaningfully increase productive output on both channels in the coming year.

Andrew, I would just add one thing. To your initial comments, you were talking about new business commissions. As a reminder, we did launch 30 of our absolute best corporate agents into franchises during this year. And so you can take our productivity numbers that are in the K that's going to come out and you can see what would that have done to new business commissions had we had those 30 all year.

I see. And just to kind of add on to that, it looks like you're almost done with the restructuring, right, by the end of the first half of this year, that will be done. And I get that productivity is key but you actually could increase the number of agents given that that restructuring is kind of winding down, right?

Yes. I mean, we should see the turnover of franchises begin to slow in 2024. That will happen over time, you shouldn't expect to see that naturally happen just in the first quarter. And we're going to continue to recruit as aggressively as we can on behalf of our agencies because they're telling us we want to hire, we need your help and those are really powerful tools for driving productivity, not just for that individual agent but for everybody in their franchise. So yes, it's very possible you could see growth in the producer count number but we're also not going to reduce our quality standards on our existing force.

And the way it works in reality is we set a minimum standard of production for the franchises and we expect them to get over it. As the average productivity of the franchises increases, I think you'll naturally see less of them leave the system. But I do believe we will continue to keep the standard where it is and keep moving franchises up in the productivity range.

[Operator Instructions] The next question comes from Meyer Shields with Keefe, Bruyette & Woods.

Congratulations to really everyone on the move forward. A couple of technical questions on the supplemental disclosure which is really helpful. When we look at the franchise productivity, I can't tell whether the denominator of that is the franchises or the producers.

It's the franchises.

And I was hoping and I'm sure that the shift of corporate agents to the franchise channel is a big part of it but we look at the productivity for the more experienced corporate agents that went down, is there any way of disentangling how much of that is because the superstars are leaving? Is there any other headwind that we should be thinking about?

No, we can quantify that for you pretty easily. So if you were to include those 30 corporate agents that we launched into franchises this year, that greater than 1-year bucket of corporate agents would have had a 19% increase in productivity. So that does have a meaningful impact to the team when you take out -- I think the line we've used before is agents on nuclear steroids and put them into franchises.

And we did have a handful move into management, I believe, too, right?

I'm sorry, that handful moved into?

Into management. So as we prepare to add more corporate agents, we need to up-level the management team and they don't sell.

And then one last question, if I can. I was hoping you give us a sense of the pricing specifically on the home side that are built into the premium and revenue expectations.

Yes. I mean we're still expecting some pricing tailwinds, at least through the first half of the year. We're not going to put a specific number on it but really, we'll focus on driving policy productivity and reigniting policy-in-force growth rate which you should see in the second half of the year.

[Operator Instructions] The next question comes from Scott Heleniak with RBC Capital Markets.

Congrats, all, to everybody there. Just a quick question on the revenue guidance that you're talking about here. And you mentioned basically revenue trends expected to get better in the second half of 2024 and into 2025. Can you talk more about what's going to be the drivers behind that? Is that new hires? Is that productivity? Is it market conditions? Or just kind of a combination of all those, or anything else that's going to, I guess, result in better revenue trends in the second half of the year versus the first half?

Yes, it's kind of all of those things, Scott. So if you think about our corporate team which they have 100% revenue recognition on their new business compared to the franchise side is 20%, so we're going to onboard a pretty large class this summer of corporate agents that we've got through our recruiting pipeline right now which you'll start to see that flow through the new business lines in the second and third quarter. And on the franchise side of the business, as we reaccelerated the growth in Q4 of 2023, we've talked a lot about the spring-loading factor of how that will now impact the next year. And so you start to see that new business convert into renewal in the second half of 2024. On top of that, I mentioned in my prepared remarks we do expect to see an improving macro environment as opposed to a deteriorating one in 2024, both from a product side and hopefully from a home market, housing market side. But even if the housing market doesn't improve, our agents have shown that they can still go out there and generate kind of record number of leads. And so we think there's a lot of things that are going to go right for us, especially in the second half of the year and so we're feeling very confident.

And then on the EBITDA margin guidance, I know you're not going to talk a whole lot about what it's going to be, just up year-over-year. But is there any other expense items that we should kind of keep in mind versus 2023 that might be different, either up or down compared to the 2023 levels as we get into the year, particularly the second half of the year and some of those agents are onboarding?

I mean, I would just watch your quarter end [ph]. I mean, you should assume that, as we onboard a significant number of corporate agents late in the second quarter and early in the third quarter, that that will flow through your compensation expense lines. Your G&A shouldn't vary, I would say, materially from the cadence in 2023. Now, to drive margin expansion which we plan to do again in 2024, you have to get some scale out of both those comp and G&A lines. So as you're looking at your model, that's something I'd point you to.

[Operator Instructions] The next question comes from Michael Zaremski with BMO.

But on the contingents first, on the lag in terms of the payment to you all, could you give us any context on 6-month versus 12-month policies between home and/or auto so we can kind of better understand that lag? And just secondly, on the lack of care appetites in the current underwriting environment in certain zip codes or states, can you further unpack what's been going on and how you're viewing the care appetite changes in your kind of guidance in 2024?

Yes. So just to briefly touch on the contingency piece. So 12 months versus 6 months, that doesn't really factor into how the contingent commission contracts work. We've gotten a couple of questions occasionally on how much 6-month policies do you write. And so that's just a tool carriers use when they want to rewrite a little bit faster. It typically only happens on the auto side. You don't see 6-month home policies. So the home policies are still all 12 months. You do see an increase in the amount of 6-month policies you write but it's still not the majority of the business. We just do see an increase of it during hard markets for auto.

And I think the second part of the question was about the carrier market and what do we see there. I'll take that one. So just to frame the question up a little bit, slightly over 50% of our business is home. And of that 50%, about 50% of that is in the state of Texas. And Texas was hit, as you know, very hard by the weather over the last several years, particularly hail in the spring of last year. A lot of carriers pulled out of the market or put additional restrictions on in selling Texas. So it's been, as Mark mentioned in the opening remarks, one of the hardest markets that we've seen. We haven't seen all the major carriers come back into the market yet but we have gotten an indication that carriers are interested in coming back in, especially in auto. So auto looks particularly good right now. And then, home, early indications are good. So the Texas home market is very important to us. California got really hard for a while. It's gotten a little bit better. But generally, it comes in a couple of forms. Carriers can pull completely out of a market, or they can restrict new appointments. We're still restricted in some states on appointments for new franchises, so it helps us really narrow our vision on where we want to add new franchises because we want to be in places where they can get full appointments. But we see the market softening over the next year and I think that really, like, when we look at our forward forecast, it implies that we think the market is going to get better, over time.

And as a quick follow-up, if the trend is towards more 6-month policies, does that put any incremental pressure on your agents in terms of them having to do a little more work around a renewal, they get the step-down in their commission rate upon renewal if they're going from 12 to 6? Or is that not something we should really be thinking about?

Yes, it's not a big issue for agents. I mean, if you do the math, the step-down in the commission rate versus the rerating faster, it doesn't really cause that big of an impact to the individual agents. Now, it does give a policy more opportunity to rerate faster, so it should help actually drive premium growth. And then, frankly, on our end, the commission rate does step down.

[Operator Instructions] The next question comes from Pablo Singzon with JPMorgan.

The productivity gains are encouraging. I guess, I basically hear is, you expect the same pace of gains in 2024. And longer-term, what kind of trajectory are you assuming for productivity?

Well, I guess I was having a hard time understanding exactly what you said but I think you said do we expect the same kind of productivity gains in the coming years.

Should I clarify? Let me go through it again. Apologies. I think it's my phone. So yes, so 2023, clearly a good year for productivity gains outsized, right, like well in the double-digits. The question is do you expect the same pace in 2024? And longer-term, what kind of trajectory are you assuming for productivity?

Yes. I would say, when we look at corporate, we're very proud of the turnaround in productivity improvement. We still believe that there is more room to grow on the corporate side and that just comes from productivity gains, maturing of the agent base as their tenure increases. On the franchise side I think is where you really see the opportunity, with approximately 2,000 agents out there and what their productivity level is versus a corporate agent. There's no mathematical reason why a franchise agent can't get to the same productivity level as a corporate. And I think the structural changes that we made to the franchise area towards the end of 2023 really make me optimistic about what the future looks like at the franchise business. And I give Brian Pattillo and his team a lot of credit with that. We structurally changed how we interact and engage with franchises rather than just putting them through training and then letting them loose. We're managing their activities more closely now and helping educate them, helping them with their sales processes, helping them with their budgets and goals, incentivizing them. It's a really, really long program of things that we've done with the franchises but it's been incredibly successful. And I think there's a long runway to continue to improve performance in the franchise side of the business.

And then the second question for me, just on the guidance. I just want to confirm that you expect margins to expand next year even with contingents down. Is that correct?

Correct.

I show no further questions at this time. I would now like to turn the call back to Mark Miller for closing remarks.

Okay. Well, I want to thank everybody for joining us and appreciate your participation and support of the stock and your questions. With that, we'll close the call. Thank you.

This concludes today's conference call. Thank you for your participation. You may now disconnect.