Goosehead Insurance, Inc.

Thank you for standing by. This is the conference operator. Welcome to the Goosehead Insurance 4th Quarter 2019 Earnings Call. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. To join the question queue, you may press star then 1 on your telephone keypad. Should you need assistance during the conference call, you may signal an operator by pressing star and zero. I would now like to turn the conference over to Dan Farrell, VP Capital Markets. Please go ahead.

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 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 may 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 structures, 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 and an archived version will be available shortly after the call ends on the investor relations portion of the company's website at www.gooseheadinsurance.com. With that, I'd like to turn the call over to CEO Mark Jones.

Thanks, Dan, and welcome to our fourth quarter and full year 2019 earnings call. I'll provide an overview of our results for the year, as well as our strategy and outlook. I'll then hand it over to Mike Colby, our President and Chief Operating Officer, to discuss some of our recent people and technology investments that are advancing our already significant competitive advantage. Our CFO, Mark Colby, will then go into greater detail on our fourth quarter and full year results, as well as a detailed discussion on the impacts of adopting ASC 606. 2019 was a phenomenal year for Goosehead, which further demonstrated the strength of our platform and our significant competitive advantage in the marketplace. In 2019, we continue to drive high levels of organic growth while maintaining strong profitability. We view premium growth as the most important measure of the overall effectiveness of our overall growth strategy. For the full year 2019, premiums placed were $739 million. This represented an increase of 45% from 2018, which exceeded the high end of the guidance range we provided a year ago of 38% to 42% growth. While our growth rates are impressive, they are not a new phenomenon for us. We've been delivering very high levels of organic growth for many years. In fact, for the five years ending 2019, our premium growth compound annual growth rate was 45%. In the fourth quarter, our revenue grew 39% and EBITDA grew 81% using ASC 605, our historical accounting methodology. For the full year 2019, using ASC 605, We delivered revenue growth of 40%, which was at the high end of our initial guidance of 33 to 41%, and EBITDA growth of 55%. We are required to implement ASC 606 for our 2019 full-year reporting. It is important to remember that implementing ASC 606 has no impact on the fundamental economics of our business. as evidenced by operating cash flow, which is not affected by the accounting change, more than doubling to $21.2 million for the full year 2019. However, it does change the way we report our results to our owners. While the governing bodies who establish accounting rules have a set of objectives with ASC 606, we do not believe those rules add clarity in understanding our particular business. Accordingly, we will do our best to explain the metrics that management uses to assess our performance with the hope of providing more insight to the investment community. The balance of our business continues to shift toward our franchise channel. This is important to understand because of the way 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. Our franchise channel now represents 67% of our overall premium compared to 62% in 2018. While our business has natural operating leverage and potential for margin expansion over time, our strategic focus remains delivering strong revenue and earnings growth over the long term. When faced with a tradeoff between short-term profits and much larger long-term profits, we always manage for the long term with an eye to maximizing total profitability over time. Our management team continues to own the majority of the company, so we are well aligned with other owners and will continue to focus on delivering shareholder value over the long term. We continue to average up the gene pool with higher quality franchise recruits over time. Total franchises at year end were 948, an increase of 47% from the year-ago period. Operating franchises increased 34% for the year to 614. Signed franchises, which have yet to go into operation, were 334 at the end of the quarter. Our recruitment of higher quality franchise agents has resulted in an elongation of average time between signing the franchise agreement and going live because these individuals frequently have more complex business circumstances to unwind before they can open their goosehead franchise. This is another positive indicator of future growth momentum as these signed franchises gradually transition to operating status and begin ramping up business production. Our corporate channel ended the year with sales headcount of 248, an increase of 49% from the year-ago period. I want to continue to highlight that the corporate channel represents a unique and vital component of our overall growth strategy and competitive advantage. We utilize the corporate channel to test and refine new technology and sales processes. This allows us to refine and identify best practices that are then rolled out across the franchise channel. While these are separate channels, we manage them as one integrated growth strategy for the company. Our tremendous success in the franchise channel is in large part dependent on our continued investment in and support of the corporate channel. Likewise, success within our franchise channel creates unique and highly attractive Let me provide one brief example of how we leverage our corporate channel to enhance performance of our franchise channel. Last year, we pilot tested something we called our Virtual Sales Coach Program. This involves select corporate agents managing and mentoring a handful of franchise agents each for a three-month period. Three months after completion of the pilot, average productivity of participating franchisees was over 55% higher than the historical ramp-up of their peers. This is just one of many initiatives we run that help our franchisees achieve extraordinary levels of productivity. Without our corporate channel, these tools would not be available to us. In April, we'll be opening new corporate offices in Charlotte, North Carolina, furthering our geographic reach of the corporate channel to drive new business and provide ongoing support to regional franchises across our eastern state footprint. Our current geographic coverage encompasses approximately 90% of the U.S. population. In addition to our people in geographic expansion, we've added to our already industry-leading technology platform in 2019 and have exciting plans for enhancements going forward. Mike will go into greater detail around some of these investments in his remarks. I'd like to take a moment to discuss our balance sheet strategy. Over the long term, we plan to maintain an efficient capital structure that includes an appropriate amount of debt. In March, we raised $85 million of new debt, a portion of which will be used to pay down our existing notes payable of $46.5 million. While this increases our near-term leverage ratios to a level in line with our historical borrowings, our balance sheet delevers very quickly given our pace of growth. As I have said previously, we carefully assess the cash needed to fund our growth strategy every year and set aside what is necessary plus a conservative cushion. Given the current uncertainty in the marketplace related to the coronavirus, we're going to preserve our balance sheet flexibility and for the time being maintain our higher cash position. I would like to highlight that today we have seen no negative impact on our business due to uncertainties related to the coronavirus. Lead flow and productivity remain very strong. The underlying market demand for homeowners and auto insurance is extremely stable. Essentially, if you live somewhere or drive something, you need to buy the product we sell, either from us or a competitor. That being the case, our management team has taken what we believe to be prudent actions to avoid potential disruptions to our business in the event they become necessary. This includes forward buying of IT equipment where the supply chain may be exposed to disruption and preparing for key employee groups to work remotely if it becomes necessary. We anticipate that any potential negative impacts on Goosehead will be temporary in nature only, and we continue to have a great deal of optimism and enthusiasm for our long-term prospects. We are very fortunate to have the investor base that we do. It includes some of the highest quality long-term investors in the world. We appreciate the support of our owners and are proud to call you our partners in creating one of the great American business success stories. Lastly, I want to thank our management team, employees, and franchisees for their tremendous efforts in 2019. Management's ownership interests in the company represent the vast majority of our individual net worths. We remain highly motivated and energized to continue to deliver strong growth responsibly as we progress along the path to becoming the leading personal lines distributor in the United States. With that, I'll turn the call over to Mike.