Goosehead Insurance, Inc.

Thank you for standing by. This is the conference operator. Welcome to the Goosehead Insurance second quarter 2021 earnings conference 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 one 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, Mark Colby, Chief Financial Officer, and Brian Petillo, Vice President. By now, everyone should have access to our earnings announcements. 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 The 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 FCC for more detailed discussion of the risks and uncertainties that could impact the future operating results and financial condition of goose head 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 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. Today on the call, we will be providing a short video demo of our digital agent platform, which will be going live in the coming weeks. If you are dialed into the call by phone, you will be unable to view the demo and will experience a few minutes of silence between the start of the video demo and our Q&A. As such, we encourage everyone to go to the webcast link for the earnings call, which is posted on our IR website at ir.gooseheadinsurance.com. Also, if you're using a mobile device, you may need to press play when the video appears.

With that, I'd like to turn the call over to our CEO, Mark Jones. Thanks, Dan, and welcome to our second quarter 2021 results call. We had another outstanding quarter of very strong growth. On this call, I will provide a summary of our key results and highlight the meaningful investments we're making today that will be significant drivers of growth in our business for many years. Our CFO, Mark Colby, will then walk you through some greater detail on our financial results during the quarter and the declaration of a special dividend. We will then hand it over to President and COO, Mike Colby, who will discuss our new digital agent platform that will be available to consumers in the coming weeks and will provide a demonstration of this truly unique and powerful technology. Before discussing the quarter, I would like to spend a minute on a critical element of our competitive moat, our vast accumulated experience. We are a client-focused, tech-enabled company. Note the order of priority. Clients first, technology second, as an enabler. You will see this on vivid display when we demo our digital agent platform. There is nothing like it on the market. It is simple and comprehensive and importantly informed by artificial intelligence leveraging millions of actual quotes by our professional agents. There is no shortcut to gaining and being able to leverage that experience. It can't be replicated by newcomers to the industry. I strongly encourage interested people to try as many competitive shopping offerings as they're willing to endure and see what is actually available. Then try our digital platform. You will be amazed. I'd also like to say a word about margins. Our business model has a very long tail. The biggest growth investments we make this year won't begin to start showing up significantly in our revenue until 2024 and thereafter. We've modeled out our business and quantified the trade-offs between growth and margins. Because there is so much growth already embedded in our business, with a lot of effort, we could slow our growth down to 10% to 12% annually in four or five years, which would likely yield EBITDA margins in the low to mid 40s. Sounds pretty appealing. However, absolute profit dollars are maximized by keeping our pedal to the metal on growth with the margins we currently produce. While EBITDA margins in our current model may be lower, They are earned on a much larger base of business, producing more profits. In addition, it is critical to our competitive position that we maximize our conquests of the land grab in the market at this time and continue to build our competitive moat. Thus, we optimize both our economics and strategic sustainability by continuing to pursue the growth strategy we have been and making the investments necessary to do so. Now, let me turn to Q2. During the second quarter, growth across our business continued powerfully, further emphasizing our significant and expanding competitive model in the marketplace. Let me take a moment to highlight some of the substantial accomplishments during the quarter. Premium growth, the leading indicator of future revenue growth, continues to power ahead. In Q2, premiums increased 46%, while policies and force grew 48% compared to the second quarter of last year. Our premiums in the franchise channel grew 50% for the quarter, and this growth provides excellent visibility into powerful, embedded, highly profitable revenue growth as those policies reliably convert to renewal after one year, and our commission share jumps to 50% from the 20% we earn on new business. Our core revenues increased 40% over the prior year period. Total franchise count at the end of the second quarter was up 59% year over year. Operating franchises also grew 47% in the quarter compared to the year ago. Our franchise mix is becoming increasingly diversified geographically with 77% of franchises located outside of Texas compared to just 42% when we went public in 2018. Operating franchises outside of Texas grew 58% year over year. Importantly, because of our rapid growth rates, 63% of our total franchise base is either in their first year or preparing to onboard. While this cohort provides minimal premium in revenue today, their predictable launch and production ramp combined with our increasing retention rates should fuel powerful growth over the next decade and beyond. Also, while our franchise unit count is growing, the unit productive capacity is also growing. as some of our more seasoned franchises begin adding producers, which will be a larger and larger source of growth over time. Our corporate agent team was up 43% from a year ago, and continued investments in this channel are critical, as efforts in training, mentoring, and beta testing of new technology and processes helps drive our extraordinary growth and improved productivity in the more leveraged franchise channel. These agents represent the gold standard of performance in the industry with new business production levels, nearly four times industry best practice, which makes them very powerful supporting critical training, mentoring, and R&D functions for the company. During the quarter, we launched an office in Denver and will complete our remaining office openings in Columbus and San Antonio and second office openings in Chicago and Austin by year end. We are also expanding our Houston and Westlake offices in the third quarter. In addition to providing support to franchisees, these corporate offices help us scale nationally and enhance college recruiting and career advancement opportunities in both the short and long term. The 2021 office openings and expansions should sufficiently absorb our headcount growth through 2022. Client retention for the quarter was 89%, a record level for our business. Our improving client retention has been driven by significant investments we make in product, people, and technology. These improvements in retention will provide material economic benefits for our business over time, as the overwhelming majority of our profits are in renewal revenue. The service experience we provide to our clients is second to none, with a net promoter score of 92 in the quarter. I could not be more pleased with the consistent and high-quality efforts put forth by our amazing service professionals. In the coming weeks, we'll be launching our digital platform. Just as our strategy to date has been exceptionally difficult to replicate by competitors, our digital platform is unlike anything in the market. The value we leverage from our enormous client-focused accumulated experience can't be replicated by tech-focused startups. We are very excited to provide you with a demonstration of this new and innovative technology in the call. We believe this will be unique in the marketplace, providing clients with a direct digital shopping experience that leverages our massive accumulated experience and a true choice platform, all while preserving the unmatched benefits that a knowledgeable agent brings to the insurance buying process. While we are highly confident this platform will enhance new revenue opportunities over time, We also believe it further will strengthen our existing go-to-market strategy with mortgage lenders and realtors. Finally, we believe this new effortless client experience will make it easier for our existing clients to refer their friends and family to GUSET, adding additional sales opportunities for our agents from client referrals. While our organic growth top-line results were impressive, I'm also proud of our significant cash generation and strong financial position. Our consistent results and financial discipline have created a rock-solid balance sheet with a large amount of cash, rapidly decreasing debt to EBITDA leverage, and virtually no intangible assets. This provides us with significant flexibility as we look to the future. As communicated since our IPO, we want to maintain an efficient capital structure that includes some debt. In addition, excess cash will be periodically returned to our shareholders. Given these objectives, we will be raising additional debt and will be paying a $60 million, or $1.63 per share, special cash dividend to shareholders of record as of August 9, 2021. I am extremely excited about the sustained and powerful growth engine we have built. These results are further evidence of our focus on the client and on the clear benefits of a choice product offering, knowledgeable sales and service agents, and industry-leading technology that provides an unmatched insurance buying experience for our clients. Our runway in the market remains enormous, and our competitive moat grows each and every day. The substantial investments we're making today, which, by the way, flow almost entirely through the P&L, provide little premium or revenue benefit in the short term. However, they will be a substantial driver of our continued high levels of growth three, four, and five years out and beyond. In order to achieve our goal of industry leadership in the personal line space, we will stay maniacally focused on providing an unmatched client experience and continually improving all drivers of organic growth, recruiting, productivity, and retention. I want to thank our employees and franchisees for their tireless efforts in making Vucet such an exceptional company. And with that, I'll turn the call over to our CFO, Mark Colby.