Goosehead Insurance, Inc.

Thank you for standing by. This is the conference operator. Welcome to the Goosehead Insurance third quarter 2022 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. 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. 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 SEC filings for a 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 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 various 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 the 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 An archived version will be available shortly after the call ends, on the investor relations portion of the company's website at www.gooseheadinsurance.com.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 our CEO, Mark Jones.

Thanks, Dan, and welcome everyone to our third quarter call. I will provide a strategic overview following which Mark Miller will cover our operating results and Mark Jones, Jr. will review our financials. We just passed the 19th anniversary of the founding of our company. We continue to refine our business model every day. When we started the company, we set the goal of becoming the number one distributor of personalized insurance in the United States during my lifetime, and we remain committed to doing what it takes to get there. I feel very fortunate to serve the team that is building one of the best businesses on the planet. With a $390 billion market, very weak competitors in the personalized space, incredibly resilient, recession-resistant underlying market demand for the product. Basically, if you live somewhere or drive something, you have to buy our product. Then lastly, extremely attractive margin and cash flow potential, particularly after 19 years and accumulating over 700,000 clients. We remain true to the principle we were founded upon, which is to place the client at the center of our universe and and to build the business around them, bringing extraordinary human capital and technology to bear to create an unmatched insurance experience. Our core business, which is our corporate agency and our franchise network, remains strong, and we continue to invest in strengthening them. This business has a powerful and growing competitive moat protecting it, and we have no meaningful competitors who operate at scale with a choice model. We're not arrogant to believe that we'll never face competitive threats in our core business, but we believe that creating viable competition will take a very long time, cost a great deal of money, and be exceptionally difficult. Our digital agent represents a potentially extraordinary growth opportunity with different competitive dynamics than those in our core business. We have a substantial competitive lead with our technology, but we constantly operate as if new industry entrants are investing to duplicate what we have built. Remember that our carrier partners entrust us to legally bind them to provide coverage and ultimately pay claims. This is a privilege we have earned over many years and millions of transactions. A crucial element of our competitive moat, particularly as it relates to the digital agents, is our relationships with insurance carriers and the track record we've built over the last two decades of writing high volumes of high-quality, profitable business. It will be very challenging to take time for competitors to earn the trust of insurance carriers sufficient to convince them to hand over the responsibility to commit them to paying claims. That being the case, we need to invest and work very hard to build our quote to issue capability as soon as possible to protect our competitive position. Our recently announced addition of Justin Ricketts as Executive Vice President of Technology and Partnerships is designed to help do just that. Justin has an internal team of more than 40 people whose mission it is to extend our technology lead and deepen and widen our competitive moat. The US housing market represents a headwind for Goosehead, but not nearly to the extent that some assume. And it is a headwind we're actively responding to based on our experience managing through the housing downturn during the great financial crisis of 2008 and 2009. Only about 20% of our revenue is exposed to the housing market from transactions tied to home closings. The remaining 80% comes from referrals and renewal business. Regarding the 20% of our revenue connected to housing, we currently represent only about 3% of home closings per year. So we still have huge market share to gain and are not dependent on overall housing market transaction growth. A referral partner search tool technology allows us to pivot to add new referral partners when volumes soften with existing ones. We're seeing this phenomenon play out every day with our agents. We're ramping up activity to generate new business via client referrals, and our digital marketing team consistently generates leads from current and former clients that are turning into meaningful revenue. While higher than normal underwriting losses have plagued many of our carrier partners this year, most have been successful at increasing premiums. Whenever this happens, we get a pay raise because we earn a commission as a percentage of those premiums. This is creating a tailwind for us in 2022 and beyond, and we hope that higher policy pricing will drive better industry profitability and more normalized contingent commission levels looking further out. While housing market headwinds impact about 20% of our revenue base, the premium pricing tailwinds benefit 100% of our book of business. 2022 has been a transition year for us. Over the last Two years, many of our corporate agents were onboarded and received training in a virtual environment. Some of these agents did not ramp up as quickly as those who went through in-person training, which negatively impacted the profitability of our corporate channel. Now that we're in a post-pandemic environment, training is largely conducted in person, and we are managing out our less productive agents more aggressively. Our business is strengthened by moving out weak performers who consume valuable management resources but contribute only negligible revenue. Management investment can be best placed where it will drive attractive returns. In 2022, we made it a priority to launch more agencies at a faster pace and have seen good progress to date with our backlog declining from 1,030 agencies earlier this year to 884 at the end of Q3. We've also sharpened our pencils on the optimal use of our resources to drive growth that is profitable and sustainable. This includes a recalibration of the relative roles that corporate and franchise channels play in our strategy. In simple terms, the cost structure for corporate is extensive and new producers take time to become profitable. While a healthy, profitable corporate business is central to our strategy, Our franchise network is the primary driver of our growth now, accounting for more than three-quarters of premiums. The cost to add new producers and franchise is nominal, and every dollar of new revenue they generate comes with higher incremental margins. We continue to leverage the full capabilities of what we've built over the years, but in ways that optimize profitability without sacrificing growth. Examples of this include utilizing the amazing recruiting machine we've built to help franchisees add producers to their agencies and creating a much larger aperture for highly capable corporate agents to become franchisees and build their own business. After launching the initiative just a few months ago to help our franchisees recruit producers, we expect to have helped place more than 30 producers with agency partners by year-end. So far this year, nine corporate agents have become franchisees, with six of them being among our top ten new agencies for productivity. That's out of almost 400 agencies launched so far. Just one specific example is Ren McFadden, who after spending three years in corporate, launched his franchise this summer in Denver. Ren was the second most productive franchise agent in our entire mountain region, in just his first month live. We're extremely encouraged by the opportunity we have to seed outstanding franchisees from corporate. Franchise opportunity also significantly strengthens our on-campus recruiting value proposition. Our optimized plan is to thoughtfully and profitably grow corporate over time, albeit not as rapidly as we grow our franchise business. We believe we can continue to attract very strong talent to our corporate business and provide great career opportunities, whether that be to remain in corporate or become a franchisee. But we believe that earnings will be stronger and capital will be most productively deployed by investing differentially in the franchise business. Finally, we continue to work hard to strengthen our management capabilities so that we have the right people and skill sets to scale GooseEd from a middle market to a large company. As Goosehead's largest shareholder and the person with the most to lose if we get things wrong, and as someone with an intimate understanding of Goosehead's needs, I'm highly confident the moves we are making are the right ones to drive long-term shareholder value. So far, our efforts are beginning to pay off as revenues in Q3 climbed 38% year over year, and we delivered $11 million of adjusted EBITDA at a 19% margin. representing 320 basis points of margin expansion from 2021. Even in an environment of economic uncertainty, our business remains very strong, and we're more confident than ever that we're building one of the great American business success stories. With that, I'll turn it over to Mark Miller to discuss our business results.