Good morning, everyone. I'm Greg Peters, and I'm honored to welcome back the management team of BRP Group to our Annual Institutional Investors Conference. For management today, we have Trevor Baldwin, CEO; Brad Hale, who's the CFO; and last but certainly not least is Bonnie Bishop, who is the investor relations professional for BRP. So, we have the next 30 minutes is designed to be a quote-unquote "fireside chat," where I'm going to ask questions, but this certainly, I welcome crowd participation. And so if you're inclined, you can raise your hand with questions. I've figured a good place to start would be just, you know, last year was an interesting year for the stock and for your company, some challenges.
Maybe you could, for a couple minutes, just give us some background of the experiences and the reasons for the results that were reported last year and the reason why you're optimistic about 2024 and 2025.
Yeah, absolutely. So good morning, everyone. Trevor Baldwin, CEO, BRP Group. I think it's probably important contextually to just kind of briefly walk through our history as a public company as context for 2023. So we went public in October of 2019 as about a $135 million revenue business. Over the next three years, we acquired roughly $500 million of revenue, scaling from what was a regional insurance brokerage firm to one with a true national footprint. Over that time period, we accelerated our organic growth rate each and every year, and you know, through that organic growth and the contributions of the $500 million roughly of revenue we acquired over those first three years, grew the business to the roughly $1.2 billion of revenue that we generate today.
In April of 2022, we made the decision to lever up our business in order to complete what was a very strategic acquisition for us, the acquisition of Westwood Insurance. We took leverage up to 5.8 times. We did build with variable rate debt, and then we didn't have ourselves appropriately hedged right as interest rates were starting their meteoric rise over the past couple of years. And so we absorbed significant increases in interest expense over that time period and have earnouts from the M&A that we've completed, from 2020 through 2022 coming due this year, through the first quarter of next year, which should be fully settled by the end of the first quarter.
So I'd say last year, you know, was certainly a tough year from a stock price performance perspective, but also I think was a very important year foundationally for our business as we made a pretty hard pivot, rationalizing back office expenses, and positioning our business for continued outsized organic growth while rapidly delivering and preparing ourselves for the inflection of free cash flow that will materialize this year and next year. You know, we took leverage down by 0.6 multiples last year. We grew organically at 19%, more than 2X what our industry peers grew at, and we improved margin by roughly 50 basis points. So overall, I think those headlines, you know, we're very proud of, but it was a year that was certainly difficult, and had, you know, tough decisions in order for us to navigate through that.
We now find ourselves in a position where we're very excited about the continued growth profile of the business heading into 2024. We expect material deleveraging based on our guidance that we put out to achieve 4X or less by the end of this year and expect a material inflection in free cash flow as we get the cash integration expenses largely behind us and have a normalization of interest expense as interest rates have leveled off. So we're super excited for the backdrop for this year. Believe that it's going to be a real turning point for the overall business. And, you know, we're comfortably seeing the light at the end of the tunnel and, you know, look forward to getting out of the penalty box, Greg.
Yeah. 19% organic revenue growth is definitely one of the leading results inside the industry. When you use words like rationalization, expense rationalization, and then this higher growth business model, those, those terms aren't necessarily congruous. Maybe you could spend a minute and say what give us some perspective on why you continue to think you can grow outsized rates of growth relative to the expense rationalization that you've deployed.
Yeah. I mean, quite simply put, the expense rationalization was pointed at the back office infrastructure of our business. We completed, you know, over 30 acquisitions from 2020 through 2022 and, you know, had a lot of kind of hard work, expensive work, integrating all of those businesses onto a single platform across a single go-to-market, deploying a single org model, an org structure. That work's largely done and behind us. And as a result of being in this fully integrated operating environment now, it's enabled us to rationalize that back office footprint that was necessary when we were going through all of that integration work.
We have, you know, the what we call our growth services infrastructure, our back office infrastructure, is sufficient to support, you know, a $3 billion revenue business today, even after that rationalization, you know, with modest adds here and there just to support, you know, the underlying overall growth. So, importantly, while headcount was up only a modest 43 people on a net basis last year compared to the net 1,000 people we added in 2022, it doesn't tell the whole story. Because of that back office rationalization that did occur as a result of wrapping up all of that integration work, we were still adding and investing in the front-end revenue-generating side of our business throughout the year. And that was just offset by, some of the footprint rationalization on the back office side.
Long-winded way of saying we feel very good about the underlying growth trajectory of the business. I'd say as evidenced by, you know, the stat I shared on our earnings call last week around the Sales Velocity in the IS business, Sales Velocity is a metric we paid a lot of attention to relative to it's a leading indicator around organic growth and indicative of the amount of new client wins coming into the business. Our Sales Velocity for 2023 was 17% in the IS business. That compares to an industry average or an industry median, I should say, of about 11.5% and a 75th percentile of about 15%. So, you know, 17% well in excess of the top quartile.
For the fourth quarter, Sales Velocity was 21%, showing an accelerating trend as that integration work wraps up, as the success of our go-to-market model continues to season and as the investments we made during 2021 and 2022 fully season inside the business. And so we're very excited about the backdrop and the momentum of the overall business heading into this year.
Yeah, the Sales Velocity comment is particularly noteworthy. A lot of the insurance brokers have reported strong organic revenue results, and it's driven by, in part, the rate increases that have happened across the marketplace. So we've got rate increases hitting your IS business, your MainStreet business, maybe, the technology business too, but maybe you can unpack the component of organics is coming from rate increases because the expectation is over the next couple of years, that's going to moderate for the industry.
Yeah.
The Sales Velocity should theoretically compensate for that.
Yeah. I'd say that's most easily discernible in our IS business. So let's just unpack that, real, real fast. For the first half of 2023, rate and exposure was a 6.6% tailwind to our organic growth. In the back half, it was a 0.5% headwind, in fact, a 2% headwind in the fourth quarter alone. For the full year, rate and exposure was a 3% tailwind to our organic growth rate in the IS business, representing approximately 25% of our organic growth. I think that's a very important distinction because the vast majority of the organic growth we generate comes from our underlying ability to generate more net new business, net new revenue relative to our peers. That means the organic growth sustainability is far more predictable in our business because it's not reliant upon external market forces.
Whereas our peers, I believe, would tell you that, you know, in this environment, you know, roughly half to two-thirds of their organic growth is driven by rate and exposure.
Can you unpack the Mainstreet component too? Because that's, you know, you talked about IS. That's a big thing.
I don't have that offhand. I don't know, Brad, if you have those specific metrics. What I can tell you is rate and exposure is a meaningful contributor to organic growth in that business. You know, in this environment, probably closer to half, but that's not an exact figure. You know, we continue to see dramatic improvements in attachment rates in our embedded channel in the Mainstreet business, which is our primary go-to-market model. We embed with 70% of the top 20 home builders in the country and provide their point-of-home sale, home insurance solution that's presented. We attach, as of the fourth quarter, to about 58% of the homes that they sell, which is up from roughly 44% at the time we acquired the Westwood business in April of 2022.
Additionally, we've been building out on a de novo basis a business focused on embedding into the mortgage origination channel. That business has had strong momentum generating $12 million of revenue in fiscal year 2023 from largely a standing start where that business came out of the ground in 2022, so we have some big expectations for the continued contributions that business will drive to overall new business velocity.
So you talk well, I didn't really mention the Risk Mapping driving organic and IAS. You have the distribution relationships for Mainstreet. Let's pivot to the technology business, the renters insurance, etc., which is software integration. Spend a minute on that one.
Yeah. There's, I'd say, two real drivers of the sustained growth velocity of that business. One, it's built on our own completely proprietary tech stack that enables us meaningful competitive advantages relative to the efficiencies at which we're able to operate, the speed at which we're able to bring and launch new products into the market that are uniquely tailored to our end-client needs. And separately, similar to our Mainstreet business, we have a very heightened focus on what I'll call niche specialty distribution, largely embedded distribution. So our original business in the MGA is a renters insurance platform where we embed via the leasing software providers to provide the point-of-lease renters insurance solution, that solution of convenience. And in 90 seconds, going through that leasing workflow, you combine one of our renters insurance products.
That is a business that has grown, you know, in excess of 20% each and every year under our ownership since 2019. It's a business that has a ton of growth runway left in it. You know, today in the software providers that we're already embedded and contracted with, they have roughly 19 million rental units inside their ecosystems. We have approximately 1.5 million renters policies enforced between HO4 and master tenor tenant legal liability, or about 7% penetration. You can think about, at maturity, us getting to somewhere between 25%-50% penetration, depending on various attributes of a building. And so we've got a long future of double-digit organic growth ahead of us just based on the software providers we're already integrated with.
We have multiple software providers that we expect to bring online for the first time this year, and we continue to turn on more buildings and more units inside our existing ecosystem. The growth in that business is actually accelerating today. In addition to that, we're launching four to five new products a year, most notable of which recently was the launch of our homeowners product suite in 2022. That business, for us, generated $365 million of premium for the 2023 year and $65 million of revenue. It's a growing contributor to our overall growth profile in a market where there's massive potential. You don't have to envision a future where we have huge market share, and that still becomes a very large business for us.
Right. So the organic profile looks pretty positive going forward. The next component, you know, would be the margin profile for the revenue you're generating. And I, one of the criticisms that's leveled against the company, you know, would be the lack of margin expansion that you've reported over the last couple of years, and you've talked about the investment you made in back office. Maybe you could spend a minute and give us some perspective on how you see the margin improvements proceeding going forward. And then, you know, the where's the dream? What's the what, what is the, the in, in maturity, what does the true margin profile of your business look like?
Yeah.
Brad, do you want to take that?
Sure. Yeah, I mean, I'd say when we were coming out of the IPO, our strategy was largely based on growth and maintaining a flat margin, but continuing to significantly outgrow our peers. As Trevor mentioned, we had to significantly pivot the business last year, and it conveniently came at the time that we were getting through a significant number of the integrations and that work that was being done. So I'd say there is a significantly renewed focus on margin in our business. And quite frankly, I think a lot of the hard work is done, because in this business, you really drive your margin a year in advance because it's largely headcount-related. And as Trevor mentioned, we hired a net, you know, I think 43 people into the business last year.
That's after adding a net 1,000 into the business in 2022, which gave us a $45 million headwind going into last year that we had to overcome, which was salaries that had not yet hit our P&L. We don't have that same headwind going into 2024. So, that's what gives us the confidence in driving real margin expansion in 2024. On an ongoing basis, you know, we have a lot of confidence and are driving a strategy around margin expansion in each of the next 4-5 years. We haven't given specific waypoints on that, but it is a priority of ours and something we expect to deliver on. Over the long term, you know, our peers operate at high 20s, low 30s margins. There's nothing structurally fundamental about our business that wouldn't allow us to get there.
You know, we don't, we haven't set a specific time horizon as to when you get there, but, you know, quite frankly, given the tech, the tech enablement within our business, given our, our client mix and our lean towards personal lines, I, I think we could probably operate in excess of the peers, over time. So the way we view it, it's an opportunity. We have peers that are operating at near perfected margins, and, you know, we see it as an opportunity in our business for, for real, you know, to really drive shareholder value.
Yeah. So, a couple pieces of the puzzle, and we've talked about this before, Trevor, but the backbone to success of an insurance broker is, you know.
It's talent.
Talent and customer retention. So, we're going to get into free cash flow, your debt, you know, the earnouts, but maybe spend a moment on the talent retention, the outlook for talent retention, and customer retention.
Yeah. One of the very few long-term competitive advantages we can cultivate as a business in this industry sector is our status as a destination for the very best, most talented professionals. And we're really proud of the culture that we have cultivated over time, our reputation as a place where high performers can come to work alongside fellow high performers, where people with aspirations for elevated career trajectory can come to achieve those types of outcomes as a result of the outsized growth profile that we have as an organization. You know, put quite simply, in our business, when you attract great people, they deliver great outcomes for your clients. And when you deliver great outcomes for your clients, everything else really takes care of itself.
So we couldn't be more bullish about the strength of our colleague franchise and, in turn, couldn't feel better about the strength of our client franchise. That is represented in the data that we see around colleague retention. We, you know, I pay very close attention to a metric we track on a monthly basis, which is retention of what we call our Vanguard colleague pool. Our Vanguard colleagues are roughly the top third of our overall colleague base based on performance ratings. We have a stated goal of retaining an excess of 90% of those Vanguard colleagues every year, and we're retaining far in excess of that today. We're, and we have retained far in excess of that over the prior years. So we're feeling very good about it.
Good. Well, that's a good you know, talking about talent, and you mentioned this in some of your previous comments. We have these upcoming earnouts, and I think the last of the major earnout payments is in the first quarter 2025. So maybe you can talk about the earnouts as their impact on free cash flow and then and then, you know, is the expectation sometimes what happens in the brokerage business, as you know, is they get their earnouts and then they jump ship to another operation. So.
Yeah.
Brad, why don't you take the cash flow dynamics, and then I can wrap up with the, just the talent retention dynamics?
Yep. So if you look at, call it the midpoint of our guidance for 2024, it's about $320 million of EBITDA. And we've estimated, I think, in a relatively conservative environment that we'd pay about $120 million of cash interest. So you get to, call it, $200 million of cash in that scenario. We have guided to about $20 million of additional integration costs, primarily on the Westwood platform, that would be largely concentrated in the first half of 2024. So call it $180 million of cash flow projection from operations. We do have $135 million of earnouts to pay in year during 2024, and we've got about another $160 million to pay in Q1 of 2025.
So, you know, with a little bit of CapEx, which runs about $25-$30 million for us, if you look at the 2024 number, you know, it's pretty much eaten up by CapEx and the earnouts. You get a little residual.
Yeah.
But as you look forward to 2025, we get through those payments, and you're on a trajectory that, that is a true inflection point, as, as Trevor mentioned, where the cash flow profile of the business, if we're converting at 60%-70% of EBITDA like our peers do, you know, it, it gives you a lot of financial flexibility, in terms of continuing to invest in growth, delever the business, and, and look at the right opportunity to, to reward shareholders.
You wanted to talk about, you know.
Yeah.
Post-earnout retention.
Yeah. So one, we've been, we've had a number of earnouts settle over the past 18 months. We have not had any undesirable attrition out of those organizations where the earnouts have settled. I think the important thing to know is centered around the mindset of people that have chosen to partner with us or sell their businesses into our platform. One, those people are generally selling in, not selling out. What does that mean? They tend to be mid-career, not late-career. They tend to roll a significant amount of the purchase proceeds into our equity, on average, a little bit over 20%. And so they're all significant shareholders in our business, and they all generally do so on a tax-deferred basis joining our pre-IPO partnership entity where they join our partnership agreement.
That partnership agreement provides for a five-year strict non-compete tied to the date that they sell their last share in the business, which effectively, because of a five-year lockup that occurs post-transaction, serves as about 11-year non-compete. Those people are choosing to spend the rest of their careers with our business when they choose to sell with us. So we feel really good about it. And by and large, most of our partners have chosen not to sell a single share.
Yeah. So the other piece of the puzzle that, you know, weighed on the stock last year and continues to be somewhat of a concern would be just the debt leverage.
Mm-hmm.
I know you talked a little bit about it, but maybe we can go at it directly, talk about, you know, where it is, how it's going to move throughout the earnouts that you're going to pay for the next five quarters, and then what your longer-term objective of where that should be considering where the current interest rate environment is.
Yeah. So, what we communicated on the call was we're operating at about 4.8x leverage, net leverage right now, and that we project to be at 4x or better, by the end of the year. I wouldn't the majority of our, earnouts for 2024, we've got about $80 million of them due in Q1, so that's the largest piece. So I wouldn't expect to see, significant delevering in Q1, but Q2, Q3, it should really progress.
Mm-hmm.
Getting into Q4 where we pay, that other call it $50 million-ish, that's due. Going forward, you know, we'll have leverage tick back up slightly above 4 as we make the Q1 2025 payouts, and then you, you delever very rapidly. And I'd say in this environment, if interest rates were to stay where they are, we would operate at the lower end of our three to four times range and, and maybe even below that given the dynamics and, and the circumstances. If we do see, you know, interest rates start to come back, then, then, you know, depending again on what opportunities for capital deployment we have, we, we may operate at the higher end of the three to four. I think it, it largely depends on where we where we sit, you know, 18 months from now.
But, you know, we have a lot of opportunities in the debt capital markets as well. We've got till the end of 2027 in term on our Term Loan B, so we have flexibility in that time frame, but certainly continue to look at opportunities to potentially fix a portion of our debt, you know, with an inaugural bond, and reduce some of the volatility. We, of course, want to do that in a thoughtful manner before we're signing up for five to seven year paper. But it does give us a lot of flexibility that the debt markets continue to be very receptive to our industry and give us a lot of opportunity, you know, to go out and put together a debt capital structure that we think would not subject us to the volatility you've seen in the last two years.
I guess the final piece of the puzzle would be just as, you know, you get through the earnouts, delevering in part through just the pure growth of EBITDA, but then also maybe some paydown of some of the variable-rate debt. Are you going to restart the acquisition,
Yeah. We think M&A is an important value creation lever for the business over time. You can see that, frankly, demonstrated, you know, in the 2020 cohort of acquisitions we completed. We provide some disclosure in our Q4 earnings supplement around the multiple buy-down there. Our entry multiple was about 13.6x over that entire cohort of, you know, partnerships, our nomenclature for acquisitions in 2020. After paying the earnouts and fully settling those last year, you know, we're in that for roughly 10.2x. And that's a cohort of partnerships where we had fairly robust investment as a result of kind of scaling from a regional business to a national one and needing to put in place the infrastructure to operate at scale. We expect even better performance out of our 2021 and 2022 cohorts.
As of right now, we would project those to land at about 9.6x on a fully settled basis for 2021 and mid-6s for 2022. So pretty significant multiple buy-down and real value arbitrage.
Yeah. Okay. Well, you know, we've hit our time mark for the presentation, the fireside. We're going to do a breakout downstairs, so you can join for more questions. But, thank you, management team, for being here.
Thank you, Greg.
Matt too. So thank you.
Yeah. We appreciate the opportunity.
Thanks.