Greetings. Welcome to the BRP Group, Inc. Third Quarter 2021 Earnings Conference Call [Operator Instructions]. Please note, this conference is being recorded. I will now turn the conference over to your host, Bonnie Bishop, Director of Investor Relations. You may begin.

Thank you. Welcome to the BRP Group's Third Quarter 2021 Earnings Call. Today's call is being recorded. Third quarter 2021 financial results, supplemental information and Form 10-Q were issued earlier this afternoon and are available on the company's Web site at ir.baldwinriskpartners.com. Please note that remarks made today may include forward-looking statements, which are based on the expectations, estimates and projections of management as of today, including certain expectations related to COVID-19 and other matters. Forward-looking statements are subject to various assumptions, risks and uncertainties and a variety of factors that are difficult to predict and which may cause actual results to differ materially from those contemplated by such statements. For a more detailed discussion of those factors, please refer to the company's earnings release for this quarter and to our most recent SEC filings, including our most recent Form 10-K, all of which are available on the BRP Web site. During the call today, the company may also discuss certain non-GAAP financial measures. For a reconciliation of these measures to the most closely comparable GAAP measures, please refer to the company's earnings announcement and supplemental information, both of which have been posted on the company's Web site at ir.baldwinriskpartners.com and can be found in the company's SEC filings. I will now hand the call over to Trevor Baldwin, Chief Executive Officer of BRP Group.

Thank you, Bonnie. Good afternoon, everyone, and thank you for joining us for our third quarter earnings call. I will make brief remarks, followed by Brad, who will cover select financial and business highlights from the quarter. And then Brad, Kris and I will take questions. We're excited to announce another strong quarter, highlighted by organic growth of 26% and total revenue growth of 106%. The MGA of the Future demonstrated strong growth at 48% during the quarter, continuing to execute in multifamily, now with over 670,000 HO4 policies in force, while also making continued progress in both flood and homeowners, which we believe will be important contributors to our growth in 2022 and beyond. We were also excited to announce two important promotions to the Co-Founders of the business. Jim Roche is now in the newly created role of Chief Insurance Innovation Officer, where he is responsible for driving continued insurance product and technological innovation, both within our MGA business and across BRP Group more broadly. Brian Schultz is now President, Multifamily and Emerging Markets for our MGA business, where he is responsible for driving continued growth of our multifamily products suite and for the creation and execution of new MGA products to be distributed both within BRP Group's internal distribution network and with external distribution partners. Their vision and leadership have resulted in fantastic results for the MGA since partnering with us in April of 2019, and we look forward to continued transformation in our business and the industry. In September, we announced the addition of Jacobson, Goldfarb & Scott, our largest partnership this year and our fifth top 100 partnership since the beginning of Q4 2020 as well as K&S Insurance, which provides immediate scale in Dallas and adds to our Middle Market presence in Texas, the…

Thanks, Trevor, and good afternoon to everyone joining us today. For the third quarter, we generated revenue growth of 106% to $135.6 million. We generated organic growth of 26% on a year-over-year basis, thanks not only to strong performance from our Specialty segment, but also robust growth across all of our operating segments and in particular, Middle Market, which grew 20% during the quarter. We recorded a GAAP loss for the third quarter of $24.2 million or a loss of $0.28 per share. Adjusted net income for the third quarter of 2021, which excludes share based compensation, amortization and other onetime expenses, was $11.5 million or $0.11 per fully diluted share. A table reconciling GAAP net loss to adjusted net income can be found in our earnings release and our 10-Q filed with the SEC. Adjusted EBITDA for the third quarter of 2021 rose 79% to $19.6 million compared to $10.9 million in the prior year period. Adjusted EBITDA margin was 14% for the third quarter of 2021 compared to 17% in the prior year period. For the fourth quarter, we anticipate an adjusted EBITDA margin of 13% to 14%. The third quarter and fourth quarter margin movement versus the prior year is timing related as a result of seasonality of the business changing, given our success in M&A. For the full year, we continue to expect to achieve the high end of our previously communicated 150 to 200 basis point increase in adjusted EBITDA margin relative to last year's 18%. For the fourth quarter, we currently anticipate organic growth in total to be the mid teens. As many of you will recall, due to the timing of contract execution and accounting nuances related to the master product we launched in the MGA of the Future. Late last year, we…

[Operator Instructions] Our first question is from Meyer Shields with KBW.

I was hoping we can get a little bit more detail on the impact of economic growth and P&C pricing in this quarter's organic growth.

So as we think about the 26% organic growth and consistent with prior quarters, the combined impact of rate and exposure on our growth was 4.1%, and that's consistent with what the impact's been overall on a year-to-date basis as well. So while certainly a relative tailwind, not kind of the overall driver of the results that you're seeing.

Can you give us -- I know we've talked about this in the past, but I just want to get a sense of the anticipated productivity ramp up, particularly of the newer recruits as opposed to the people that came via partnerships in the quarter?

So as you've heard in our remarks, Meyer, we're having tremendous success adding talent into the business with over 650 organic new hires on a year-to-date basis, which represents more than 50% of our or roughly 50% of our total headcount as of year-end 2020. So you can really think about those investments spring loading our business for continued outsized organic growth into the future. As we think about ramp time it really depends on role in the business. On the longer side and some of our more complex longer sales cycles, you can think about a two to three year ramp period from taking someone kind of green off the street to making them highly effective and productive in a manner consistent with our overall results, which, as a reminder, would be multiples of where industry productivity is from a new business generation standpoint. In other parts of the business, we can bring folks in and have them highly productive in around 90 days. So it's just relative to what parts of the business they're in and kind of what that ramp period is.

[Operator Instructions] Our next question is from Elyse Greenspan from Wells Fargo.

My first question was just -- I just want to flush through the organic growth outlook for the fourth quarter. So as you said, I believe mid-teens and that reflects, I think, 20% growth within the MGA business. So due to the timing that you pointed out with last Q4. but are you still assuming kind of you would be within double digits in the businesses away from MGA, I guess, that is implied within that guide as well?

So a couple of things. One, yes, that still implies a healthy double digit organic growth rate in the business away from the MGA. And what I would just point out is this is in no way pointing to a deceleration in the growth profile of the business. This is -- last year as a result of accounting nuances tied to when the master program we launched contract was signed, we effectively recorded two quarters worth of revenue for the master product in the MGA in the fourth quarter. And so we're lapping that comp. Despite that, we still expect master revenue for the quarter to be flat on a year-over-year basis, even though we have a compare to two quarter’s worth of revenue last year. And we expect the MGA overall still to generate 20% organic growth despite that kind of accounting related headwind. So we feel really good about the overall growth trajectory of the business. As I think about the MGA overall, new business trends remain incredibly strong. As you look at the months of June, July and August, we were setting new records sequentially every month from a new policies issued perspective. And as we think about our pipeline, we have a pipeline of enterprise software distribution providers that were at a really good stage at that represent over 2 million units that we expect to go online over the course of 2022. So our pipeline has never been stronger in that part of the business. Frankly, our pipeline across all of BRP is really strong and we feel really good about how we're positioned to continue generating outsized organic growth.

And given that we're one quarter away from the end of the year, do you guys have a sense in terms of how 2022 could shake out relative to that kind of the normal 10% to 15% or so organic revenue growth that you guys typically target?

So we're not going to share updated guidance on '22 until our year end call. But what I would share is the performance you're seeing in the business this year with year-to-date organic growth of 24% and full year organic growth, including the MGA as if we'd owned it for the full 12 month period in the prior two years of 17% every single year we've been public, we've effectively exceeded that 10% to 15% guidance.

And then one last one. So you guys said that now you'll be at the upper end of that acquired revenue that you expected for this year of the $175 million to $200 million. I know you had put out $100 million to $150 million for next year. So is it 2021, are you pulling forward some M&A from 2022, or it's just there's a better pipeline and 2022 could still be within the range that you previously provided?

Elyse, we're just seeing a better pipeline in 2021. That is not a pull forward of our previously communicated 2022 expectation.

Our next question is from Josh Shanker with Bank of America.

First question, maybe you've said it already. What was the organic growth for the business, excluding MGA of the Future?

We didn't disclose that, Josh.

I'm might be -- about 18%, does that sound approximately correct?

Josh, it's Kris. I think we gave a specific number for Middle Market and then three of the four segments were double digits, and the one that wasn't was one point away. I don't think we've detailed organic by segment yet. We usually do that on an annual basis.

And when we look at like the 2Q '21 growth rate, was there any COVID, I guess, tailwind because of the weak 2Q? And to what extent do we see that also in 3Q that there was some lift from the prior year comps being difficult or being difficult a year ago and creating a tailwind this year?

Our organic growth in 2Q and 3Q of '20 was 19% and 20%. So I'm not sure I’d necessarily view those as easy comps. With that being said, I think, sure, there's certainly a little bit of a COVID recovery that you're seeing reflected in the overall results. But if you're thinking about that relative to kind of the uptick in underlying client level exposure units, the combined impact of rate and exposure on organic growth for the quarter was 4.1% and on a year-to-date basis, it's 4.09%. So it's not the driver of the overall organic story here.

No, of course no, I'm just trying to figure out how much of it is, if I'm trying to model forward. As that goes away, I recon, is that a 500 basis point tailwind, a 200 basis point tailwind? I'm trying to think about that as it goes forward.

I mean, I'd certainly expect it to be south of 500 points. It would need to be inside that combined impact of rate and exposure, which I would expect to both be kind of pulling us up right now. So as you think about 4.1% being the year-to-date number, it's something inside of that. I'd say the more kind of relevant topics is what's going to be the kind of relative impact of the economy and growth into 2022, how does inflation impact that. And as we're kind of thinking about the coming year, we're relatively bullish on the overall economic environment. And while we certainly expect some continued inflation pressures on the economy, as you think about our business, we're set up to capitalize on that with our product effectively repricing on a monthly basis. And so positioning us well to continue capturing growth and helping our clients navigate the challenges associated with the current environment.

Our next question is from Greg Peters with Raymond James.

This is Alex Bolton calling in for Greg Peters. I was wondering if you can give an update on the master product and its traction, and how LeaseTrack plays into that as well as how that might play into unit penetration?

So the master product continues to perform really well, Alex. I think the stat I would point to is the fact that in Q4 of last year, we effectively recognized two quarters’ worth of revenue in the master product for the MGA, and we expect revenue this quarter to be flat despite that or this coming quarter to be flat. So the growth has been really good. That is being powered by the software that LeaseTrack brought to us and so they're a key ingredient to that overall success that we're seeing. And that's certainly contributing to a favorable uptick in penetration across the units that are live in our system today.

And then I was wondering if you can provide any update on future homeowners, flood products, thinking out into the years to come.

So we continue to make good progress on both our home and our flood products and we expect that on a combined basis they will be meaningful contributors to the organic growth of the MGA in 2022.

Our next question is from Michael Phillips with Morgan Stanley.

I guess, would you maybe want to parse out that 4.1% into the two components, how much was rate versus exposure?

So we don't break it out. It gets tough to really detail out some of the nuanced differences there, so that's why we reported on a combined basis. But as you think about the building blocks of organic growth, there's really four drivers. So first is what's the relative retention of prior year revenue. As we've communicated in the past, we tend to be in line to slightly better than industry average as a result of our service model and specializations. So you can think about that being a slight benefit to us relative to our peers but not a meaningful driver of our outsized results. You then can think about the combined impact of that rate and exposure. So exposure being the relative expansion or compression of the underlying rating factors in our clients relative to that being headcount values of inventory, revenues and things of that nature. And then certainly, the impact of rate, which is reflective of the pricing environment on the insurance product side. Both are tailwinds to us today and on a combined basis, yielding that 4.1%. I think you would naturally assume based on the news you're hearing in the economy and the relative rate we're seeing in the market that that number would be higher. However, I think -- and what you would have heard from me in the past is our clients tend to alter their insurance buying behaviors. So maybe they're taking larger deductibles or buying less limits but they're continuing to work inside certain budgetary constraints relative to what they can spend on insurance. And so that's why you're going to see some downward pressure on what you would otherwise expect to see there. But then after you take that retention, you add in rate and exposure, the balance that's bridging up to the 26% for the quarter and the 24% organic growth for the year so far is all new business, that continues to be the most notable driver of our outsized organic growth.

That's actually what I was asking because I thought the force sounded a little low, but makes sense on what you're seeing from the changes in what they're doing and what deductibles and limits on all. So they did sound a little on the surface. And then longer term kind of question, I guess, as you think about the MGA of the Future business, out five plus years or whatever. Do you still see the bulk of that coming from its current base in terms of renters, or are there other ways to use the skills and benefits you guys have in other areas? Where that'd look in kind of longer term, I guess, is what I'm kind of asking?

We expect revenue to be coming from a plethora of new products five years out and renters to be one small piece of the overall business.

Our next question is from Pablo Singzon with JPMorgan.

So my first question is about the Specialty business. I was wondering if you could talk about what the biggest component of that business is ex MGA? And what drove, I guess, the relatively weak growth there as I’m -- at least I'm looking at sequential quarters? I think, by my numbers, that business grew about -- ex MGA grew about 46% in the second quarter and in the third quarter, it slowed down to 19%.

So I mean we wouldn't view 19% to be weak result, we're really excited and pleased with that relative to what we're seeing broadly across the industry. That business is specialized E&S wholesale business, so you can think about their largest area of specialization being professional liabilities, such as medical professional, cyber liability management, professional liability lines. And we had an exceptional quarter in the second quarter with the 40 plus percent organic that you referenced and 19% in the third quarter is really strong.

And then second question, so I appreciate your comments on organic into MGA for the fourth quarter. I'd be interested to hear your thoughts on what could potentially happen with the Middle Market given that you grew 20% this quarter, I think, off an 11% growth comp last year. And for 4Q, you'll be lapping against a much easier comp. I think it was down 3% last year.

We expect strong organic growth in the Middle Market business for the fourth quarter.

Next one I had was -- so Trevor, just to follow-up on your comments regarding the organic hires. Are the expenses associated with those hires fully showing up in the P&L, or in other words, like I guess, another way of asking the question is, do the margins now fully show that burden? And if anything, as they become more productive, we should expect some margin accretion from those, I guess, investments in hiring?

Pablo, as we said on the call, given the outperformance in the business, we continue to expect the high end of our previously communicated 150 to 200 basis points expansion. We're making meaningful investments in the business, which we expect to spring load future revenue growth and that, that will lead to margin expansion into the future.

And last one for me. So I think it's fair to say in general that multiples for deals have been going up for everyone, including BRP. I was just wondering how that changes how you evaluate potential partnerships? Does this sort of reach the threshold in terms of recurrence that you expect or growth or margin accretion? Just sort of how, I guess, the price to your environment today changes how you evaluate partnerships?

I mean, we're really pleased where we're positioned. We really do think we're a partner of choice. And I think it's evident in the organic growth that we continue to publish quarter after quarter that we're focused on what we think are the best businesses and the best partners. And we're happy to be very competitive in prices for those select businesses and to have those partners join us, and we expect those shareholder returns to continue to be fantastic.

Our next question is from Adam Klauber with William Blair.

Yes, a follow-up on the margin question. It sounds like you expect the margin to continue to go up in the future. If you had to -- I'm not asking for numbers, but if you had to like give us two factors why the margin should go up in 2022, what's going to drive margin expansion going forward?

I mean, the biggest note or factor I would put out there is the overall investment we're making in the talent in the business ahead of the revenue coming on, and that's fully reflected in the margin that you see today. So we've hired organically over 650 people into the business through the third quarter on a base that reflects roughly 50% of where we started the year. And so you can think about those significant investments powering the organic growth that we're going to see in the business for years to come going forward. And as those people come online and become productive inside our system and generating revenue, they're going to be highly accretive to where we sit today, fully absorbing the cost of those folks on our business.

So that's the main factor we should look at going forward?

I mean if you look at this business, 80% of our expense base is payroll. So the only way to impact margin is payroll. We have the belief that you invest deeply in talent and ultimately, that's going to lead to continued outsized execution for our clients. Our clients will continue to honor us with their renewals and future business and we'll continue to win and take share from our competitors, growing our top line and absorbing those investments that we've made into the business.

And then as far as cash provided by operating activity is obviously part of free cash, that's sort of flat with last year. A lot of that is being driven by change in operating assets and liabilities, there's a lot that can flow through quarter in, quarter out. Do you expect fourth quarter to be better, I don't know, cash provided by operating activities?

So let me just nail down the numbers, Adam, from Page 10, the statement cash flow of our 10-Q. So as you pointed out, we look at operating cash flow net of AR and AP because of the fact that we hold fiduciary cash and we pointed that out before. So if you do that, we actually generated $54 million this year compared to $20 million last year so a pretty substantial increase. Both of those represents 60% free cash flow conversion from year-to-date adjusted EBITDA. In this quarter, we incurred some more material prepaid expenses as well that brought that conversion ratio down a little bit. So we do expect continued expansion of that free cash flow in the fourth quarter in relation to the prior year.

We have reached the end of the question-and-answer session, and I will now turn the call over to CEO, Trevor Baldwin for closing remarks.

Thank you all for joining us this evening and your interest in our results, and we look forward to speaking with you again at year-end.

This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.