Greetings, and welcome to the BRP Group, Inc. Third quarter 2022 Earnings Conference Call. At this time, all participants are in listen-only mode. A formal question-and-answer session will follow the presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host Bonnie Bishop, Executive Director Investor Relations. Please go ahead.

Thank you, operator. Welcome to the BRP group's third quarter 2022 earnings call. Today's call is being recorded. Third quarter financial results supplemental information and Form 10-Q are issued earlier this afternoon and are available on the company's website ir.baldwinriskpartners.com Please note that remarks made today may include forward looking statements subject to various assumptions, risks and uncertainties. The company's actual results may differ materially from those contemplated by such statements. For more detailed discussion, please refer to the note regarding forward-looking statements in the company's earnings released for this quarter, and to our most recent 10-K and subsequent periodic filings, including our most recent form 10-Q, all of which are available on the BRP website. During the call today, the company may also discuss certain non-GAAP financial measures. For a more detailed discussion of these non-GAAP financial measures and historical reconciliations 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 website at IR dot Baldwin risk partners.com. I will now turn the call over to Trevor Baldwin, Chief Executive Officer of BRP group.

Thank you, Bonnie. Good afternoon, everyone. And thank you for joining us on our third quarter of 2022 earnings call. I will start with a few remarks followed by Brad who will address select financial and business highlights from the quarter then Brad, Chris and I will take questions. Before I get into our results. I'd like to take a moment to talk about Hurricane Ian a storm of significant proportion and impact to a number of the communities in which we live and work. The category 4 strength, slow pace of movement and sheer scale of the storm led to a severity of loss that will likely make Hurricane Ian, the costliest insured loss event in Florida history and among the costliest our industry has seen. I'm incredibly proud of the response from our colleagues across the country who have been working tirelessly with our clients, insurers and community stakeholders to facilitate much needed support for the recovery and rebuilding. Beyond the obvious and severe impacts to individuals, families and communities, there will be meaningful reverberations across our industry relative to availability cost in terms of insurance capacity. This is the type of market in which we excel were a depth of expertise, breadth of market access, and innovative solutions can solve real challenges for prospects and clients positioning us to take share. This was demonstrated in our third quarter results, but accelerating financial performance on top of exceptionally strong prior year results, highlighted by organic growth of 28% with all four of our segments achieving record or near record organic growth including 80% organic growth in the MGA. It's best quarter ever. Adjusted EBITDA for the quarter was up 118% compared to the third quarter of 2021 as a result of our strong top line growth and margin…

Thanks, Trevor. And good afternoon, everyone. For the third quarter revenue grew 91% to $259 million. Organic growth in the third quarter was 28% with all four segments achieving double digit organic growth. The strength of these results on top of strong prior year organic growth of 26% highlights the growing momentum we have in our business today. And early signs of success we are seeing in the growth investments we have been making. We recorded GAAP net loss for the third quarter a $47 million, or loss of $0.43 per fully diluted share. Adjusted net income for the third quarter of 2022, which excludes share based compensation amortization and other one time expenses, was $20.8 million or $0.18 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. The largest reconciling items were amortization of $23 million the change in fair value of earnouts of $22 million and one time partnership and integration costs of $12 million largely tied to significant integration costs associated with the Westwood partnership. Adjusted EBITDA for the third quarter of 2022 rose 118% to $41.9 million, compared to $19.2 million in the prior year period. Adjusted EBITDA margin was 16% compared to 14% in the third quarter of 2021. Adjusting for the change in accounts receivable and accounts payable related to our holding fiduciary cash as well as earn out flowing through operating cash flow, free cash flow from operations improved by approximately $2.2 million compared to year-to-date 2021. Next, I'll summarize a few items regarding expectations for the fourth quarter and the full year of 2022. First, for the fourth quarter of 2022, we expect to generate organic growth in the high-teens, which should equate…

Thank you. At this time, we will be conducting a question-and-answer session. [Operator Instructions] We have a first question from the line of Greg Peters with Raymond James. Please go ahead.

Hey, good afternoon, everyone. The first question will be on organic revenue growth results on specifically in middle markets and specialty. For middle markets, I'm intrigued that you're reporting relatively strong results compared to the peer group and you mentioned some client wins. Maybe you can unpack some of the detail that's going on to that result. And then in specialty. Trevor, you talked about the headwinds or the challenges of the property market in Florida. And I'm just curious how that might manifest itself with organic as we think about that going forward.

Yeah. Good afternoon, Greg, and appreciate the question. So to start with middle market, one, we're exceptionally proud of the results. And we believe that it showcases the value that our colleagues are delivering to clients every day. And the reality is those results are being driven by an acceleration of new client wins. That's a result of the investments that we've been making in national resources, building our depth of incline industry sector capabilities, and risk product centers of excellence that enable us to bring the best of our organization to our clients, no matter where they reside, and how they access thoughts. And that's showing through and showing up and newer and new wins, it's showing up in larger wins, and broad base strength across our footprint. As we think about the specialty business, you know, the property market in particular we're anticipating is going to enter a period of dislocation that that the industry hasn't seen in decades. But as I mentioned, that's the type of market where we excel where our depth of expertise, our breadth of market access, and the uniqueness of the solutions that we're developing and bring to market enable us to solve real problems for our clients, ultimately positioning us to take more share. Specifically in the specialty business, we believe the responsible job we've done managing capacity and delivering profitable underwriting results to our capacity providers, is going to position us uniquely in what setting up to be a very difficult reinsurance marketplace, that we'll be able to access capacity, more nimbly, and at more scale than many of our competitors and bring that capacity to market for our clients.

All right. There's a lot to unpack and then answer I'll probably take that offline. I'm going to take that offline. I'm going to pivot to the guidance for next year. And I'm trying to crunch the numbers pretty quickly, but the revenue guidance for the full year and the adjusted EBITDA guidance for the full year. I was wondering if you could talk, Brad for a minute about what the implied adjusted EBITDA margin is with that guidance and how that compares with what your guidance is for this year.

Yeah. Good afternoon, Greg. So if you look at the range we put forth and, I will note that we're continuing to, to work through the budgeting process and fine tune that, as we finish Q4 here, which is why we provided a relatively broad range. But it would look at about 200 basis points of margin expansion next year. And that's in light of still absorbing a significant amount of investments that we've made in the business in the last two years. We've said before, it takes approximately three years for those to roll in and be sort of fully funding in our results. So we're continuing to see the growth, really impact the organic numbers you're seeing, you saw that in Q2, you saw that again in Q3. We expect that to have even more impact in 2023. But we are continuing to absorb those investments as they mature in the business.

Got it. Thanks for the clarification.

Thanks, Greg.

Thank you. We have next question from the line of Meyer Shields with KBW. Please go ahead.

Thanks. Two questions, I guess on the guidance going forward. Trevor, you talked about GDP contraction, is that real or nominal in terms of the expectations. And I'm wondering, specifically, whether there's a consideration of maybe more distracted clients that are less inclined to talk, in addition to just attrition?

Hey, Mayor. So I'll let Brad take the question on GDP, but then I'll add in some commentary around the client distraction. So what we're anticipating relative to client buying behavior next year is that it's going to be a real opportunity for us to pick up share as a result of the difficulty of securing limit of securing the type of terms and conditions that clients are seeking. And just the general kind of dislocation we're anticipating in the insurance marketplace. As I mentioned earlier, that's the type of market where we tend to really excel where our breadth and depth of expertise and capabilities enable us to really stand out, take share and also deliver fantastic solutions to existing clients, so that they don't feel like they need to look for, for advice and for outcomes from others.

And that's real GDP, Meyer.

Okay, thanks. That's helpful. And then just one final question on that if I can. Is there any explicit debt pay down in the debt leverage side?

Yeah, Meyer, so if you if you step through that, conservatively on a $250 million or $260 million adjusted EBITDA number. We generate, let's call it $100 million $125 million in free cash flow. So we are assuming that we'll be generating, again, a conservative amount of free cash flow to contribute to our net leverage coming down.

All right, perfect. Thanks so much.

Thanks, Meyer.

Thank you. We have next question from the line of Elyse Greenspan with Wells Fargo. Please go ahead.

Hi, thanks. Good evening. My first question is on the organic guide for 2023. Right, you guys, have had a string of periods, right, where you've been coming in better than your expectations. And you said the high end of that 10% to 15% range, but it sounds like we could get a really strong pricing environment next year, especially in the lines impacted by Ian. So you're trying to conservatively guy like, is there a chance that you could come in above that range? And what can you maybe give us a sense of the baseline pricing expectations that support the 10% to 15% target?

Hey, Elyse, good afternoon. So there's a lot of puts and takes to the type of an insurance environment we're anticipating next year. And so all of that is contemplated in the organic guide. What I would tell you is while we're expecting pretty meaningful rate, particularly in cap property, that tends to also change clients buying behaviors, and so you'll see them take larger deductibles. You'll see them by less limit. And so you wouldn't expect a straight kind of pass through or a correlation from the level of rate we're expecting and into the organic growth overall. And so we feel appropriately conservative and how we're, we're thinking about the results and expectations for next year, and feel like we're well positioned to continue to drive fantastic outcomes to all of our stakeholders.

Also, within that organic guide, I guess another question, right, you talked about starting to see an impact of the new hires and the investments you made this quarter. But then you also said, right, that it takes about three years for those to fully roll in. So what what's the revenue impact that you're assuming on from the new hires embedded within that 10% to 15%, full year guide for next year?

Yeah, so Elyse, I'm not going to break out specifics, relative to come new hires versus the ongoing business. But what I can tell you is, you saw meaningful acceleration and growth for our business both quarter-over-quarter and year-over-year in third quarter. And part of that acceleration is a result of the success from the investments we've been making over the past couple years being beginning to earn through and show up in an actual results and client wins. And we expect that to continue to be a meaningful contributor to our results next year. So we're feeling really good about how the business is positioned. And in the strength of our business model, is going to enable us to deliver consistency and strong execution for our clients, despite what we're expecting to be a relatively volatile insurance marketplace and somewhat difficult economic environment.

At least I'd add in just to clarify, it's high end of the 10% to 15%.

Yes, and then within that high end of 10% to 15%, do you expect all of your segments will be within that range? Or any color you can give us well, on the segments relative to the guide?

We're not going to get into segments that at this point, Elyse, but we'll plan to provide some more color around segment level performance during our investor day, next week.

Okay, and then one last one on the M&A side. So you said within the guide you're not assuming any acquired revenue next year, as you work to kind of get your leverage down? What could cause you? I mean, if there's deals that come along, is that what's going to determine whether or not there's acquired revenue, or you just on the sidelines until you get your debt within that range? Are you just trying to put out a conservative guide? I'm just trying to get a sense of when the acquisitions could start to ramp up again.

Yeah, so Elyse, two things. One, the pulling M&A out of expectations for next year is not overwhelmingly as a result where leverage sets, it's a broader input than that. So as a management team, what I would tell you is we view part of our role to be allocating capital. And as we assess the overall environment today, the pricing in the external environment has not changed to reflect the increase in cost of capital. And in conjunction with that, we're having tremendous success and fantastic results on the investments we've been making into the business. And so from a capital allocation perspective, that's what we're prioritizing today and focusing on strengthening our balance sheet during a period of volatility. With that said, we remain opportunistic. We continue to have dialogue with a number of high-quality opportunities and for the right opportunities, we will responsibly look to get things done, based on today's backdrop. We don't expect that next year, but that can evolve.

Thank you,

Thanks, Elyse.

Thank you. We have next question from the line of Josh Shanker with Bank of America. Please go ahead.

Yeah. Thank you for taking my question. I don't imagine you would give this kind of detail in most courts, but given some of the noise in the third quarter, can you talk a little about how much revenue was generated from the QB relationship you picked up with Westwood, obviously 80% MGA the future growth is significant, but I assume some of that growth is one time in nature.

Yeah, great question, Josh. So, a few things to clarify. One, the MGA growth sands the QBE program administrator agreement was 44%. So still incredibly strong. And the other thing to clarify is that the 36% and growth you're seeing from the QBE program administrator agreement, contribution to the MGA's organic growth for the quarter, I wouldn't necessarily characterize as one time because while that program is rolling into our results, and that kind of overall uplift it's somewhat one time in nature, that's a reoccurring book of business that has growth built into it in the 36% results that you see. And so if you had just taken a flat line of the book, at the start of the program administrator agreement, the contribution wouldn't have been 36%, it would have been something less than that. But because of the growth that we're driving into that program, we're seeing accelerated results, and we would expect that to continue.

Hey, Josh, I'd also add, you know, we tried to provide some additional disclosure, on organic growth with the PA with the interplay between Westwood in and MSI and the intercompany, consolidate -- elimination and calculating organic growth. So I think it's Page 7 of the supplement, you can walk through that calculation, because I think there's been some confusion. And, clearly we were backing out intercompany transactions and calculating organic growth.

That's great. And then not you sort of started along my efforts was 36% growth in the QBE relationship. 20%. Westwood, can you give us any color and given a lot there? In general, what is the organic growth within the acquisitions that you did over the past 12 months?

Yeah, so if you look at the Page 3 of the supplement Josh, at the very bottom line there, you'll see total revenue of business owned as of 12/31/2021. And that gives you a sense of the growth of the overall business including acquired businesses are a proxy for organic growth, for the business, for everything that was acquired last year, including those parts of the business not yet today contributing to our organic growth calculation. And you can see it's actually higher than the 28% it's 36%, which highlights the fact that the businesses that we partnered with it last year actually growing faster than BRP as a whole, which I think is a testament to the capital allocation that that you saw from our team last year, and the focus on partnering with businesses that make us better, and that we can help make better as well. And you're certainly seeing that play out.

And one more, please. And I may not get an answer. I've always been very careful about giving margin information out about MGA in the future. But could you maybe look into the future and talks about how many years out you think it will be when the MGA of the futures EBITDA down margin is greater than the BRP as a whole. Is that three years out? Is that four years out? It doesn't have to be the exact number, but how far out should we be thinking?

Josh, I think will shed some light on that being next week at the investor day.

All right, I'll take that. Thank you very much.

Thanks, Josh.

Thank you. We have next question from the line of Weston Bloomer with UBS. Please go ahead.

Hi, thanks. My question is on margin and the investments you're making in your business. I may have missed this, but did you disclose how much of the $50 million has been put to work year-to-date? And then what are your expectations for 2023 as well? I'm just trying to get a sense of kind of the year-over-year comps on those investments.

Yeah, Weston. So yeah, we did not give that update. But as far as the investments we're making this year, you can think of those is basically ratably rolling into the year. So we are on pace with the commitment we made earlier this year. I believe it was the $60 million we were going to make in year. As you look to next year, we are currently not specifying any other denovo investments outside of normal course for the business. But what I would say as I described before we continue to get rollover impact of the significant investment we've made over the last two years, is that sort of matures in the business.

Got it. And I think last quarter, you'd said 850 new hires in the first half of the year. Do you have that number for the 3Q? And do you expect most of the investments to be hires as you move forward as well? Or will be kind of other investments in technology and things of that nature?

Yeah, hey, Weston. And so we hired a approximately 450 people in the third quarter. So basically on trend with the first half of the year. And what I would tell you is our investments in the business are largely talent related, even the investments that are technology oriented. They tend to be into technologists who come in build technology into and for our business.

Great, thanks for taking my questions.

Thanks, Weston.

Thank you. We have a next question from the line of Pablo Singzon in with JPMorgan. Please go ahead.

Hi, good afternoon, I was hoping if you could provide perspective and your expectations for I guess, interest expense next year, just given where rates are in the pay down you're planning for your debt. Thanks.

Yeah. So, Pablo, we already are experiencing pretty significant cash interest increases. We were able to increase here today, free cash flow, even in light of 170% increase in what we're paying in cash interest. We do outline in the earning supplement our exact debt outstanding. And we effectively use the forward curve to build our expectation as to what our variable rate debt will look like, going into next year.

And probably about, as Brad talked about earlier and we think we can get $100 million $125 million of free cash flow next year after paying interest from that EBITDA guide we provided. So still significant capital created to manage the debt levels down to closer near our 3.5 to 4.5 long term range that we've talked about.

Got it. And then my second question is, I just want to get your guy's perspective, and I guess, the trajectory of free cash flow so far and we see the bridge from where we are going to add 100 to 125 next year, right? Because as I look at what you've done year-to-date $59 million, that's about 30% of adjusted EBITDA. And I think last year, cash was actually negative in the fourth quarter. So I guess just how to think about with regard to what you see a pretty good results for next year. You're just getting the pattern from last year, and, what you guys have planned for next year? Thanks.

Yeah, I can give you a really high level bridge problem. And again, we're continuing to work through our 2023 finalization on budgets. But the way we're thinking about a high level is, if you take our range of adjusted EBITDA I provided the 250 to 260. If you calculate somewhere in the range of $100 million to $110 million of cash interest next year, as well as we've been at a run rate of about $20 million to $30 million of partnership and integration related costs. That's how we're backing into our range, we provided on free cash flow. Because the main adjustments for us in bridging from adjusted EBITDA to free cash flow are those two elements.

Pablo, I also add when you're comparing the year to date free cash flow to prior year, there's a pretty big timing mismatch in partnership expenses between this year and last whereas they're very much front loaded with the Westwood partnership this year, whereas last year, it was very much Q4 weighted. And so there's not kind of a perfect year-over-year comparison there. In addition to that, because QBE -- or because of the Westwood businesses being absorbed out of QBE there's pretty significant integration and Transition Services expenses that are one time in nature that are in the partnership expenses bucket this year, which we would not expect to reoccur over.

Got it. That makes sense. Thank you.

Thanks, Pablo.

Thank you, ladies and gentlemen, we have reached the end of the question-and-answer session. And I like to turn the call back to Trevor Baldwin, CEO for closing remarks. Over to you sir.

Thank you all for joining us for our third quarter '22 earnings call. And we look forward to speaking with you next week at our inaugural Investor Day presentation. Take care.

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