Greetings, and welcome to The Baldwin Group Third Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session follow the formal presentation. [Operator Instructions]. As a reminder, this conference is being recorded. And it is now my pleasure to introduce your host, Ms. Bonnie Bishop, Executive Director, Investor Relations. Thank you, Ms. Bishop. You may begin.

Thank you. Welcome to The Baldwin Group's third quarter 2024 earnings call. Today's call is being recorded. Third quarter financial results, supplemental information, and Form 10-Q were issued earlier this afternoon and are available on the company's website at ir.baldwin.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 a more detailed discussion please refer to the note regarding forward-looking statements in the company's earning release and our most recent Form 10-Q, both of which are available on The Baldwin 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 reconciliation to the most closely comparable GAAP measures, please refer to the company's earnings release and supplemental information, both of which have been posted on the company's website at ir.baldwin.com. I will now turn the call over to Trevor Baldwin, Chief Executive Officer, of The Baldwin Group.

Good afternoon, and thank you for joining us to discuss our third quarter results reported earlier this afternoon. I'm joined this afternoon by Brad Hale, Chief Financial Officer; and Bonnie Bishop, Executive Director of Investor Relations. The third quarter ended with Hurricane Helene and was quickly followed by Hurricane Milton, marking one of the more intense hurricane seasons in recent history, particularly for Florida's West Coast. With over 1,000 colleagues throughout the state of Florida, we witnessed firsthand in our communities the destruction and loss caused by these two major storms. We worked quickly to assess the safety of our colleagues and simultaneously focused on assisting with the recovery efforts of our clients throughout the affected areas. As we continue to work through the recovery process, I am reminded yet again of the critical role we in the insurance sector play during some of the most challenging moments of our clients' lives. It is during these times when people and businesses have endured catastrophic loss and are dealing with displacement, financial uncertainty, property damage and overall disruption that our industry steps in to help make people financially whole and get back on their feet. My sincere pride and gratitude extends to our colleagues who are working tirelessly for our clients to provide them with expertise, guidance, and solutions to navigate the aftermath, lead the recovery, and ultimately continue to protect the possible. With that, I'll go through our results for the third quarter where we saw steady momentum across the top-line, while also delivering margin improvement and adjusted free cash flow expansion. Both organic revenue and core commissions and fees revenue grew 14%, a testament to the strong underlying performance we are seeing in the business and the overall resiliency of our business model in the face of increased headwinds…

Thanks, Trevor, and good afternoon, everyone. For the third quarter we generated organic revenue growth of 14% and total revenue of $338.9 million. Looking at the segment level, we generated organic revenue growth of 7% at IAS, 26% at UCTS and 14% at MIS. We recorded GAAP net loss for the third quarter of $14.5 million or GAAP diluted loss per share of $0.13. Adjusted net income for the third quarter, which excludes share-based compensation, amortization and other one-time expenses, was $38.5 million or $0.33 per fully diluted share. A table reconciling GAAP net income 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 rose 14% to $72.8 million compared to $64 million in the prior year period. Normalizing for the pro forma impact of the sale of connected risk earlier this year, adjusted EBITDA grew 18%. Adjusted EBITDA margin expanded approximately 60 basis points year-over-year to 21.5% for the quarter, compared to 20.9% in the prior year period. Adjusted free cash flow for the third quarter was $27.8 million, a 15% increase year-over-year, a direct reflection of our continued focus on expense discipline and operating leverage in the business. In the third quarter, we paid $5.5 million of earn-outs in cash inclusive of amounts reclassified to colleague earn-out incentives. In October, we paid an additional $14 million, bringing our year-to-date total cash earn-out spend to $115 million. Our remaining estimated undiscounted earn-out obligations now stand at approximately $194 million. As a reminder, several of our partnership agreements contain provisions that permit former selling shareholders to allocate portions of the earn-out proceeds to colleagues who meaningfully contributed to the partnered firm's achievement of the earn-out. When this determination is made, we record compensation expense that…

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions]. The first question comes from the line of Tommy McJoynt with KBW. Please go ahead.

Hey, good evening, guys. Thanks for taking our questions. There's some headlines around Westwood and it sounds like you touched on it there at the end and potential -- we've seen headlines around potential issues around the underwriting profitability and capacity for Westwood. So what information can you guys share that would be helpful in terms of Westwood carrier capacity mix, kind of how long that capacity is contracted for and as well as the underwriting profitability of those programs.

Yes. Hey, Tommy, good evening. This is Trevor. Happy to cover all those areas. And we'll just start out with saying we're aware of the report and I would tell you it contains a number of statements that are factually inaccurate, incomplete and/or misleading. And let me start with a comment regarding our partner with the builder program, which is QBE. And they've been and continue to be a great partner for us. So let's go through a few things here. First, the assertion that our relationship with QBE is definitively ending in May of 2025 is misleading. The initial term for the QBE Program Administrator Agreement, which we signed with QBE at the time that we acquired Westwood with our MGA goes through May of 2025, but extends through May of 2027, with our support helping QBE arrange reinsurance that equally covers the business to be written between May of 2025 and May of 2027, which I would highlight brings the QBE program structure in line with how all of our non-QBE homeowners programs are structured today. We're currently working to arrange the reinsurance program to support that QBE program through May of 2027 and feel good about our execution based on the historical loss ratio performance of this book. So specifically over the last 10 years, the builder program loss ratio has outperformed a basket of the top 15 largest homeowners riders by an average of 800 basis points of loss ratio per year and that trend has persisted since the inception of the Program Administrator Agreement when we took over. As Brad mentioned in our prepared remarks, we are preparing for some erosion in program economics in 2025, as a result of our obligation to help QBE arrange this reinsurance cover. And while the outcome could vary…

Yes. Thanks, Trevor. So in the Medicare business, we operate as a national distribution platform on behalf of our health plan partners in what is commonly referred to in the industry as a national Field Marketing Organization or FMO for short. That means our health plan partners delegate to us in part or all of the responsibility for contracting third-party agents and agencies, providing them with ongoing compliance and training and oversight, as well as sales and marketing training and oversight support. From time to time, we acquire these down line agencies in order to control more of the distribution value chain and increase our share of the economics. You can think about this as us vertically integrating ourselves down into the value chain and acquiring agencies and their direct agents who are closest to the plan members we provide advice and enrollment support to. The agents of these third-party Medicare distribution agencies are not employees of Baldwin and the agencies are in no way controlled by us pre-acquisition. Therefore, we can confirm we've appropriately accounted for these acquisitions under U.S. GAAP. The $1.8 million of earn-outs paid to the acquisitions mentioned in the report, in addition to all of our earn-out payments are in no way a replacement for or in lieu of compensation they represent incentive-based, transaction-related payments that are the industry standard and insurance agency acquisitions.

Tommy, any follow-ups?

Yes, just one quick one numbers, you mentioned the $10 million to $15 million of EBITDA impact. Is it fair to think of that as only a half year or potentially eight months impact and there would be an additional impact in 2026 over 2025 similarly to that?

Yes. Tommy, that's the right way to think about it. I'd say you should think about it as kind of a one-time impact that clearly, we're able to absorb while still increasing margin and delivering industry-leading kind of mid-teens or solid double-digit organic growth. So we feel really good about how we're positioned for next year.

Thank you. Next question comes from the line of Hristian Getsov with Wells Fargo. Please go ahead.

Hi, how are you? So for the IAS, I know you reiterated that staying in the double-digits for the full year, but I guess that kind of implies an acceleration in the Q4. So I guess, what gives you kind of the confidence? Because you talked a lot about stuff kind of getting pushed back in terms of like construction and all that. But I feel like if it's getting pushed back, it will likely get pushed back even further than the Q4. So I guess, have you seen something that maybe gives you a little bit more confidence going into the Q4 that you could see that kind of accelerate from here?

Yes. Hey Hristian, this is Trevor. I'd say three things. One, our expectation assumes the rate and exposure headwinds persist into the Q4. With that being said, there's two dynamics that give us confidence around the acceleration in the quarter. One is our visibility into continued really strong new business results and the prior year comp being a relatively easy comp that we're growing off of.

Got you. And then in terms of like if we get a potential like macro slowdown, let's say first half of next year, is that -- have you guys like put some like thought into your 2025 guide? I know you guys talked about like rate and exposure kind of maybe continuing to maybe not decelerate, maybe stabilize. But I guess, I'm trying to get a sense of like what percent of your business would you say is like macro sensitive? I don't think you guys have ever quantified like what percent like construction is, which I would consider as macro sensitive. But are there any other points of your business that might see a slowdown if, let's say like a mild recession kind of materialized early next year?

Yes. So I'd say the two areas I'd point out would be construction and employee benefits, which is headcount centric. Construction across our business is, you can think about it as about $100 million revenue business. Employee benefits would be about 30% of the overall IAS business. And I think about frankly what we're seeing in the third quarter as being kind of the relative impact you could expect in that type of an environment. And it's certainly kind of conservatively contemplated that those headwinds persist into 2025 based on the expectations that we've set. Importantly, what I just reinforced for you, Hristian is, we feel really good about the durability of our growth profile, our earnings growth opportunity and the margin accretion runway that we have ahead of us. As a result of how much of our overall growth is driven by net new business, which as you saw in this quarter enabled us to power through those market-driven headwinds. And so while there are some impacts, puts and takes, so to speak, around both insurance and economic cycles, as a result of the consistent ability we have to deliver outsized new business, we should -- we're confident around our ability to kind of grow in an outsized manner through those cycles.

Got you. And one more if I can, I know you previously, you've kind of commented on like multiples in like the M&A world, I guess. Have you seen any shift? And I know you guys are bringing your leverage down, but I guess with a lower rate environment, let's say it turns even lower quicker than you guys expected. Would you guys return to M&A quicker than you originally expected or multiples a little bit too high and you'd want to see some contraction there as well?

Yes. I mean, I'd say, from what we're seeing and hearing, multiples continue to be very high. Our M&A strategy is not going to be dictated based on the rate environment that we're seeing. It's a function of our financial profile and the strategic nature of the businesses that we'd be looking to acquire and the capabilities and resources that we bring -- they bring to our platform. We continue to remain focused on strengthening our financial profile, which should see a meaningful inflection next year. We're really excited about the accelerating free cash flow and continuing path to delevering as we continue to post really industry-leading growth results, healthy margin accretion and overall strong top and bottom line results. So we're not thinking about M&A being a meaningful driver to our results next year. And as I've said in the past, I would not model any actual M&A in the year next year.

Thank you. Next question comes from the line of Gregory Peters with Raymond James. Please go ahead.

Well, good afternoon, everyone. So I want to get back to the margin guidance. I just want to make sure we're picking up all the pieces in the change for the outlook for 2024. And then, the other question I had related to margins in the context of the guidance for 2025 is that with the substantial, let's call it 10% plus sort of organic target for the enterprise for next year, I would anticipate that, I think the law under your guidance is a 20 basis point margin improvement. That seems kind of light in the context of the growth that you're expecting. So just help us reconcile those two things, please.

Yes. Hey Greg, good evening. So let's take those one at a time. For Q4, there's really two drivers that are causing us to put forth some conservatism in our outlook. One is the kind of rate and exposure headwinds we saw in Q3. We're baking in an expectation for that to persist across our IAS and MIS businesses. And the second is an expectation for a one-time; call it $2 million to $3 million top and bottom line impact to contingent loss ratio based profit share contracts related to the recent storm activity. When we look to 2025, you're right, we are outlining an expectation for double-digit organic growth as we've kind of consistently said, we believe our business is capable of and will deliver through market and economic cycles. When you look at the low end of that margin accretion guide at 25 basis points in a vacuum, I would agree with you that is relatively low considering that growth path. However, what that contemplates is a built in kind of EBITDA headwind associated with our obligation to help QBE source reinsurance to support the builder program beginning in May of 2025, which we've sized right now at $10 million to $15 million. And so if you normalize for that, you can think about kind of a more kind of regular way, kind of, year in, year out margin accretion expectation.

Fair enough. I know you said it in the comments, but I just, I want to make sure I got it all.

Yes.

And then my follow-up question is just around organic revenue growth. I know you covered some of the headwinds in IAS. Maybe you could address if you look at the rate of change of organic, if we look at sequential trends, and I don't want to get hung up on sequential trends, but even annual trends, it's slowly -- the rate of change is slowly slowing down, I should say, but by no means is it -- it's still a great result. But I'm just curious how you feel about that outlook is, as we're modeling our projections going forward, is it fair to assume that UCTS over time is going to gradually migrate to your 10% to 15% range? Or how are you thinking about it?

Yes. So there's a lot there, Greg. Let's maybe start high level and then we can get into some more granular specifics. When you think about kind of the rate of change in organic, I would tell you it's in the retail businesses, so IAS and MIS entirely driven by change in rate and exposure. And so I don't have an expectation that you're going to continue to see a rate of change. If anything, I think it would move back up over time. I mean take IAS as a specific example in the quarter, rate and exposure was a 600 basis point headwind to organic growth in the quarter. So normalizing back to the same, call it 1.3% tailwind that we experienced in last Q3. IAS' organic growth would have been 13% rather than 7%, which is kind of healthily right square in the middle of our long-term 10% to 15% target and 1.3% rate and exposure trend is not something that I would characterize as kind of outsized or kind of unique in nature. Like when you think about the fundamental ways in which rate and exposure building blocks build, you can think about kind of GP -- GDP for the economy largely as being a proxy for exposure unit expansion or compression, plus or minus the impact of what's happening with pricing in the economy and then insurance rate. And we've certainly over the past few years been in a constructive rate environment that has begun moderating over the past few quarters, which is I think consistent with what you've probably seen across the industry. But I would just point you back to our ability to consistently deliver net new business results that meaningfully kind of exceed industry norms, which leads us to our confidence in our…

That's a full answer. I appreciate it. Just one minor last question, which is you mentioned customer retention. I think that related to the IAS channel. Can you talk about producer retention? That's another critical variable. How is your producer retention holding up?

Yes. We feel great about our producer retention. We refer to our producers as risk advisors. We track colleague retention, Greg, on a monthly basis. And one of the key metrics I pay attention to is our retention of what we call our vanguard colleagues. That's the top third of our colleague population as they rank from a performance basis every year. And as of September, our retention of vanguard colleagues was in excess of 95%. You can carry that statistic through to our advisor population and that is illustrative of kind of the strong retention we're seeing.

Thank you. [Operator Instructions]. The last question comes from the line of Pablo Singzon with JPMorgan. Please go ahead.

Hi, good evening. So a couple for me. One, can you please explain how the change in QBEs we ensure will result and lower EBITDA for you? Start to hear on how that works.

Yes. Hey, Pablo, this is Trevor. So when you look at the way MGA programs are structured, particularly when it's with reinsurance kind of purchased separate from kind of the paper that that you're writing the program on, you can think about there being kind of three components of the overall cost structure. There's a fee that goes to the insurance company who's providing the regulated paper that you file and write the product on. They will typically take some risk on the program as well as part of the reinsurance panel. You can then think of kind of a percentage of the premium dollar that gets paid to the reinsurers for taking the risk on that program. And so that would be effectively, your expected losses plus some margin for those risk bearers. And then, you can think about there being a fee for claims adjudication, which generally we are the TPA for our programs and adjudicate those claims and so that fee goes to us. And then you can think about commission for providing the kind of program administrator services. So everything from product development and ongoing filings to underwriting to policy issuance and everything in between. And so specific to the QBE program, QBE was writing that net all along and intended from day one the reason they sold Westwood was to get out of North American personal lines, at least that was -- what was communicated at the time. And so the plan has been all along for that to be kind of a gradual transition into the more traditional program market, whereas in May of 2025 they would transition to being more of a paper provider and us bringing in a panel of third-party reinsurance providers to take the risk. As you've heard from me in the past, when we launch new programs, our economics are not optimized and that's because you're bringing a new program to kind of that reinsurance market or risk capital provider community for the first time. And you can think about there being a similar dynamic here as we're bringing this program into the reinsurance market for the first time. And as a result, there's some conservatism in how people are going to look at expected losses. And so long as we can continue to drive industry-leading results and improve overall loss costs overtime, those economics have the opportunity to then grow once again over time similar to the new programs that we launch.

Got it. Makes sense. And then second question maybe for Brad, I think your cash flow guide for the year used to be 160 to 195, right? And now you're saying 140 or 150. Can you just bridge the gap there? How much of it was 3Q? How much is 4Q? And how are you thinking about conversion in 2025?

Yes. It's a combination of 3Q and 4Q. I'd say you could split it half and half, Pablo. And it's really two drivers. One, the revised adjusted EBITDA guidance, which is the starting point for how we calculate and communicate free cash flow. And the second being the fact that we took out an additional $100 million opportunistically when the bond markets were quite favorable and we launched our inaugural bond in May. And so that has resulted in a higher cash interest expense burden for the year, which is those two are effectively getting you to our revised full year guidance.

Yes. And then just last for me, just a couple of clarifying questions on the rate and exposure comments. I guess, first you talked about the construction book and some timing-related softness there. Are you counting that against the rate and exposure headwind? I think you said 4.7, right? I wasn't sure how you're sort of like thinking about that negative this quarter, so.

Yes. Hey Pablo, you can think about the kind of pushing out of job starts as being probably half of that negative impact on rate and exposure. The other you can think about as being exposure being flat in the employee benefits business. And so if you normalize those two factors, you bridge back to low-double-digits OG and IAS.

Okay. And then, as we think about 2025, anything, Trevor, you mentioned that you're assuming, I'm not sure if it's flat or some headwinds from rate and exposure. What was that? Or what are you assuming in terms of the shape of that curve, right? So I think 4.7 is a pretty meaningful headwind like, does it get better than 2025? Is it sort of the same, like, I'm not clear for specific numbers, but how should we think about the shape of that curve as we go through quarters and at some point simply call should get easier and all that stuff. But yes, if you like, talk through how that factor might swing results as we go through 4Q and 2025.

Yes. Hey Pablo, a couple of things. One, I'd say, we're still a little far out to get into kind of specific shape of rate and exposure impacts quarter by quarter. We'll be prepared to talk more about that as we get back out here on our year-end call. Overall, you can think about kind of the glide path of that impact being most prominent in the beginning of the year when these headwinds from 2024 were not as meaningful and kind of gliding off over the balance of the year.

Yes. So thanks, Pablo. And now, as we bring the call to a close, I wanted to take a moment to reflect on our recent five-year anniversary as a listed company, which was a couple weeks ago in everything that has been accomplished over that time period. I remember ringing the opening bell at NASDAQ's market site on October 24, 2019, and it feels both like yesterday and a distant memory all at once. In 2019, our debut year in the public markets, we were the first commercial insurance broker to IPO in over 20 years. We had less than 500 colleagues, total revenue of $138 million, adjusted EBITDA of $29 million, and adjusted diluted earnings per share of $0.27. We had generated organic growth of 10%. We're very much a regional business. However, we had a clear vision of who we wanted to become and a strategy to get there. Today, I sit here with immense pride for our team and colleagues across the country as we have more than executed on the five-year vision we set forth at the time of our IPO. Across key business metrics, we have executed well in many ways beyond our own expectations. Today, we have just over 4,000 colleagues, a roughly 8x increase from five years ago. We have LTM revenues of $1.34 billion, a 10x increase. We have LTM adjusted EBITDA of $295 million, a 10x increase. And we have LTM adjusted diluted earnings per share of $1.37, an increase of over 5x, resulting in a compound average growth rate of over 40% in our adjusted earnings per share since the IPO. As proud and excited as I am for what we have accomplished over the last five years, I can easily say I'm even more enthused for what lay ahead…

Thank you. This concludes our today's teleconference. You may disconnect your lines at this time. Thank you for your participation.