Thank you for standing by. This is the conference operator. Welcome to the Goosehead Insurance Third Quarter 2020 Earnings Call. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. [Operator Instructions] I will now turn the call over to Dan Farrell, VP, Capital Markets. Please go ahead.

Thank you, and good afternoon. With us today are Mark Jones, Chairman and Chief Executive Officer of Goosehead; Michael Colby, President and Chief Operating Officer; and Mark Colby, Chief Financial Officer. By now, everyone should have access to our earnings announcement, which was released prior to this call, which may also be found on our website at ir.gooseheadinsurance.com. Before we begin our formal remarks, I need to remind everyone that part of our discussion today may include forward-looking statements, which are based on the expectations, estimates and projections of management as of today. The forward-looking statements in our discussion are subject to various assumptions, risks, uncertainties and other factors that are difficult to predict, and which could cause actual results to differ materially from those expressed or implied in the forward-looking statements. These statements are not guarantees of future performance, and therefore, undue reliance should not be placed upon them. We refer all of you to our recent filings with the SEC for a more detailed discussion of the risks and uncertainties that could impact the future operating results and financial condition of Goosehead Insurance. We disclaim any intentions or obligations to update or revise any forward-looking statements, except to the extent required by applicable law. I would also like to point out that during this call, we will discuss certain financial measures that are not prepared in accordance with GAAP. Management uses these non-GAAP financial measures when planning, monitoring and evaluating performance. We consider these non-GAAP financial measures to be useful metrics for management and investors to facilitate operating performance comparisons from period-to-period by excluding potential differences caused by variations in capital structure, tax position, depreciation, amortization and certain other items that we believe are not representative of our core business. For more information regarding our use of non-GAAP financial measures, including reconciliations of these measures to the most comparable GAAP financial measures, we refer you to today's earnings release. In addition, this call is being webcast. An archived version will be available shortly after the call ends on the Investor Relations portion of the Company's website at www.gooseheadinsurance.com. With that, I'd like to turn the call over to CEO, Mark Jones.

Thanks, Dan, and welcome to our third quarter 2020 earnings call. I'll provide an overview of our results for the quarter as well as our strategy and outlook for the full-year. I'll then hand it over to Mike Colby, our Chief Operating Officer, to update you on some of our technology and human capital investments as well as updated actions around the global pandemic. Our CFO, Mark Colby, will then go into greater detail on our third quarter results and outlook. We delivered phenomenal results in the third quarter, exhibiting continued strong and profitable growth with exceptional service driving high levels of client retention. We also continued to invest heavily in people and technology, which we believe will sustain our momentum many years into the future. The results further validate our unique and time-tested business model. We run the business putting clients at the center of our universe. This has had a profound effect on the lens through which we view investments in our business. All of our investments are made with the guiding objective of creating better client experiences and a more loyal client base. We invest in initiatives that create client-focused competitive advantages and our disruptive impact on the industry is without peer, producing truly extraordinary organic growth while delivering high levels of profitability. We are ardent believers in the experience curve and work very deliberately to capture and leverage our accumulated experience and intellectual capital using both human and artificial intelligence. A simple example of this is the approximately 2,500 updates we have made to our proprietary CRM system just this year. We're working. We're constantly improving and by continuously leveraging the experience curve across a larger and larger business base, we deepen our competitive mode. Management remains, by far, the largest owners of Goosehead's stock and…

Thanks, Mark, and hello to everyone on the call. Our strong results through the first nine months of 2020 continue to validate our strategy around technology and human capital investment, which is expanding our competitive advantage in the marketplace. We have made substantial progress on our technology development road map and made key additions to the team, all while navigating the challenges presented by an ongoing global pandemic. Before I review our progress in the quarter, let me update you on our current protocols around COVID-19. We began bringing employees back to the office on a reduced and rotational basis in the third quarter. Our focus on the return to the office was first on newer hires and their managers to ensure a positive onboarding experience and successful start in these critical early months of employment. By the end of the third quarter, we have almost all employees back in the office for at least 50% of the work week. Additionally, we resumed live in person initial training with our corporate start class in October and provided an option for franchise trainees to attend in person. We believe that live in person training at our headquarters is the most effective way to onboard new team members where we can provide access to our subject matter experts, top performers and senior leadership. However, we do not anticipate returning to a required in person training until the second quarter of 2021 at the earliest. We are taking these steps carefully and deliberately and have implemented a number of COVID mitigation practices at our facilities including a screening process upon entering the office, requiring face coverings and social distancing. We will continue to follow all local government and CDC guidelines in our approach to reopening fully while continuing to prioritize the health and…

Thanks, Mike, and good afternoon to everyone on the call. For comparability purposes, my comments on our third quarter 2020 results will be discussed against the third quarter of 2019 as if recognized under ASC 605. A reconciliation of ASC 606 accounting to ASC 605 accounting for 2020 has been provided as a supplemental schedule in our earnings release. For the third quarter of 2020, total written premiums, which are an important leading indicator of our future core and ancillary revenue growth, increased 49% to $301 million. This included franchise premium growth of 57% to $213 million and corporate segment premium growth of 33% to $89 million. This growth is being driven by continued high retention rates, strong new business generation and increasing agent productivity in the franchise channel. The continued shift in our mix of business towards the faster-growing franchise channel implies significant embedded future revenue growth as new business premiums convert to renewal premiums after year one, at which time, our royalty fees increased from 20% to 50% for ongoing renewals. At quarter end, we had over 657,000 policies in force, a 47% increase from one year ago. Our consistent and rapid year-over-year growth in both premiums and policies positions us well for long-term success. Revenues were $32 million for the quarter compared to $21.2 million in the prior year period, an increase of 51%. If Q3 2020 was reported under ASC 605, revenue grew 42% to $30.1 million. Importantly, core revenues increased 45% to $26.7 million, if reported under ASC 605. During the third quarter, our franchise channel generated core revenues of $11.3 million, if reported under ASC 605, an increase of 55% from a year ago, with the results driven by continued strong growth in new business and renewal royalty fees, from an increasing increase in…

Thank you. [Operator Instructions] And we do have a question from the line of Mark Dwelle with RBC Capital Markets. Please go ahead.

Really just one quick question. You were commenting on the addition of offering flood insurance and a few other products. Can you talk to that again and explain like why – how that is that that works? How it enhances your retention?

Mark, this is Mike Colby. Thanks for the question. Our goal with every account, with every customer is to capture full share of wallet. So if that means – and the standard package would be the home, auto, umbrella and as we're learning the flood, I think, is a great addition to that. But obviously, if they have second homes, cars, etc. It's very powerful retention tool to be able to cross-sell into all lines of business. It increases switching costs. It allows us to really demonstrate our value-add in the process. So that is a focus of ours and always has been and is a focus across both channels. What you see especially with our go-to-market strategy is leading with the home and specifically during a mortgage origination, whether that's a new purchase or refinance. So there's a lot going on for the agent. There's a lot going on for the customer. And to the extent that we can make it easier and remove obstacles, it dramatically increases our likelihood of capturing those other lines of business. If it's a super cumbersome process, the agent – neither the agent nor the client are going to want to deal with it. So when we can streamline that, it dramatically improves the likelihood of us capturing that full share of wallet. And not to mention, the data that we're bringing into the system is also alerting us where the opportunity is before it would be up to the agent to really inquire. But now we're pulling in data, and we can see they own a motorcycle. We can see if they're in a flood zone that makes sensitive to purchase a flood policy. So we're excited because removing those obstacles, streamlining the quoting process and presenting it front and center for the agent will increase the likelihood of us capturing those lines of business, which will drive retention. That is statistically true in our business and every business.

I see. So ultimately, at the end of the day, it's just to basically make sure that you can satisfy all the customers' needs. And I mean, I guess, equally, it doesn't let some other agent get a foot in the door or anyway, if you can kind of click all the boxes for them.

Great point. For sure. It insulates the client from other competitors. And I'll mention it to you the standard comparative rating applications that are available in the market are typically just for the primary homeowners and the auto. So what we're doing is unique, bringing those other lines of business into that comparative rating platform.

I see. Okay. One other question, just kind of, I guess, generally in the marketplace. We've seen a lot of commentary from some of the big homeowners and auto writers that – lowering prices, particularly on auto insurance. Is that something that you're seeing across your platform as well? I mean, it probably only has a minor impact on the commission revenue, but...

Yes, I think that's consistent with what we're seeing, Mark. But when we're growing total written premiums at the rate, 49%, we're not going to feel those single-digit kind of rate declines. We don't feel it as a headwind when they're lowering rates, and we don't really feel a tailwind when they're raising rates. Really, what we're focused on is driving growth through new agents, focusing on productivity-enhancing tools for those agents and increasing new sales and focusing on client retention. Those are areas that we can control, and that's where we're focused on driving growth.

Okay. Thanks. Thanks for the answers.

Thanks, Mark.

[Operator Instructions] And our next question is from the line of Meyer Shields with KBW. Please go ahead.

Thanks. I want to follow-up on one of Mark's questions, if I can. When you've got rate decreases, I guess, historically, we've seen less shopping because people aren't frustrated. Is there any way of disentangling that retention benefit from the other operating improvements that you're making?

Would that help with retention, I guess it was on the margin. I mean, I think the question kind of gets at a couple of things. One is, I think retention impact would be a positive one, whether that's a material impact or not, I don't think it's material. So – as it relates to retention. As it relates to our new business opportunities, I think, it is worth, again, emphasizing we leave with the home at a point-of-sale transaction, and we cross-sell into the automobile. And typically, even in a softening rate environment, we're – because we're working with auto insurance companies across the country, we can find a competitive rate as part of that homeowner insurance procurement.

Okay. No, that's helpful. You mentioned another point that I want to touch on. I understand that the market strategy is leading with the home. Is there a potential pathway to leading with, I don't know, renters or motorcycle? Would that – would it make you to have complementary penetration strategy?

No. I mean, look, I think the renters insurance market that customer segment is actually quite unattractive. Lower retention, smaller accounts, similar acquisition costs. So when we're looking at go-to-market, we want to lead with where we can add the most value and where the most opportunity is, and we feel like that's in the property side. And then we cross-sell into those other lines of business. Now we certainly can accommodate with renter's customer, but that's not where we're investing dollars for client acquisition is there. We're going to start with where the big revenue opportunity is.

Okay. No, that certainly makes sense.

Homeowners own other assets. And that's not always true with renters.

Right. No, that's certainly true. Mark, you talked about the sales classes in August and September setting records in production. I was hoping to get a little bit more color about what you think is driving that. In other words technology, training. Is that moving people faster to overall productivity? Or should that productivity improvement last – that product improvement margin left as these agents gain more experience?

Well, I think it starts with recruiting, and we're getting better and better at identifying candidates that can come into the system and produce at very high levels very soon. So I think it definitely starts there. Definitely, I want to give a lot of credit to our training team who has – continues to iterate the training program and make it better and better every single month. And especially in a virtual environment, I mean, they've continued to be able to bring people on and get them ramped up very quickly. So it's yet to be determined if those outsized contributions will continue in the ramp-up process, but we are pretty confident that they will at least hit our production ramp-up goals for them.

You're starting your career in a better spot. When you have that momentum in your training class, it's certainly a better position to be in than maybe climbing out of the hole that you dig. So I think – and by the way, the work on our end doesn't stop at initial training to make sure that these agents want successfully and we invest very heavily in our agent support and sales leadership infrastructure to make sure that, that momentum carries into their wide operating environment. And I think it's worth noting as well, we've talked about in the past, our implementation process and some changes that we've made in the implementation process. And part of that was we want them to be better prepared, and we're seeing the performance. But we want them to go live immediately after coming to training. So that's an important timing consideration as well. When you come to training and then you have some type of life event, say, or something going on that would prevent you from going live right out of training, maybe a couple of months, you really lose that momentum. So that's part of our thought process as well and implementation is we have the time training to be immediately before they go live, and that's where we're getting the best results. So I think it's a combination of things from recruiting to the better onboarding experience, better training experience and then the support that we continue to deliver after training.

Understood. And certainly showing up in the results. Thank you so much.

Thank you. Meyer.

And our next question is from the line of Adam Klauber with William Blair. Please go ahead.

A couple of different questions. I know East Coast has been a pretty good growth area. Is that still – as far as new franchises. One, is that still growing really well? I am not looking for exact figures and numbers, but just anecdotally, which states are doing really well?

We're not really seeing any recruiting challenges in any of our markets that we're focused on. The Mountain West and the West Coast is still growing quickly for us. We're starting to – as we've talked about in the past, we've put more recruiting resources on the State of Texas, and we're starting to see those results – those efforts pay dividends in Texas growth, the Midwest, mid-Atlantic, a fast-growing markets for us, Georgia is a new fast-growing state for us, including the Northeast. So I – not to paint with a broad brush on this, but we truly are seeing great results in all of our markets.

Okay. And then how is the churn running, I'd say, in the last three, six months compared to a year ago? Either agents or franchise or just across both forces.

We certainly took – I guess, display some patients during the early months of the COVID pandemic and obviously, want to work with folks who are struggling. And certainly, maybe they're struggled or exacerbated through the COVID process. I'd say we've kind of resumed our normal approach to sales management, whether that's managing people up or managing people out. I think we're back to kind of our approach that's worked for almost two decades now. But I would – I'd take the market about the specifics on churn.

So the corporate sales channels remained relatively stable over the past few years, and we continue to see some improvement in the franchise channel for the year.

Okay. Great. And then finally, what's the size of your franchise recruiting staff at this point?

89. So that's combined corporate and branch op recruiters.

And for – I guess, just for example, just roughly what would have that been roughly a year ago?

I think I mentioned in my script, it was about 60%, 60?

60 people at the end of 2019.

Sorry, at the end of Q3 of 2019. So it's about 55% growth year-over-year. So continuing to invest there. And again, those investments don't really pay off for two, three years at the earliest. It takes them a while to get burned into our system. And then from there, everyone they recruit, don't really contribute to our P&L for two to three years after that. So we feel like the investment – what we're seeing right now in our P&L is a result of investments we made in 2017 and 2018. And so the investments we're making today, we'll hopefully see in 2022 – 2022 and 2023 and beyond.

Okay. Great. Thanks a lot guys.

Thanks, Adam.

And we have no further on at this time. I will now turn the call back to Mark Jones.

I just want to thank everyone for joining us, and appreciate your support and let you know that we're going to continue to work hard and do our best to dramatically outperform the industry. Thanks a lot.

Thanks, everyone.

That does conclude your conference call for today. We thank you for your participation and ask that you please disconnect your lines. Thank you and have a great day.