The Baldwin Insurance Group Q1 2024 Earnings Call Transcript

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May 7, 2024

There are 9 speakers on the call.

Operator

greetings and welcome to the Baldwin Group First Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Bonnie Bishop, Executive Director, Investor Relations.

Operator

Please go ahead.

Speaker 1

Thank you, operator. Welcome to the Baldwin Group's Q1 2024 Earnings Call. Today's call is being recorded. 1st quarter financial results, supplemental information and Form 10Q 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.

Speaker 1

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 earnings 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 reconciliations 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 dotcom. I will now turn the call over to Trevor Baldwin, Chief Executive Officer of the Baldwin Group.

Speaker 2

Good afternoon, and thank you for joining us to discuss our Q1 results reported earlier this afternoon. I'm joined this afternoon by Brad Hale, Chief Financial Officer and Bonnie Bishop, Executive Director of Investor Relations. Our Q1 2024 results represented one of the most complete performances we've seen across the business since going public, showcasing broad based revenue momentum in tandem with robust margin expansion and improved free cash flow generation in the wake of the expense rationalization initiatives completed in 2023. All three of our segments achieved double digit organic revenue growth, resulting in overall organic revenue growth of 16%. Adjusted EBITDA grew 29% year over year, resulting in an adjusted EBITDA margin of 26.7 percent, a 280 basis point expansion over the Q1 of 2023 and free cash flow from operations grew 51% in the quarter to 53,000,000 dollars As we discussed on our last earnings call, the business is rapidly approaching a real inflection point.

Speaker 2

We are 4 quarters away from satisfying substantially all our outstanding earn out obligations. The result of which will be a step function increase of our free cash flow profile. In IES, we generated organic revenue growth of 11% in the Q1. This was largely fueled by record new client wins, which were up nearly 90% over the first quarter of 2023 driven by increased collaboration across the firm made possible by our integrated platform that enables broad based accessibility to expertise, tools and resources. We also saw rate exposure, which had been a headwind in the 4th quarter, return to more normalized levels and serve as a slight tailwind for the quarter, albeit down meaningfully from what we saw in the Q1 of 2023.

Speaker 2

Our UCTS segment grew organic revenue 21% in the Q1, driven by continued strength in our multifamily and home products, which has persisted into the 2nd quarter and growing contribution from the commercial property and high net worth homeowners products we launched in late 2023. Our MIS segment had a strong quarter with organic revenue growth of 24%. The durability of our embedded homebuilder distribution strategy via our Westwood platform delivered superior new business and retention results despite continued weakness in housing sales and our national mortgage and real estate operation continuing to scale rapidly. As we have discussed over the last few quarters, we have implemented strategies and procedures to deepen our focus on efficiency and to simplify and optimize our operating model. On May 1, we took another meaningful step towards accomplishing that goal with the announcement of our brand transition to the Baldwin Group, in connection with which our public entity changed its name from BRP Group, Inc.

Speaker 2

To the Baldwin Insurance Group Inc. With our partnership integration work largely complete, a unified go to market brand that enables us to more clearly and efficiently convey the capabilities of our firm to all of our stakeholders is a natural evolution. Importantly, we believe the combined brand will yield revenue, cost and cultural synergies going forward. As part of our rebranding strategy, we are also changing our NASDAQ ticker symbol to BWIN. The ticker symbol change will take effect on May 20.

Speaker 2

In summary, we are extremely pleased with our results for the Q1 and for the exciting opportunities that lie ahead for the Baldwin Group. Our largely completed integration work will now enable us to increasingly leverage the full value of our talent and technology advantages, which have driven our continued industry leading organic growth and accelerating margin and free cash flow expansion. I want to thank our nearly 4,000 colleagues for their tireless dedication and commitment to all of our stakeholders as they manage a dynamic insurance marketplace and transformative period for our firm. As the economy remains resilient by many measures, there are still challenges for many of our clients as they navigate economic uncertainty. We are grateful for our clients who place their trust in us for advice and solutions, which deliver the insurance protection and risk mitigation vital to their businesses and livelihoods.

Speaker 2

We continue to work tirelessly on your behalf simplifying complexity to protect what's possible. With that, I will turn it over to Brad, who will detail our financial results.

Speaker 3

Thanks, Trevor, and good afternoon, everyone. For the Q1, we generated organic revenue growth of 16% and total revenue of 380,000,000 We generated double digit organic revenue growth in all three segments with IAS coming in at 11%, UCTS at 21% and MIS at 24%. We recorded GAAP net income for the Q1 of $39,100,000 or GAAP diluted earnings per share of $0.33 Adjusted net income for the Q1, which excludes share based compensation, amortization and other one time expenses was $65,300,000 or $0.56 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 Q1 rose 29% to $102,000,000 compared to $79,000,000 in the prior year period.

Speaker 3

Adjusted EBITDA margin expanded 280 basis points year over year to 26.7 percent for the quarter compared to 23.9% in the prior year period. Adjusted EBITDA growth at nearly double the rate of strong organic growth is evidence of the meaningful operating leverage we have in the business across our expense base. Free cash flow from operations for the Q1 was $53,300,000 a 51% increase year over year, a direct reflection of the expense rationalization work we highlighted last quarter coupled with the continued outsized growth of the business. In the Q1, we paid $54,000,000 of earn outs in cash inclusive of amounts reclassified to colleague earn out incentive. Thus far in the Q2, we paid an additional $35,000,000 of earn outs in cash, bringing our remaining estimated undiscounted earn out obligations to approximately $222,000,000 Of note, despite having paid approximately $89,000,000 of cash earn out and $21,000,000 of cash bonuses through April 2024, the business has delevered over a quarter turn from where we ended 2023.

Speaker 3

As discussed on the Q4 earnings call, 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 is an offset to the change in contingent consideration and net neutral to net income. As a result of this practice, we added back $3,600,000 of compensation expense in the Q1 associated with Colleague earn out pools and based on current estimates expect to add back approximately $6,000,000 in the 2nd quarter for earn outs we paid or are coming due. On March 1, we closed on the sale of our Connected Risk Solutions wholesale business to AmWinn, generating gross cash proceeds of approximately $59,000,000 As discussed on our last call, this transaction is expected to be neutral to 2024 adjusted EPS and accretive to both 2024 organic growth and adjusted EBITDA margin. As I mentioned earlier, we ended the Q1 at less than 4.5 times net leverage, down more than a quarter turn from where we ended 2023.

Speaker 3

By year end, we anticipate having satisfied $130,000,000 of aggregate earn out obligations, while simultaneously bringing net leverage below 4 times, the high end of our stated long term operating range. Looking ahead, our full year 2024 guidance remains unchanged. We continue to expect revenue of $1,350,000,000 to $1,400,000,000 organic growth towards the upper end of our long term range of 10% to 15%, adjusted EBITDA of $315,000,000 to $330,000,000 and free cash flow from operations of $165,000,000 to $195,000,000 For the Q2 of 2024, we expect revenue of $325,000,000 to $335,000,000 dollars and organic revenue growth towards the high end of our 10% to 15% long term range. We anticipate adjusted EBITDA between 69,000,000 dollars 74,000,000 and adjusted EPS of $0.30 to $0.34 per share. Of note, based on the expected timing of certain contingent commission revenues and prior year quarterly comparable, we expect the margin accretion implied in our full year guidance to be more heavily weighted towards the 1st and 4th quarters.

Speaker 3

To sum it up, we are thrilled about the strong start to the year and the broad based momentum we are seeing across all of our operating segments. We are immensely proud of our colleagues as they continue to persevere through a challenging insurance environment. Moreover, thank you to our clients for their trust and confidence in our ability to deliver differentiated advice and solutions. We will now take questions. Operator?

Operator

Thank you. Ladies and gentlemen, we will now be conducting a question and answer Our first question is from the line of Meyer Sales with KBW. Please go ahead.

Speaker 3

Thanks. First off, Trevor, just because we get

Speaker 4

the question a lot, is there any quantifying the impact of rate and exposure on 1st quarter organic?

Speaker 5

Yes. Hey Maher, good afternoon. So in the retail businesses, rate and exposure was roughly 4.5% tailwind to organic and the revenue in the quarter. I think notably, while that's up from the roughly 2% headwind that we saw in the Q4 of last year, it's down meaningfully from roughly a 10% tailwind in the Q1 of 2023. I think that speaks to the underlying quality of the organic growth trend that you saw from the business this quarter with record new business in the IS and Main Street Businesses.

Speaker 5

New business was up roughly 90% in our IS business and overall new business with sales velocity was up 700 basis points across our retail businesses.

Speaker 4

Okay, perfect. That is very helpful. Also a question for Brad, and I may just be misunderstanding, but you talked about contingent commissions being particularly margin helpful in 1Q. But when I look especially, I'm sorry, at UCTS, it looks like profit commissions were down significantly by enough so that they were down overall on a year over year basis. Am I missing something there?

Speaker 5

Yes. Hey, Meyer. So I think what Brad was mentioning was specific to just the margin accretion we're expecting for the year, which is going to be more heavily weighted to the Q1 and the Q4. Specific to UCTS, profit commissions were down in the quarter year over year. That's driven really by 3 kind of primary dynamics.

Speaker 5

1, in our umbrella product portfolio, we did not receive a contingent commission this year, and we did last year. That's about a third of the impact you're seeing on a year over year basis. And that the contingent commissions in that product line tend to be more episodic in nature. It's a long tail product. We have a trading partner there that's been supporting that product line for us and our partner for over 20 years.

Speaker 5

And I don't need to tell you about what's been happening with reserve development and certain casualty lines. So we're certainly not immune to that ourselves, although we continue to see leading underwriting results overall. The other two dynamics, 1, last year we'd finished up calculations on profit share commissions in the renters portfolio during the Q1. As that book's grown, there's more complexity to that calculation. So that's more of a timing issue.

Speaker 5

And then lastly, last year, in particular with one of our fronting partners related to a certain product line, we received an override for 18 months' worth of premium as it was a new booking and that this year is going to be 12 months. So again, just a timing dynamic. So 2 thirds timing, 1 third tied to specific idiosyncratic dynamic in that umbrella portfolio.

Speaker 6

Yes. I think importantly, Meyer,

Speaker 3

the performance

Speaker 6

in Q1 was even better than Sprint because of the headwinds we saw in contingent. So you could have seen an over 400 basis point margin expansion had contingents been a little more in line with the prior year. And then in feeling back the guidance a little bit, I was specifically talking about Q2 and Q3. So while we continue to see real momentum in core commission and fees and in real operating leverage in our expense line items. I'll point out 2 comparables to last year for Q2 and Q3 that I think are worth mentioning.

Speaker 6

Q2 is largely when we received cash on our prior year accrued contingents. In the last couple of years, that's been a favorable tailwind for us. But it's just hard to budget. So we take a conservative approach in Q2 and don't plan for upside to prior year accruals. In Q3, we actually had about $7,000,000 hit Q3 last year that we largely expect to get moved into Q4 this year.

Speaker 6

And it was related to 2 items. 1 in MIS, we locked in a contingent that eliminated any downside risk for us for the balance of the year. We did that in September 23 last year. And in UCTS, we received sufficient information about our home book in September of 23 last year in order to book an estimate. We would expect a more normal trend to be getting that information in Q4.

Speaker 6

So that's the shift you're seeing year over year. Given those dynamics, if you read between the lines, we're develop, points in Q4. As contingents develop, right, that can shift throughout the year, but based on the line of sight we have now, we think that's the best view of the cadence of the margin expansion we get in the year.

Speaker 4

Okay. That was phenomenal. Thank you very much guys.

Speaker 5

Thanks, Meyer.

Operator

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

Speaker 7

Hi, thanks. Good morning. I think you guys called out, I think, Brad, you addressed in your prepared remarks, right, but this new colleague earn out incentive line. Is that just a geography, meaning a shift from your other earn outs? I'm just trying to understand if that's like a new metric this quarter or it's just it sounded like maybe it's just geography.

Speaker 7

It is just geography, Elyse.

Speaker 6

I think we had it in Q4 as well. The nature of it is, look, we fully accrue the earn outs and certain of our partners establish a colleague incentive pool where they can allocate a portion of the earn out to non selling shareholders. That is not a sort of Trevor and Brad decision, right? That is our selling former partners make that decision. It does result from a GAAP perspective and a shift from the change in earn out to comp expense because they are Baldwin Group colleagues.

Speaker 6

So it's just a geography thing in terms of how we treat that, in the add back schedule because it's net neutral to the P and L. The change in earn out directly offsets the comp expense hit we take. But if we don't add it back, it mischaracterizes what the accrued earn out payment was that we had accrued over time with respect to performance of that business.

Speaker 7

And that was the $6,000,000 I guess for the Q2. So would you expect that line I guess to call out something in that line item until you get through the majority of their announce later this year?

Speaker 6

Yes, we would. And again, these aren't necessarily massive pools. And we don't have line of sight because it's not our decision to make. So yes, we will be explicit about calling out what we're seeing so that you all can model it appropriately.

Speaker 7

Okay. And then to the last question, I think you said $600,000,000 and change right of margin improvement in the 4th quarter. What's like what's driving that? I think there was some contingent discussion, but what's like what's the big driver of that $600,000,000 because that's a pretty big level of margin improvement in the Q4?

Speaker 6

Yes. I would characterize it as two things, Elyse. One is, I mentioned $7,000,000 of contingents that we would expect to largely show up in Q4 this year that did not show up in Q4 last year. And as you know, that's super margin accretive. In addition, we've mentioned the headwinds we saw in rate and exposure in the IIS business last Q4.

Speaker 6

And based on the trends we're seeing now and that rate and exposure normalizing, we would expect an uplift in that business, which bridges the full 450 to 600 basis points of margin expansion I mentioned.

Speaker 5

Yes, Elyse, this is Trevor. I think it's worth really underscoring the momentum we're seeing business hitting on all cylinders, broad based double digit organic growth across all segments. But despite all of that, the strength of the quarter is not even fully highlighted in the financial results as a result of the contingent commission timing we mentioned in UCTS and elsewhere, we're incredibly excited and bullish about what we're seeing in the business. The work we've done to really stitch the business together through all the hard work around integration and development and deployment of technology, how it's enabling us to go to market effectively and efficiently, how we're seeing our colleagues work together across the platform to drive really fantastic results and outcomes for our clients. And all of that's resulting in really, really strong momentum on core client commissions and fees and we expect that to continue.

Speaker 7

And then, Trevor, last quarter on M and A, right, you said even though you guys will be within your leverage target at the end of this year, it sounds like you might go back into deal mode next year, but it will be a little bit of a different strategy than in the past. Is that still kind of the same, I guess, M and A blueprint that you guys have today?

Speaker 5

Yes, that's the right way to think about it, Elyse. Our priority continues to be delevering the business. As we sit here today, we're short few quarters away from having a very different free cash flow profile for the overall business. And as a result, we're going to have a lot more flexibility from a capital allocation standpoint and that's something we're very much planning for and looking forward to. M and A has been an important lever for us in the business over time and one that we've been able to successfully pull to create a lot of value for shareholders.

Speaker 5

And it's one that we expect to continue to do so with. With that all that being said, M and A is going to look differently for us going forward. When we came public in October of 2019, roughly $135,000,000 of revenue, getting the scale was existential. We were at a period in time where there was a gold rush of sorts for the industry broadly around really kind of large scale high quality firms that were coming to market. And I'd say better than anyone else, we took advantage of that time and we're able to partner with what we believe to be among the highest quality, most differentiated platforms out there.

Speaker 5

And you see that represented in the continued durability of our outsized organic growth and beginning to see that flow through in the underlying kind of margin accretion as we've brought those businesses together and lots more to come there. Going forward, we would expect M and A to be a bit more episodic in nature. We find ourselves today at a time where M and A volumes are down, call it 35%, 40% year over year, largely a function I think of where cost of capital is and the impact that's had on some of the more highly levered acquirers in the space. So we're going to sit back. We're going to pick our spots.

Speaker 5

We're focused as always, 1st and foremost on culture and alignment. And then equally so on strategic fit and what makes financial sense and we need to check all three of those boxes. So I would not anticipate us doing any meaningful amounts of M and A through the balance of this year. And from there, it's going to be episodic in nature to a degree where I'm not sure I'd suggest you put anything in your models, but we're going to be opportunistic. And when something strategic comes up that makes sense, whether it's strong fit, we're going to be all over it.

Speaker 5

And we've proven we've got the playbook. We can identify those high quality businesses. We believe and history would suggest we have an offering that is attractive to those high quality firms and those principles that aren't looking to sell out, but sell in and become part of a larger scale enterprise where the very best and brightest of our industry can come together, and ultimately through our shared experiences and collective expertise generate and create outcomes that otherwise would be we would unable to do on our own. So, we're super excited. We feel like we're really well positioned.

Speaker 5

And importantly, the business is performing exceptionally well on an underlying basis, both from a top line and bottom line margin accretion. And so we're not in a position where we have to do anything and we can pick our spots.

Speaker 8

Thank you.

Operator

Thank Our next question comes from the line of Pablo Singzon with JPMorgan. Please go ahead.

Speaker 8

Hi, thank you. There was a note in the 10Q about Founders Shield being moved from UCDS Insurance Advisory. How much did that change the growth profile in each of those segments? Or was it not meaningful enough either way?

Speaker 6

It was not meaningful enough either way Pablo, it didn't change it materially.

Speaker 8

Okay. And then Trevor, I was hoping you could impact your commentary on, you missed this year, a tremendous number, right? I was curious to hear if it's you're seeing it broadly speaking or is it concentrated certain geographies or practice areas and sort of any color or commentary you can provide would be helpful.

Speaker 5

Yes. The new business was broad based across our footprint. So I wouldn't say it was concentrated in any one area, Pablo, which is fantastic to see. We've brought together businesses with deep expertise across a number of areas, including real estate, oil and gas, construction, private equity and M and A, technology and life sciences. And we're seeing big wins in all of those areas.

Speaker 5

And importantly, we're seeing parts of our business that didn't have that expertise before they joined the Baldwin Group, leverage those resources and those capabilities as a result of how accessible we've made them through the work we've done to integrate this business and how we've aligned and assimilated around a common go to market model. And that's unlocked real opportunity that's being leveraged in the field to deliver that expertise and ultimately convert that into new client relationships. So, it's broad based. And I'd say we saw a recovery in our construction practice in the quarter as we signaled that we had expected last call. It wasn't anything outlier in nature.

Speaker 5

It was more just kind of regular way the type of growth and new business results we would expect to see.

Speaker 8

Got it. That makes sense. And then lastly, for me, I was curious to hear if you're anything change in, I guess, compensation you're receiving from your insurance person and overall base. And I guess, typically in the main three channels, right, where I guess the past several years like all of carriers have been under pressure and I think some of them have adjusted compensation for their partner purpose. But any significant changes you're seeing, I guess, for the overall company, right?

Speaker 8

And perhaps you could even touch on Medicare or commercial side? And then specifically the retail Main Street business? Thanks.

Speaker 5

Yes. So at a high level, no, Pablo, we're not seeing any abnormal changes there. When we look at both our IS and our Main Street business, client retention continues to operate in line with where we have historically. Overall premium retention, if anything is above the intermediate to longer term historical standards based on where we are in the rate cycle. And look, I'd say from time to time, do you see insurance companies pull on the commission lever if they're experiencing pretty significant financial challenges?

Speaker 5

Yes, you do. And do we see that from time to time? Absolutely. Do we ever see that in a manner that's kind of noticeable or impactful to our overall results? No, we haven't and we're not seeing that today and we wouldn't anticipate that going forward.

Speaker 3

Okay. Thank you.

Speaker 5

Thank you, Pablo.

Operator

Thank you. Ladies and gentlemen, as there are no further questions, I now hand the conference over to Trevor Baldwin for his closing comments. Trevor?

Speaker 5

Thank you, Ryan. I want to thank everyone for joining us on the call this afternoon. In closing, I want to thank our colleagues for their hard work and dedication. I also want to thank our clients for their continued trust and confidence. Thank you all very much and I look forward to speaking with you again next quarter.

Operator

Thank you. The conference of the Baldwin Group has now concluded. Thank you for your participation. You may now disconnect your lines.

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