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Operator: Greetings, and welcome to the BRP Group, Inc. Fourth Quarter 2020 Earnings Call. At this time, all participants are in listen-only mode. A brief question-and-answer session will follow the formal presentation. It is now my pleasure to introduce your host, Bonnie Bishop, Executive Director of Investor Relations. Thank you. You may begin.

Bonnie Bishop: Thank you, operator. Welcome to the BRP Group’s Fourth Quarter 2021 Earnings Call. Today’s call is being recorded. Fourth quarter and full year financial results, supplemental information and Form 10-K were issued earlier this afternoon and are available on the Company’s website at 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 a more detailed discussion, please refer to the note regarding forward-looking statements in the Company’s earnings release and to our 2022 Form 10-K, both 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 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.baldwinriskpartners.com. I will now turn the call over to Trevor Baldwin, Chief Executive Officer of BRP Group.

Trevor Baldwin: Thanks, Bonnie, and good afternoon, everyone, and thank you for joining us on our fourth quarter earnings call. I will start with a few remarks followed by Brad, who will address financial and business highlights from the quarter and for the year, then Brad, Chris and I will take questions. 2022 was a record year for BRP, a year of transformative growth and broad-based execution across our business. We achieved total revenue growth of 73%, industry pacing organic growth of 23%, a new record for BRP since our IPO. And achieved double-digit organic growth across all of our operating groups, showcasing the value our clients place in the advice, solutions and relationships we deliver across our enterprise. Adjusted EBITDA in 2022 grew 74%, and 2022 adjusted net income was $1.03 per share, up 29% for the year.

I am particularly pleased with these results as we continue to absorb the meaningful investments made over the past few years at the confluence of talent and technology in our business. As these investments continue to season, I believe they will drive continued outsized organic growth and accelerating efficiency and productivity across our business. Given the financial performance we delivered during the fourth quarter and full year, we are encouraged by the positive underlying momentum we’re seeing across all of our business segments. In Middle Market, sales execution and new client wins accelerated through the year as a result of our investments in adviser talent, go-to-market capabilities and product and industry expertise across our national footprint.

Our MGA of the Future platform again delivered outsized growth as we continue to take market share and execute on building and launching new products. In MainStreet, we saw organic growth of 24% in the fourth quarter driven by the continued early success of our national expansion strategy. Westwood, our homeowners focused business embedded in the new homebuilder channel is not yet included in our organic results, but grew revenue over 32% during the fourth quarter and 25% for the full year, showing exceptional durability amid accelerating challenges in the U.S. housing market during the year. In Medicare, we saw a solid annual enrollment period as a result of growth in agent count and increased productivity. Though results of the fourth quarter selling season will largely be recognized in the first quarter of 2023 due to the effective date of policies.

In summary, 2022 was an exceptional year for our business, a direct result of the value our colleagues continue to deliver clients and our stakeholders more broadly. We showed up when it mattered for clients, providing advice and solutions that simplify the complex, help navigate uncertainty and manage risk amidst volatility, enabling them to continue pursuing their business aspirations and personal dreams. In addition to recognizing the close of a record year for BRP, 2022 marks our third full year as a public company since our IPO in October of 2019. During that time, we have transformed our business and continued to accelerate towards our goal of building a top 10 global insurance brokerage and advisory organization. We transformed the scale of our business from approximately $140 million of revenue in the year of our IPO to over $980 million of revenue today, evolving from a regional business to a national platform.

We have grown to nearly 4,000 colleagues from approximately 500 at the time of our IPO, all while continuing to cultivate and enhance our distinctive culture, which has attracted leading talent and served as a critical alignment point for partnering with exceptional businesses that share our vision of building the insurance distribution and advisory firm of the future. During this time, since our IPO, a period of intense internal and external investments to support our rapid growth and innovation, we have delivered a compound annual growth rate and adjusted earnings per share of 54%. For all of these reasons, I am immensely proud of the team we’ve assembled, the magnitude of what we’ve collectively accomplished in a very short amount of time and the position we’ve put our business in to thrive for many years to come.

As I look forward to 2023, while economic uncertainty and stress in large parts of the insurance marketplace remain elevated, I am confident that our business continues to be incredibly well positioned to deliver for our clients, colleagues, communities, insurance company trading partners and investors. I want to thank our valued colleagues for their grit, tenacity and commitment that have enabled the results we delivered to our stakeholders during 2022. You all are the reason that BRP’s best years continue to be ahead. With that, I will hand the call to Brad for a more detailed review of our financial results.

Brad Hale: Thanks, Trevor, and good afternoon, everyone. For the fourth quarter, we generated revenue growth of 55% to $246 million. And for the full year, we delivered revenue growth of 73% to over $980 million. We generated organic revenue growth in the fourth quarter of 26%. For the full year, organic revenue growth was 23%, which, as Trevor mentioned, was the highest full year organic revenue growth rate achieved since our IPO. This level of organic growth, along with EBITDA growth and free cash flow generation helps us progress along our path of reducing net leverage to the high end of our 3.5 to 4.5x long-term range. We recorded a GAAP net loss for the fourth quarter of $91.5 million or a loss of $0.84 per fully diluted share.

GAAP net loss for the full year was $76.7 million or $0.74 per fully diluted share. Adjusted net income for the fourth quarter of 2022, which excludes share-based compensation, amortization, and other onetime expenses, was $14.4 million or $0.12 per fully diluted share. For the full year, adjusted net income was $119 million or $1.03 per fully diluted share. A table reconciling GAAP net loss to adjusted net income can be found in our earnings release and our 10-K filed with the SEC. Adjusted EBITDA for the fourth quarter rose 94% to $39.2 million compared to $20.2 million in the prior year period. Adjusted EBITDA margin was 16% for the fourth quarter of 2022 compared to 13% in the prior year period. Adjusted EBITDA for the full year grew 74% over the prior year to $196 million.

Adjusted EBITDA margin was 20% for the full year. I’m also pleased to announce that we have completed the full remediation of our three previously identified material weaknesses related to IT, accounting reconciliations and the overall control environment. This is a significant accomplishment in our life as a public company and has been a three-year journey as we’ve evolved from a largely private company infrastructure at the time of our IPO to a sustainable public company infrastructure today. I’d like to thank our accounting, internal audit and IT teams for their grit and tireless commitment to reaching this important milestone. Now I’d like to discuss a change in our operating groups, which will affect our reportable segments going forward.

Beginning in January 2023, we have combined our current MainStreet and Medicare operating groups into a single operating group, renamed MainStreet Insurance Solutions. In addition, we have renamed our Middle Market operating group, Insurance Advisory Solutions and our Specialty Operating Group underwriting Capacity and Technology Solutions. We will report three operating groups, which equate to reportable segments, beginning with our first quarter 2023 10-Q to align with how we are running the business operationally and reviewing internal financial results. Corresponding information for prior periods will be recast to reflect this change. Regarding expectations for the year, I’d like to reiterate our communication from the third quarter earnings call.

For the full year 2023, we expect organic revenue growth at the high end of our 10% to 15% range, which, based on the performance we are seeing across our business year-to-date, includes an expectation for mid-teens organic revenue growth in Q1. Additionally, we anticipate revenue for the full year of $1.14 billion to $1.17 billion, and adjusted EBITDA of $250 million to $260 million. For the first quarter of 2023, we expect adjusted EBITDA to be between $75 million to $80 million and adjusted EPS of $0.38 to $0.40 per share. As a reminder, our adjusted EBITDA margins have historically been seasonal in nature, with the first quarter being the strongest quarter. However, the Westwood partnership as well as several large P&C middle-market partnerships in the fourth quarter of 2021 have resulted in an adjusted EBITDA margin being spread more evenly across our quarters.

The shift in seasonality of expected adjusted EBITDA margin in the first quarter of 2023 is expected to be offset by increases in each subsequent quarter for the balance of the year. In conclusion, we are very pleased with our fourth quarter and full year 2022 results. Our differentiated operating model and significant recent investments are yielding outsized and profitable growth. I echo Trevor’s appreciation for our colleagues who are the firm’s driving force and for our clients, trading partners and shareholders for their confidence in us. We will now open up the call for Q&A. Operator?

Operator: Our first question comes from Weston Bloomer with UBS.

Weston Bloomer: My first one, I was just hoping you could highlight — I know you gave guidance for 4Q results and they came in above those expectations. I was hoping you can kind of break out where results kind of came in ahead of your initial expectations and how those trends are kind of looking in the first quarter of the year?

Trevor Baldwin: Yes, Weston, this is Trevor. So the short answer is broad-based strength across our business. We’re operating and hitting on all cylinders. And we saw performance everywhere from our MGA of the Future and specialty business that had really exceptional organic growth; our Middle Market Group, where we’re seeing the investments we’ve made in talent and capabilities lead to accelerating client wins, as evidenced in the 17% organic growth rate. Our national expansion strategy and MainStreet is showing early signs of success with mid-20s organic in the quarter. And our Medicare business had a really solid annual enrollment period, albeit most of the financial results from that won’t show up until the first quarter of 2023 because of the effective data policies.

Weston Bloomer: Great. And given the stronger results in the quarter, is it just too early to adjust 2023 guidance, just given the stronger base and maybe the momentum in the 1Q? Or are there any other offsets that should we think into the back half of the year?

Brad Hale: Weston, it’s Brad. Yes, I think it’s just too early to adjust 2023. We are seeing good momentum as business carry into January. But there’s still a lot of uncertainty in the economy. So we’re keeping our guidance as delivered in the third quarter.

Operator: Our next question comes from Meyer Shields with KBW.

Meyer Shields: Just a quick question to go with on M&As. I was wondering if you could lay out how you’re thinking about it given the strong performance and improving leverage?

Trevor Baldwin: Yes. Meyer, this is Trevor. So a few things. One, from a BRP perspective, I think 2023, I would not model any M&A. We’ll continue to be looking at opportunities, and there may be some small opportunities that arise that are interesting, but we’re focused on continuing to delever the business. Organically, the business is performing exceptionally well, so we don’t have a growth problem. And frankly, the M&A marketplace is one in transition right now. If you look at the M&A activity in 2022, while the nominal number of transactions was not down precipitously, the volume of acquired revenue was, I think, which speaks to some of the underlying health in that market and transition. The reality is the cost of capital is up meaningfully.

We have not yet seen that be fully reflected in valuations. And as a result, a lot of the larger, higher-performing businesses are choosing not to come to market and transact in that type of a backdrop, the type of assets that we would typically be most interested and excited about. We feel really good about long term, our position as an acquirer of choice for the industry’s leading businesses, and it’s just going to be more episodic in nature going forward.

Meyer Shields: Second question, just — and this is, I know, very broad, but I was hoping you could update us on how your clients are planning for — I guess, everyone’s been expecting a recession forever. Are you seeing that in their — discussions in their action?

Trevor Baldwin: Yes. That’s a great question, Meyer. So what I would say is, our clients are very pensive. There’s a lot of uncertainty in the environment. People are, I’d say, as unsure about what the future holds as we’ve seen in 15 or 20 years. With that being said, we’re not seeing soft — tremendous softness in clients’ operating results yet. There’s obviously puts and takes to that. Certain industries are under real pressure, others are doing as well as they ever have. But broadly, we’re not seeing the impact of kind of recessionary forces in our clients’ results today. There’s just — there’s never been more uncertainty around the environment based on the conversations we’re having.

Meyer Shields: Okay. Perfect. And just a very quick one for Brad. It sounds like the only segments that are changing are MainStreet and Medicare and everything else is just being renamed. Is that the right way for us to build our models ahead of the first quarter 2023?

Brad Hale: Yes, Meyer, that’s correct. It’s effectively just a combination of those two segments, MainStreet, Medicare.

Operator: Our next question comes from Elyse Greenspan as Wells Fargo.

Elyse Greenspan: First one is a quick one. Did you guys provide the MGA of the Future organic growth for the fourth quarter?

Trevor Baldwin: We did not break it out separately, but it was very strong.

Elyse Greenspan: Okay. And then — so when we think about the organic growth for the year ’23, right, 26% for the fourth quarter, and then your guidance assumes mid-teens in the first quarter. And I know you guys have historically, right, been conservative, and we’ve seen quarters come in above guidance. But when you set that Q1 guide, are you modeling for any slowdown in any of your business or just trying to build in some level of conservatism?

Trevor Baldwin: I think there’s a characteristically appropriate level of conservatism in that number at least, but there’s just a lot influx right now. Similar to how I characterize the M&A marketplace is one in transition, I’d say the insurance marketplace is experiencing rapid transition. One of the most challenging property insurance markets in a generation, we’re seeing continued flows of premium out of the admitted market into the E&S market that ultimately shows up in kind of synthetic rate or commission compression in our revenue streams. I don’t want to — it’s just appropriately conservative. We’re continuing to execute. The business is doing exceptionally well, but it does not seem appropriate to guide any higher than mid-teens.

Elyse Greenspan: Okay. That’s helpful. And then you guys pointed right to looking to delever and get back to that 3.5 to 4.5 target. When you think about your financial plan for the year, I think you said you would be there by the end of the year. Is that still expectations kind of Q4? How are you seeing that come together?

Brad Hale: Yes, that’s still our expectation, Elyse. We continued to delever the business in Q4. And yet our plan to delever by Q4 this year is still the plan.

Operator: Our next question comes from Pablo Singzon with JPMorgan.

Pablo Singzon: The first one is a quick numbers one. Can you just provide detail on the increase in the stock-based comp this quarter? I just came in much higher than what I thought and I guess, compared to past quarter. So what drove that increase?

Brad Hale: Yes. Pablo, it was largely incentive comp based for key colleagues, and we saw it as an opportunity to reward our high-performing colleagues with more VRP stock under their incentive plans for the year.

Trevor Baldwin: It’s consistent with our practice of having a high degree of pay performance and strong equity alignment with our key leaders and executives across the Company.

Pablo Singzon: Got it. And Brad, just given the way the accounting works, the $21 million should carry over, right, through future quarters, more or less?

Brad Hale: Correct. Yes, that will vest over a period of time to the extent it’s vested shares. It’s a onetime hit. So if it’s — we offer under multiple plans, Pablo, some are three-year, some are vest four-year vest and some vest immediately depending on the incentive award. So I wouldn’t say all of it carries over. It is a mix.

Pablo Singzon: Got it. And then last one for me. If I look at your operating cash flow as a percentage of revenues, that number rose year-over-year on an absolute basis, right? But are — it actually grows year-over-year on asset basis, but as a percentage of revenues, it actually declined. And you sort of contrast that against adjusted EBITDA, which is roughly flat, the margin. So if you could talk through what drove the decline and your expectations for operating cash flow in ’23?

Brad Hale: Yes. Pablo, we provide the calculation of free cash flow in our supplement. And we were able to increase free cash flow 5% year-over-year even with an increase in cash paid for interest of $42 million or 194% and increased partnership integration costs of $15 million or 80%, which was driven mainly by the TSA associated with the Westwood transaction, which was a large public company carve-out and carried larger integration costs as well as integration of the large Q4 ’21 partnerships. Now if you normalize for sort of those two increases being the partnership related and integration costs as well as interest, our year-over-year free cash flow was actually up over 60%. So interest will continue to be a headwind for us this year. But as we continue to delever the business, and hopefully see interest rates decline, we do expect to meaningfully improve our free cash conversion over time.

Operator: Our next question comes from Greg Peters with Raymond James.

Greg Peters: I guess just coming back at the revenue outlook for ’23. In the context of some comments you made, just wondering about the seasonality, how the seasonality has changed now with Westwood. And what we should think about that as with the new reporting segments. Well, it look like it did last year or do you think it’s going to change a little bit? Some color there would be helpful.

Brad Hale: Greg, it’s Brad. Yes. So the seasonality has changed a bit and that there’s really two factors there. One, P&C as a percentage of the Middle Market has become larger over the last 18 months or so. And benefits is what really drove our previous concentration of revenue and EBITDA in Q1. And then in addition, Westwood, which is a large EBITDA-generating business, Q1 is actually their weakest quarter of the year, and they’re stronger in Q2s, 3 and 4. And so we are seeing a shift in seasonality of both revenue and EBITDA, which we provided in the prepared remarks. So we are expecting a lower margin in Q1 in comparison to prior year, but that is made up over the balance of the year in Q2, 3 and 4.

Greg Peters: Okay. That’s actually helpful. On the comments around operating cash flow and free cash flow and deleveraging, there’s two ways to delever, you just grow your EBITDA, and that is just an easy way to delever. But there’s also debt paydown. I’m just curious, as your cash flow conversion improves, as you mentioned in the other answer, do you anticipate actually paying down some debt with that cash flow in ’23? And how should we think about interest expense in ’23?

Brad Hale: Yes. So we are going to appropriately manage our working capital and pay down the revolver as aggressively as we can throughout the year as we generate operating cash flow. But I wouldn’t model in some meaningful paydown of debt. Really, the delevering story is one of organic growth for us and continuing to drive EBITDA growth. In terms of interest, if you take sort of current rates, so about 4.5% base rate, we model about a little less than $100 million of interest expense for the year. And every 100-basis point move in that base rate will move that interest expense about $900,000 per month, either up or down, depending on where base rates go. So that’s how you can think about modeling the interest expense.

Greg Peters: Just one follow-up on the — I asked about seasonality of revenue. I guess, given Westwood and all the moving parts, what’s your view about seasonality of free cash flow for ’23?

Brad Hale: Yes. So I think you’ll see more free cash flow in Q2, 3 and 4 than we’ve shown in the past where previously it was highly Q1 concentrated. And actually, Q2 from a cash receipt standpoint is our strongest because it’s largely when we receive the majority of our profit sharing from the prior year.

Operator: There are no further questions at this time. I would like to turn the floor back over to Trevor Baldwin for closing comments. Please go ahead.

Trevor Baldwin: Thank you all for joining us on the call this afternoon. In closing, I want to thank our 4,000 colleagues for their grit and tenacity in a challenging year and our clients to their confidence in BRP to deliver solutions and insights that simplify the complex and help navigate uncertainty. During 2023, we look forward to being a beacon of opportunity for all of our stakeholders. Thank you all very much, and I look forward to speaking with you next quarter.

Operator: This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a great day.