Quince Therapeutics Q3 2024 Earnings Call Transcript

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November 7, 2024

There are 6 speakers on the call.

Operator

Greetings and welcome to the Hagerty Third Quarter 2024 Earnings Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce Jay Kaval, Senior Vice President of Investor Relations.

Operator

Thank you. You may begin.

Speaker 1

Thank you, operator. Good morning, everyone, and thank you for joining us to discuss Hagerty's results for the Q3 of 2024. I'm joined this morning by Mikael Hagerty, Chief Executive Officer and Chairman and Patrick McClymont, Chief Financial Officer. During this morning's conference call, we will refer to an accompanying presentation that is available on Hagerty's Investor Relations section of the company's corporate website at investor. Hagerty.com.

Speaker 1

Our earnings release, slides and letter to stockholders covering this period are also posted on the IR website as well as our 8 ks filing. Today's discussion contains forward looking statements and non GAAP financial metrics as described further on Slide 2 of the earnings presentation. Forward looking statements include statements about our expected future business and financial performance and are not promises or guarantees of future performance. They are subject to a variety of risks and uncertainties that could cause actual results to differ materially from our expectations. For a discussion of material risks and important factors that could affect our actual results, please refer to those contained in our filings with the SEC, which are also available on our Investor Relations website and atsec.gov.

Speaker 1

The appendix of the presentation also contains reconciliations of our non GAAP metrics to the most directly comparable GAAP measures that are further supplemented by this morning's 8 ks filing. And with that, I'll turn the call over to Mikheel.

Speaker 2

Thanks, Jay, and good morning, everyone. We appreciate you taking the time to join Hagerty's Q3 2024 earnings call. The last of the most stubborn lease have finally fallen to the ground, signaling the end to yet another great driving season in North America. With year to date written premium growth of 16%, Iredity customers were out enjoying their special cars in larger numbers than ever. In fact, we are on track to add a record 275,000 new members in 2024 as our impressive portfolio of value added offerings from events and live auctions, the Hagerty Drivers Club and Media continues to fuel mid teens compounding revenue growth in year in year out with a visible path to expanding margins including large gains in 2024.

Speaker 2

Now as you have all seen on the news over the last month, hurricanes Helene and Milton were large destructive catastrophes. Fortunately, we have a disciplined approach to underwriting and our team of 1700 Hagerty employees was well prepared to help members with their losses. Events like these are typically a perilous time for insurance carriers as a botched customer service experience can lead to attrition and low net promoter scores. 1 of our Florida members was on hold with his home insurance carrier the entire time it took for us to process his loss in person at our on-site pop up center at the Porsche dealership in Clearwater, Florida and deposited money into his account. We take pride in working closely with our members to get them back out on the road with minimal friction, leading to even higher net promoter scores after a claim than before.

Speaker 2

Thank you to OneTEAM Hagerty for helping us generate our NPS of 82 more than double the industry average. It's a key differentiator that not only fuels our direct business, but also helps us to create long lasting partnerships with national carriers who look to Hagerty for the expertise and white glove service that car enthusiasts deserve for their prized possessions. Our top line momentum persisted into the Q3 with total revenue growth of 20% over the 1st 9 months of 2024. It also marks the 7th straight quarter of translating this incremental revenue into greater profitability. Year to date operating income excluding Helene's $25,000,000 impact came in approximately 5 times higher than the prior year period.

Speaker 2

Importantly, our revenue growth and margin expansion generated $190,000,000 of operating cash flow during the 1st 9 months of the year, up 43%. Let me share a few other key highlights shown on Slide 3. Revenue gains were driven by commission and fee growth of 16% in line with written premium gains as we added 220,000 new members during the 1st 9 months. Earned premium for our risk taking entity, Hagerty Reinsurance, jumped 24% due to written premium growth and historical increases in quota share. Membership marketplace and other revenue grew 20% with marketplace up 54% due to strong results from our Monterrey Live auction, higher inventory sales and an increase in financing revenue.

Speaker 2

Year to date profitability improved significantly over the prior year period with operating margin expansion of 4.40 basis points despite Helene's negative 280 basis point drag on margins. Our cost discipline drove a year to date decline in G and A of 4% and allowed us to hold growth in salaries and benefits to just 1%. Year to date loss ratio was 47%, 6 points higher than the prior year due to unusual cat losses during the 1st 3 quarters, including of course Helene. This resulted in operating income of $60,000,000 and adjusted EBITDA of $105,000,000 Slides 45 are reminders of the 2024 priorities that are driving our operational efficiencies including 1st, improving loyalty to drive retention and referrals 2nd, enhancing the member experience in a cost effective and efficient way 3rd, building Hagerty Marketplace into the most trusted place to buy, sell and finance collectible vehicles and 4th, increasing our flexibility and control over our underwriting profits as we look to launch our Enthusiast Plus business in early 2025 through our newly acquired insurance company, which closed during the Q3. Let me now turn to our updated 2024 outlook.

Speaker 2

Given our underlying results during the 1st 9 months and strong business momentum into the Q4, we are increasing our full year revenue outlook. We now expect total revenue of approximately $1,180,000,000 on written premium growth of 15%. Our underlying profit outlook is in line with prior expectations and our new outlook including estimated losses from Helene and Milton of $30,000,000 is for net income of $65,000,000 to $74,000,000 and adjusted EBITDA of $110,000,000 to $120,000,000 Our focus and execution on top line growth and margin initiatives should result in the profitability that allows us to lengthen our leadership position. Patrick will cover the outlook in more detail, but I believe the headline numbers don't adequately reflect the underlying profitability of our business, particularly as we invest in key growth initiatives such as the State Farm rollout, the launch of Enthusiast Plus and the build out of Hagerty Marketplace into 2025, all of which should pave the way for sustained profit growth and value creation for shareholders over the coming years. Let me now turn the call over to Patrick.

Speaker 3

Thank you and good morning everyone. Let me walk you through our results for the 3 months ended September 30 shown on Slide 67. In the Q3, we delivered 17% growth in total revenue to $323,000,000 Written premiums grew 13% due primarily to robust new business count and retention that improved to 89%. This performance is in line with expectations as we are maintaining a selective approach to growth. Commission and fee revenue jumped 13% to $116,000,000 in line with written premium gains.

Speaker 3

Membership, marketplace and other revenue increased 27 percent to $42,000,000 Our membership business delivered high single digit growth in new members as we launched new partnerships and began to introduce HTC local chapters. We also continue to invest in our Broad Arrow team of automotive specialists, resulting in 26% growth at our Monterey sale, taking share against the muted industry backdrop. Earned premium grew 19% to 166,000,000 dollars Our underlying loss ratio came in at 44% and fully loaded loss ratio was 60%, which included $25,000,000 in catastrophe claims from Hurricane Helene. Year to date loss ratio of 47% included 7 points of cat impact. Receiving commission for Hagerty Re, our risk taking entity at 47% of earned premium, our combined ratio of 94% is slightly above our long term target of 90% due to the cap losses.

Speaker 3

Despite the elevated combined ratio, Hagerty Re delivered a very healthy 26% return on equity. Turning now to profitability shown on slides 89, we reported a 3rd quarter operating profit of $10,000,000 Operating profit excluding Helene would have been roughly double the prior year as underlying margins continued to climb higher on tight cost discipline and operational efficiencies. We better leverage existing G and A, down 6% in the quarter and salaries and benefits declined by 8%, helped in part by lower incentive compensation. Adjusted EBITDA declined $13,000,000 year over year to $24,000,000 as improved margins were offset by the lean $25,000,000 of losses. On the bottom line, we delivered 3rd quarter net income of $19,000,000 in line with the prior year's results.

Speaker 3

Net income was helped by the continued growth in our capital base and better diversified investments offset by post tax cat losses of $20,000,000 The loss related to the change in fair value and settlement of our private and public warrants in the quarter was negative $1,000,000 As a reminder, we completed our warrant exchange during the Q3 whereby we issued 3,900,000 shares of Class A common stock in exchange for all 19,500,000 warrants. Net income attributable to Class A common shareholders was $3,000,000 after attribution of earnings to the non controlling interest and accretion on the preferred stock. GAAP basic and diluted earnings per share was $0.03 for the quarter based on 90,000,000 weighted average shares of Class A common stock outstanding. Adjusted earnings per share defined as consolidated net income before the gains and losses related to our warrants divided by fully diluted shares of $360,000,000 came in at $0.05 for the Q3 and $0.22 for the 1st 9 months of 2024. Thanks to the $190,000,000 of operating cash flow that Mikael mentioned, we ended September with an unrestricted cash balance of $147,000,000 versus long term debt of $123,000,000 Long term debt, excluding back leverage for Broad Arrow Capital's portfolio of loans collateralized by collector cars, was only $77,000,000 Let me wrap up with our updated 2024 outlook shown on Slide 10.

Speaker 3

As Mikhail mentioned, we increased our outlook for total revenue growth to a range of 18% to 19%, powered by 15% written premium gains. High rates of top line growth combined with operational efficiencies and the benefits of scale are driving strong operating leverage and even faster rates of bottom line growth. Our revised outlook now incorporates $30,000,000 of pretax impact from Saline and Milton or $24,000,000 post tax. This results in a new net income range of $65,000,000 to $74,000,000 and adjusted EBITDA of $110,000,000 to $120,000,000 In summary, we are executing well on our plans to deliver compounding revenue growth, margin expansion and cash flow production and are investing in the initiatives that should sustain our high rates of profit growth over the coming years. With that, let us now open the call to your questions.

Operator

Thank you. We will now be conducting a question and answer session. Question comes from Pablo Sigmund with JPMorgan. Please go ahead.

Speaker 4

Hi, good morning. My first question is on expenses. As you had both pointed out, so good expense control with G and A down and salaries up low single digits year to date. I guess if you take a step back and think about where Hagerty could go in the next few years, right? Is this a sort of business where you can grow revenues mid teens, but keep expense growth at recent levels?

Speaker 4

Or will there be some catch up in expenses at some point?

Speaker 3

Hey, Pablo, good morning. Thank you for the question. Yes, we do believe that the business is built to deliver kind of that mid teens written premium growth and obviously a bit faster growth in the marketplace business. So that side of the equation, I think is pretty straightforward. On the cost side, what you've seen for the last couple of years, we put a lot of effort into rightsizing the cost structure and maintaining discipline on that.

Speaker 3

That will continue. And so we do expect to see margin expansion over time. We'll give guidance for 2025 on our Q4 call. As Mikhail mentioned, it is a period where we are making investments in some pretty important initiatives. Obviously, the State Farm, which will really ramp up next year.

Speaker 3

And then also we're going through our technology transformation, implementing what we call Apex, so Duck Creek implementation and all the related systems. And so there we are in a phase of investment. We'd expect that we'll continue to see some margin expansion. And then as we get through those investments, then we'd expect to see it leg up again. So it's the trajectory that we've been talking about.

Speaker 3

We're going to stay disciplined on the cost side, and we do believe that our revenues will grow faster than our costs and we'll be able to deliver some leverage.

Speaker 4

Got you. And then just on the attritional loss ratio ex Helene, right? I think Patrick had mentioned 44%, right? So that's a bit higher than where you guys have traditionally run. Anything unusual that came up this quarter that brought you to 44% instead of 41% or 40%?

Speaker 3

Percent? No. As we've always talked about over the years, the range of loss ratio, it's kind of been mid-30s, sometimes up to the mid-40s. And so it can move around and it can certainly move around in a given quarter. There's nothing structural that we're seeing that is concerning to us.

Speaker 3

The big loss issue for the quarter was certainly the cat event, but the underlying loss ratio we still feel confident about.

Speaker 4

Okay. And then last for me. So the losses from Helane and Milton, are those losses something you hope to recoup through pricing? Or is there sort of water into the bridge? And going forward, it'll just be a matter of risk selection terms or so basically I guess simplistically will these losses have any implications for how you're pricing business on a go forward basis?

Speaker 3

Well, we always include in our pricing a cat load, right? And so the question is what actually happens? So 2022, we had a cat event in Ian. 2023, we had nothing. This year, obviously, we've got the 2 cats and those are reflected in the updated guidance.

Speaker 3

So I guess the answer is yes, right. We're always looking at what our pricing is and what we need to load in relative to cats. And as our modeling suggests that we need to make changes there, those will flow through. You have seen us pretty consistently increasing our rates. A lot of that rate lately has been more on the liability side.

Speaker 3

But if we conclude that we need to do something on the cat side, then yes, we'll settle that in over time.

Speaker 4

Okay. Thank you.

Operator

Next question comes from Mark Hughes with Truist Securities. Please go ahead.

Speaker 5

Yes. Thank you. Good morning. I wonder if you've seen any kind of change in shopping behavior. I think with the auto rates going up pretty substantially across the industry is understanding that I think that's helped you because you've got a good price point and people have been more likely to be looking around.

Speaker 5

Do you notice any change in trend in that behavior? Number 1, is that a fair assessment? And then 2, how do you see that lately in terms of new business?

Speaker 2

Thanks, Mark. It's Mikheel. It's a great question. And I think we've talked about this before that indeed the hardening of the auto insurance rate market pricing has definitely pushed more people to shop, especially in some states where there's just a lot of rates being taken or coverage is being benefited by whether it's a result of the regulatory market or just actions by individual carriers. So that benefits us.

Speaker 2

It just pushes more of this business of these people off the market and we definitely benefit from it. I think heading into the summer, you were starting to see the predictions of the increases slowing down out of the regular auto markets. We certainly have we heard that signaling from some of our best partners who are out there, the names that you know. And so I think what we saw is that maybe the increase in people shopping sort of leveling off. But it's going to be interesting to see what happens after this hurricane season to see whether, again, some of those states, who are sort of hoping for some moderating in the rate increases that they might need to take more rate.

Speaker 2

We're not looking at that ourselves right now. We think our underlying price and underwriting discipline works well in the states where we're flood exposed. I mean, and it's important to remember that really Helene was a flooding event, whereas except where it went up further in the Carolinas and Milton was more of a wind event, not so much a flooding event. So it has very different dynamics to it. So yes, we're benefiting from things going on in the market and it will be interesting to see how the overall thing settles out.

Speaker 3

Mark, when we look back at 2023, the industry rates were up 14% and our rates were up 3% to 4%. We think in 2024, the industry probably ends up being something like up 10% and will be a similar up 3% to 4%. And so those rate increases drive shopping as Mikael suggested. And then when people do shop, our rates are going up. Our rate gap with the industry is as wide as it's ever been, because it's a different product.

Speaker 3

We're pricing appropriately, but we just think about the risk differently. And so that matters. And this year, we're on track to bring in something like 275,000 new customers versus 250 or so last year. So yes, we do think that our value prop is pretty compelling right now and that's helping with our growth.

Speaker 5

I appreciate that. Thank you.

Operator

I would like to turn the floor over to McHugh for closing remarks.

Speaker 2

Thank you, operator, and thanks to all of you for joining us today during this busy election week. We've carefully curated the Hagerty brand over the last 4 decades around a shared passion for the automobile. And that campaign continues today to bring together car lovers. We've built a unique and highly differentiated business model that allows us to help members protect, buy, sell and enjoy their special cars. We believe we have the recipe for success that should position us to further penetrate the $46,000,000 collectible car opportunity in the United States, delivering durable, profitable growth year after year.

Speaker 2

With only 5% market share today, we believe we have a long runway ahead. We will share our outlook for 2025 on our Q4 earnings call as we have done in the past, but we are highly encouraged by our business momentum as well as the quality of our team's execution that should allow us to sustain high rates of profit growth and create value for all stakeholders. Until then, never stop driving.

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Earnings Conference Call
Quince Therapeutics Q3 2024
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