GSHD - NASDAQ

Thank you for standing by. This is the conference operator. Welcome to the Goosehead Insurance First quarter 2023 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 would now like to turn the conference over to Dan Farrell, VP, Capital Markets. Please go ahead.

Thank you and good afternoon. 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. 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 the 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 SEC filings for a more detailed discussion of the risks and uncertainties and that could impact 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 our 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 various 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 the use of non-GAAP financial measures, including reconciliations of these measures to the most recent 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 An archived version will be available shortly after the call ends on the Investor Relations portion of the company's website @goosehead.com. With that, I'd like to turn the call over to our Chairman and CEO, Mark Jones.

Thanks, mark, and good afternoon everyone. Last quarter, I outlined our strategic priorities for 2023, which included improving overall corporate and franchise new business productivity, upgrading our recruiting and talent development for both corporate and franchise distribution, investing in our service function to protect our profitable renewal base, expanding digital marketing efforts to drive cross selling in other referral business, and are improving our technology platform to support core business growth and expanding distribution through partnerships. I'm very pleased with the progress we've made around these strategic priorities and I'm excited about the positive energy these initiatives are generating across the organization. Currently, a significant portion of my time is focused on recruiting and building a high performing franchise business. We believe thoughtful expansion of our franchise business represents one of the greatest opportunities to create outsized returns as we build high quality scale franchises in every city in America. We've done a good job in attracting many talented and successful franchise owners over the years. Today many of these owners have thriving businesses with strong revenue and profitability growth. However, going forward, we are adjusting our recruiting approach to improve the long-term health of the entire franchise community. For the next phase of our franchise evolution, we have resized, refocused and restructured our franchise development team and aligned it with our marketing and franchise operations. Together the goal is to target the right type of franchise owners and the right geographies. We're recruiting perspective owners with the passion and perseverance to build long-term growth assets. We're also directing franchise launches toward areas with favorable product and demographic characteristics. Today, five states account for roughly 65% of our franchise revenue and we have a huge untapped potential in many states where Goosehead currently has low penetration such as Arizona, Colorado, Georgia, Minnesota, North and South Carolina, Utah, and Washington State, just to name a few. While we have highly successful existing franchises in states like California, Florida, New York, and Texas, we have been slowing launches in these geographies as current product access challenges have made it difficult for new franchises to thrive. We believe that over time market forces will self-correct and these geographies will once again represent excellent opportunities for franchise ownership. I see a point in the future where we could have up to 50 or more mega franchises across the U.S. with many producers in each one and thousands of smaller growing franchises. A large part of this expansion strategy will be driven by our dedicated recruiting efforts for franchises, additional business operations, training and support, and the increasing launch of corporate agents into franchises that have demonstrated the ability to ramp new businesses and scale at accelerated paces. During the quarter, we launched 83 new franchises and closed 109 underperforming franchises that were not following our model. Importantly, these underperforming franchises only accounted for about 1% of new business. We're also seeing early signs of improvement from this quality over quantity approach. Our first quarter franchise launches are pacing 33% better on new business production than franchises launched in the first quarter a year ago. While all of these efforts are slowing operating franchise growth from historical levels, I'm confident that this will be more than offset over time by higher productivity and higher franchise success rates. Today, our top corporate and franchise agents generate similar levels of productivity. However, our average franchise agents with greater than one year of tenure are roughly 40% less productive than equivalent corporate agents. We will strive to meaningfully close that gap over time. Turning to other areas in the business. On the corporate side of the business, we're seeing the highest agent productivity levels in recent company history, total corporate agent productivity in Q1 increased 55% year-over-year. For agents less than one year we are seeing 88% year-over-year growth. These exceptional levels of productivity are allowing us to generate 95% of last year's production with 44% less headcount and helping fuel our rapid margin expansion. We've seen a pronounced cultural shift in corporate sales over the past several months, that gives us confidence that we're adding significant number of high quality college graduates back to the business this summer. Overall, I couldn't be more pleased with the rapid transformation of the corporate sales function and the trajectory of this team for the rest of the year. When I joined a year ago, our service agents were delivering high quality experiences for clients as evidenced by our industry leading net promoter scores, but we had fallen behind on headcount and our call wait times had reached unacceptable levels. Today, I'm pleased to report that our average service call wait times are down 70% from the peak in the middle of 2022. Now we're beginning to optimize the cost structure through ongoing technology initiatives and increased outsourcing on non-client facing service functions. One of our most significant differentiators continues to be our technological advantage. During the quarter, we added 15 engineers to our technology team significantly increasing our output capabilities. The cornerstone of this advantage is our proprietary Aviator platform, which drives significant productivity improvements for our agents. While QTI remains our most notable technology investment in the first quarter, we delivered a number of additional enhancements to Aviator, which are driving increased bind and package rates. We continue to relentlessly focus on the agent interface to provide efficient tools that allow our agents to deliver the best client experience in the industry. In the second quarter, we expect to fully integrate a large language artificial intelligence chat bot with Aviator. We believe this integration will allow our agents to rapidly access vast amounts of insurance related information and quickly answer client questions. In future quarters we anticipate expanding this integration to our digital agents so that our clients can have access to the same resource. On QTI we remain confident that we will have a number of meaningful carriers with Quote To Issue capabilities this year. The momentum in our partnership organization is building rapidly and our business development pipeline continues to grow. Earlier this week, we announced the strategic partnership with Vivint Smart Home, a leading smart home security company with 1.9 million customers. This partnership demonstrates how Goosehead's geographic reach, innovative technology and choice model differentiate us from the competitors and allow our partners to embed adjacent high value add services into their existing go-to-market motions. We believe this partnership will further simplify the process of protecting and securing homes for clients and help to reduce claims and losses for the benefit of both clients and carrier partners. We continue to be in various stages of discussions with several potential partners across a variety of industries. I'm extremely excited about the potential of our partnerships with Vivint and our other continued technology and partnership progress. Our digital cross-selling efforts are also driving revenue lift and we expect further benefit as we leverage our new Quote To Issue capabilities. Cross-sold new business through digital marketing is up double digit sequentially and quickly becoming a powerful lever for new business consistency and lead diversification. We also know this cross-selling motion is also a critical initiative in lifting client retention rates as adding an additional line of business increases customer retention by several years. I'm extremely happy with the operational improvements we have achieved over the past year. I'm even more excited about the improvements to come that we believe will allow us to drive significant and sustained revenue and earnings growth as we become a larger company in the personal lines universe. With that, let me turn it over to Mark Jones, Jr.

Thanks, mark and hello to everyone on the call. We are very pleased to be seeing continued improvement in productivity and earnings power from the strategic decisions we are implementing. We expect these changes to drive further momentum over time as we drive consistent high levels of revenue and earnings growth. Our premium in the first quarter, the leading indicator of future revenue, increased 41% to $638 million. This includes franchise premiums of $491 million, up 44% and corporate premiums of $147 million, up 33% from a year ago. We are operating in a segment of the value chain that is naturally hedged, which creates strong and consistent results and insulates us from the challenges that carriers or captive agencies face. Pricing in the personal lines market continues to accelerate as we saw premium retention in the first quarter of 102% versus 100% in the fourth quarter and 94% a year ago compared to our strong client retention of 88%. As carriers recovered their underwriting profitability through premium increases, we should see premium retention trend back towards client retention. However, as pricing stabilizes, more carrier product becomes available in the most challenging markets, which we believe will further power growth and contingent commissions should return to historical averages. Our policies enforced at quarter end was $1.4 million, up 23% from a year ago, as our actions to improve productivity have a near-term impact on PIF growth. We would expect some slowing of the PIF growth rate in the second quarter, but we expect that the growth rate will stabilize and begin to reaccelerate as we move through the back half of the year. Total revenue for the quarter was $58 million, an increase of 40% compared to the prior year period. This includes core revenue of $52 million, up 42% in the quarter, driven by high levels of client retention, increasing productivity and PMC pricing momentum. Contingent commissions in the quarter were $1.9 million compared to $1.8 million a year ago. We continue to expect contingent commissions to be about 40 basis points of premium for the full year with the majority hitting in the third and fourth quarter as carrier profitability challenges persist and prevent significant contingency growth. We are continuing to improve the quality of our operating franchise force and prospective franchise additions. In the quarter, we launched 83 franchises as we continued to balance our robust pipeline with higher standards of quality in our recruiting and more targeted geographies. We terminated our transfer at 109 underperforming franchises in the quarter, representing about a 31% annualized churn rate. We expect churn to remain high in the second quarter before beginning to trend down gradually towards our historical levels of 10% to 15%. Importantly, this trend of underperforming franchises remains a de minimus piece of new business generated at about 1%. Operating franchise count at quarter end was 1,387 as our culling actions for quality are impacting the overall unit growth. We could see some further near-term slowing in the growth rate of operating franchises due to expected culling efforts in the second quarter and higher recruiting standards. However, we believe total franchise producer growth and increasing productivity will more than offset this over time. Our total franchise producer count at quarter end was 2098 up 10% from 1,912 a year ago and down slightly from the 2,101 at year end. Our expectation is for growth in the total franchise producers to accelerate particularly in the back half of the year as our franchise recruiting team places producers with our most successful agencies, more corporate conversions launch and begin hiring and our culling of underperforming franchises normalizes. We are beginning to see some new business productivity improvement from the actions of our franchise development force. However, this is being partially offset by the challenging product environments which are slowing growth in a number of our larger franchise states, including Florida, California, Louisiana, and New York. We expect pricing actions by underwriters will gradually improve and the operating environments in these states and improve product availability for our agents. Turning to our corporate distribution, we are extremely pleased with the production we are generating with significantly fewer agents. Our corporate headcount at the end of the quarter was 276, down 44% from a year ago and also down from the 320 at year end. The sequential decline in corporate headcount was partially due to the seasonality of hiring, which is negligible in the first quarter, but ramps in the second and third quarter during the on-campus recruiting season. We believe the improvements we have made in management, culture and productivity in our corporate sales team give us an improved platform to reestablish corporate growth and importantly act as a high conviction talent pool of potential mega agencies. We expect the corporate headcount will grow from the current levels and for the full year versus year end 2022. As we have said, the level of our agent growth will be governed by trends and productivity. While the addition of new agents may temporarily impact the less than one year agent productivity, we will be closely monitoring new agent success rates to ensure they're meeting our high standards. We believe there is significant room for further expansion in the greater than one year agent productivity over time as we continue to invest in our Aviator platform, execute successful marketing campaigns and enter into strategic partnerships to add incremental lead flow. Moving to our expenses, we performed well in the quarter as we continue to balance expense discipline with reinvestment for growth. Total expenses excluding equity based compensation were $47.8 million, an increase of 19% from a year ago. Compensation and benefits increased 18% as we invest in top level talent and our partnership, technology, marketing and service functions, partially offset by headcount declines in corporate sales. Other G&A expense of $15.9 million was up 17% for the quarter. We expect G&A expense growth rate to increase during the year as we make additional investments in our marketing plan, see increased travel expenses related to corporate recruiting and execute on our franchise development plan. Bad debt expense for the quarter was $1.7 million compared to $0.8 million a year ago due to culling of our signed but not yet launched franchises. Adjusted EBITDA in the quarter was $10.2 million, up from $1.3 million in the year ago period. Adjusted EBITDA margin improved approximately 1500 basis points to 18%. While we expect margin improvement for the remainder of the year, we do not expect it at the pace of the first quarter given the timing of expenses through the year and seasonality of quarterly earnings. As of March 31, 2023, we had $24.6 million of cash and cash equivalents. We had an unused line of credit of $49.8 million and total outstanding term notes payable balance of $93.1 million. We are raising our guidance for the full year 2023 as follows. Total written premiums placed for 2023 are expected to be between $2.85 billion and a $2.98 billion representing organic growth of 29% on the low end of the range to 35% on the high end of the range. Total revenues for 2023 are expected to be between $260 million and $267 million representing organic growth of 24% on the low end of the range and 28% on the high end of the range. We expect full year adjusted EBITDA margin to expand over the full year 2022. We believe that our strong and disciplined execution of our strategy positions us well for the remainder of the year and beyond. I want to thank our team for all of their dedicated efforts in making Goosehead one of the most amazing personal lines growth companies in the industry. With that, let's open the line up for questions. Operator?

Certainly. [Operator Instructions] The first question comes from Matt Carletti from JMP. Please go ahead.

Hey, thanks. Good afternoon.

Hey Matt.

Just a couple. Hey, how are you? Maybe I'll start with, obviously, you touched a bit on the Vivint partnership that was just announced, but I was hoping you could go back to the couple of what would seem potentially bigger partnerships, mortgage related partnerships announced in January and maybe just give us an update. I know it's early days still in terms of implementation, but with, three going on, four months of look back, just kind of what kind of where we stand, maybe what the reception's been, amongst the agents. Just any color you can provide now that we have a few more months to look back.

Yes, I would say those first couple were early. I mean, some good signs and we definitely bought it, brought in some new referral partners through it. I'm much more excited about and opportunistic about, or excited about the opportunity of this live Vivint partnership. I think it has a lot of potential to it. We've just had a few a few days of it so far. And it's only a partial sample, but it's been tremendous, the uplift, so I feel great about, about that one.

Yes, I would think thing though, just from standpoint is, we've seen a big slowdown in housing market activity and yet we've been able to just generate the leads that we need to drive strong growth. And it's hard to draw a straight mathematical line between the credibility that these mortgage partnerships give us and the willingness of people to work with us. But that certainly would be one tertiary benefit.

Yes, I would say it just, it opens doors for us in general. As our agents go out and call on these referral partners, it gives us credibility that's hard to measure directly, like you get from the Vivint relationship where it's a direct lead flow that you can measure.

That makes sense. On sticking on Vivint for a moment, I think I caught in the press release that part of it is you'll be, acquiring their agency or plan to. Is that, I mean, how big is that kind of existing book of business? Is it anything we need to think about in terms of, thinking about as we model? Or is it small enough that it's not material?

Yes, Matt I would say, it's accretive to us. Sure. But it's really not the biggest piece of the partnership. I think most importantly is lead flow back and forth and helping clients get the most value out of both their homes, alarm system as well as their insurance policy. We really, it took on that to help service the clients more. There'll be more information about that in the future.

Okay, great. And if I could just sneak in another one kind of a similar update question, but you've spoken in the past about, as you build out the digital agent, efforts to get more carriers, kind of, working on a direct buying basis. Can you give us an update kind of where that stands and, what progress has been made?

Yes, this is Mark Miller. I think we've made a ton of progress. Do you remember a quarter ago, maybe it was two quarters ago, we talked about Justin Ricketts joining the team. He came in and looked at the way, we had architected it up to this point and we decided there was easier, better ways to, and if you think about going forward, how do we add more carriers at a more rapid pace and we redesign, the platform so that the carriers could plug into it more easily. And so we wouldn't have to recode every time we're making great progress. We've got a list of about 10 carriers that are in different levels of activation at this point. Our pipeline right now looks like towards the August timeframe we would start adding more carriers on. Then it's pretty heavy all through the rest of the fall into the end of the year. And there will be some significant carriers in there between now and the end of the year. But we're a bit dependent upon the carriers at this point. So we've built out everything we need to do on our side of the platform. Now it's availability of resources on the carrier side.

Great. Thanks for the color. And congrats on a very nice start to the year.

Thank you, Matt.

Thanks, Matt.

The next question comes from Mark Hughes from Truist. Please go ahead.

Thank you very much. Good afternoon. You mentioned the states where it's tough to place business, I think because of the pricing and regulatory environment. How much of a restraint on growth would you say that is?

And it certainly in places like California where carrier product is really not available, if you're a new agent trying to launch there, I think that has a significant headwind for growth specifically with franchisees. That's why we're being more targeted with where we are placing agencies with our recruiting efforts. So I also think that that yields kind of future growth as the product market opens back up and premium rates start to normalize and carriers get profitability back. And that's the kind of beautiful thing about our business is that, like we said in our prepared remarks, it is very naturally hedged. So as soon as premium rates start to stabilize and carriers are making money, again, the environments where we're seeing the most challenges will become extremely favorable and we'll be the best partner for any carrier out there.

A question on the renewal royalty fees, it's pretty steady sequentially between the fourth quarter and the first quarter. Historically, you've had a step up between Q4 and Q1. You've got a very strong pricing that is helping you out. Was there anything in that number, and again, thinking the progression from Q4 and Q1 that that was unique or different this quarter?

Yes, and when you call those agents that you still retain those that renewal book, is that correct?

Yes, and sometimes they'll sell it to another franchisee and if there's not a buyer out there, then they, that hits to our corporate book. Yes.

Okay, great. Thank you.

The next question comes from Michael

Hey, thanks. Maybe I'm digging into some of the, the positive dynamics that, you talked about in terms of the well, I guess maybe not thinking about it positively, but like the culling of some of the of the agents and also the, the franchisees converting from corporate or, on steroids in terms of productivity. Just curious of some of these actions or is there any things you want to call out that are providing a good short term boost to profit margins that we should be thinking through over the course of the year? And just so, we may be thinking out into 2024, we so we don't get kind of over our skis in terms of just thinking about the dynamics and the margin improvement and as future quarters come on.

Yes, so I would say we, we've had nice margin expansion the last four quarters in a row. We expect to continue improve, to improve and have margin expansion on a quarterly basis, probably not at the same rate that we had in Q1. That was a pretty substantial step function increase. So there's several reasons for that. One of the main drivers is improving productivity, actually generating profitability on new business where, if you're in the insurance industry, you know that you really don't make a lot of money on new business. It's all in the renewals but also expense discipline. And that's not something that changes year-over-year. And if you look at some of the expenses we had in Q1 of 2022, we did a better job of managing those and finding more efficient uses of resources in Q1 of 2023. Our assign conference this year was much more efficient and effective. We had only our agency partners there as opposed to agency partners and corporate that kind of reduced cost, but kept it as a very impactful meeting. We're not going to sacrifice on our productivity metrics, so you shouldn't necessarily see a change in the way profitability flows from the corporate sales force, and we're going to continue to hold agencies to a very high standard. So you shouldn't see the behavior of margin changing dramatically between 2023, 2024 and beyond

That's helpful. I guess going back just to a follow up, I want to make sure, because you on your prepared remarks, you did make a number of comments about reduced product access you but in regard to Mark Hughes’s question, you talked about kind of, there's a natural hedge too because you're getting a tailwind from a, I think from pricing, right? Just rates being high. So just net-net is the hard market for auto and two lessers and home, is that a net benefit still, even though you're having to some product access challenges or is it kind of a wash?

Yes, it's probably a wash. I mean, it prevents us from adding as many policies onto the books as we possibly can, but then you do get the raise in the entire book of business, and then on the other side of the coin, you're not getting as much contingency revenue, which is a 100% profit. So that's part of the strategic advantage of being where we are in the value chain. But we certainly look forward to a time period where there is better product availability in some of the most populous states. And so we can have a lot more agents that are being extremely successful and kind of hyper growth.

And Mike, this is Dan. One other thing too and a lot of these states that have product challenges that we still have franchises and agents that are very successful, it's just sometimes harder to add new agents in these states to get the additional agent appointments, et cetera.

Got it. Maybe lastly, Mark Miller talked about, you can envision a day with, 50 or more mega franchises, how many mega franchises are there today and is there, would you be able to shed light on kind of what you, what internally you view the EBITDA margin to be on those mega franchises?

Thank you.

The next question comes from Mark Dwelle from RBC Capital Markets. Please go ahead.

Yes, good afternoon. Mark Jones, I think in one of your junior, in one of your comments, I think you had suggested that there'd be slower PIF growth in the second quarter. I guess the first question is, why do you think that and what's going to make it be better in the second half?

Yes, so we've talked about before, kind of the reduction in corporate sales headcount does cause some slowdown in the total amount of production. Now, the productivity out of that group has been outstanding. So credit to the team, they're doing a fantastic job. But the year-over-year comparisons get a little bit easier in the back half of the year. We have called out a large number of franchises in the last, six to eight months. We expect that to begin to normalize. There's still work to do in Q2, but we expect that to begin to normalize in the back half of the year. And as we add more producers into agencies and spin out more corporate agents and they begin hiring, my dad talked about Jessica McNally on in his prepared remarks and how she's already hired several people at her agency. We have several other corporate managers that we would expect to launch and begin hiring relatively quickly, and that adds a tremendous amount of new business productivity out of one single store. So we expect PIF growth will bottom out in the second or third quarter and then begin to accelerate after that.

I would just add one thing. I mean, I think we mentioned it in the prepared remarks, but the college class that we're adding, that will start in June and then, we'll, every summer month is fairly large. Once those get burned in and ramped up we'll see productivity coming from those again, so we'll, we're not quite at the low for the corporate headcount, but pretty close to it right now. We've got another month and then they start.

Got it. That's helpful. Second question I had is, as you think about your journey towards better EBITDA margins over the next two, three, five years, however long would you say that the, your ability to deliver that is going to be more dependent upon productivity improvement or more dependent upon just maintaining a strict expense control? I realize it's obviously going to be a little bit of both, but as you envision it, which of those levers is, is the more vital one in delivering that outcome?

The longest lever delivering that outcome is retention. So retaining the existing book of business for as long as possible is what adds the maximum amount of profitability. The new business productivity adds incremental margin, absolutely. And the higher that productivity is, the better the profitability is. But in reality, keeping the clients on the books for as long as we possibly can in delivering outstanding service like our team does every day, is really the differentiator and what's going to drive long-term margin. Maintaining expense discipline is obviously critical and we're seeing good benefits from that so far in 2023, and I would expect that to continue. But I think far and away the biggest factor is retention.

Okay. Thanks for that. I think those are all my questions.

Great.

The next question comes from Meyer Shields from KBW. Please go ahead.

Great, thanks. I just I know we're sort of talk about the same issue in of fifth growth going forward, but I'm a little unclear about whether these are issues stemming from internal changes or well, I should say, and or carriers that are just less interested in growth because of profitability pressures. And I was hoping you could clarify that for me.

Can you repeat the question? You cut out.

We broke up a little bit. Sorry.

I'm sorry. No, it's my phone. I think I'm just trying to understand you talked about slowing PIF growth and it sounds like a lot of that is in the states where you've got a significant presence. And I'm trying to sort of disentangled how much of it is just looking for better growth opportunities because the market has newer Goosehead agents. How much of it is carriers in these states just less welcoming of policy cam growth?

Yes, it's certainly both of those things, but in reality, we are not saturated in any market that we're in. Houston, for example, is our deepest market that we have agents in, and there is extremely productive agencies and corporate agents in the city of Houston that continue to grow at really rapid paces. Carrier product challenges being alleviated in the, hopefully near term future will unlock significant PIF opportunity. But as Mark Miller mentioned as well, adding new corporate agents back into the system under strong and good management that has discipline controls over productivity we'll also have a very meaningful impact and we should be naturally seeing productivity improvement as we continue to accumulate experience every year.

Meyer, I would point out that the, the product challenges with carriers are different in different regions. Like we have a lot of agents in California that have been there for a while and they have a good product portfolio. What we don't have the ability to do because of the, sort of political environment in California is none of the carriers are able to get much in the way of much needed rate. And so they're not adding new sort of new appointments for new agencies. So what we've done is we've just said, okay, well if we can launch people in California, but they can't be successful, let's not do that. Let's launch them in markets where we have good access to product. The market demographics are good. The metropolitan areas are large. So we're just trying to be smarter in most markets. I would say other than California, there is some sanity to the regulatory regulators and, they will always go through the sort of hard cycle, soft cycle and, adjust rates accordingly. California's just a very complicated beast right now, but we feel really good about basically most of the rest of the country, even if it's not in an optimal product situation now, it will get there. And so what we're, what we're really trying to do with our franchise recruiting efforts is really focus on where we can put people that will maximize their probability of success.

Okay. That's currently helpful. I think Mark Jones Jr. Had also commented on, I just want to jump a little bit more into the timing of, let's say the corporate headcount bottoming and PIF count bottoming. Because it sounds like those are close to simultaneous. Is that accurate? Is the same thing in terms of whenever you've got any headwind from franchise selling?

Yes, we should be onboarding a significant amount of corporate agents during the second half of Q2 and then, and a Q3 over the summer as kind of college campus recruiting hires start. And that is a contributing factor to the PIF growth bottoming out in the kind of middle of the year. So yes.

Okay, perfect.

We have, just to give you a sense Meyer, we on our recruiting, we are feeling so bullish on the, the classes that are starting this summer. Just to give you kind of one sense of, sort of quality screening, only 5% of people that we interview actually make it through to get an offer. So we're being highly selective. We're almost going back to the old day. We're using a model that is the one that built the business successfully in the first place. I'm not able to do this myself anymore, but it wasn't that many years ago when Robin and I, Robin or I interviewed every single person that was going to be starting with us. So now, Brian Pattillo that runs corporate, corporate sales. I think you inter Brian, you interview almost everybody that ends up getting an offer. The standards are really, really high. So we're really bullish on the, the group that's starting this summer.

Okay, fantastic. Thank you very much for the color.

[Operator Instructions] The next question comes from Pablo Singzon from JPMorgan. Please go ahead.

Hi, thank you for squeezing me in. So the first question I had was just on compensation [indiscernible]. It's been roughly, flat at about $30 million, $31 million for the past three quarters. And obviously it's an effect of various things you're doing, but I was wondering would it be able to assume that source stays at that level, I guess until the second half where maybe you ramp up a bit on corporate hiring?

Yes, I wouldn't expect to see huge swings in compensation expense. Obviously we need to continue to add people into the service function. They scale really nicely in, into the revenue bar. We will be adding as we've talked about, significant amount of corporate sales agents, but the, a lot of the back office scales very, very well. And so we don't really need to add a ton of headcount. I wouldn't be expecting to see massive increases in employee common benefits. You will see some, some of the normal onboarding and hiring as we go throughout the year. But nothing crazy.

Okay. And then just as a follow to that, the equity complain, which is 6.6 this quarter, I guess, for the rest of the year it'd be reasonable to assume that states at that level, right? Until sort of the next reload. Is that the correct way to think about that one?

Yes, so we do our annual option awards in January. And so there's those were issued in Q1. There may be movement, slight movement up or down during year as if there's any kind of employment type changes, but that would be a good baseline for the year to think about.

Got it. And then the last one, last question for me is a little broader. So just thinking about your comments on, building up the mega franchises I was wondering is there a certain size of franchise where, the current economic arrangement you have with them, which basically 50-50, becomes less attractive for these bigger partners, right? And if so, is that sort, you're not anywhere near there yet, right. But at some point is that serves something that might come up as a something to maybe renegotiate or think about on the road or, you think this earth can stick with us economic sharing until franchise group? That's fine. Sorry, what was that?

Yes, I can you hear me? Its Mark Jones that, it is a very, very different thing to manage a service organization to manage the finance and accounting when you have an independent agency. It's very complex. Those are very, very different things than hiring and managing salespeople. And we have had no pressure from anyone. All of our largest agencies, they're the people that we work the closest with and there's a lot of intangible there's a lot of intangible value that they get a lot of, which is we work with them and consult with them on how to build a huge agency because we've done it. And so there's a lot of value there. We feel like the economic arrangement is fair and that's not something that is front and center ever. We, it's we agree at the beginning and that's it. That's the arrangement.

Understood Mark, thank you so much.

Next question comes from Paul Newsome from Piper Sandler. Please go ahead.

Hello. Good afternoon. Thanks for the call. Couple, may be one or two follow-up questions. There's been lots of buzz around the investment community that progressive and maybe a few others have yanked back their marketing costs very recently and fairly significantly particularly in the digital area. My guess my question to you guys is, are you seeing that and does something like that have an impact on your business, either positive or negative?

Yes, Paul, that doesn't really impact us based, on where we are kind of in the value chain. I mean, if progressive wants to cut back on their marketing spend, that doesn't change our agent's ability to write with progressive or to kind of distribute the best product available for the client. So we're not seeing any impact from that.

But presumably there's some serve secondary impact from all the things they do for independent agents. Others I suppose, but I don't know if it's could be that either way.

Paul, this is Brian Pattillo and I can just say that yes, as a corporate agent, I think specifically with the way that we go to market, we're getting referred from the loan officer or realtor or the client referral, so we really don't rely on branding of the carrier or advertising the carrier to drive any business. Yes, we're relying on the referral partner to send business, so it really has no impact on us whether progressive advertises or not.

Fair enough. And then completely separately, just wanted to see if there was any updated thoughts on sort of the balance sheet and capital management. You're obviously producing a little bit more, actually a lot more EBITDA. And does that, is the plan there to use it just for pure investment in the business or are you thinking about changing the debt structure or anything like that respectively.

Yes, we've talked about being comfortable at kind of the four turns level of debt as a ceiling. I wouldn't expect to see anything in 2023 related to leverage. We're comfortable in investing in the business with excess cash flow today and paying down debt to the extent that, that makes sense to kind of reduce interest expense given the interest rate environment. Yes.

Well, I mean, we'll look at it, we'll look at it, once kind of the economy is more stable and there's less uncertainty in the general economy and also interest rates come down, then we'll look at our debt situation. But we're not about to add any additional debt at this point. It's not that we're strapped, it's just that there's no need to take unnecessary risk.

Well, I appreciate the help as always. Thanks for the call. I appreciate it.

Thanks Paul.

This concludes the question-and-answer session. I would like to turn the conference back over to Mark Jones, CEO for any closing remarks.

I'd just like to thank everybody for their participation on the call and let you know that we're going to be working very hard for all of our shareholders. Thanks.