Q3 2019 Earnings Call

Good morning, and welcome to the Realogy Holdings Corp. third quarter 2019 earnings conference call via webcast.

Today's call is being recorded an a written transcript will be made available in the investor information section of the company's website later today.

A webcast replay will also be made available on the company's website.

At this time I'd like to turn the conference over to religion Senior Vice President Alicia Swift. Please go ahead Alicia.

Thank you Shelby good morning, and welcome to really de third quarter 2019 earnings conference call on the call with me today are really de CEO , and President Ranch, Nighter, and Chief Financial Officer Charlotte's Imminently.

As shown on slide three the presentation the company will be making statements about future results in other forward looking statements. During the call. These statements are based on current expectations and the current economic environment.

Forward looking statements and projections are inherently subject to significant economic competitive and other uncertainties and contingencies many of which are beyond the control with management actual results may differ materially from those expressed or implied in the forward looking statements for those who listen to the rebroadcast of this presentation. We remind you that the remarks made herein are as of today.

Okay November seven and have not been updated subsequent to the initial earnings call important assumptions and other important factors that could cause actual results could differ materially from those in the forward looking statements are specified.

In our earnings release issued today as well as in our annual and quarterly Sep filings also certain non-GAAP financial measures will be discussed on this call and per FCC rules important information regarding these non-GAAP financial measures is included in our earnings press release, now I will turn the call over to our CEO and President range Snyder.

Good morning, Thank you Alicia I'm really looking forward to this call him to Q in a given everything that has happened since we last talk you three months ago.

Definitely the very recent changes in the competitive environment that look positive for us.

We have new product and partnership Walkie continued agent was she knew efficiency result, and the backdrop. It in a day improving housing market. We also have a couple of exciting strategic changes to discuss let me start with our Q3 financial results, we generated 223 million in operating EBITDA in the quarter or revenue.

It was a little lower than what we expected that expense savings were better than we expected. So we ended the quarter about right, where we thought we would.

We generated 174 million in free cash flow and reduced debt by 163 million, including retiring 93 million a bond at a 10 million dollar discount given our confidence in commitment and our ability to de lever Charlotte and her team team sees the latter opportunity to pay down debt while generating.

Better economics for religion.

We delivered our second consecutive quarter of agent growth in our own brokerage business with the overall agent count up an additional 1% in the third quarter and now up 3% year to date with the recent positive changes in the competitive environment September and October were two of the three best agent growth months, we have it.

She is in the last two years.

<unk>, we remain on track to deliver the 70 million in cost reductions were 29 team that we previously discussed and Charlotte, we'll share with you a new and materials that are 2020 expense reductions we've already executed since we last spoke to you.

We like the improvement in the overall housing environment that we're seeing and the low rate environment is clearly a positive for housing, especially compared to the rising rates of a year ago.

Our volume in the quarter improved from minus 3% in Q2 to minus 1% this quarter, but was less than the shift to positive volume we had guided tour.

Our franchise business is basically flat year over year on volumes, which improved from minus 2% in the prior quarter.

Our own brokerage business was down 3% on volume year over year, which improved from the minus 5% in the prior quarter.

The decline was driven by continued competitive pressure in select geographies, particularly in California, Another and new Q3 headwind was New York City, one of our larger market, which was down substantially in Q3 consistent with other industry reports much of the New York City decline is attributed to recent tax changes.

Especially the new mansion taxes.

Just like in Q1 in Q2, we had a gap to nurture this quarter approximately 700 basis points. While some of this is driven by the geographic mix of our business EG, New York City in Q3, the lion's share is the competition for high volume agents it really ramped up in late 2018.

Attrition of our high volume agents has gotten worse over this time, while those he just contribute much less to profitability. They do contribute a substantial amount to volume flash market share. This has been and we'll continue to be a market share headwind given the choice between profitability in market share, we do choose profitability anywhere.

See in the market share impact of that choice in our results.

Looking ahead financially to the rest of the year and subject to potential macro and other uncertainties on operating EBITDA. When EBITDA, we now expect to land near the lower end of the 590 to 610 million guidance previously provided.

Landing near the lower end of our operating EBITDA guidance is based on us having around 5% volume growth in Q4 with a bit better balanced between NRT and RFP.

We expect to be below Nars current Q4 transaction volume forecast at 13% as we'll continue to experience headwinds from the impact of competitor pressures, we have faced sense late 2018.

Let me now turn to the biggest question that we've been getting recently, which is what is happening in the competitive environment. As we told you earlier this year the competitive intensity an agent recruiting and retention took a large step up in Q4 2018 and continue through this past summer with August 2019, being one of the most.

Intense months in the last two years. The challenge has really been all financial disruption from one competitor not the technology disruption the grabs headlines but.

But then something happened in September .

Investors seem to start caring about profitability and it started to show up in the competitive environment in both September and October we saw substantial decline in agent recruiting intensity, both year over year and compared with the summer of 2019 from our most intense competitor.

In our own brokerage business September October were two of the three best months of agent growth for us in the last two years.

So while we cannot predict what other companies will do in the future. This is by far the biggest change and the competitive environment to our benefit that I have seen in the last few years.

During this whole time, we've stayed focus on recruiting profitable agents and not making unprofitable decisions, while big Robert revenue headline numbers are interesting and no. One has bigger revenue numbers than ours in our industry, we operate for profitability.

So given that positive change the competitive environment, we are even more excited about the potential of the many new products were introducing in the market to help us when more liftings drive agent productivity and recruit and retain agents.

First over the past year, we've launched multiple marketing products, including listen contractors and social ads engine to help drive better marketing for our agents in Q3, we launched exclusive look a new marketing product the bullet all of our 47000 Coldwell banker owned brokerage agents share in search.

New listings before they are available to the broader market via public web sites, given the size and scale of our business. This is a unique competitive advantage exclusive look should be national by the end of the year and expanded to our coldwell banker franchisees and there are approximately 40000 domestic agents in.

2020.

Second last quarter, we launched turnkey in collaboration with Amazon as a new source of lead generation for our agents and franchisees in Q3, we launched the Realogy military rewards program and more recently, we announced an affinity lead generation program with a RP that will launch in Q1 or 2020, we.

Excited to enter 2020 with three new high potential lead generation programs that can provide high quality leads to our agents and franchisees and deliver great value propositions to consumers. We look forward are ramping up all three as we invest in each throughout 2020, and we expect these programs to build over time.

Third we've been testing I buying in a capital light way in a few cities for almost a year, we have three big learnings from our own testing it from watching the industry first we remain skeptical about using our capital to fund a standalone home buying and selling model because we do not see a path to profitability and frankly.

I don't like the RIS second.

There is real power to the consumer certainty and flexibility I buying provides and we have found it to be very helpful for our agents to win listings.

Third the predominant high buying experience, we see in the market today is just not financially good for the consumer as they pay a higher fee than the agent Commission and they typically realize a substantial discount to where their house would trade in the market.

So given those learnings this quarter, we launched a better product for consumers and agents named real sure a capital light program again in partnership with home partners of America.

Real sure provide sellers certainty via a cash offer good for 45 days and to the ability to market their home with an agent to beat that cash price during that time with the consumer keeping all of financial upside.

We launched a complimentary product real sure mortgage that allows the same seller to use the real for cash offer to guarantee funds to bid on their next home with no sale or financing contingencies in their offer making them unattractive buyer real sure further differentiates realogy and our agents and helps us when additional listings we're very.

Excited about this and are moving quite quickly real sure is already in 10 markets. Both for company owned agents and franchisee agents.

Finally, we launched real vitalize, a product for sellers that better positions or property per sale by funding staging and home improvements, including everything from landscaping to appliance repair to bathroom remodels with payment collected at closing real Vitalize Leverages, a partnership with home advisor to organize and execute.

The home improvements this product provides a differentiated offering for our agents and is already available to approximately 40% of all Coldwell banker company owned offices, we anticipate scaling this product across our company owned brokerage operations this year and expanding to franchises in 2020.

We've been moving very fast and delivering in an agile way both on our own and with partners and the last 12 months alone we've watched multiple unique products and establish multiple new partnerships, we believe that providing unique products and partnerships that only a company of our size and scale can do to help agents franchisees and consumers.

We'll be a substantial differentiator for us to win more listings attract more agents and drive growth.

Finally, I want to shares to strategic changes with you first today, we announced that we are selling the relocation part of our cordless business to serve up for 400 million of proceeds we like this transaction a lot. We are divesting non core very complex business at the same time, we've also signed a five.

Your broker services agreement with served up with the goal to continuing to provide high quality brokerages services through the Cartus broker network to our current relocation clients and to try to earn even more relocation transactions from service today, we're already earning about 1000 of serve as current relocation.

Actions in our network.

We're very happy with the price and proceeds of the deal will be using the substantial majority the proceeds to accelerate our debt Paydown. We will also receive a big simplification dividend from this transaction or global relocation business has operations in 12 countries has a very large supplier network require significant capital expense.

Matures and needs its own securitization facilities, which drive swings in working capital.

Realogy will retain the cartus affinity business, which delivers brokerages services to affinity members Realty will also retain its broker network made up of expert agents and brokers from Realogy is great real estate residential residential real estate brands using Realogy will continue to generate earnings from its affinity.

Business as well as continue to generate downstream earnings from transactions provided to our franchise and owned residential real estate brokerage companies. The transaction is expected to close in the first half of 2020 pending regulatory review and the satisfaction of other closing conditions second as we approach.

The 20, our top two priorities have not changed investing in the business and continuing to leverage.

On investing in the business I described three new lead generation programs that we want to invest in for growth and I've shared in multiple new consumer facing products that we want to expand nationally that are designed to help our agents and franchisees when more listings to drive growth.

On to leverage and you're seeing our actions this quarter.

To accelerate bull investing in our business and our de leveraging we're eliminating our dividend, which will free up about 40 million annually in free cash flow, while we have ample free cash flow to pay a dividend. We believe this is the right move for our shareholders. It's driven by our view that the long term interest of our shareholders. Our best served by proactive.

Really accelerating deleveraging towards our below four times target by ensuring we invest to grow our new partnerships and products as quickly as possible I will now turn the call over to Charlotte for a deep dive into the financial performance. Thank you Ryan Good morning, everyone. Let me start with a few highlights in the quarter before guide.

Moving to more of the financial and operational details.

During the third quarter, we continued to deliver operating EBITDA and generate strong free cash flow, we executed significant operational improvements across the business and remain laser focused on driving even greater efficiency and lowering costs.

We reduced net debt paying down on our revolver and repurchasing unsecured notes in the open market at a discount as we work towards our goal of reducing overall leverage.

Permission slip pressure was lower than we had previously anticipated our new Commission plans remain well received by the market contributing to the three plus percent NRT agent growth, we have achieved so far this year.

Now, let's jump into our Q3 consolidated financial results on slide deck.

Total net revenue in the third quarter was 1.6 billion down 47 million versus prior year, primarily due to lower NRT revenue.

Operating EBITDA was 223 million down 19 million from Q3, 2018 and inline with our expectations.

<unk> expenses were relatively unchanged in the quarter versus Q3, 2018 as ongoing cost savings initiatives and lower overall commission costs helped offset higher employee benefit expenses and the volume decline.

We anticipate there will be stronger flow through from our cost savings efforts in the fourth quarter.

In the quarter, we took a noncash impairment charge of 180 million related to our company owned real estate brokerage services segment, which reduced goodwill at NRT.

Q3, 2019, net loss was 70 million compared to a net income of 103 million in Q3 2018 due predominantly to the impairment charge increased interest expense of 25 million and the decline in transaction volume.

Interest expense was impacted by a 19 million swing and the mark to market on our interest rate swaps.

Q3, 2019 had a 12 million mark to market loss versus a 7 million benefits in Q3 2018.

Adjusted earnings per share was 65 cents compared to an adjusted earnings per share of 85 cents in Q3 2018.

Now, let's turn to cash flow and the balance sheet.

Free cash flow was 174 million in the quarter and 149 million year to date.

Cash from operating activities increased year to date, largely due to working capital improvements.

Capital expenditures were 24 million in the quarter inline with the prior year, although we do anticipate slightly higher expenditures in the fourth quarter associated with the ramp up of our office footprint optimization efforts.

We continue to execute upon our commitment to de lever and reduced net debt by 163 million, we paid down on our revolver by 65 million and repurchased 93 million of the 2023 unsecured notes, which generated $10 million and one time gain.

Our overall net debt leverage ratio and senior secured leverage ratios improved on a sequential basis to 5.2 times and three times respectively.

We also exited the third quarter with over $1.4 billion in liquidity.

We will continue to actively manage our debt portfolio and remain committed to using our excess free cash flow to reduce leverage below four times.

Now, let's move into the Q3 2019 year over year review of segment operating performance on slide seven and eight.

Our acute revenue was 216 million down 5 million due primarily to lower intercompany royalties from NRT.

RFC transaction volume was flat and royalty per side was $329 up $7 versus prior year.

Our ESG operating EBITDA was 153 million down 8 million, primarily due to intercompany royalties and higher I T costs as we continue to invest in our technology stack.

NRT revenue was 1.2 billion down 46 million predominantly due to lower transaction volume.

NRT transaction volume improved sequentially, but did not returned to positive growth for the quarter.

Operating EBITDA was 31 million down $12 million as the decline in revenue was partially offset by lower overall operating expenses driven largely by the savings programs implemented to date.

Q3, 2019 agent Commission splits were up 47 basis points year over year, and slightly better than our expectations on a like for like basis splits for up 64 basis points. We now anticipate overall splits to increase by 50 to 60 basis points for full year 2019.

This revenue was 103 million down 5 million, primarily due to a decrease in international revenue.

Operating EBITDA was 34 million down $5 million driven by the revenue decline.

TRG revenue was 170 million of 8 million, primarily due to higher closed units from refinancing activity and higher underwriter revenue.

Operating EBITDA was 31 million up 11 million largely due to a 7 million dollar increase in GRA mortgage JV earnings.

We are pleased with the performance of the GRA JV and continue to anticipate it will generate approximately $10 million and operating EBITDA for fiscal year 2019.

Corporate expenses were higher by 5 million, primarily due to higher health and welfare cost spending to support our strategic initiatives and legal fees, we anticipate additional pressure here in Q4.

I'll now turn to our cost savings initiatives on slides nine and 10.

Our cost savings initiatives basically consists of two broad buckets of activity at 2019 cost savings program, we announced earlier in the year and new programs centered on simplification and standardization.

As a result of both we expect to realize cost savings totaling 75 million in 2019 exceeding our original plan and we're now targeting 80 to 100 million of savings to be realized in 2020.

First our original 2019 70 million dollar cost savings program that was announced earlier. This year. This program largely consists of office footprint and related workforce optimization, we had been redesigning office space to both improve overall attractiveness and functionality, while Rightsizing NRT square footage.

We have already action, 80% of the 70 million target.

In 2020, I expect the carryover from these initiatives to drive an incremental 30 million of savings for Realogy.

Second in Q3, we have already executed new programs that further simplify our processes organization structure and enterprise wide procurement of goods and services.

These actions will drive 40 plus million an annualized savings in 2020 through a centralized approach we look broadly across realogy to identify areas, we could streamlined management layers redesign team structures to enable teams to move faster and make quicker decisions. We also took an IND.

Up to review across our three largest areas of spend and have identified areas, where we can take better advantage of religious scale and resources at the core. These changes are designed to enhance our ability to help all affiliated agents and owners grow their businesses.

So in summary for 2020, we are excited we had 70 million of savings already actions and while we have 10 to 30 million still to identify we're confident that we can deliver on our 80 to 100 million dollar goal.

These bold and exciting moves will position us for stronger performance going forward and are a big step towards offsetting inflation and other negative impacts to the business like commission split increases and USA.

If I could take just a moment on USA, we were disappointed that our long term relationship with our affinity partner USAA came to an end as they focus their priorities on their core business. The U.S.A. partnership represented a large portion of our highly concentrated affinity business and in network Homesale transaction.

Is that we're close by our company owned and franchised brokerages as a result of leads from the Cartus broker network.

We incurred 11 million of restructuring costs in the third quarter in conjunction with these cost savings initiatives, we expect to incur total restructuring costs of 66 million for full year 2019.

Wrapping up I'm pleased with the corridor, we delivered steady progress across key metrics and continued to execute meaningful operational efficiencies.

We are positioning realogy for improving financial and operational performance and we remain resolute in our goal to reduce leverage I am excited about what we have accomplished so far as well as what we are building towards with that I'll turn the call back to Ryan for some closing remarks.

Thank you Charlotte, we're generating substantial EBITDA and free cash flow. Despite all the financial disruption in the last two years, we're making progress both on our operating efficiency with benefits to both 2900 2020 and in our debt Paydown.

We are demonstrating strong agent count growth, we are launching new products and partnerships to win more listings recruit more agents and drive future growth and we are making strategic changes to better position us for the future like divesting non core business.

We're excited by the changes in the competitive intensity, we've seen in the last few months and we remain strongly convinced especially in a more rational world. We are by far the best combination of scale market position agents brand products and partnerships to win in our industry. We're demonstrating that we're moving quickly to drive change it sets us up.

For future growth you have the financial resources to invest in the business compete successfully and grow profitably.

With that I'll turn it over to the operator.

At this time, if you'd like to ask a question you may do so by pressing star one on your telephone keypad.

Again that star one if he would like to ask a question.

First question comes from John Campbell of Steven.

Hi, Thanks, Good morning, guys.

Good morning.

You touched on the Mark isn't kind of attrition at the high end I just wanted to dive in a little bit more on the competitive environment and how you feel I guess about the sustainability of some of the recruiting tactics, you're seeing out there it sounds like that cooled off a little bit over the last couple of months, which is good to hear but do you expect that the whole.

Look I can't predict what competitors are going to do but it was incredibly striking we told you how last year Q4 was a huge recruiting timing that continued and August 19 was a very big recruiting time, when you watch what happened across the industry. Both anecdotally from our people in the field, but also we watch the agent migration from company to compete.

Any across you by using data from 240 MLS as this is data driven and given that all the disruption was kind of coming from one financially disruptive competitor, especially at the high end, we actually saw the recruiting intensity drop.

Substantially in September compared to both the year before and August 19, and an October 19 at dropped even more it was down almost half from what it was an October 18, and down almost two thirds or what it was in August of 19. So I don't know what it's going to continue but something changed in the ecosystem.

System and I strongly believe it's that investor focus on profitability did I commented on and in my two years here at the company it's been by far.

The best benefit I think for us from a competitive intensity and environment standpoint going forward and we tried this were season that moment and as I said, we had two of our three best months of agent growth.

In the last few years in September and all and October .

Good to hear and then on the Soc harness that was a little surprising when I think kind about the long term value there, but I just want to terminate makes sense was kind of a looming impacted the USA loss, but two quick questions. There. So first is it safe to assume that I guess all the sale proceeds go to debt reduction and then secondly.

Hey, RP in the military rewards programs. It sounds like those are still on the table, but how difficult is it the manage those without cortices relocation business I just want to better understand I guess the type of services you guys. Yes, Let me just let me just stop you could your first statement minor correction. So we did not sell cars, we sold the relocation business, that's part of Cartus and we.

Every single thing associated with the affinity business at Cartus, including many affinity partners.

Including the newer ones that you name. So we have every single piece of the ecosystem needed to not just do great with our existing affinity partners, but to bring in a new one like a RP grow at work with our agents in the hardest broker network and our great brands to do that right. What we've done is get rid of what.

It is a very complex global business, which does one thing really good for us in an ecosystem standpoint, which is it actually provide some relocation leads to us, but as you will see in our in our press release. We also signed a five year broker services agreement with service to really make sure we.

Do everything we can to totally compete to preserve and hopefully even grow the relocation roots leads. So you should really think of this is the sale of the relocation business partner card is not all of Cartus and that I think it sets us up even better to focus on generating those leads.

Without all the complexity of owning that business and.

Server runs a very large business there in a better position.

Consolidate and get value out of that integrated company and we're excited for that for the transaction and our broker network will always have those great agents from our brand. So we have not.

Hurt ourselves at all in that area I think we feel like we're doing good things there and we like not just the sale proceeds which will primarily go to debt reduction, but we also like this complexity dividend in terms of simplification that I tried to disclose described.

Going forward and what I would add to that too as well the affinity business I think we disclose it represents about 18% of the revenue in 2018 the margin profiles of those businesses are very different so just to put that out there too. Okay. Thanks for the clarification just one more on that.

What was kind of rough mix of EBITDA between the two.

That would be helpful for us to kind of forecast that out as we move forward.

So we've never disclose that with this transaction and things I think bluntly there'll be a lot of moving pieces.

In our financials and reporting and stuff like that that frankly, we're just gonna have to give you more clarity on or off down the road.

So we've never disclose what you're asking for day today won't be the day to do it okay fair enough. Thanks, guys.

Your next question comes from Ryan Mckeveny of Zelman and associates.

Hi, Thanks, so much.

Just one.

Follow up on the last question on the Cartus side of things so.

Percentage of revenue. That's affinity is is that the baseline to think about as far as what's being kept kind of excluding any movement like USA versus a RP verse turnkey et cetera or is there additional revenue.

Related to the relocation that would still be.

Flowing through there again, just trying to think about it a baseline or how to how to best think about.

New side of things into 2020, yet so there's a couple different ways you can think about it in the card is segment PNM filed the 18% is a combination of all affinity businesses. So what's left from a revenue perspective is the relocation business, but there are other pieces that go into that from a total realogy perspective, theres like knock on.

Transactions that happened in our owned and franchised brokerages.

Got it okay.

And this separate question on on Earth G.

So kind of a two parter so when I look at the quarter itself.

The just when I compare the sides true RFP versus the market in total is it would seem as though there is some share loss in the segment. So curious if theres anything specific to call out on that whether its.

Any big franchises that may have left or anything along those lines and then the second piece of that question on more of the forward outlook, we've seen a lot of the announcements of late.

Some of the era affiliations that I'm sure Sherry and Simon or kind of driving with the new strategic organizational changes. So I'm. Just curious if you can give us a what's currently going on with RFP and then maybe just big picture overview, how you're thinking about that going forward.

And are we starting to see the benefits of the moves you guys made on the reorganization a few months ago. Thank you.

Sure Ryan I'll take that so look you called it exactly right you know our RFP volume in the quarter.

Did fall shorter NRE and it was mostly driven by sides.

Two things really drove out so one is our franchisees, especially in some geographies frankly are subject to the same compressed competitive pressures, we've been highlighting especially in our own business.

So life as one of our franchisees in California is very different than life of one of our franchisees in Ohio.

And so that is definitely a piece of it but the other is we did in Q2 have a.

Very high volume, but very low margin franchisee. The we couldn't come to terms with and kind of mutually decided to part ways Theyve gone independent and we had the full impact of out for the first time in Q3 and that was big enough to actually be one of the drivers that's worth calling out for you there on the flip.

Side, we've seen some good things on the announcements you've talked about with era and better homes and gardens as we've talked before we're trying some different pricing approaches we've called out better homes GARS. An example.

Both the hopefully drive more franchise sales and drive more agent recruiting for our franchisees.

But overall that competitive pressure thing is probably the bigger headwind than anything.

There's always puts and takes of.

Franchisees who are.

Leaving ecosystem, usually a pretty small number as well as new ones that come in.

And so we do a both of those going on but that one high volume low margin. One we couldn't agree with that had a bigger impact and then the competitive pressures.

And hopefully one of things you heard in my.

Talk Ryan was how many of the new products and partnerships that we're doing are also our for franchisees as well as for our owned business.

Both in terms of great lead generation, but even things like you know real sure and exclusive look in things like that we want to bring into our franchisees also because I could be helpful thing along with pricing changes helped drive more growth there.

Got it thanks very much.

Your next question comes from Stephen Kim of Evercore ISI.

Yes, thanks, very much guys and thanks for all the information regarding the savings plan Im sure what I wanted to ask you a little bit about the where we're seeing that show up on obviously it looks like we would expect to see that in the NRT margins, but when we look at the effect of the splits move in the case.

Quarter.

I at least in my model I Didnt see the benefit.

That I would've expected to have seen from the fact that you have 80% of this 70 million plan already done I didn't see the benefit in the margins in fact, it seemed like there was something weighing on the margins in NRT and so I was curious if you could talk a little bit about.

Are there other pressures right now in the NRT margin, which are offsetting some of the savings program benefits.

In particular, I'm thinking maybe the loss of some USA referrals, which come in at a high margin maybe if you lose some of those is that when the margin.

You could you talk about things like that that may have affected the numbers in threeq. He was we see them sure. So let me just clarify while we have action, 80% of it we have not realized 80% of it and the PML yet so the biggest single trunk will come in the fourth quarter. So theres theres like 44 million year to date of the seven.

Plus million. So you can do the math on and how that works. So actioning. It Didnt mean, it hit in the PNM and we do generically have inflation like everybody else and so there will always be offsets to inflation. We did have an unusually high hit in health and wellness were self insured and there was a large there were three large.

With that claims that hit us in the quarter and so thats sort of a one off that we've had to deal with but.

I tried to give more detail on the savings because you come back into a 44 achieved year to date, how much is going to hit in the fourth quarter and then because it's so back loaded that's why we get 30 million carry forward benefit from those programs next year and then the ones that I announced in the scripts.

Sort of that 40 million plus like the vast majority of that has already been actions. So some of those savings will roll through as well in the fourth quarter, but the majority of that is going to contribute to 2020, and it's an important distinction because while we've only actioned, 80% of our 70 million today, we've already.

Actioned, 80% of next year savings targets today, so like I feel very good about the programs the benefits start to come but I will leave you with they are actions.

Steven just to close off on it on the USA thing.

The the thing that we did the 8-K about in August .

The program kind of ran as normal through September .

And we in USA together are taking care of all the members who were in the pipeline.

Kind of going forward. So the impact you're talking about did not show up in the third quarter from USA, but USAA will be a headwind.

Paul.

The cartus PL and downstream a bit.

In 2020.

But it is not affected the Q3 or are the 2000 2019.

Numbers.

Got it okay. That's that's very good color. Thanks, very much for that that's helpful.

Second question related to maybe I missed this but I didn't hear you mentioned among the long list of initiatives that you are working on Amazon turnkey.

Just curious if you could talk a little bit about that how important is on an relative to the other initiatives you're doing.

You know across the business.

Well just going on fired up this morning's Steven just to be clear things I listed aren't things. We're working on there was actually things that we've launched and we're really excited about sure but I did I did mentioned Amazon look we launched the turnkey program in collaboration with Amazon last quarter, It's still pretty early you know world. We're only in 15 cities, we like the learnings and.

And we think it's a really.

Good potential source of high quality lead generation for the future, but I just wanted to use that to pivot to the fact that since we last talked to you which included Amazon We launched the Realogy military rewards program to have an offering out there to kind of meet the needs of not just the USA type customers, but others, we've been growing our Navy Federer.

Credit Union program substantially Theyve ramped up their marketing as part of this has been great and then we have signed the ERP program that we will launch in Q1, So would love the Amazon thing early days.

And apologies that I wasn't clear about that in the a in the script.

Thanks, a lot guys very encouraging.

Your next question comes from Jason Dilutive Piper Jaffray.

Thanks for taking the question just on the lessening of the competitive intensity.

From the key competitor has that been across all geographies and is that helping lessen the commission split pressure that you've been experiencing.

I would say because again I was talking about September and October I wouldn't say anything on the commissions as Charlie talked about is affected by that yet these things kind of have a lag you know competitive intensity now.

Got it shows up even more and results kind of down the road in splits and other things and then we've.

The numbers I gave you in the way we've been looking at it because we've been even like the October data you know, we're looking at a pretty real time here in early November we've really been looking out at national we Havent pulled apart the same kind of data city by city.

But the but the overall pheromones qualitatively from our field is about the same.

But again these things can turn again in the other direction, but boy. It was a after two years of of a certain kind of financial disruption. It's its by far the the the biggest benefit on the competitive environment that I've I've felt in in a couple of years.

It's good to hear in and then on the guidance so you're guiding to the low end if I just do the math it implies pretty significant growth in the fourth quarter I know that assumes a 5% volume growth but.

With the loss of the affinity business I know, there's the benefits with the cost saves, but can you just help us trying to understand the fourth quarter kind of implied guidance, a big step up there.

Yes. So so the affinity thing just to reiterate it does not impact us. This year. So the loss of USA begins to impact us nest next year, so theres not any negative hurdles there and if you do the math on the cost saves we're talking over 30 million plus of cost saves that are going to hit in the quarter and then there's just other general times.

Okay and volatility on some of our expenses that that the the peg is to the 5% growth that Ryan spoke about.

Yes look we use kind of big growth I mean look last year Q4 was.

Down quarter slots I don't want to be [laughter], I don't want to be disingenuous like the compare isn't as isn't isn't a great isn't a huge number.

And just try to be really clear, though you know the mark people are forecasting a much bigger number than what we're kinda anchoring too, but both kind of given you know our relative performance and some of that cumulative market pressure stuff that we've been talking about we just wanted to be clear with you that hey, if it is around 5%, that's how we kind of get there.

It's above that will do better but below that or the mix is kind of weird than than that maybe a little bit at risk, but just trying to be clear, 5% kind of the number and 5% in Q4.

We'll see we'll see how it goes but that's that's a clarity we just thought might be helpful for you.

On the on how we're doing the math.

So that's it.

That's helpful. Thank you.

Your next question comes from Anthony Powell loan of JP Morgan.

Thank you.

So first question on USAA is there way to just give us a sense in 2019, what you think EBITDA contribution from that program is and how much of it would come through or if she NRT versus cartus EBITDA.

So we've never just like with the Relos that Weve never broken out are the sub parts of the Carter's PNM al and I don't think that today will be the data start doing that.

But obviously, we make money both on the core Relo business that we've just.

Divest it but also on the affinity business I think the color that I, probably give you a little bit is that look I told you. We told you our affinity business is highly concentrated right.

USA was frankly, our biggest affinity partner.

That was by a reasonable margin right. So its impact is going to be material and that this directly in card us on the harvest CNL, but there's kind of about an equal hits on the downstream from the transactions is kind of Stephen's question was getting too earlier, you know about 80% of those transactions from USA.

Hey go to or wet or typically going to RMG about 20% have gone to our own owned brokerage business in different parts of NRT and so again.

Tween divestiture, we've done in the USA thing there may come a day when we decide to give you either more historical or future clarity on stuff, we've never given before today won't be that day, but you know again is highly concentrated our biggest partner and kind of a 50 50 split between the direct hit in the downstream head in the downstream.

As 80 or 80% are paid 20% in RFP, that's probably as far as we're going to go today.

And as a lot bar that we've ever gone before so but hopefully it.

Because I have seen a pretty wide range of how people model that impact in 2020.

Right.

So the maybe just asking about the card is and relocation piece being sold just trying to understand the effect. It could have on your leverage because if we just looking at the two numbers. We were trying to know we have our cartus in the last four quarters did $77 million of EBITDA and you're selling.

Piece of it for 400.

Million dollars like.

If you sort all of that EBITDA effectively you'd be at about the same multiple is your net debt EBITDA is now and so wouldn't really do much in terms of de leveraging here, but just kind of shrink the business.

What do you think is is the effect on net debt to EBITDA from the sale sure sure. So as I typed piped in earlier on a question that while the business on a revenue basis is more like 80% of the Cartus PNM, it's much less on the EBITDA basis, So I can.

And sort of direct you to its a relatively sizeable chunk of de leveraging from the transaction I'm not going to give you an exact number because then you're back into all the rest of the numbers, but it's certainly not neutral.

Basically gives us a good chunk on our de leveraging.

Okay, and then just one last one if I may shifting gears over to NRT and the recruiting there how should we think about the growth in agents in headcount.

Versus.

Growth in revenue and gross.

Profit I'm, just trying to understand the nature of the recruiting I don't if those things all match perfectly one to one.

They don't let me just give you a few thoughts and none of them are going to have the detail that you're looking for so first off.

When we recruit agents and we talked about agent growth. They are profitable. So we're in the business of recruiting profitable agents and especially trying to grow agents here something we've done for a long time it'll continue to doing we're not out making.

Negative offers to agents just to bring in volume. So that's that's one thing that you should keep in mind.

The second thing you may want to think about there is that we don't do a lot of the whale hunting, we don't pay seven figure bonus right, we'd like to bring them in and grow and as I as I kind of said.

The second thing, though is we're we are fighting the that the cumulative effect of some of the past competitive things, which is if you lose an agent in Q1 of 2019, you've lost their volume kind of going forward and it shows up in your Q3 Q4 kind of numbers you bring an agent.

In who may not be as big of a whale at the time. It takes time to actually grow them. So there's a little bit of it have a have a timing thing there, but growing the profitable agent based clearly is a good thing it to be doing we've really kind of.

Making are keeping on profitable people is just not the right thing for the company and we're going to keep choosing profitability over market share.

But then when you look what happened September October our agent growth. We had two of the best three months. We've had the words agent growth means the combination of recruiting and retention. So both of those got better during that time, leading to the best two of the three best month agent growth, which is why we like the.

Positivity, what's happening to competitive environment, even if we don't control or Gary can guarantee that was going to continue it sure feels different and we like that and as to our benefit.

Okay. Thank you.

Your next question comes from Jack missing going at the site G.

Hi, good morning.

I wanted to put a little bit a sharper pencil on the on the debt reduction. So we've got 40 million no dividend.

We've got 400 million gross from the sale.

I guess, there's going to be tax implication on that is there any basis or.

I guess, what's the net what's the net number we should expect on the dead and then.

You know you've got term loan you pay down some revolver you can't I don't think you can do anything on the nine in Threeq.

Where does that kind of sources and uses where does where do we expect to see that.

You know chip away on the on the leverage sure. So so first of all on.

We the majority of that will be tax free because we'll be absorbing our and our wells. So the majority of that will come to us as a bit of timing, we get sort of 375 at closing and 25 later.

And as far as like closing costs and other things, there's something there, but it's not hugely material.

It will go first to our term loan commitment for sure.

Thats a requirement from some of our covenants. So that that's the first place that it will go but we do have the capacity to be able to reinvest some of that and the business. If we chose to do so.

Okay, and then leads me to the next question you know Ryan bigger picture.

She talked previously in the call about you know you don't they don't Chase wells and Theres, obviously to an offset between maintaining commission splits and market share and that sort of thing I guess, what do you think about the business overall.

How do you balance.

Leverage and market share how do you balance growth, the new initiatives and spending there versus versus additional de leveraging.

Yeah. It's a great question you know one of the great things about this company, even with all the financial disruption in the markets last couple of years is we still generate a lot of free cash right and I've never actually felt like were constrained on our ability to invest in the business, which is I think our top priority over time.

And so I've never felt the need to star.

Either the things, we need to do to grow the business or invest in new partnerships or whatever so that we can focus on deleveraging.

The dividend change does it give us the ability to actually.

Focus a little bit more on de leveraging and invest in the business like those are higher uses than paying a dividend on it.

And so that's just the tradeoff between invested in the business and deleverage itself isn't one we've had to make.

In the in the in the.

Anytime recently, given that we do generate good free cash flow so.

But what you know but I.

I never thought the dividend was the highest calling for our company and the seem like the right time, when we want to invest to drive more growth in these partnerships and consumer products and when we've got a good de leveraging opportunity in front of is kind of piggybacking on the transaction to actually be really clear on those two things were going to be focused on.

But I don't feel like on a daily basis on trading off de leveraging with.

Investing in the business.

And again, we're going to say progress on profitability or we could we could go out and grow our market share by.

Making big offers and bringing over volume or not profitability.

And.

But we're we're out there recruiting profitable agents. So we got 3% growth on that this year, we're excited about it.

Okay. Good just sneak one more it.

On the on the I guess I'm looking at slide nine either just.

Okay.

There's a lot of the numbers and sort of kind of a clear of the 75 of the 8100 how much.

That is net how much that drops to the bottom line or or should we see.

A majority of that go to some of these expansion initiatives.

It's a great question. That's a question I get all the time and I think I you have to think about it and pieces because there is moving pieces to the business. So these savings were all dropped to the bottom line. The question is what are they offset and so from our perspective, we have ongoing inflation merit increases blah blah blah.

Pressure on the commission splits and so those are things that will definitely absorb a portion of it and I think if you think about it in those terms then you can back into sort of a decent percentage of what may drop to the bottom line, but but that's that's first and foremost then on top of that is pure volume. So if we have.

Tsum sort of flat volume and you assume a commission split increase and you assume inflation those things solve each other to the degree that volume is up or down that's what makes it fall through more or less.

Okay.

Thanks for taking my questions.

Your next question comes from Matthew Bally of Barclays.

Good morning. Thank you for taking my questions I'm, sorry, I wanted to go back to some of the competitive commentary I know, it's been asked about a few different ways, but obviously some great color there just around how you're tracking that so.

It sounds like you're kind of linking that with your own agent count growth and market share of course, so kind of without predicting what your competitor will do if if Ryan we sort of flat line. What you saw in October .

What's kind of the go forward impact there how would you or how should we think about resulting kind of agent count growth and volumes versus the market in that type of environment. Thank you. Yes look so we're pretty clear like in the near term, we're gonna lagged in our numbers, partly from that cumulative thing that I talked about.

And again, we we talked about agent growth because it encompasses both the recruiting we're doing and the retention of existing agents.

And again in previous quarters.

It's been some retention stuff with a with a very aggressive competitor that's caused a little bit of market share challenge. So.

If the competitive environment goes back to the way. It was then life what kind of continue the way it's been and thus I was good for us but.

For us the first thing we got to do to grow our pool of profitable agents and were up 3% on that this year and.

And then second if the environment stays the way it is right over time, the cumulative thing that's been a headwind for us will become a positive for us right and that does imply a little bit more of a rational world for a longer period of time.

But again given how we've lived in the last two years as an industry with the financial disruption.

LNG out there.

It just feels different qualitatively and quantitatively and so we can't control it but the same thing thats cumulatively been a headwind.

If things are a little more rational and like they felt like they were in say October will cumulatively over time turn positive if we can keep driving our agent growth and having the higher retention that we saw.

Got it that's very helpful. And then secondly, just on the commission splits side you know I think the Q4 guide would sort of implies step up around 100 basis points are so year over year.

Plus or minus and I guess, presumably that's that's simply just as agents kind of reach those higher productivity tiers.

Seasonally so I guess number one just how should we think about the seasonality of splits now as you've rolled out. These new programs does does that sort of imply that there would be then a greater than usual step down into Q1 of 2020 and secondly, you know do you kind of have an update on what you see is like.

Ongoing market rate of splits like on an annual basis. Thank you yeah. So for Q4 to get to a step up in Q4, it it's actually largely driven by some assumptions on the higher recruiting efforts. It's it's not like a new market rate. Yes. There is a piece of it as the agents get higher up on there.

Mission splits grid.

And then Theres always timing and RPL basis, like if they're big deals development deals that go or don't go those happen at a different split but they can actually have a material impact on our overall split rate because they're at much lower rate. So whether we have some are we don't have them or we're lapping them or not.

So that those are the real reasons for the Q4 uptick as far as Q1 goes it really is sort of dependent on.

Our ongoing recruiting efforts that can drive things up as well there is a little bit that we will end up being hurt next year by the loss of USAA because of some of the.

The difference in the commission rates on those transactions, but it's it's not material the other than the biggest thing by the way for 2020 is back to the earlier question just what happens with the competitive environment right and so that's that's kind of that question on what happens with commission splits and Twentys.

Pretty correlated but the nice thing was for 2019 is even with a very tough competitive environment at least for the first eight months of the year. We actually showed that we're able to get out of the plus 200 basis point kind of increases we've dealt with and 17 in 16 and get to the kind of plus 50 to 60 that we're talking about we'll see what happens next year.

And with this competitive environment, it's probably going to be a few more months of watching to.

Give you better sense of what the actual trend is as opposed to what I.

You know some recent changes, but again still positive for us, but but admittedly recent over only a couple of months.

Alright got it thanks again.

Your next question comes from Chris Gamaitoni Compass point.

Good morning.

So Charlotte I wanted to follow up on the cost inflation kind of offset of cost saves just on your fixed cost base, what's your typical rate inflation.

Well so there's there's a there's a normal nominal inflation in general is like 2% to 3%. However, you know if you look at some of the initiatives that we're trying to go after when you lower the overall cost base you help both ways. So you will help lower that today's cost base and then you have less inflation. So we're really targeting the space.

Is that are both inefficiencies today, but also will drive could just more inflation in the future.

Okay.

Double benefit there.

Okay.

That's helpful.

I wanted to get any updated thoughts on the capital contribution to revitalize your partnership with home advisor, assuming your front loading the cost how much of working cap you think that's going to consume as you ramp.

Yeah.

We like the we'd like to partnership a lot there there.

Very good partner, we're going to fund the programs working capital.

Related to the timing of the work performed to the ultimate consumer repayment when they sell their house, we don't anticipate the working capital needs to be material to our total free cash flow.

But boy, we're excited about the program and.

And if that becomes a different answer overtime, we tell you, but at the moment, we don't anticipate would be immaterial to our total free cash flow.

Alright, thanks, so much.

Your final question comes from Bose George of <unk>.

BW.

Hey, good morning.

The Q on Big California, Realtor data it showed improvement in September .

So just wondering on a monthly basis.

And our T. segment did you.

What sort of trends that you see there.

We saw California also improve California still did improve less than the national So from a geographic mix standpoint that hurts us a bit versus the market number Youre thing, though is California has been where we've had the most competitive pressure and so once you've lost somebody in California, and then Cal.

For your coming back a little bit you don't you don't get that come back because you you don't have that person with you anymore, but we'd like to positive trend for California, It's still a very big business very profitable business for us out in California, and and so again relative to the U.S., California was a little weaker that's what we saw in our data, but it was.

Still better than California had been so you know bit about market share gap on our GAAP kind of headwind.

But we also got that accumulation of the competitive stuff, but we're rooting for a strong, California again still a big profitable business for us.

Just just a place of all of a lot of.

Competition in the last 18 months.

Okay makes sense. Thanks. Thanks, you just one on Cartus.

The.

Any unallocated sort of expenses at the corporate segment that we could see sort of being removed as a result of the sale.

Yeah like Brian said, there is a simplification dividend here for sure and we will be looking to make sure that we take full advantage of that across the network.

But deal quantify that and the future, yes, we'll come back more broadly in 2020, there's a lot of moving pieces here. So we want to make sure.

We get it all laid out clearly yeah and by the way when we do that did that we really like this transaction alive and we really like this transaction without even have tried to quantify all the pieces of that simplification dividend. We know it's there we've been focused on taking care of our employees and this transaction.

Which we like the proceeds the economics of as is the thing you're talking about as an additional benefit economically that is there that I listed a lot of examples of but we have not even tried to make the put that into the business case, yet. So we're real excited we've got work to do though still.

Okay, great. Thanks.

There are no other questions in queue. So with that will conclude today's conference call. Thank you for your participation you may now disconnect.

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