Q2 2022 Anywhere Real Estate Inc Earnings Call

Yeah.

Good morning, and welcome to our second quarter 2022 earnings conference call and our first if anywhere real estate before we begin Ryan Schneider will share perspective on our recent rebranding.

So I'm so excited about such a powerful existing business, a new focus on the consumer meaning homebuyers and sellers anywhere in their real estate journey from just starting to search to that incredible keys in hand moments and driving cultural change to deliver that future. So I'm all in on it.

Right and I'm actually I'm, so committed to this that I want to signal this broader change to the world as our current branded identity have not kept up with our company's transformation.

So now is the time to move our brand to watch next and I'm excited to announce realogy will become anywhere real estate.

[music].

Good morning, and welcome to the anywhere real estate second quarter 2022 earnings Conference call via webcast. Today's call is being recorded and a written transcript will be made available in the investor information section of the company's website tomorrow.

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

At this time I would like to turn the conference over to anywhere senior director Daniele. Please.

Please go ahead Danielle go ahead Danielle.

You Abby good morning, and welcome to the second quarter 2022 earnings conference call for anywhere Real estate, Inc. On the call with me today are anywhere CEO and President Ryan Schneider, and Chief Financial Officer, Charlotte Simonelli ASP.

As shown on slide three of the presentation. The company will be making statements about its future results and other forward looking statements during this 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 litigation regulatory and other uncertainties and contingencies many of which are on the beyond the control of management, including among others rising inflation and mortgage rates constrained inventory declining.

Portability and other macro economic concerns as well as the impact of the foregoing on consumer demand.

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 July 28, and have not been updated subsequent to the initial earnings call.

Important assumptions and factors that could cause actual results to 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 SEC filings.

Finally on July 13th we announced new naming conventions to our business units, which followed our company's rebrand anywhere real estate, Inc, or anywhere on June 9th.

On today's call, we will make reference to our reporting segments, which are as follows anywhere brands, formerly known as Realogy franchise group anywhere advisors, formerly known as real Itchy brokerage group and anywhere integrated services, formerly known as Realogy title Group now I will turn the call over to art.

Oh and President Ryan Schneider.

Thank you Danielle.

Welcome to our first earnings call it anywhere real estate in our first earnings call. Following our May 12, Investor Day, we were excited for that Investor day became because it gave us a chance to share the powerful results of the first chapter of our company's transformation and to articulate our next chapter and strategic future.

As we said during our Investor day, having improved our operating performance and fortified our balance sheet, we like our mix of businesses across the real estate transaction, especially our luxury leadership position and.

Beyond continuing to leverage our existing strengths, we're committed for the future to simplifying and re imagining the consumer experience buying and selling a home.

And while delivering in the future we laid out for you continues to be our priority. The biggest change since we last spoke has been the shift in the housing market record increases in mortgage rates to nearly double the levels. They were a few months ago combined with rising inflation and broader macroeconomic concerns have substantially changed buyer affordability.

Our demand and seller expectations and we saw that mostly later in the quarter, especially in June .

Now I remember historically, we have said that a 50 to 100 basis points increase in mortgage rates is a big headwind for housing and in the past few months. The industry has seen more like a 250 to 300 basis points increase in mortgage rates, which has clearly changed the market.

Well, we're now in a much more rapidly changing housing market, we believe our strategic progress and our financial strength have anywhere well positioned especially relative to many of our competitors to execute so first we generate profitability and free cash flow even in tougher housing markets like you'll see in our Q2 results and we believe that investors are.

Increasingly valuing delivery of those critical metrics.

Second our balance sheet progress, our liquidity and our current low leverage ratios have us well positioned for all parts of the housing cycle and finally, we're always very focused on cost we delivered consistent cost reduction programs. Even during the very strong housing markets of the past two years and this year, we've meaningfully increased our cost reduction.

<unk> plans as we see the housing market change it.

Consistent with this performance strength in both good and challenging housing markets, Let me share our Q2 results we.

We delivered $2 1 billion in revenue and $202 million of operating EBITDA in Q2, while this is down from 2021's record $2 3 billion in revenue and $310 million of operating EBITDA, It's still a powerful financial results on both an absolute basis and relative to our competition.

Our franchise segment again demonstrated its attractiveness and resilience.

It's 200, it's 204 million operating EBITDA was down only $20 million from 2021, while the market headwinds in greater direct effect on our frontline businesses like title mortgage and owned brokerage.

And our transaction volume reflected the weakening housing market. We've all observed our volume was down 6% year over year in the quarter with units down about 15% our owned brokerage business, which we now call anywhere advisors transaction volume was flat to prior year, our franchise business, which we now call anywhere brands transaction volume was down.

9%. The difference was was driven in part by geography by the greater luxury mix for advisors and by one meaningful acquisition.

We used our $70 million of free cash flow in the quarter and cash on hand to repurchase $45 million of shares to Opportunistically purchased $60 million of our 2020 three bonds at a discount and to continue to invest in the business our commitment to expanding to delivering more consumer products is unchanged. Since we last spoke we've expanded access.

Two our homeplace app for consumers to two thirds of our Coldwell banker Realty footprint and we liked the direct to consumer engagement. It is driving.

Our commitment to helping consumers and agents better sell their homes with great products continues for example, the listing concierge product we showcased at Investor day crossed an amazing threshold with over 50% of adoption among our coldwell banker Realty listings and those of you at Investor Day heard how much we love our franchise business, while we're always <unk>.

Spanning our network with new franchisees, we had a special result in Q2 in June we were proud to help one of our great franchisees bring a leading luxury brokerage in Oregon into the Sotheby's International Realty franchise network. This New addition to our franchise network brings with it $2 5 billion in sales volume in over 60 million in gross.

Commission income. This is the largest gross commission income addition ever to the Sotheby's International Realty franchise network and the second largest addition ever to any of the anywhere brands franchise networks.

Let me shift now to what we're seeing in the housing market first while most headlines are about price cuts relative to list price. The most important thing to always look at his home prices versus a year ago. We have had two years of double digit price increases and even plus 11% price growth in Q2 that trend has.

Now changed.

Overall price for open contracts in June and July is up but only in low single digits and our July open contract data, we see price still up in most markets, though a substantial moderation from the previous trend EG price up about 5% in places like New York City tax.

Southern California prices flat in places like Florida, and New Jersey.

Second we entered 2022 estimated in units would be down from 2021.

That trend has accelerated especially late in Q2, the new contracts. We see opened in June and July are down about 20% versus the previous year and this is substantially worse than what we saw in the market in both April and early may.

And the most consistent feedback I'm hearing when talking with agents and franchisees and looking at our data is the speed at which change is happening whether you are talking about buyer demand and expectations seller expectations or increase creativity getting deals done.

Now looking ahead, the housing market volatility the pace of change of potential additional fed actions together make it pretty tough to forecast the rest of the year.

But like we've been doing all year. Our goal is to provide you with transparency about what we're seeing in the market and what we are estimating in our business outlook. So Charlotte will be sharing our operating EBITA volume commissioning cost estimates later in this call.

So as we close out Q2, we delivered good profitability and free cash flow, we invested to grow our business in the future and return capital to shareholders. We remain even more focused on cost in this rapidly changing housing market.

We remain confident in our ability to deliver financials, especially relative to many of our competitors I want to come back and make a few comments on the longer term, but first let me turn it over to Charlotte to discuss more details about Q2 and our updated estimates.

Good morning, everyone before we get into the results for the quarter I want to level set on the current macro backdrop and how our business remains forward looking in an ever changing environment.

As Ryan said, we have a strong foundation and we are well equipped to navigate today's environment responding with agility to volatility and uncertainty while remaining focused on our long term objectives and values, which have made us so successful.

We are not immune to the challenges in the market, but we have shown we will flex our cost structure and strong balance sheet and liquidity in ways that are clearly an advantage for us.

We believe we can be a net beneficiary as the current market landscape will naturally forced winners and losers.

The combination of our strong business model the strategic investments we have made the capabilities, we have built and our culture positions as well.

The key is making decisions that deliver today, while also staying committed to our strategy, which is designed to drive long term value and which we believe positions us for success, regardless of the macro environment.

An example of this is our continued focus on improving our cost structure. We have proven we are relentless on our cost structure, regardless of market conditions.

In 2021, we delivered about 85 million in cost savings.

For 2022, we originally budgeted about $70 million of cost savings, but given the current backdrop, we have targeted an additional 70 million plus of both permanent and temporary cost savings for total full year savings north of $140 million.

These additional savings are in three buckets.

We have moved rapidly to respond to shifts in the housing market to rightsize, our cost, including purely variable as well as semi variable costs that are tied to volume, especially across our brokerage and title businesses.

Second we continue to re imagine and reduce our retail office footprints.

We have reduced our administrative office footprint, which is down almost 80% since Q1 2020.

Finally, we continue to streamline our administrative support cost structure through our P. A and other automation as well as enhanced use of business analytics and technology tools, including power B, I Hyperion and advanced analytics.

Another example of our success is our strong balance sheet and liquidity position.

With over 800 million lower gross stack than Q2 2019.

Our long dated maturity stack lower cost of capital and an untapped revolver, we had a lot of financial flexibility and we believe our balance sheet as a competitive advantage.

We generate attractive profitability and free cash flow, even in more challenging housing markets and we recently moved to positive outlook from Moody's Despite the market backdrop.

We remain committed to our plans to address the 2023 notes on or before maturity and have started to tackle this already in Q2 by purchasing 60 million of these bonds in the open market at a discount.

And in July we successfully executed an amendment and extension of our revolving credit facility.

We were able to upsize the extended portion of the revolver to $1 $1 billion and to extend the maturity to July 2027.

During Q2, we also repurchased $45 million in common stock with about $255 million of repurchase authorization remaining.

Looking forward, we will continue to balance these priorities with the impacts of the broader economy and our need to invest in the business as we look to advance our goal to make the transaction process simpler for consumers.

With that context, I will now briefly highlight our Q2 financial results.

Q2 revenue was $2 1 billion down 134 million or 6% year over year versus the unseasonably strong Q2 last year and down about $100 million due to the partial sale of the underwriter business.

Franchise brokerage and title agency revenue drove the remainder of the decline offset in part by growth in our relocation business.

Q2, operating EBITDA was $202 million down 108 million due to softer franchise in brokerage transaction volume higher agent Commission costs and a decline in title earnings.

Title now anywhere integrated services included a hit of about 20 million year over year due to the sale of the title underwriter.

These impacts were offset in part by favorable relocation earnings that were driven by strong volume growth.

Cash on hand at the end of Q2 was $251 million, excluding restricted cash and free cash flow was $70 million.

We ended Q2 with the senior secured leverage ratio of 0.05 times and a net debt leverage ratio of 3.4 times and we will continue to target of three times net leverage ratio through cycle moving forward.

As a reminder, we are now a full cash taxpayer and paid $42 million in cash taxes in the quarter, which impacted our free cash flow.

We also had a big swing in our working capital, which contributed positive free cash flow last year, but it was a drain this year due to growth in our relocation business and due to timing and lower accruals and the rest of our business.

Our anywhere brands business, which includes leads and relocation generated $339 million in revenue and $204 million in operating EBITDA in the quarter.

Our core franchise business is national in scope and Skus to more average home sale prices, which makes it more directly impacted by the rise in mortgage rates and lower inventory.

Despite near term volume headwinds, our core franchise business has very attractive fundamentals, including a steady royalty stream and 70% plus profit margin in the quarter.

Our relocation business generated favorable operating EBITDA in the quarter led by strong client initiation volume, which was up almost 40% year over year, including a resurgence of international volume.

Our anywhere advisors business, which skews high end with an average price point above $700000 with our coldwell banker Corcoran and Sotheby's International Realty brands generated $1 8 billion in revenue and $11 million in operating EBITDA in the quarter.

Advisors generated operating EBITDA of $127 million before the transfer of intercompany royalties and marketing fees paid to our franchise business.

We continue to invest in this business with Q2, our eighth consecutive quarter of agent growth up 6% year over year like for like.

Ongoing agent recruiting success combined with agent mix drove most of the 236 basis points increase in commission splits versus prior year.

Our retention rates also remained at historical highs in the quarter between our recruiting success and our retention numbers you can see we are leaning in here to position us for future growth.

And while this high end recruiting success and record retention does bring with it some upward pressure on agent Commission costs, albeit moderating slightly sequentially, we remain laser focused on driving profitable growth.

Anywhere integrated services delivered $144 million in revenue and 21 million in operating EBITDA. In Q2 Q2 revenue reflects the absence of the tunnel title underwriter with the balance of the decline primarily due to lower refinance volumes.

Operating EBITDA declined $34 million year over year, primarily due to the title underwriter sale with the remainder also due mostly to lower refinance volumes and $10 million lower mortgage JV earnings driven by the abrupt uptick in mortgage rates.

Based on what we see today, our current view on transaction volume for the second half of 2022 is down about 10% to 20% year over year, which implies full year volume down 6% to 11% year over year.

Having earned 202 hundred $71 million year to date. This volume outlook combined with our additional cost actions of 175 plus basis points and commission split headwinds and a few other moving pieces in our business has is today with our current estimate for full year operating EBITDA between six and 700 million.

Yeah.

We like our free cash flow delivery, but keep in mind, our full year conversion percentage will be lower given we are now a full cash taxpayer and have negative impacts due to working capital.

We are laser focused on the $300 million cost savings target, we announced at our Investor day.

This target spans 2022 through 2020 six not including the incremental 20 twenty-two temporary saves just announced and will be delivered through reinvention of several parts of our business we.

We will drive further integration among our title and own brokerage businesses and automation on a much broader basis.

Stepping back we have been and continue to be relentless on costs and proactive on our balance sheet.

We will move with speed and agility to not only deliver results today, but also invest selectively to continue to advance our strategy with our luxury focus our re imagine cost footprint and key technology advances and consumer focus.

I will now turn the call over to Ryan for some closing remarks.

Look it's clearly a dynamic time in the housing market and a where real estate is well positioned given our profitability and free cash flow delivery, our balance sheet and liquidity strength that are increasingly impactful consumer focus and we believe we demonstrated those strength with our Q2 results, even given the market headwinds and the current market volatility likely creates.

Opportunities for anywhere to use our strengths to enhance our market position relative to our competitors.

Now looking to the future the fundamentals for U S housing actually remained quite strong, especially the demographic trends and the higher demand.

And what will be most important to the future is changing the customer experience. We believe people will buy and sell houses in a spectrum of ways in the future all anchored in an improved customer experience and so we are continuing to invest to grow our future that includes driving growth from our existing businesses, especially our franchise business and our luxury focus.

<unk> market share by utilizing our market, leading scale incumbency strength at exciting investments in products technology and talent.

Delivering great consumer experiences buying and selling a home there are attractive economics share gains and competitive advantages to leading into this future.

And we must recognize that our true competitive set going forward is going to be differed from the past. It is companies focused on the consumer experience that are likely to innovate disrupt change and win in this industry going forward. So we're ready as anywhere real estate to navigate and deliver during this challenging part of the housing cycle, while remaining focused on the <unk>.

Innovation required to win in the future with that we will take your questions.

Thank you at this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad, we will pause for just a moment to compile the Q&A roster.

Yeah.

And we will take our first question from Justin Ages with Baron Bird capital markets. Your line is life.

Thank you thanks for taking the question.

Ryan first one for you in a little bit of General I think I was hoping you could help us understand how you plan to balance the kind of short term operating environment that we're seeing right now.

With the vision that you laid out for us at the Investor Day.

Just the puts and takes the kind of achieving those long term targets that you gave us.

Yeah, No. It's a great question, we're clearly going through a change in the housing market as we as we speak look you know as we tried to talk about on the call. We're moving pretty quickly to adjust to what's happening in the market changed I think the emphasis on a even more cost focus not just that we've had in the good markets but in.

A more challenging market I think it was pretty clear and something that we were excited about.

We're going to stay focused on that but we're not going to stop investing for the future.

And we generate the free cash flow and profitability that allows us to do that.

And so while we're adjusting kind of in real time to the change in the housing market, especially on the expense side.

We have not pulled investments and things in the future.

Because we still think this is where the industry is going to go and needs to go and we need to be a leader in that in that journey.

Yeah.

Alright, that's helpful. Thank you.

And the next one.

Somewhat related maybe for Charlotte, just hoping to dig a bit deeper.

On the EBITDA guide given the commentary that Youre seeing.

Gave about.

Home prices moderating a bit the transaction volume that's included in the EBITDA Guide.

That's that can be more on the unit side is and how we should be thinking about it then.

No the numbers that I provided we're actually total volume based and like Rang showed we are seeing some price appreciation. So I think it's a balance you also have to remember like we are lapping our highest growth and absolute months in Q2 and in July of Q3, and you know our comparisons start to become a little.

[noise] easier, we had like 85% volume growth in Q2, and I can't remember exactly what it was in Q3, but it was certainly a lot higher than it was in Q4, so and especially in July . So I think you have to kind of take them a little bit of the real time data and balance that with kind of what we're lapping from the prior year, but that those 10 to 12.

Percent is as volume and you know the costs, we're going to continue to flex them. So based on what we see today. We've taken actions that you know are commensurate with that if things change. We will continue to take action I think we've shown that especially during COVID-19 two that we will move quickly. So so you have to balance them our ability to.

Continue to flex our cost base with whatever volatility we continue to see in volume.

And one thing on the total volume you know, there's really three things to think about one is whats going to happen with prices, what's going to happen with units.

But also what's going to happen with our relative performance alright. So you put those three things together make whatever assumptions you won and those three things kind of go into the range that we that we gave.

Okay. That's helpful. Thank you both for taking the questions.

Yeah.

And we will take our next question from John Campbell with Stephens. Your line is open.

Hey, this is a J <unk> stepping in for John Campbell. Thank you for taking my questions.

Ryan kind of continuing on this conversation here can you speak to some of the market trends or leading indicators, you're seeing so far in July and how this market backdrop may give you confidence for this revised guidance here.

Well, yeah, I mean look it's as I said, it's a rapidly changing market a J. So we're just trying to give you what we see at the latest it is kind of hard to predict you know look you can find an anecdote for anything but if you look at the data I shared what was that what we're seeing happening in price and in units in our portfolio.

A couple of other things you might find interesting.

What we're seeing.

If you go back into Q2 also is we're actually taking more listings at 500000 and up than we did the year before Conversely, there are less listings out there below $500000 and I think that gets a little bit to some of the inventory issues.

Some of the seller and buyer expectations changed I talked about so I find that to.

To be interesting and then in our portfolio at least about half of our listings are still are going under contract in two weeks or less.

That's down from about 60% of listings going under contract in two weeks or less last year, but thats still meaningfully above 2019, where it was like 35% and all these things are moving fast out there. So you know we're seeing more strength in.

And in markets like New York City in Texas, and the Carolinas.

You know like I talked about on the on the call you know, Florida, and New Jersey are much more of a kind of flat.

Kind of areas.

And.

California has got a few headwinds but.

<unk>.

We gave you the overall numbers and Thats, just a little more color, it's moving pretty fast we're watching it pretty closely and.

You know that that volume rain Charlotte gave US you know a little wider right in part because of kind of that uncertainty are you now.

On our side, but you really have kind of the latest data that we have.

Including some of these additional kind of examples I just gave here.

Great.

Helpful. And then maybe a quick one on are reassured here I was curious are you seeing any read throughs from reassure and then additionally is there any further traction from this business given the market backdrop and have you seen an incremental uptick in the number of sellers electing to accept the competitive bid from reassure.

That's a great great question here, so we like real sure we're continuing to invest in it I think the biggest story on reassure.

Like many of the other power buyers I would say is a two part thing one is.

From what we see both in our down in the market I Echo some comments other people have made that kind of.

There's power buying concept I think is here to stay right in and we like the fact that we've got it and we can we can do it at scale.

And so I think it is here to stay but you know.

You've seen I think most of the people who are in this part of the ecosystem pulled.

Pull back a little bit because of the market pullback and we havent pulled back out of any cities or anything like that but we'll probably invest a little bit less in real sure just because theres a little less market for it right now when the whole market is down the way it is but we really like it we're continuing to invest in it.

And most of what we've seen what we've seen is as are our numbers in and anecdotes that make us believe it's here for the long term as a concept and as part of us.

But also that in the near term it has to flex just like many of its competitors have flexed and like we're flexing into a into a bit of a different housing market.

Great. Thank you and good luck the rest of the year.

Yeah.

And we will take our next question from Anthony Pallone with J P. Morgan Your line is open.

Great. Thank you. So my first question is who.

And to get some help with maybe bridging some of the comments you've made in the past about pushing for market share gains and you also showed that your agent count I think was up you said, 6%. So that those are positive, but when I look at your your unit numbers in the quarter. They seem to underperform nor are down about 15.

Versus 10, and your price wasn't up as much as some of the Nora data suggests so can you talk about just what's happening on the market share side and help bridge that a bit.

Yeah. So.

If we look back if we look back over time I think our unit share has gone up over over time, but we have gotten.

We think we've gotten a good amount of of share gain also on price, which kind of leans into the luxury stuff that we do I would say right at the moment, Tony the truth is I am not 100% sure what's going on with our market share in Q2 of 'twenty.

22, we.

We don't have a clean comparison to give you given you know the 8-K that we put out in some of the revisions and disclaimers that people third parties have done with their data that we often compare to so you know.

We're looking at our market share comparisons like MLS data that covers about 80% of our business and some other stuff and all these measures up challenge to it but we like our agent growth in the quarter, we like the kind of very very high retention that we've had we like the ability to bring in kind of a larger than usual franchisee.

To continue to stay focused on that and you know like the earlier question.

Kind of asked.

We're not coming off what we said at our Investor day, which is growing our market share is going to be an important part of.

Delivering the kind of financials, we wanted to deliver for this group, but you know as we sit here right in the second quarter.

The data for the quarter is a little tough to tough to.

Tough to judge again, given given some of the some of the disclaimers people have done about the data we sometimes compare to so we don't really have a clean comparison to give you, but we like the pieces that we saw and.

Things do bounce around quarter to quarter, but I think if you look over time, we've been you.

You know a barn up on units and kind of like the price the price luxury thing we've been doing so that's probably all I've got for you. It's a strange answer and it's kind of late breaking so hopefully we'll have better comparisons for you in the future.

Okay fair enough.

But then on that competitive landscape you talked about sports.

Sports being up at least 175 basis points, I think which is fairly consistent with what you've talked about before I mean, what are you seeing on that side has anything shifted for the better or worse, given what's happening in the environment for housing.

Yeah. So a couple of thoughts on that the quarter's agent Commission splits were up 236 basis points. The majority of that was driven by agent mix still and the recruiting and retention. So most of that is driven by things, we do control the recruiting and retention as well as the mix, which we.

Don't control and you know with.

With lower inventories and lower listings that the higher cost agents are definitely getting a higher share and continue to get a higher share of the transactions now for the full year, I said 175 plus basis points on a year. So what that implies is that the rate of increase is going to go down part of what drives that is some of that heavy recruiting we did.

Last year.

On the high end agents, we start to lap that so youre not increasing on top of an increase that you've already had so part of that just diminishes because of the timing of the actions that we've taken and part of that is driven by volume not normally you won't see the volume impact until there the actual agents tables reset so.

Theres still more benefits from that to come if volumes continue to go down we're not rooting for that obviously so the single biggest driver of why things should abate is mostly due to lapping heavy recruiting we did last year in the fourth quarter and Tony I want to take a bunch of ownership here in the sense of you know.

You know, where we are here for profitable growth, but hopefully you've seen that in times. When we were willing to let the market share go.

If it was going to be negatively profitable, but part of the part of the reason that we've got some of those upper pressure as we are excited about a bunch of the recruiting and retention success that we've had.

And you know I would say in the last I don't know six to nine months, we've also kind of shifted and been doing more of our recruiting at.

At the higher end or slash in some of the higher end markets.

In a way that's also driven some of the upward pressure here and so you know I think Charlotte sharing kind of a you know a higher guidance number on this topic than we than we had last quarter is there is the right thing to do.

And you know I'm still intrigued by what you know in a.

In a tough market.

What it might do to the competitive environment.

Again, you know even in a tougher market, we're throwing off some free cash flow, we make good amount of EBITDA et cetera.

It's probably too early to see how that translates into the agent recruiting and retention market, but I have a hypothesis or at least our hope that it will be a benefit to us and an early indicator I've got of that actually is.

When we look at the industry numbers, Tony we see about 19000 agents moved in Q2.

That's actually down from previous Q2s of like 25, or 30000 agents moving so theres something going on I think happening and I think as you know the market is tougher and companies are under more pressure there may be some benefit to us here because we have the the octane to keep pushing for more of this profit.

Or will growth, but it does have to have a few of these.

Ancillary.

Hits like into the Commission line, sometimes so so we'll see how it plays out but but.

This environment may create some opportunities for a company like us. It's got some strength that has the desire for growth that has the ability to do it still profitably, albeit you know occasionally it at less margin maybe than the average.

Got it that's helpful.

Thank you and then just if I can last one maybe for Charlotte.

Can you maybe help a bit on the free cash flow side, you had talked about I think some working capital needs over the year, but yes.

Also been buying back some stock and debt and just trying to.

Tie that together in the back half of the year.

Yeah sure. So you know as I said, we ended the year with 250 plus million of free cash flow. That's after we bought back the.

The stock and retired $60 million of debt.

On the in the quarter it was a pretty material impact on networking capital.

Because if you think about last year, our volume was up about 85% you're building accruals at that time.

Sizable accruals tied to this gargantuan growth, we had our volume was down 6%. So there is a complete reversal there.

And then you know the securitization working capital had a material impact because as we start 40% up in Anne Klein Initiations, and reload and then we start tapping into our securitization working capital. So most of the negative hits from working capital is actually already hit year to date, but on a full year basis like if you look back over time.

Over the past five years networking capital most years is sort of like neutral ish, but there are certain years like every three or four years, just because of timing like last year, we basically accrued a bunch of expenses that got paid out in March.

So it hits you this year and like I said it it actually already hit us. So it's it can be the most material swing on our free cash flow conversion and we expect it to be so this year taxes, you know where nothing they were like a nil impact to free cash flow conversion and now you know it's sort of in the.

Low double digit numbers I'm, just because we're a full cash taxpayer so hopefully that helps.

Tony It's Ryan I'd love to make a comment here.

A little bit out of my Lane, but also just so you know you at our owners can know how I think about it which is you know if you look back at our company.

We're kind of a $40 to whatever 70% free cash flow conversion company right and you know in strong earnings years in you know not a lot of working capital violence. We're on the seven were on the high side of that in years, where our earnings are less slash the.

The working capital so I talked about were more like more like on the 40% side right to me I look at those cash taxes and you can do the math on it and it's basically you know you know 15 to 20.

Percent now that we're a full cash taxpayer so in my head I've kind of reset my expectations for our free cash flow conversion range.

From 40 to $75 to more like 25 to 55, two because of the cash tax thing and then again you know you know kind of the EBITDA and working capital.

Kind of swings for the year kind of pushed us to one end or the other of that and I found that to be a helpful framework as I. Just think about you know both what we are deliberate in what we're trying to deliver.

Got it okay. Thank you I appreciate all that.

Thanks, Tony.

And we will take our next question from Tom in the joint with K B W. Your line is open.

Hey, good morning, guys. Thanks for taking my question.

So we've seen some pretty meaningful divergence in Europe .

Per year trends and brand.

The high end advisers.

Much of that would you attribute to just tougher comps last year versus general kind of outperformance in the luxury segment or maybe any other factors and when do you think those factors should subside and bring us to payments growth rates back closer to parity.

That's a it's a it's a great question.

And thank you for asking it and I think Charlotte first of all that you know when we last year in Q2, we had whatever it was 80 plus percent kind of year over year growth.

The the brand side, especially the luxury brands drove a huge piece of that right. So they're lapping something that's much tougher than kind of a lot of the rest of the portfolios that is a piece of it but I tried to lay out the biggest three reasons. One was one was just geography right given how we're our.

Detected.

New York City for example, New York City was up eight points of volume in Q2, when our portfolio was down negative six.

The new Yorks in New York City, I think is our second biggest market.

As a company, but you know New York city's only on the advisor side right. We don't really have a franchise presence of any size in New York City.

So.

So what corker and and so it'd be international Realty.

Coldwell banker did in New York City really was a swing and that's just one example, the geography, but it's like the most striking.

Second you know those three brands on our own side Corker and S. I R. In Cola banker do skew more luxury and as you heard in my listings commentary and stuff like that.

We really like what's going on with us in luxury at least on a relative basis, if nothing else and then third we did in April .

Bring a franchisee into our owned area up in Seattle, that's a luxury market. We didn't have a presence there and it was a way to keep the franchisee.

Who is exiting the business in our network and Youll see in our press release that actually without that.

That was like three points of the difference basically on the advisor side. So those three things are really what drove the difference I don't know if the geographic thing is going to kind of normalize and flatten out I think the luxury outperformance will continue and then obviously the.

The the acquisition will continue to carry into the numbers when you do year over year comparisons. So that's how I'd answer it.

Okay.

Thanks.

And then switching over a little bit too.

Mortgage JV, we saw sequential improvement in.

Kind of a tough market for mortgages broadly.

Do you kind of have an outlook for that segment in particular in the back half of the year and into next year.

Yeah, we haven't shared a specific outlook I would tell you that we think were ferrying them as good or better as other mortgage companies you do highlight that sort of sequential improvement.

So we are obviously, taking actions to continue to balance the cost structure et cetera, but we remain focused on growing our loan officer base and you know like it's it applies across the broader business too. So we will continue to make selective investments for long term growth because while it is <unk>.

Painful in the short term, we like this business for the long term. So I don't expect it to be a material contributor to our EBITDA for the rest of the year, just like most mortgage companies and again, probably faring better than some of them, but ongoing we still have you know a lot of love for this business and think.

Once we can get past the acute macro issues that we're experiencing right now that this is going to be a great business for us.

Okay. Thanks, Karen.

Thank you.

We will take our next question from Matthew Bouley with Barclays. Your line is open.

Hey, good morning, everyone. Thank you for taking the questions.

Wanted to follow up on the commission split outlook.

It sounded like you know the assumptions around the second half of the year more reflection of sort of a continuation of.

Prior trends.

And I think if I heard you right, it's not yet reflecting the changes to agent split tables.

I'm just curious I guess, if transaction volumes play out the way you've guided is there sort of a tangible benefit to commission splits as we think about 2023.

Or is this sort of.

Constant upward pressure related to recruiting.

You know end up kind of outweighing that thank you.

Sure Yeah at some point if volumes were to continue to be down the tables do resets I mean again, we're not rooting for a continued volume decreases. So I think the one thing I would point you to is this next piece.

Because it's it is material and I think it ties into why we continue to heavily recruit at the high end because in a world of low until the inventory situation improves a lot of the higher end agents are just getting a higher percentage of the transaction. So it's important that we have a strong base on the you know the.

Producing agents, which tend to cost more so we're going to continue to do that where it is profit positive for us like Brian said, you may have a bit of a margin hit but you know the agent mix thing is the thing that you know.

We would hope in the longer term does settle itself out but it is correlated to inventories. So I hope on the flip side of that though you have seen us be super proactive on our cost actions and so while we do want to invest in the higher end agents and enter in our agent growth and I also did mentioned we have continued his.

Auricle high retention as well so that's the value proposition that we're investing in which helps us to balance splits for the longer term, but.

But the cost saves are what we're focused on in the short term to to make sure that we have the right balance between investing for growth and splits versus profitability.

Got it okay. Thank you for that Charlotte and then.

Second one just following up on the transaction volume guide that discussion I mean, it sounds like.

It's hard to make a call on share here as you mentioned given the 8-K.

Kind of inability to compare versus the market with with that change in data, but I think nor yesterday spoke to something more like a low single digit decline in transaction volume dollars for the year just based on their assumptions around.

<unk> units and median price.

So my question is given your assumption is this sort of ripping the band aid off.

<unk>.

Kind of level setting the market for a range of just weakening outcomes that could potentially happen.

Or is this you're really looking into the past eight weeks of the business <unk>.

Trends in saying that this this assumption for the second half of the year is basically what's been happening for the past eight weeks that kind of is the assumption worsening or you know are basically just kind of equivalent to what we've seen over the past eight weeks. Thank you.

So again I think it's.

Give it given some of the the disclaimers that people made about third party data out there it's tough to do price comparisons these days look.

What we're trying to do here is is just be as clear as possible about what we're seeing and kind of what we think the range would.

It would be kind of based off what we're seeing not just in the moment, but even some of the trends stuff that we're seeing.

You know I think you know.

Putting prices aside you know kind of what we're seeing and what we're talking about on the unit side is I think kind of in the ZIP code of what some other people have been forecasting.

But again ours is literally what we're seeing and then and then we're coming up with our kind of range out of that.

On the price side again, we gave you exactly what we're seeing so we've got that info for you.

And then how we do on a relative basis, we'll see right, but we do have the leading indicators, we have whether it's on the agent growth front or the franchise.

Expansion front so.

You know.

As I kind of said you know we're.

For the last four years, we never gave you any guidance on this kind of stuff right I mean, and you know and there's a constituent of people listening to this call who you know told me. It was a that was a bad idea to not do that.

This year has been a pretty challenging year.

And you know our estimates have never tried to be estimates that we guarantee youre going to come to fruition.

Because I think it's a very hard thing to predict the housing market and the macro and I think this year kind of showed that.

You know because again, our volume was running consistent with our start to the year guidance for a big part of your 2022, but the world's changed orders. So what we're really trying to do here is just give you.

Recent data as we can and kind of what were you know literally estimating in our business you know from our perspective and.

We're not that interested in kind of trying to like be forecasters versus others, and who's right and who's wrong, but you know we've literally shared with you our data through.

Late July of what we're seeing and then what were assuming for the rest of the year based off that that data and the trending that we're seeing and you know and and giving you hopefully a framework that if you have a different view you can plug that in and then you can adjust you know the other parts of our.

Of our estimates for that but you know as we talked about I talked about earlier.

It's a little wider range.

Then probably we'd like to provide you have our estimates in part because of the uncertainty of the prediction here.

For the second half of the year that's implied in your question. So.

We hope the.

Transparency and the view of our estimates is helpful. But they're also not tablets coming off a mountain written in stone that that that are guaranteed to last for thousands of years.

But the spirit of alright arrangements and to try to you know put quite a very broad framework around you know.

What we think sort of the best case scenario could be and like you know sort of more year Rip the band aid off scenario kind of thing.

Like Brian said, we haven't provided these ranges in the past. So there is some spirit there behind trying to do that for you guys.

Understood well, thank you Charlotte Thanks, Ryan.

Thank you.

Yeah.

And we will take our next question from Kwaku, our broker with Goldman Sachs. Your line is open.

Hey, guys. Thanks for thanks for the call and most of my questions were answered, but I just wanted to follow up on the.

From a free cash flow discussion here in sort of the relocation receivables.

Just give us a sense of sort of first given that the receivables are going up it seems like the relocation business is picking up again can you give us a little bit of an update on that business and then second where could that working capital usage go over over the next year or so.

Yeah. So we're really pleased with our relocation business. The progress has been amazing it's actually initiations are even up over 2019. So not only is it rebounded it's even better than it was before Covid had said, where we you know we continue to make investments in that business throughout COVID-19, especially in after it because of all this.

Access and the rest of our business and we think that business is well positioned.

So yes, so what happens with the securitization is as you start to build gross you tap into it but then that it basically unwind itself and usually the securitization ends up being like a neutral factor on the year. It's just a cute in the quarter. So so that should unwind.

As you know, it's it's sort of settles itself out and if we continue to grow more than 40%. It will continue to build so 40% was just a material number.

And that's why it's so acute in the quarter as far as the next year for working capital like I tried to say we the reason we have negative net working capital aside from the securitization is just timing of accruals and because of the strength of our business over the past two years, you know theres accruals that sit in the <unk>.

Business at year end, where the cash flow comes out in the first quarter to pay those accruals and it was it was very material and you can see it in our Q1 actuals. So most of that between Q1 and Q2 is actually already hit there can be some small variation, but going forward once you've lapped that it should not continue to be a drain for us over the next 12 months.

Perfect.

Just to continue on some of the trends in the macro.

I think when we were having when you guys were hosting.

Yesterday, it seemed like the high end or the luxury was really much more resilient than the other pricing price points and then something seemed to have happened in June can you just give us a little bit of a puts and takes as to how that transition sort of transpired so to speak.

You were seeing.

And the transition from May into June and potentially into early July .

Yeah, I think the I mean, the the June and July kind of drop off was clearly crustal market, but I think on a relative basis from it in our portfolio at least this may not be true for everybody to enter our portfolio leased.

The luxury stuff is still <unk>.

<unk> resilient right and some of that is luxury has got a little more cash buyers. So you don't have as much of the mortgage hit but you know I talked earlier about the kind of the luxury.

End of <unk>.

Part of our own brokerage business kind of is.

As part of the reason that business is outperforming the broader kind of more national franchise business.

Our our 500000 it up listings are actually growing right not shrinking versus a year ago, whereas the mass market listings are are dropping a.

Versus a year ago. So I think the whole market has moved.

But I think the relative performance within the market may not be that much different at least in our portfolio from what it was in May and I think it's the same reasons you know less less less impact on mortgage you know kind of the the fact that the.

Higher and people are still doing well and you know I think both sellers and buyers are kind of reset expectations and and that adjustment might be happening a little faster on the luxury side and part of it. Though is also the lap like Ryan called out. So you know that business performed above way above our 85% volume growth last year.

<unk> was very high contributor of that so I think in part.

That you know the year over year LAPIS is impacting things too.

Thank you guys and best of luck for the rest of the year.

Thank you.

Yes.

And we will take our next question from Ryan Mckenna with Zelman and Associates. Your line is open.

Hey, Thank you and good morning.

Charlotte sort of a new world very focused on the recent and near term dynamics in and certainly the incremental $70 million of cost savings. This.

This year it makes sense.

But can you help us think about kind of cost saving opportunities or incremental levers that could be pulled next year is it.

Transaction volume and 23 is actually worse in 'twenty, two and more so curious on actual kind of operating expense cost savings.

As opposed to some of the flex points around things like splits or commission rates or franchise royalties.

So again it just kind of curious if on the Opex cost savings as you look into next year is there still opportunity to take cost out of the business.

And I know you've been on a path of cost savings for quite a few years. So.

Just not not sure if the low hanging fruit, it's already out of the business or if there's incremental opportunity.

Going forward. Thank you. Thanks for the question Yeah. So we committed to a 300 million ish target for over the horizon of 2022 through 2026. So hopefully that does indicate I do believe there's a lot more cost that can be taken out of this business and that's why I tried to articulate this temporary cost stuff that we're doing.

<unk> is not part of that because it can just be short term things, where we you know dramatically reduce expenses and discretionary spending one way or the other but that's not how we would run our business going forward. So I don't want that to be committed to try to deliver the 300 million a lot of what actually we do is flex or our.

Our sort of our workforce model based on volume because if you can think about it a pretty sizable portion of our employee base actually supports these transactions and if there is you know 20% less transactions to have to do it. It's a constant thing that we're doing in end markets can be different so we're constantly flexing our workforce model.

Relative to the amount of transactions that we need to handle both up and down so that and you know you can't really say that that's permanent cost savings because it's really just a flex based on volume. So that's part of what we're doing this year that the stuff. That's part of our long term plan that we shared at Investor day is literally.

Re imagining the transaction, which will be much more automated and so you know I feel very good about the $300 million target I feel like there's definitely more room to go part of what we're dealing with right now is just flexing things.

Based on some acute changes in the market, which we would normally do whether it's 5%, 20% any percent, whether it's up or down.

That's very helpful. Thanks for that color Charlotte.

And Brian one for you I wanted to dig in a bit on the M&A and investment environment.

So one of the things we're picking up on is it does seem that there's independents looking to acquire there's other independents looking to sell you know I'm not sure. If those dynamics have changed as the market has shifted over the last month or two but.

<unk> also seen over the last year.

<unk> equity interest in investing in well run franchisees or in some cases independents. So I guess I'm. Just curious are you seeing a shift in the market.

Around just industry consolidation or attractive acquisition opportunities potentially for your business.

And kind of a second piece of that is just into a more challenging macro backdrop any thoughts on how you think about M&A or consolidation opportunities within the brokerage segment or maybe more so than the franchise side with potentially lining up deals are helping some of the franchisees.

Potentially acquire consolidate amongst amongst themselves. Thank you yeah. So I'll try to keep it brief here because I know we're at the career at period of time look so we're trying to be pretty selective on M&A kind of stuff that we do kind of either luxury focused or you know the pricing has to be really attractive.

And we're always out there trying to help you know either our franchisees make marriages or as I talked at Investor Day, you know we've.

We've kind of helps some some third party capital kind of come into the industry you know among our franchise network and so we will keep doing those things.

I think the market is changing so fast that I don't really have a new read on it I would expect in a more challenging housing market for there to be more consolidation opportunities I think consolidations inevitable no matter what.

And I would expect the prices to adjust in a tougher market, which again could be another place where our strength to let us take advantage of something relative to the competition, but it's a little too early to have a different.

Set of data on that for you.

So I'll, probably just leave it there.

Yes.

Yeah.

And ladies and gentlemen, this concludes today's conference call and we thank you for your participation you may now disconnect.

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