Q3 2022 Re/Max Holdings Inc Earnings Call
[music].
Good morning, and welcome to the Remax Holdings third quarter 2022 earnings Conference call and webcast. My name is Chris and I will be facilitating the audio portion of today's call.
At this time I'd like to turn the call over to Andy Schulz Senior Vice President Investor Relations Mr. Schulz.
Thank you operator, good morning, everyone and welcome to <unk> Holdings third quarter 2022 earnings Conference call.
Visit the Investor Relations section at Www Dot Remax holdings Dot com for all earnings related materials and to access the live webcast and replay of the call today.
If you are participating through the webcast. Please note that you will need to advance the slides as we move through the presentation.
Turning to slide two our prepared remarks and answers to your questions on today's call may contain forward looking statements forward. Looking statements include those related to agent count franchise sales financial measures and outlook brand expansion competition technology housing and mortgage market conditions capital allocation dividend.
Share repurchases strategic and operational plans and business models.
Forward looking statements represent managements current estimates.
Thats Holdings assumes no obligation to update any forward looking statements in the future forward.
Forward looking statements address matters that are subject to risks and uncertainties that may cause actual results to differ materially from those projected in forward looking statements.
These are discussed in our third quarter 2022 financial results press release and other SEC filings also we will refer to certain non-GAAP measures on today's call.
Please see the definitions and reconciliations of non-GAAP measures contained in our most recent quarterly financial results press release, which is available on our website.
Joining me on our call today are Steve Joyce, our Chief Executive Officer, Karri, Callahan, our Chief Financial Officer, and the Presidents and Ceos of our brands, Nick Bailey and Ward Morrison with that I'd like to turn the call over to <unk> Holdings CEO , Steve Joyce deep.
Thank you Andy and thanks to everyone for joining our call today.
Looking at slide three during the third quarter, we performed well in the face of increasingly difficult market conditions.
Our results once again reflect the strength and resilience of our differentiated business model.
Some of our notable quarterly highlights include.
<unk> Holdings total revenue was $88 9 million down only 2% compared to last year as our Integra acquisition and growing mortgage business helped offset the impact from the softening housing market.
We generated adjusted EBITDA of $31 5 million and our adjusted EBITDA margin was a robust 35, 4%.
Adjusted EPS was <unk> 56.
We accelerated our stock buyback program and repurchased over half a million shares during the quarter.
Total remax agent growth grew by over 3000 agents to 144000 agents in total.
A new record.
As a motto mortgage presence continued to grow with an increase in the open office count during the quarter.
Our wind low loan processing business increased as well.
We are pleased with our third quarter results, particularly given current market conditions.
During times like these are a higher percent franchise model unique in our space is a key competitive advantage and serves us well.
<unk> revenue from dues and fees based on agent Count and open motto offices accounted for almost 65% of our revenue.
Excluding the marketing funds during the third quarter.
Combined with an asset light business, we have a relatively low cost structure that allows for robust adjusted EBITDA margins and strong conversion to adjusted free cash flow.
Since our IPO nine years ago, we have consistently converted between approximately 55 and 75% of our adjusted EBITDA to adjusted free cash flow.
This enables us to generously returned capital to shareholders. While also strategically reinvesting in our business since going public we have pay up more than $125 million in dividends.
<unk> stockholders and we are now almost one quarter of the way through our $100 million stock buyback plan, which we commenced in January of this year.
We also aggressively pursue buying back our remax independent regions, which we think has been an excellent allocation of capital and driver of value.
In particular, our Integra acquisition continues to perform well and deliver an increasingly enhancing return.
Our expanding mortgage business has helped further diversify our revenue streams and provided additional and exciting avenues of growth.
We continue to execute a full speed on our strategic growth initiatives, we announced at the beginning of the quarter.
Frankly, it feels good to be playing offense, while so many others in our space are taking a more defensive stance. We believe we are in a very desirable position as we approach. The next phase of the housing cycle.
A lot of options and we intend to be strategic and opportunistic.
One final note the board and I have met recently and we agree that I should remain as CEO on an interim basis through the second quarter of next year. When we expect to start a formal search for a permanent replacement.
With that I'll turn it over to Nick.
Yeah.
Thank you, Steve and good morning, everyone moving to slide four as is typical for this time of year September home sales declined nine 7% from August According to the most recent <unk> National housing report.
Cross the 53 metro areas surveyed in the report inventory climbed to two months supply for the first time in about two years.
During that period quick sales kept the housing covered relatively bear, but now with the supply of two months there are a lot more options for homebuyers.
<unk> also suggests some progress toward more balance in the market.
For a long time six months of inventory with the standard for a balanced market that favored buyers and sellers evenly now with the evolution of technology in various changes in home buying pattern. The new standard is becoming four months and we're halfway there.
Additional good news for Homebuyers September's median sales price of 400000 with $6, 1% lower than the year high of 426000 in June and one 2% below August though it was six 7% above September of 2021.
The fed's move to cool inflation are clearly, having an effect on the housing market the historic pace and magnitude of the interest rate increases have created a reset and softening of the housing landscape as intended we.
We believe however that demand is still high based on generational factors. So in terms of annual sales, even a slower market will still stay in the historic range of results.
After all it's important to view things in context.
At nearly $6 9 million sales of new and existing homes 2021 wasn't uncommonly strong year without that context, the year over year comparisons can make the current housing climate seemed more dire than it really is and the fact that 2022 is shaping up to be a pretty good year for home sales.
Now admittedly I'm, an optimist, so when I talk to people about the housing market I implore them to take a deep breath and keep things into perspective interest rates go up and down and recessions come and go but no matter what people are going to buy and sell homes and based on our five decades of experience. It will happen millions of times every single year people get married they have.
They get divorced they move for jobs.
So that's not really the question.
The key question as you see on slide five as which agents brokerages are going to be the ones, helping those consumers with their home sales and purchases.
That's where our main competitive advantage comes in the productivity of Remax agents, because no matter what other business models may be doing and no matter whats happening in the economy reacts agents had a long track record of being ahead of the competition.
As you can see in every kind of housing market over the past 12 years relax agents in the U S are consistently outsold competing agents at large brokerages by a wide margin from 2010 to 21 U S housing experience markets at both ends of the spectrum and the number of U S homes sales has gone up and down as has the average.
Action sides per agent, but remax agents have continued to out produce the competition two to one at participating large brokerages. According to the real trends data.
We also believe experienced in navigating through changing markets will influence who will succeed in the next leg of the housing cycle.
<unk> had nearly twice as much experience as the typical realtor in 2021 and advantage that has widened in recent years.
The median years' of experience for U S. Remax agents was 15 last year compared to just eight years for non members that means most of our agents have gone through market changes that many in the industry have not.
That's one reason, we're more confident and aggressive than many other brands right now.
I don't believe there is enough download profit share split or whatever to enable unproductive agents to stay in our industry long term when markets are changing as they are today.
Looking at slide six overall agent count increased over 3000 agents year over year and reached a new high of more than 144000 agents underscored by continued growth in Canada and globally in the U S. We continue to see slightly depressed results driven primarily by the uncertain housing market, we expect to see a notable industry wide contraction in the <unk>.
Number of real estate agents across the U S and in truth, that's not a bad thing from our perspective, and while our model makes us more insulated than most we are not EMEA. Our U S agent count will likely be under a bit of pressure for the foreseeable future.
Increasing our U S agent count remains a top remax priority and Thats why we are so focused on the growth initiatives announced last quarter. These initiatives are all underway and we are happy with our progress thus far they should make a difference in our agent count EBIT impact isn't as clear as it would be in the absence of market headwinds, we expect the new programs for teens.
And conversions mergers and acquisitions to be even more impactful in our 2023 results.
Part of this is due to the time it takes for people to make a move these are big decisions for highly productive teams of brokerages and it often takes months for someone to take the plunge and make a change that's why it's so critical and advantageous to put these initiatives in place when we did having our systems already up and going and gives us great runway into the new year.
Some teams and brokers have already come on board and we're looking forward to many more joining us during the last part of 'twenty two and into 2023.
Lastly, regarding our July announcement to launch Max Tech powered by <unk>, we couldn't be more pleased with the response from our network. We launched the first phase of the rollout in Canada in September and the initial work is progressing nicely even more telling.
We spent a good part of the past couple of months on the road in our annual regional fall retreats across the U S and Canada, engaging with brokers and agents alike.
<unk> for this next step in our Tech evolution has been off the charts and it's not lost on our membership and surely not on many of our competitors that we are actively increasing our value proposition, while others are cutting services when the U S. Rollout begins in early 2020 threep that difference in approach should even be more apparent.
With that I'll turn it over to award.
Thanks, Nick looking at Slide seven model continued to grow during the quarter opening more offices in selling additional franchises likewise removes business expand it posted its best quarter, yet as measured by the number of loans process.
An industry that has been hit, particularly hard by rising interest rates.
April to be in this position and talking to you today about our growth.
That demonstrated ability to grow in virtually any kind of market is one of the many reasons. We are bullish on our mortgage business and the broker channel in general and in fact, our mortgage brands continued to garner more attention and earn more accolades for their quality and for model with a unique opportunity offered entrepreneurs for example franchise business review, which is ranked <unk>.
Mortgage as a top 200 franchise for four years running also named model was a top recession proof franchise based on an assessment of modest potential to outclass the competition during trying economic times.
Another publication Black Enterprise recently named motto of top 25 franchise for Black entrepreneurs based on an analysis of completed using franchise business review data. This top 25 list highlights franchise ores with the highest owner satisfaction survey scores among participating black franchise owners.
Also <unk> was just named the surface partner of the year by the National Association of mortgage brokers at its 2022 recognition awards.
<unk> was the only processing company recognized in the compliance processing category for quality service and support of the mortgage broker channel.
We believe the growth and success of our mortgage business is due to the unique and compelling value proposition each of our brands offer and the fact that ancillary services like mortgage provide real estate entrepreneurs with the opportunities for revenue and earnings diversification something that is going to be increasingly important in the face of shifting housing market conditions.
About 70% of module sales have been the real estate professionals grew within close proximity to the real estate transactions, namely purchase originations and that proximity is the key to success for many of our franchisees.
Looking ahead, our future is very bright as we expect our mortgage business to continue to expand however in the near term growth has been muted by the challenge housing market and this will likely remain the case until rates settle out also we're in the process of enhancing and increasing our sales force. We are not yet at full capacity and this too may impact our pace of sales as we finish out 2022 and start 2023.
Consequently, our stated desire to sell a 120 franchise next year no longer it looks feasible. However, we expect to provide an update regarding our 2023 franchise sales expectations on our fourth quarter call next February .
With that I'd like to turn the call over to Karen.
Thank you Lauren good morning, everyone moving to slide eight third quarter revenue declined approximately 2% to $88 9 million. Excluding the marketing funds revenue was just over 66 million also a decrease of approximately 2% when compared to the same period last year.
This decrease was driven by negative four 9% organic growth and adverse foreign currency movements of half a percent, partially offset by three 2% acquisitive growth.
All acquisitive growth came from last year's Integra acquisition, which we closed on July 20, <unk> and continues to perform well.
Organic growth decreased primarily due to lower broker fee revenue and an increase in recruiting incentives, partially offset by mato growth and increased events related revenue right.
Rising interest rates have adversely impacted housing affordability and weakened housing demand, resulting in fewer transactions and by extension lower broker fee revenue.
Excluding broker fee and marketing fund revenue, our organic growth rate was flat.
Looking at slide nine our Q3 <unk> expenses decreased two 7% to $49 7 million.
Third quarter 2022, selling operating and administrative expenses decreased primarily due to acquisition related expenses lower personnel costs, excluding restructuring charges and reduced head count partially offset by restructuring charges.
Travel and event expenses and higher legal expenses between our restructuring charge in the third quarter and the acquisition of Integra in last year's Q3, there's a lot to unpack when comparing the two quarters, but we are happy to answer any questions you might have.
Looking ahead, we expect our Q4 <unk> expenses will decrease sequentially from the third quarter and be between <unk> 39 and $42 million.
Moving to slide 10, before I get to our outlook. There are a couple of items I want to briefly mention.
We accelerated our buyback activity during the third quarter repurchasing just over 500000 shares.
Since the inception of our program in January we have repurchased approximately 1 million shares and total returning almost $24 million to shareholders in the process. We continue to believe that repurchasing our stock at its current valuation is an outstanding allocation of capital.
Right value for our shareholders.
I wanted to call out the impact of today's increasing interest rate environment is expected to have on our earnings specifically, we believe rising interest rates will decrease our adjusted EPS by approximately 10% year over year during Q4.
The estimate includes the 75 basis point raise by the fed that was announced earlier this week.
And the current interest rate environment, we expect about a 3% adjusted EPS degradation for each million dollars of additional interest expense.
Now onto our guidance.
The company's fourth quarter and full year 2022 outlook assumes no further currency movements acquisitions or divestitures.
For the fourth quarter of 2022, we expect agent count to increase 1% to 2% over fourth quarter 2021 revenue in a range of 80 million to $85 million, including revenue from the marketing funds in a range of $21 5 million to $23 5 million and adjusted EBITDA in a range of.
23 million to $27 million.
For the full year 2022, the company is reducing guidance to reflect the current housing market conditions and other related macroeconomic trends and now expect.
Is it accounts increased 1% to 2% over full year 2021 down from one to two 5% revenue in a range of 352 million to $357 million, including revenue from the marketing funds in the range of 90 million to $92 million down from 354 million to $364 million.
And adjusted EBITDA in a range of $118 million to $122 million down from $123 million to $128 million now I will turn the call over to Steve for closing comments.
Thanks Terry.
Looking at Slide 11, we believe change brings opportunity in the current economic climate is certainly defined by change we have faced similar circumstances over the past five decades and performed well and we believe we are positioned to do so again.
With a scale global business unmatched brands strong financials and a proven track record of success. We think we are in an enviable position.
Our strategic growth initiatives have us on our toes, while others are on their heels.
We look forward to finishing the year on a high note.
With that let's open it up for questions.
At this time I'd like to remind everyone. If you would like to ask a question. Please press Star then one on your telephone keypad.
First question is from Anthony Powell loan.
Oh My apologies. Our first question is from Stephen Sheldon with William Blair. Your line is open.
Hey, Thanks, good morning.
First just as we think about modeling adjusted EBITDA for 2023.
So a little bit a ways out, but just can you walk through some of the moving pieces with any visibility you have especially as we think about it.
The drag from tech initiatives that profit trajectory of motto.
And then just curious if your investment priorities changed at all here where were some of the cost savings from the discontinuation of booze could maybe flow through a little bit more next year or does it still seem like most of that will be reinvested.
<unk> Investor Day, I guess and other priorities.
Thanks, Cary I wanted to start with a chip in it.
Sounds good good morning, Steven Yeah. It's a great question, obviously, we will have a lot more to say about 2023, when we get.
So thats call in February obviously, some uncertainty as we think about just the macro and what that means for the top line as we think about the cost structure as we said back on the call last quarter.
We are expecting the announcements that we are.
Announced early in the third quarter.
<unk>.
About $8 million annualized run rate.
Benefits to EBITDA on a go forward basis thinking about that.
As it relates to spread kind of ratable on a quarterly basis, but nothing has changed at all.
We're very we're.
Thinking very opportunistically and aggressively given our franchise model.
And where we sit and so are looking to continue to invest in that <unk>.
Reinvest those dollars back into the business and so that reinvestment will come both in terms of additional personnel primarily supporting the mortgage business and then also in terms of.
Some revenue relief as we announce some of the mergers conversion and acquisition initiatives as well as the team's initiative.
We'll ramp that investment it will be a little bit less of an investment in the first half of 2022.
23, Im sorry, and then that'll scale in the back half and as we think about the you specifically mentioned the motto side, we still think it's a prime time to be investing in the mortgage business is contributing to our organic growth and so we're kind of looking at that breakeven pushing out maybe a little bit into early early 2024 now.
And I think the wildcard for us that where.
We are carefully watching as everybody else is as we believe the investments, we're making will will actually will help us both on the agent acquisition side.
Two teams and through acquisitions and then on the on the motto side.
And the only question that we've got coming.
In conclusion, as we budget and we plan for the year is how much of that is going to be offset by the conditions in the market.
Yes.
Got it Thats all very helpful.
Maybe just as a follow up on the.
And the effort to attract larger teams I think get some pilot markets that maybe you rolled out in August I guess, what early traction or.
Conversations pipeline building have you seen there and how long do you think it could take for those efforts to be rolled out more broadly and to have a more material impact than hoped maybe stabilize the agent growth in the U S market.
Nick once you take that.
Sure for both teams and conversion.
Our early initiatives for us, but we are we're very pleased with both and we have success in both thus far our team has just launched August one so.
Though it's too early to give specifics.
We know that building a pipeline does take a little bit of time for both but we can report thus far success in both categories.
And we'll have more information as we round up end of year.
Great. Thank you.
The next question is from Anthony <unk> with Jpmorgan. Your line is open.
Great. Thank you and good morning.
My first question is can you talk to any <unk>.
Concessions you might be making right now for agents are franchisees as the markets.
Deteriorated and maybe contrast that with perhaps what you've done in the prior housing downturn just trying to understand as we look to 2023, if there's any headwinds we should expect there as you accommodate sort of a tougher market.
Yes.
It's Nick.
So thats more fully.
We are putting either investment dollars or fee braces and the acquisition of additional <unk>.
It's not to say that at this point, so, but Nick wants to talk a little bit about the activity, we've got going on and where we think this is might go and past performance.
Sure. We don't have any current incentives on a individual per agent basis. So as Steve mentioned, it's just investments in the initiatives that we have so.
Unlike quarters in the past, where we have had initiatives or incentives. We don't have any right now and we don't anticipate any of those in the coming quarters.
Okay.
And then just a follow up I have is with regards to capital priorities can you talk about just how you're thinking about buying.
Buyback versus the dividend versus debt Paydown.
Yes, so clearly.
Our primary capital allocation is always going to be to return to shareholders. So we've been relatively aggressive this year on <unk>.
Share repurchase we've held the dividend.
To the point if you will.
Look at our actual <unk>.
Distribution of free cash flow.
$50 million of 54 so.
And so that I think you can expect us to continue to evaluate the market.
We still see a significant dislocation between intrinsic value and price we will continue to invest in the stock and we will continue to to to hold the dividend and look for opportunity to increase it over time.
So then the other though is that.
With the dislocation in the environment.
We actually think it's an opportunity potentially for for opportunistic investment.
In the mortgage business.
And potentially other active.
Acquisition targets.
Depending on circumstance. So you can expect us to continue to evaluate the opportunities we see available.
And hopefully.
We believe the environment could provide opportunity for us to look at some interesting other investment opportunities.
Okay. Thank you.
Okay.
The next question is from Tanya <unk> joined with <unk>. Your line is open.
Hey, good morning, guys. Thanks for taking my questions.
I actually can't recall, such a wide range of estimates from the industry on U S existing home sales looking forward.
MBA and Fred Anr habit around $5 million in Fannie has it below $4 million.
You guys have a very wide representative national footprint, What's your house view on the industry existing home sales for next year.
Well.
Cleveland confused so Nick why don't you answer that.
Thanks, Steve.
Youre exactly right. It is pretty wide and I think the challenges everyone's doing a year over year comparison to a year that was a complete anomaly.
So we have to reflect back I would say, Moreover, say, a 10 year period of time, where we've averaged around 5 million sales give or take.
Where I am very optimistic about especially the five to eight years ahead. In this market is we still have a shortage of around four to four 5 million homes in the U S and we've got millennials at the ages of 25% to 42.
At the prime of their purchasing we've got seeds as big as the millennial population right behind them that are stepping into home buying and so I truly believe that in the years ahead, we've got tremendous demand and we still have a shortage of inventory and it's somewhat similar in Canada, especially with their three year immigration plan to bring double the number of folks into the country to help with labor.
That they have in the past few years and so I think when we step back and look at it.
Probably just a little bit more of our 50 year history of the seven recessions that experience on this to say income changes and it's not just a one year comparison and so generally generationally, we are pretty optimistic on what's ahead.
We're going to have to bump through rates Silicon me and let things settle out there'll be some pressure on overall agent count just in the national grid.
Yeah.
Which our business model obviously.
Strength in times like this we're not totally immune to it.
But it does show our strength and something that will leverage moving forward.
Yeah.
Got it thanks, Matt.
Then also you touched on Canada, there can you remind us the various revenue and earnings contribution from Canada, specifically and then your expectations for it seems like Canada slowdown is a bit more.
A bit more sharp and what we're seeing in the U S.
[noise] carrier Nick wants to chip in on that.
Sure. So Canada continues to be the bright spot for us our Integra acquisition last year continues to outperform our expectations from a top line perspective kind of looking high teens in terms of revenue contributions in terms of the Canadian operation. One thing that I think is important to realize and we've.
Continued to see growth in terms of agent count growth in Canada, North Canadian agents are still contributing about 80 cents on the dollar.
Two our topline now since we have the vast majority of agents within our company owned region umbrella and so Canada continues to be a.
A very bright spot for us and are continuing to leverage a lot of a lot of growth initiatives and opportunity. Despite the strong market share that we have there.
And the only thing I'd add to Gary's comments. There is when you look at total agent Count you have about 140000 agents across Canada. We account for over 25000 of those so were 17% 18% of the total total agent count with number one market share by a strong margin and so that gives us a lot of strength to help continue to drive the growth across that.
Country, whereas you compare in the U S. One five.
Realtors compared to our total numbers, we represent about 4%. So we think that that plays into the candidates growth as well.
That makes sense. Thank you.
Yeah.
The next question is from.
John Campbell with Stephens Your line is open.
Hey, guys good morning.
Good morning, Hey, So, we've obviously seen and heard from a lot of folks in the channel just about the negative impact of lower end or I guess less productive agents on total total total agent count, but basically a big step up in attrition from that lower end cohort.
Clearly you guys have some of the industry's most productive agents. So I'm thinking that's probably less of an issue for you guys, but I'm curious about any color you might provide there.
Yes, so I think.
We have for the most part.
The industry productive agents kind of about a two to one average margin and so.
Theres clearly going to be 200 agents out there now there's clearly going to be a drop off for the less productive agents, because we're not going to be able to make a living doing it already and the incremental revenue to.
To offset their costs. So we expect to see a lot of that drop off we may see a little of it but we actually expect that.
Two.
To be offset in some part by all the other activities we're doing Ed.
We also see it as somewhat of an opportunity as agents that are concerned about the brand there with the <unk>.
Filiation, and whether or not they could do better with a stronger brand, we see that somewhat as an opportunity Nick do you want to add to that.
Yes, I think something Thats important we talked about convergence for example, when we look at the pipeline.
This is the time when we're seeing.
People look for more competitive advantages and value and I think the reality is in the last couple of years, we've seen a lot of agents had a lot of new brokerage has come to the industry, but they were somewhat artificially upheld by the strengths of the market and so now it's really putting pressure on what's the true value and so we're seeing the competitive landscape is cut cut cut.
Everything were historically, where we've been through these things before the great recession, not a comparison to right now but in comparison into how quickly the dynamics in the market changed.
And how we can respond and agents have been through it our average agent is.
Around 15 years' experience, where the industry averages around eight.
So when you have double the experience you've seen some of the other sides of this and so this is where this is where we really think that the brand and the remax agents shines because they know how to control their costs and what to do to capture more buyers and sellers at a time when.
This is a brand new market for some people that have only been licensed two years.
Okay that makes sense in this kind of dovetails into the next question.
It seems to me Ron maybe a little bit contrary to what you said earlier you mentioned that.
U S agents youre expecting that to remain under pressure for the foreseeable.
A foreseeable future just wanted to dig back in on that comment you guys have clearly ramped up the recruiting incentives you made obviously a strategic focus to grow agents could you explain a little bit about why you don't think youll be able to battle through the kind of ongoing end market headwinds.
While we will be able to.
Why you want it sounds like the comment you made earlier about.
<unk> pressure on the U S agent count over the foreseeable future I want to make sure I heard that correctly.
Yes, yes, so to clarify that.
When I look at just theres going to be overall pressure on total number of agents in the business and so even though we talk about how our years of experience we rely on that and.
That will be something that will help not only our brand brokerage and business model and our agents and brokerages go through a changing market, but we're not totally immune to it I mean, we have agents that have joined brokerages or join teams that have also been license just a couple of years and so there will be some pressure on some of our agents and we realize that but.
When we look at for example, what we're doing with teams and strategic initiatives. This is a time when you maybe have individual agents that now start struggling on their own and they may want to join the team and so you can see teams start to expand and pull pull people in.
Within their within their teams and the conversion side the industry consultants that do the valuations for most brokerages throughout the U S and Canada.
Their words not mine this is the biggest.
A larger number of valuation request that they've seen in their 40 year history.
So that is part of the reason that we looked at the conversions and mergers acquisitions opportunity and our pipeline is extremely full on it because there are there are a lot of folks that are in high demand and so while there will be some pressure on some of our agents in some markets.
We're hoping to make up for that with the opportunity and demand on acquiring companies.
Recruiting $10 2500 at a time versus one at a time.
Okay that makes sense thanks for the clarification.
Okay.
The next question is from Ryan Mckenna <unk> with Zelman <unk> Associates. Your line is open.
Hey, good morning, and nice job on the quarter.
Words, so on motto I wanted to ask.
So it sounds like the new franchise sales targets might adjust but if we just look at the trend in open mottos, obviously looks pretty compelling I think it was 200 last quarter to 11 this quarter $2 17 as of October So a nice ramp there I guess I'm curious is the is the macro environment driving any acceleration in that timeline from kind of <unk>.
Rail to open motto offices or is that more just the natural progression of how how you should kind of transition to <unk> to.
To open offices.
Anything there would be would be helpful.
Yes, I think the biggest thing recently.
Have invested in some recruiting lays on in our particular.
Sector. So we're trying to support our owners and finding their first qualified individuals that helps them get open and so we've already seen some increase in the speed of that so.
So we see the positive effect of that in May invest more in that particular area as we.
Get passed.
First few that we've been able to speed up this particular process. So we think there's opportunity there.
The states they come and go on the speed of their ability to get somebody license and we've seen that with the change in the industry. There is little bit less busy. So they are able to look at some of our applicants quicker. So we view that as a potential upside as well so recruiting efforts and licensing are improving and we hope that continues to make <unk>.
When officers happened a little bit quicker.
That's great.
Strangely enough.
The conditions.
Hunter now and next year actually are probably favorable to us in terms of growing that business.
That's great and carry one follow up or clarification.
Wanted to square a couple of comments. So you mentioned for <unk>, I think 39% to $42 million and then on the comment about the kind of run rate EBITDA benefit of 8 million are seemingly $2 million a quarter is that effectively saying.
Kind of take the <unk> from <unk> and assume that drops down by $2 million a quarter.
Going forward or is there kind of a different flow through to the to the EBITDA benefit of the cost saves.
Any any any help you can provide there.
So I think a couple of things to keep in mind were really looking at reinvesting that $2 million back into the business right. So that's just going to ramp.
Over the course of the year, so it's not necessarily going to come down we're just reinvesting it back into the initiatives. The other thing to keep in mind, just with regards to seasonality, let's keep in mind that our first quarter.
<unk> is just unseasonably high because of our annual agent conference. This year is the 50th anniversary, we're very excited and have a lot of things.
To celebrate.
I wouldn't be surprised if that SMA is even a little bit higher than it has been in the past offset by additional revenue because of additional participation. So kind of Q1, if youre looking at Q1, I think you are probably more of a consistent.
Performance in 'twenty three 'twenty, two just because of some of that seasonality and obviously, we will have more to say.
In February as we get into 2023 outlet.
Got it very helpful. Okay. Thank you.
Yes.
The next question is from Ronald Camden with Morgan Stanley . Your line is open.
Hey, a couple of quick ones, just one just going back to the question of competition.
And the industry, just hoping you can sort of contextualize what the competition for agents is today versus 345 years ago.
Whether it's some of the recruiting fees or anything just trying to get a sense of how do we put that into context today. Thanks.
Yes, I think and I'll ask Nick to give a more full answer I think partly what we're seeing is a lot of the incentives that are there.
Or going out to bring agents and it had some success our sense is that that may be lessening somewhat and so.
So our timing may be good in terms of our strategies to bring more agents in and obviously <unk>.
Company by company, either people or Ferring.
Better or worse.
Their model dictates our model obviously.
Allows us to be very stable in terms of our cash flow in our at our resources.
And so so we believe.
Again like motto the timing is probably good for us to push on on these two initiatives that Nick is overseeing.
And that we will see over time.
Whether or not the relative weakness of the market drive step that.
That opportunity to be.
Greater than we were even hope Nick do you want to add to that.
Yes, I would say that I think the competitive landscape from a few years ago. We saw a really high number of models and companies come in that were transaction or very low cost discount type of models and when we see the market contract somewhat theirs.
The only so much that.
The brokerage can can give away if you will and so where we see the agents and brokers who starts turn is relying more on productivity.
Agents over the last couple of years many of them, even several new to the business.
Somewhat order takers the business was just flying off the shelves in certain ways.
And so now it becomes more about how do I find the client how do I get another closing versus how do I say $25 a month.
And that's where our productivity shines through.
Great.
Just going back to the sort of the guidance reduction.
I think we're really interested to see sort of what what assumptions really change on the macro side I mean, clearly you guys have a view of.
Maybe internally of what home sales are our home prices are going to do just sort of curious how those sort of pieces change that moved that that led to maybe some of the guidance reduction.
Sure.
Sure. So when we look at the guidance reductions primarily the impact was coming from the top line and is primarily macro driven.
So when we look at the adjustments that we made the biggest contributor was with broker fee.
Little bit of headwind coming from our continuing franchise fees and the other thing Thats, having an impact is just the strengthening dollar.
Of the increase contributions from Canada, and so that's really.
The drivers that impacted the reduction that then kind of fell through to the bottom line.
Great and then one last one if I may I'm, just looking at the operating cash flows of $61 million year to date.
Just wondering if that's a good.
Obviously things are slowing down a little bit, but is there anything sort of timing or anything related to that or is that sort of a good.
Run rate number that we should be thinking about thanks.
Yes, there is nothing thats unusual.
Quarter relief from the of consequence from a from a cash flow perspective.
We looked at it a lot in terms of the strength of our business model kind of the hallmark nature of the franchise model and our ability to consistently convert our adjusted EBITDA <unk> adjusted free cash flow and that kind of been in.
<unk>.
60% to 70%, 70% range interest expenses have been a little bit of an impact on us and so do you expect that to maybe come down a little bit.
Over in the future just as interest rates rise, but the strength of the business model really shine in an environment like this and there is nothing off the queue unusual as it relates to our cash flow performance in the corner.
Thank you.
The next question is from Jason Stewart with Jones trading your line is open.
Hey, guys, it's Matthew on for Jason could you talk a little bit about the restructuring and impairment charge if you haven't already.
And what we should expect there going forward.
Carey.
Sure. So the restructuring charge was directly tied to the announcements that we made in early July .
The shift in our technology strategy that resulted in a reduction in force. So thats a one time event approximately $7 million, primarily severance related and then we had some some asset write offs as well and so that's a onetime event don't expect that to recur in the future.
That impairment.
On the face of the income statement that has to do.
With some things that we're doing with our corporate headquarters in terms of just trying to optimize our space.
So again Thats a one time event, we don't expect to see that happen again going forward.
Thanks, and then.
How how much do transactions and lower transaction volumes affect the broker fees.
Yeah.
Gary.
Sure. So obviously broker fee, we look at in terms of a number of different contributions obviously the number of transactions home price and then agent count.
Are all factors. So it is the variable part of our business and the part that is most tied to the end market. So in the end market is under pressure.
That's the line item, that's going to be most impacted.
And just I think just to keep in mind, our business model is fundamentally different it is only 1%.
The commission. So obviously, we're more insulated than many others, but we're not immune to what's happening from the man in the macro from that perspective.
Gotcha. Thank you guys.
Okay.
Our final question today is from Justin <unk> with <unk> capital markets. Your line is open.
Hi, Thanks for taking my question I was hoping we could discuss the organic revenue comment I believe you said it was flat without <unk>.
The decrease in broker fees can you just give us a little more detail on the <unk>.
Aspects of it there.
That are contributing it to be flat I would have thought the decline in U S agents, where they had outsized impacts but is that being offset by kind of Canada international and mortgage growth.
Sure.
Sure you're exactly right, Jonathan So I think when we look at the business right now.
Yes.
Despite the environment we are.
We're optimistic because we do have some differentiation and diversification with the mortgage business that was about a point of organic growth.
Canada continued to grow global continued to grow as you noted and that really did offset some of the U S agent Count and then some of the investments that we're making in particular in the pilot states as it relates to team, which we think are very prudent and opportunistic investments as we think about positioning ourselves for growth in the future.
Alright, that's very helpful. Thank you and then next on capital allocation I know you mentioned.
Preference right now for buying back shares given how attractive they are from a valuation standpoint, but is there more kind of focus on looking at buying some more of the independent regions. Given that there are valuation might be a little impressed giving the current housing market conditions.
Yes, so we're looking at that all the time, we think that's actually an excellent allocation of our capital as well so that is sort of opportunistic obviously ed.
At any point in time, we're in dialogue with the remaining independents as to whether or not there is possibility for transaction. So it.
Don't be surprised if you see us do more of that within the next year or so.
Alright, perfect. Thanks, so much for taking the questions.
We have no further questions at this time I'll turn it over to the presenters for any closing remarks.
Thank you operator, and thanks to everyone for joining our call today.
That concludes the call have a great weekend.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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