Q4 2022 Anywhere Real Estate Inc Earnings Call
Good morning, and welcome to the real estate 20 twenty-two earnings conference call via webcast today's call is being recorded.
[noise] script 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.
This time I would like to turn the conference over to anywhere Senior Vice President Alicia Swift. Please go ahead Alicia.
Thank you Dennis good morning, and welcome to the ear and 20 twenty-two earnings conference call for anywhere real estate.
On the call with me today are anywhere C E O and President Ranch Schneider, and Chief Financial Officer, Charlotte someone alley.
As shown on slide three of the presentation the company will be making statements about its future results.
Looking statements during this call.
[noise] statements are based on the current expectations and the current economic environment.
Well, we're looking statements and projections are inherently subject to significant economic competitive litigation regulatory and other uncertainties and continue to feed many of which are beyond the control of management, including among others industry and macroeconomic development.
Packed of such developments on consumer demand.
Current liabilities beta are in excess of amount of crude in connection with pending litigation.
Actual results may differ materially from those expressed or implied in the forward looking statements and.
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 issue today as well as in our annual and quarterly SEC filings.
In October 2022, the company initiated a plan to integrate one brokerage group entitled Group, However, based on industry and business development. During the fourth quarter of 2022. The company has determined that it's reportable segments will remain consistent at December 31, 20 twenty-two with prior period.
For those who listen to the rebroadcast of this presentation. We remind you that the remarks made herein are as of today February 23rd and have not been updated subsequent to the initial earnings call.
Now I will turn the call over to our CEO and President Ryan Schneider.
Alicia good morning, everyone over the past few years anywhere is made powerful progress at all transformation.
2022, with real momentum, even as the housing market worsened in the year, we leveraged our unique advantages stayed focused on our priorities enter quick actions that enabled us to deliver 6.9 billion of revenue and 449 million and operate in EBITDA.
We accelerated our cost reduction she'll like target of 70 million to realise over 150 million of cost savings in a year.
Rigorously prioritize our growth investments in Capex.
Capitalized on the improving competitive environment.
We remain committed to growing our advantage positions that are existing businesses, especially franchise luxury a transaction services along with simplifying the transaction for agents and consumers.
Looking back on 2022, it was a rapidly changing year for housing with substantial declines in the market. We got worse every single quarter effectively all the market decline. This from a drop in unit transactions, culminating with Q for market volume down more than 30%.
Higher mortgage rates continue to put pressure on affordability and these higher mortgage rates are hurting this new supply of inventory as many homeowners are locked into their current home with low mortgage rates.
Proud how are great agents and franchisees are taken care of customers even in the midst of this tough housing market as they continue to demonstrate their value in the marketplace.
2023, it looks like a volatile year, where the housing market will be meaningfully lower than 2022, driven by a substantial drop in unit transactions industry 20 twenty-three forecast for transactions are typically in the four to four and a half million unit range down 10% to 20% from 2022 and remember.
[noise] unit transaction declines have a disproportionate impact on our business is unit declines also impact our mortgage and tidal opportunities and we'll see what happens on the price side of the volume that question.
Now, we expect Q1, 23, 23 market volume to be down around 30% versus 2022, but we expect those year over year quarterly comparisons to improve throughout the year.
And I still believe the outlook for housing over the decade as strong.
And most importantly, and potentially Excitingly right now we may be at or near a bottom already.
We're all seen a number of the housing indicators in the macro economy exhibit more stability in our block from December 2021 to November 20, twenty-two are year over year volume comparisons all showed open volume lower than are closed volume effectively showing housing.
Results decelerating.
That slipped in December 2022.
Both in December 2022 in January 20th 23 are open volume comparisons were higher that are closed volumes.
So even with a tough and likely volatile 2023 market ahead, I'm increasingly optimistic about our position to the opportunities in front of us. So first we are laser focused on changing how we operate our company to deliver greater efficiency and enhance our value proposition.
We realized 150 million in cost savings in 2022 and later in this call Charlotte will share the equally powerful efficiencies we were expected to drive in 2023 and.
And our excitement in this area is not just about lower cost its about rearchitecting our business for greater success in the future. We will re imagining a real estate brokerage officers to be more efficient.
The ball and integrated with transaction services like title and mortgage which means we can provide fewer but more impactful agent and consumer support us.
Building on our past investments to digitize our operations, we are automating processes across brokerage entitle, removing work and friction for agents and consumers and while we've lowered our marketing span for 2023 given market conditions. We are excited how we're using a more digital marketing mix to deliver greater value for agents in France.
<unk>.
Second we are rigorously prioritize in our growth investments, which include continuing to expand our powerful franchise business, leading into our luxury leadership position and driving innovation in our nationally scaled title and mortgage businesses.
Most importantly, we liked it better competitive environment that we have seen evolve in 2022 and the competitive differentiation we're achieving.
We believe our results demonstrate a flight to quality and that there will be gross benefits for us when the market rebounds.
We experienced record franchise sales of 2022, bringing in substantial new companies in helping our existing companies grow via M&A an agent recruiting.
We continue to have strong growth in our anywhere advisers agent base up four per cent you over your organically and most excitingly in this better competitive environment, we were able to recruit at better economics within in the past few years.
And as we've been sharing with you throughout the year, we continue to have record high agent retention in our own brokerage business.
Finally, we've recently brought a new to market a new innovative multi franchisee title joint venture opportunity is part of our franchise value proposition and are in the process of launching the first three in Florida and California.
So even in the challenging market, we liked a flight to quality that we're seeing in a better competitive environment and our growth factors, which together, we believe will pay substantial dividends for us when the market recovers now.
Now I will turn it over to Charlotte to discuss our results in more detail.
Good morning, everyone 2020, K with a challenging year for housing market that we are excited about the progress we've made and the position we are in to further our leadership in this industry.
We continue to deliver meaningful operating eat a guy and have taken the necessary steps to improve anywhere as financial and operational performance with our accelerated cost reductions and prioritization of our investments to drive Krauss.
I will highlight are full year 2022, and Q4 financial results.
So your revenue was 6.9 billion in operating <unk> 449 million.
Q for revenue was 1.3 billion down 33 per cent in line with our transaction volume decline.
Q for operating EBIDTA was 12 million down versus prior year data lower transaction volume higher agent Commission cost and various other items like the sale of our underwriter business offset in part by additional cost savings.
Our business delivered well above that number in the corner, but operating EBITDA was reduced by several specific items, but thank you for including write offs and our franchise business and at R. G. R. H I V as well as additional legal across.
Cash on hand at the end of 2022 with 214 million and full your free cash flow as negative 159 million.
A large negative working capital use in Q1 2022.
This was driven by our 2021 outsize performance, which drove sizeable across by year end 21, which were paid in Q1 2022.
We ended the year with a senior secured leverage ratio at 0.77 times.
That leverage ratio of 5.1 times.
We are pleased with the progress we have made on our balance sheet, we have a long dated maturity sac and have lowered our cost of capital.
We redeemed for 2023 notes in November and now have limited debt maturities until 2026.
Now, let me go into more detail on our business segment performance.
Or anywhere brands business, which includes leads and relocation generated $670 million and 22 operating EBITA.
Operating EBITDA decreased 81 million year over year, primarily due to lower revenue related to transaction volume declines, partially offset by decreases in operating and marketing costs.
Ah relocation business substantially outperforms 2021, and even exceeded its pre COVID-19 2019 fully or performance driven both by cost efficiencies and new clients signings.
Or anywhere advisors operating EBIDTA was negative 86 million, Okay on 195 million versus 2021. However, this business generated 287 million in operating EBITDA before intercompany royalties and marketing fees paid to our franchise business.
Our agent face was at 4% year over year like for like and Commission slips for at 203 basis points here every year.
And for 20 twenty-three even as overall market volumes are anticipated to decline. We expect continued split pressure driven mostly by continued agent Max as the higher producing agents, who earned the highest <unk> will continue to drive more of our volume.
We will also have pressure from previous for creating amortization.
That's 2023 split pressure is expected to look more like what we experienced in queue for 2022 were splits for about 130 basis points higher year over year.
Anywhere integrated services delivered 9 million and operating EBITDA in 2022.
Operating EBITDA declined 191 million euro per year due to lower mortgage J D earnings lower purchase and refinance volumes lower earnings due to the sale of our title underwriter business.
As you have already seen an R. A K December open transaction volume was down 35% are.
Our January open volume was down 31% and.
And we expect our queue, one closed volumes to be down about 30% year over year, which will drive our queue, one operating EBITDA unusually negative.
Consistent with industry forecasts, we expect the quarterly volume numbers to improve throughout the year, but estimate that our annual transaction volumes will decline about 15% to 20%.
With this range of volume declines are 2023 operating EBITDA will be below 2022.
But despite the weak housing market, we expect our operating free cash flow to be modestly positive driven by favorable working capital robust savings programs.
Investments and judicious cash management.
As Ryan have mentioned, we have a relentless focus on driving efficiency in this challenging housing market.
2022, we once again demonstrated our ability to rapidly change with market conditions, delivering efficiencies and executing 150 million in cost savings.
These are comprised of the original $70 million in savings we targeted in the beginning of the year and another 80 million, we proactively drove in the back half as market conditions eroded.
For 2023, we expect to deliver about 200 million, an additional cost reductions, including carryover of approximately $50 million of actions taken in 2022.
Let me give you more detail and how we're thinking about these cost savings programs.
The largest part of our cost structure today is tied to our operational real estate footprints. This includes the physical brick and mortar as those are brokerage entitled operations, but also the other support components like staffing tools and resources and other non agent activities.
Brian said, we are transforming our physical space locations, both in quantity and and the way, we deliver services to agents and customers.
We are also advancing our technology and product solutions, which not only drive cost efficiencies for us, but also improve the agent value proposition.
Second we continued to reduce our operating costs to better match, the housing market demand and changing how we work.
We have lowered her head count down 11% from June 2022, as we've right size for this market.
Other examples of our savings programs include our ongoing efforts and procurement, ensuring our marketing spend disposition to deliver the highest our eyes identifying software synergies and prudently managing other corporate excesses.
As much as possible these actions should not impact our agent and franchise partners, nor our plans to transform the consumer experience.
However, these savings will be offset in part by inflation and our people cost.
Where costs and litigation costs, driven by too fast action, Jerry trials, which are scheduled this year to name a few.
And while the housing market remains a challenge we continue to prioritise investing for growth, while driving efficiencies for today and tomorrow we.
We have made progress against the goals, we shared with you at our Investor day, both on our savings targets and in creating an improved agent experience and look forward to sharing further progress against these goals and future calls now let me turn to call back to Ryan for some closing remarks.
Thank you Charlotte anywhere responded to the challenge in 22 22 for housing with agility, we re imagine how we operate and strengthen our financial profile, while continuing to make strategic progress of invest for growth in 2023, we remain committed to growing our advantage positions, especially enfranchise luxury and transaction services and simple fine.
Transaction for agents and consumers standing here today in February we really like what looks to be a better competitive environment for us and potentially most excitingly based off the data in our book from December and January we May have reached the bottom of the housing downturn, we really a lot of our position to win especially as the marker rebounds.
With that we will take your questions.
If you would like to ask the question simply press Star then the number one on your telephone keypad.
Your first questions from the line of John Campbell with Stevens. Please go ahead.
Hey, guys good morning.
Hi, John .
Hi, I wanted to check back on the rule of thumb you guys are providing the pass around the you know the one per cent volume swing kind of equating to 50 million of EBIT <unk> is that still a good measure to consider and then also on the 200 million how should were you thinking about the net impact for the year.
Yeah. It's a great question, John I think you know the 15 million is still pretty close I think what I would say is when when the volume declines are more heavily base in sides, you know that can impact our business a little bit more because there's a knock on impact the title and mortgage. So you know you can <unk> ish there, it's definitely still a good analog to.
<unk> as far as the 200 million you know I don't think that the <unk> the flow through it's gonna be different than what we've seen in other years you know as you know most of it flows through however, we do have those offsets that I mentioned in the script like uhm enhanced.
Enhanced people costs and some inflation around software in litigation. So I can't give you an exact percentage, but uhm the flow through is is pretty consistent with what we've seen in previous years.
Okay. That's that's very helpful.
I'm sorry, if I can if I can build on that a little bit I I wanted to just double down on a couple of things there one is <unk>.
<unk> and I started my script.
You know when the decline is all units. It is is a disproportionate hit on us because it hurts the mortgage and title opportunities right and we clearly see that in our 2022 resolved.
When you know units were down pretty dramatically both are in the market and.
And for US right. So that's a big thing the other thing on the on the cost thing is it. It does get you just the crusher how volatile 20th 23 is gonna be right. You know in terms of what happens on the cost side. Because obviously 2022 is a pretty wild housing market right. We are all those unit declines we have the right environment change of political style of high inflation.
You know et cetera, and you know I chose the word volatile than my script for a reason you know you know the biggest uncertainties. The housing market itself right and you know lower unit transaction forecasts and we'll see what happens on fries and depending on what happens with that will probably drive some of our cost base also writers you know, we're rooting for a stronger year, but that would probably.
You know me and we'd bring some marginal costs back you know if it's a more challenging here then you know obviously, we keep looking there, but you know.
There's also the uncertainty on the competitive side you know like I said, we liked the competitive environment that we've got it's evolved in there and I think there'll be some real questions about which companies are gonna prosper, which ones are going to struggle in a in a kind of talk here and so you know we like our relative position what we're seeing on the gross side you know, we'll see if there's any you know opportunities there.
Does that might create for us that would change our spending potentially you know and then you know another area of volatility for 2023 is what litigation right. You know Charlotte mentioned that that'll be a clause headwind for US. We've got these two cloud of action jury trials and then we got a couple of other multiple defendant kind of industry Klaus reactions out there in in in these.
Just the things we know about you know.
The wild stuff in 2022 like Ukraine, the inflation stuff what the fed did on on rates. You know we didn't know a lot of those stars. So end of the day you know there's this what happens with units will make a big difference in our all of our businesses with that way you know, including those title and mortgage results are you <unk>.
Two and what happens with the macro and some of these other things will make will will make a difference on the cost side, but I think Charlotte, giving you the the right way to that we're thinking about it right now.
And you know just like Charlotte gave you are January results, we'll we'll do our best throughout the year to keep you keep you updated just like you know we we gave you our queue for results six weeks ago. Just so you had them in.
Kind of you know see what we're using it as we plan kind of going forward. The other thing.
Alright, and the other thing I would say is.
Because of where the housing market has been in the best back half of last year like the majority of that 200 million is identified so I feel very good about where we're starting off the year from an identified perspective. The other thing I would tell you is it does not include the more draconian things that we did during COVID-19, so hopefully that helps.
Round out your thinking on the savings programs.
Yeah. That's that's very helpful and it's a very good point on the unit impact I hadn't thought about that too much one more here just relative to your guidance for the full year did you guys said modestly positive free cash flow from operations. If we could dig into that for just a second I'm a new card since I have a pretty big influence on the working caps, if you could talk to expectations there.
And then also just moving down the total free cash flow what else should we be considering you know relative to the Capex and maybe your your job application program.
Sure. So his first <unk> it actually was a drain for us in the fourth quarter normally on a full year basis, we end up about zero on the securitization facility give or take you know small single digits, one way or the other we actually had a pretty big drain of almost $50 million. So that on wines in the first quarter now.
I can't tell you, how we're gonna finish the year, but like I said the majority of years that will neutralize over the year and will end up on a zero basis stomach it'll benefit us in the first quarter and hopefully on the full year basis, because of where we ended last year. So that's how I would think about the securitization. Some other working capital components to think about it you know like.
All of our free cash flow working capital declines from last year really happened in the first quarter and for the reasons I called out in a script. So we don't anticipate having that impact us in the same way in the first quarter of this year, so working caf at all.
Set of being a hit like it was last year should actually be in a slightly positive for us. So so other than that from a capex perspective, you know <unk> as I call that we're being very judicious and we still have a healthy capex forecast. It's on the lower end of what we've spent over the past you know sort of four or five years, but you know it it's still very <unk>.
And that is obviously focus around two things first you know driving our strategic goals, which is improving sort of the the customer experience and part of that happens uhm and technology and part of that happens on the facility side. So so it's it's still a healthy but focus budget, but on the lower end of what you've seen as <unk>.
And over the past four or five years.
Okay very helpful commentary, Thank you guys.
Your next questions from the line of Brian Mcgivney with Zellman and Associates. Please go ahead.
Good morning, Thank you.
Charlotte <unk> on the cost savings so realized 150 million. This year 200 million expected next year. So that's $350 million in total I think that compares to an expectation or a target of 300 million uhm that you laid out at the analyst day between 2022 and 2026. So can you talk.
About how much of the 22 23 dynamic is kind of structural cost actions that you were planning to take you know maybe just at a later point in time that are being pulled forward or how much of the cost actions are more you know variable with the pullback in volume such as marketing spend yeah. Yeah. That's a great question.
So so your appointment we had a goal of about 300 million and you can see we've already delivered or will expect to deliver about $350 million. In these two years alone how I think about it is it's kind of like two thirds. One third so a lot of this is structural stuff that we are you can call it pulling forward.
I think you know we weren't really specific about what she or the savings were gonna happen. When we did investor day anyway. I think this is this is the right cadence for how we would Wanna go attack some of those permanent structural savings. So I feel good about the progress against our goal, but to that point a third of it probably is more variable tied to the housing market and.
<unk> point earlier, if the housing market comes back faster you know some of that cost might come back faster too. So I kind of think of it as you know like 60, 40, or two thirds, one third of sort of more structural savings versus tied to the housing market and variable are temporary.
Got it okay. That's very helpful. Thank you and then one higher level. One so if we go back in time to the <unk> in the G. F. C. Obviously very tough from a volume and profitability perspective, but there there were some operational offsets in the numbers at the time So commission splits.
To the agent went down Commission reached the consumer went up franchise royalty rates went up search so kind of partial offsets against the volume environment at that time, I guess I'm curious.
The business you know today and going forward in this tough environment is it possible that some of those partial upsets flow into things or is there any reason that it's.
Different this time than than previous volume declines in and I know your commentary on the split suggest continued upward pressure at least modestly and twenty-three, but just curious if there are kind of levers beneath the surface and a tough salim environment that made a trend in a slightly better direction. Thank you.
Oh, that's a great question why don't I start off on that let Ryan Phelan with other thoughts that he might have.
So the fact of the matter is like if you think of the royalty rates and if you think of average broker commission rates and things that are structural to this business there.
They're not really moving in a favourable direction because of you know either size consolidation and franchisees or the mix of homes that are being sold tend to be at higher price points. These days, which tend to garner you know slightly lower average broker Commission right. So I don't anticipate those things changing and less than.
[noise] of homes that are being sold you know with with inventory coming back on and you know that may help us in the future, but I I don't really see that helping us in 2023 per se from a commission split perspective, you know the the good news is the competitive side of that is is significantly more rational and unlike I called out.
The the biggest impact that we're gonna have an <unk>.
Pure agent mix, so to the extent that again, we get more home sell transactions, there's a hopeful benefit in the future that the agent mixed kind of normalizes itself out and we have agents across the spectrum delivering the home sale transactions is it if that was the case today. If we didn't have this agent mixed head.
You'd probably see a significantly better profile on commission Smith, but until that changes you know we kind of are where we are so I'm probably not the answer you wanted to hear but that's kind of how I I'm looking at it in the short term yeah, I I don't have a <unk> a lot more to add on that Ryan I mean, if you just talk on the franchise side with a little more detail you know.
You know.
You know our our our top 250 franchisees are about 70 per cent of our business right now alright, and you know you know our rebate tables or public. So you can see how you know the the more business that people do the the lower royalty ready to <unk>.
And you know that's up from you know whatever you know, 65% you know five years ago, which is up from 37% 10 years ago, which was up from whatever it was you know back in the ascendant days so.
You're talking about so I think that this concentration both on the franchise side and then you know the agent you know the best agents do at a higher percentage of deals.
Have bold created a little bit of a different kind of.
Go system in the margin of probably makes it less likely that you'd go to some of those affects that happened in the in the.
You know down for them you know.
Two years ago.
Got it that's very helpful. Thank you.
Once again, if you would like to ask a question simply press Star then the number one on your telephone keypad.
The next question is from the line of Tammy MC joint with K B W. Please go ahead.
Hey, good morning, guys. Thanks for taking my questions could you talk a little bit about what's embedded in your guidance for the mortgage G. B for for for next year, either directionally or an absolute EBITDA term just you want to be that clear.
Sure Yeah. So as you know it was a drain obviously on the year for us in 2022.
Good news is I do expect it to not be a drain in 2023, and then that has a better set of a year over year impact as well. So I don't I don't imagine that we're gonna be like you know, making money like we did two or three years ago, but the good news is that it shouldn't be a drain on us it should be positive and there's a obviously a positive year over year.
From that as well.
The mortgages.
Competitive environment, Tommy is also likely to help us.
We've seen a couple people and mortgage rates, some pretty big strategic shifts.
You mean.
<unk>, we're doing some things on the recruiting in kind of a building the depth of our.
Kind of joint venture in a way that's that's pretty helpful. As you've seen some eligible pullback and so you know we're hoping to reach some of the competitive environment benefits on that next year. Even if it's you know obviously got a bit of talk business.
Thanks, and then just my second question could you remind us of some of the leverage covenants that you guys have on on your revolver and some your debts uhm and are there any concerns on with with the lower EBIT next year, you guys running into you know breach.
Seeing any of those covenants or do you guys feel like there's a there's a pretty safe Christian.
Oh that was a bit of a softball, but thank you for that one no at the end of the day are most restrictive covenant is our senior secured leverage ratio at 4.75 times and as you saw <unk> 0.77 times. So uhm, we don't have any concerns about breaching the senior secured leverage covenant, we do have a covenant that.
Total debt leverage a four times that you know we're unable to do share buybacks were clearly beyond that right now at 5.1 times, but.
But I don't really consider that overly restrictive and and you know basically at the end of the day.
Everything that we've done over the past two or three years to handle this refinancing and a strong and positive market at <unk> you know the best terms possible you know the significant transformation of the balance sheet.
I guess the lesson there for for everyone is take care of that when times are good and then you'll be well prepared when times you know in the housing market takes the cyclical depth like it tends to do so we feel really really proud of what we've done over the past few years on the balance sheet and uhm and it puts us in a good position to continue investing behind our strategic prior.
Or a cheese and you know obviously, we start to focus on the cost is just the right thing to do for the business, but I'm not worried about those covenants yeah. Tommy that's one thing that I wanted to just.
Double down on a bit here, which is you know.
<unk>.
When you look at our balance sheet today, and I'd give Charlotte and our finance and legal and other teams you know all the all the credit for this I.
I mean, you know.
We've seen the moment a couple of times to basically you know a couple of billion of unsecured debt.
Out to maturities like 29, and 30, you know we've got other moves beyond that we paid off our 2023 nodes and we moved from a world where we used to have a lot of secured debt. So.
To the point, where our secure data is you know.
You know <unk>.
Credibly low right and hence you even.
Tough year for housing, where there's 22 or 23, you can see that our senior secured leverage ratio is quite far away from you know our you know our our kind of emotional <unk> covenants and and you know it wasn't an accident.
When I talk about our transformation on the balance sheet part is you know as important as anything in this and so you know it says if if we hadn't made those moves we'd we'd be having a pre different conversation right now staring out.
2023 for our industry, but you know whether it's the light maturities weather's, a massive shift to unsecured whether it was frankly, they're pretty low rates that you know Charlotte and the team God.
You know in our lower interest experience and we used to pay like we're in a lot better position, there and that does give us the room to even.
Even in what is looking like a pretty volatile and kind of wild year 2023.
Keep making some of these investments keep simplifying the company keep changing how we do you know your pilot mortgage keep investing to have you know franchise sales pro things like that so lovely question, you know still an important topic for us to stay focused on we're never going to relax on the balance sheet side, but.
It <unk>.
It's.
You know being prepared for these kind of challenges with the housing market in a cyclical businesses.
Why you Wanna get ahead of these things and hopefully our owners feel like we've got the company in a very different position on the balance sheet side.
Oh great.
Right.
Thank you Tommy.
And we have come to the end of the Q and a session and with that this concludes the anywhere real estate, you're in 2022 conference call and webcast. We thank you for your participation you may now disconnect.
[music].
Mmm Mmm mmm.
[music].