Q2 2023 RE/MAX Holdings Inc Earnings Call
Oh no no.
[music].
Good morning, and welcome to the Remax Holdings second quarter 2023 earnings Conference call and webcast. My name is Chris and I'll 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 of Investor Relations Mr cells.
Thank you operator, good morning, everyone and welcome to remark Holdings' second quarter 2023 earnings Conference call.
Please visit the Investor Relations section of Www, 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.
Forward looking statements include those related to agent count franchise sales and open offices.
Actual measures and outlook brand expansion competition technology housing and mortgage market conditions capital allocation dividends share repurchases strategic and operational plans and business models.
Forward looking statements represent managements current estimates Remax holdings assumes no obligation to update any forward looking statements in the future.
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 second quarter 2023 financial results press release and other SEC filings also we will refer to certain non-GAAP measures on today's call.
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 Ward Morrison and Nick Bailey with that I'd like to turn the call over to <unk> Holdings CEO , Steve Joyce Steve.
Yeah.
Thank you Andy and thanks to everyone for joining our call today.
Looking at slide three the strength of our recurring fee model drove second quarter performance largely in line with our expectations. The combination of higher interest rates and tight inventory is made for a challenging housing market and agent recruiting and retention environment. However, we are pleased to see continued.
<unk> remarks agent count growth in Canada, and our global regions in the U S. While we saw a decline in agent count growth.
Pace of our U S agent count losses slowed quarter over quarter, which is positive given market conditions.
We remain squarely focused on our strategic growth initiatives.
And as we continue to build our related pipelines. We believe we are positioned for improved U S agent count performance.
On the mortgage side <unk> is ramping up and we continue to expand our motto franchise sales operation.
The addition of experienced personnel with in depth franchise expertise to our inside sales team is just one reason we are optimistic about increasing the pace of motto franchise sales in the second half of 2023 and beyond.
Some of our notable quarterly financial highlights include.
<unk> Holdings total revenue of $82 4 million.
We generated adjusted EBITDA of $26 6 million and our adjusted EBITDA margin was 32, 3%.
And adjusted diluted EPS was <unk> 40.
Regarding the CEO search we've had robust interest in the position and multiple internal and external candidates have actively participate in the process.
We still plan to announce our next leader by the end of the summer with that I'll turn it over to ward.
Thanks, Steve turning to slide four despite the current market conditions, our mortgage business is growing which we believe is both encouraging and we're at this particular moment.
We're seeing terrific results on the remote front as business continued to increase month over month throughout the second quarter, we met or exceeded our expectations. Both the number of loans submitted and in loans cleared to close.
Many factors are contributing to we most increasing success, including a full sales team with a mature process and built in accountability, increasing interest for remote services from both our motto network as well as the wider industry.
Greater number of motto franchisees using the wingo loan brokerage system that is integrated with me most processing services and additional transactions at the modern network grows.
The motto side in terms of open offices, our team is doing a great job of moving new franchisees through the process and we're doing a better and faster than we ever have with eight franchise sales in Q2, we had a decent quarter, all things considered and while our velocity need to increase as we believe it will we're proud of our accomplishments of continuing to grow our mortgage business.
This environment I'm encouraged that our pool of prospective franchisees continues to steadily improve for example, one of our second quarter sales was to a roughly 300 agent real estate brokerage affiliated with another national brand. This type of sale can be a catalyst for additional interest and it is a good example of the caliber of candidates we're getting into the <unk>.
Pipeline, we continue to see real estate brokerage in teens players, including some big ones, who have proximity to real estate transactions doubling down right now we're seeing the benefits of expanding into the mortgage space and recognizing that motto is a compelling opportunity for them to do so.
Have the transactions and they're interested in the financing side of the equation.
Just over a year ago, when we set forth our plan of expanding motto sales force. Our initial goal was to hire additional highly qualified sales professionals, which we've done. However, we also experienced some staff attrition, which set us back again.
Ultimately during the process, we recognize the better option with the potential for greater and more immediate impact we can hire an inside sales team with a proven track record of success at another franchise or and that's just what we've done.
Our new inside sales team hired last month will do the hard but worthwhile work of proactively calling embedding prospects. We're very excited to have an in house group that has worked together and achieved promising results previously they understand the franchise business model and they are excited to join model as we are to have that we believe they can make a difference in the pace of.
Franchise sales during the second half of the year and beyond based on their success, we plan to hire additional field sales resources to handle the increased volume of interest.
And speaking with many of our franchisees. We believe most are faring pretty well considering they're operating in the worst industry conditions since the great financial crisis of 15 years ago, but as Kerry noted on last quarters call. Some of them need temporary assistance as a bridge over rough patch combine that with the slowdown in franchise sales we have experienced over the past year, we now expect our mortgage.
Segment to generate roughly $1 million less of revenue this year than we originally forecasted in February .
And although we're not yet growing at the rate we expect it to continue to adjust as needed and invest strategically for future growth. We believe we are well positioned for success when the market rebounds with that I'd like to turn the call over to Nick.
Thank you award moving to slide five our worldwide agent count grew by more than 500 agents year over year as of the end of the second quarter agent count growth outside of the USA and Canada accelerated to 7% during Q2 with countries, including Turkey, Peru, Brazil, and South Africa, adding a notable number of agents we believe the.
During the global appeal of the <unk> brand and the impact of effective recruiting campaigns are the primary drivers of our success.
Canada also continues to be an amazing growth story, despite the rebalancing market. Our presence continues to grow north of the border except for January Canadian agent Count has grown in every month this year.
Happened across the country, our Canadian affiliates are continuing to recruit from a variety of sources, including re recruiting a lot of so called Boomerang agents, which are onetime remax agents, who leave the system to kick the tires at a competitor only to realize they should have maybe never left the worldwide leader.
An example is a former number one re next team who left for not only one but two competitors only to return to remax during the second quarter after two years away.
Power of the brand combined with the unmatched support and professionalism at their local remax brokerage with a key determinant in their return home more stories like this are out there and we expect to see even greater number of agents and teams come back in the future.
In the U S. Our monthly agent count losses narrow during the second quarter compared to Q1, which was encouraging we continue to see steady progress from our teams and conversion mergers and acquisition growth initiatives as well as from our Max recruit growth program. However, the gains are not enough yet to offset the industry wide contraction that is.
Impacting us as well.
The <unk> pilot, we launched last August and its helping our affiliates gradually expand to retain existing teams and build pipelines a prospective large teams in the five pilot States of California, Florida, Maryland, New Jersey and Texas.
You might recall that the program includes a package of training technology and attractive economics for teams of six or more whether it's remax teams growing six members large teams joining the network or existing teams staying with us at a higher rate. This initiative is showing promise with both added and grown larger teams that are.
A higher rate than we had before in the pilot states.
But the biggest impact has been on helping current affiliates grow their existing teams, which is a really desirable outcome. It's well documented that remax agents outsell competing agents by more than two to one at large brokerages and while agents working as individual producers closed almost two thirds of the Remax networks to nearly 800000 U S.
Central transaction sides last year teams led the way in agent productivity.
It was made up approximately 30% of the U S. Remax agents and contributed slightly more than one third of the production last year. Moreover, remax agents on teams of six to 10 agents averaged 35% more transaction sides and 40% more sales volumes in individual remax producers, we see similar in <unk>.
<unk> results among our Canadian teams as well.
It's statistics like these that have are so focused on our team's initiatives we'd like to have the pilot program is advancing and based on the successes. We've seen so far we recently announced an expansion of the program to Arizona and an extension of the pilot within the six states through the end of this year.
With respect to our program around brokerage conversions mergers and acquisitions, we continue to add to both the number of closings and to our pipeline of prospects. We have successfully converted or helps some of our existing franchisees merge or acquire many smaller brokerages and importantly, we are seeing more sizable transactions.
Inception to date, we have completed almost 60 transactions some of which are still on confidential status and we anticipate hundreds of agents have or will come into our network. As a result, we believe this is just the beginning seem some of these larger opportunities convert as well as many of the smaller ones as proof of concept that.
Should help build on our momentum going forward.
The rollout of Max Tech powered by <unk> continues to add to the recruiting value proposition of local franchisees. The latest figures show adoption and engagement results that are well above industry averages and broker owners in both the U S and Canada can leverage the technology as a tool in their recruiting and retention efforts.
Now a little more than a year after announcing the move the transition to Max Tech powered by <unk> has gone extremely well, we believe it's positioning our offices for even better results once the macro environment has normalized a bit more.
And lastly, Macs for the growth program, we unveiled in April continues to gain traction participation in the live training monthly growth calls and multiple coaching option has topped 2600 attendees, which is higher than anticipated.
Participating brokerages are out recruiting their peers and extra crude involves some new resources and services, but it centers largely on accountability and keeping franchisees focused on our recruiting activities that they need to do in order to grow it's not an overnight solved every recruiting challenge, but it is laying the groundwork for more consistent and sustained growth.
Over time, we're extremely pleased by these results so far with that over to Kerry.
Thank you Nick good morning, everyone moving to slide six second quarter revenue declined 10, 6% to $82 4 million.
Excluding the marketing funds.
Revenue was $61 4 million a decrease of approximately 11% compared to the same period last year.
The decrease was driven by negative 10, 5% organic growth and adverse foreign currency movements of two 9%.
Organic growth decreased primarily due to lower broker fees and to a lesser extent a reduction in U S agent count, partially offset by higher mortgage segment revenue.
Recall that roughly 60%, 65% of our annual revenue excluding the marketing funds is recurring in nature in the form of monthly continuing franchise fees are annual agent is only about 25% of that revenue is from the variable broker fees, which represents our share of the agent Commission.
Looking at Q2, when overall existing U S wholesale were down over 20% year over year, our organic revenue was down only 3% excluding brokers need.
Turning to slide seven Q2, selling operating and administrative expenses decreased one 4% to $42 million, primarily due to changes in the fair value of the contingent consideration liabilities and lower legal fees, partially offset by higher bad debt expense personnel expenses.
<unk> related expenses.
We continue to believe the collective health of our affiliates within both network remains strong having said that we are facing a modest decline in collection, which negatively impacted bad debt expense during the quarter. This is to be expected given the rebalancing housing market and its consistent with what we have witnessed during prior downturn over.
Current market conditions have largely pressured our top line and our margin expansion, we continue to monitor our expenses closely and look for efficiencies.
Moving to slide eight regarding our outlook, we tightened up our full year guidance ranges overall and doing so the midpoint of 2023 agent count guidance moved up half a point based on the strength of international agent growth.
Midpoint of our full year revenue guidance moved down slightly as the midpoint of our 2023 adjusted EBIT guidance consistent with the trend we mentioned on our last earnings call.
Now onto our outlook, the company's third quarter and full year 2023 outlook assumes no further currency movements acquisition or divestiture.
For the third quarter of 2023, we expect agent count to change zero to 1% over third quarter 2022 revenue in a range of $78 5 million to 83, and a $5 million, including revenue from the marketing funds in the range of 20 million to $22 million.
And adjusted EBITDA in a range of $23 5 million to $26 5 million.
For the full year 2023, we now expect.
Ladies and Counterchange zero to 1% over full year 2022.
Revenue in a range of $320 million of $332 million, including revenue from the marketing funds in a range of $82 5 million to $86 5 million and adjusted EBITDA in the range of $92 million and $98 million now I'll turn the call over to Steve for closing comments.
Looking at slide nine we made progress during the second quarter on reinvigorating, our U S agent count growth.
We are pleased that our mortgage business continues to grow.
Over there is still much work to be done we believe our strategic initiatives have the potential of improving our organic growth rate and creating meaningful value over the longer term, though.
Though the macroeconomic climate has reduced their near term impact we believe our initiatives will meaningfully jumpstart our results as the housing industry resumes growing again.
With that operator, let's open it up for questions.
Thank you.
I'd like to ask a question. Please press Star then one on your telephone keypad.
The first question is from Ryan <unk> with Zelman and Associates. Your line is open.
Hey, good morning, guys. Thank you for taking the question.
So I know you don't break out transactions each quarter across the company, but I guess, just with the size and scale of the organization is it.
Fair to think that it's something like 50 50 between.
Agents, working with buyers versus sellers or any SKU.
Generally that that remax might have toward listing agents.
<unk> buyer agents compared.
Compared to the industry overall, so that's kind of part one.
And then part two and maybe this would be Nick.
On the listing side, specifically I guess, just any thoughts generally that you're either picking.
Picking up from from your agents are franchisees or the research you guys do in terms of what might.
Change the stuck factor Thats out there is it is it primarily just hopefully interest rates move lower end.
The stock factor. It goes away, we have seen their spend some legislation or legislative ideas thrown out there around changes to capital gains and various things speculated on so I guess I'm just curious.
What do you guys think is the likely outcome going forward from.
More listings eventually coming to the market. Thanks a lot.
Nick why don't you take that.
Sure Alright.
In terms of the first question I would say generally the split is around $50 50 on buy or left side I will say if it had to favor one side generally more top producers, which caters to remax will favor the listing side somewhat heavier.
Heavier, but for the most part Barrett equal split as far as how we see the step factor I like that term.
Think interest rates right now combined with consumer confidence what we've seen this year when you look at EBIT.
A little dip in rates, we see showings immediately go up that week that obviously results in pending and so you can watch the activity at the micro level from showing depending which at 30 to 45 days results to closing, we see rates tick up a little bit we all of a sudden see that showing activity decline as much as 20 or 30%.
So as we look at the outlook of the remainder of the year and moving into next year, if rates come down a little bit it gives consumer confidence it gets a little bit a little bit higher and we see a little bit more inventory.
I've said, though that I think the spring market was a little bit lackluster because the move up buyer didn't come to the market like the historically have people who are in love with their rates and statistically having 90% of.
Homeowners with a mortgage have a rate under 5% of that 50% or under $3. Five those are historic numbers and so that move up buyers in love with their rate and not super excited to come to the market and that's where we think the inventory has been at a little bit of a hole I think that will affect us a little bit in 'twenty, four, but we know that lifestyle and life Chi.
Yes that makes sense, okay. Thank you guys.
Yes.
The next question is from John Campbell with Stephens. Your line is open.
Hey, guys good morning.
Good morning, Joe Good morning, Hey.
Mortgage where do you talk to a $1 million or haircut I think for the annual guidance. This year. It would be great. If you could maybe help us just with a refresher there what's the rough contribution you're expecting now for the full year, how does that look relative to last year and then from a profit standpoint, how far off is the mortgage offering our segment from profitability or maybe just.
Adjusted EBITDA.
Kind of positive inflection.
Good.
Sure Hey, good morning, John It's Gary so.
As Warner stated we.
We're very excited that the mortgage business is continuing to grow right now despite the market condition.
Revenue headwind is really driven by a couple of factors. We've seen franchise sales just given what's happened from a macro perspective, and how it's impacting mortgage just impact the velocity of sales doing some exciting things to try and try and jump start that but that's a factor and then as we provide some temporary relief to our mortgage.
Franchisees as we as they kind of go through this rough patch, we're looking at deferring a little bit of that a little bit of that revenue and not creating a pressure.
Pressure on the top line as well so those are the biggest.
Okay.
Yeah, So John you're right I mean, as you can imagine the timing around these is sometimes difficult to predict and the you know the.
The quarterly run rate can be a little bit challenging youre right Q2 was a little bit lighter as we look at the back half of the year, it's really going to be dependent.
You're right in terms of the nature of the expenses.
Are all professional fees associated with us vigorously defending ourselves and the timing in which some of the upcoming trial activity happens could impact us.
So obviously, if we really ramp up and some of that hits us in Q4, we're looking at probably some increased spend and maybe pushing us midpoint or below the guidance range and if that pushes into next year. We could have some some favorability I'll go in the other direction.
Okay. Thank you.
Yes.
Your next question is from Ronald Camden with Morgan Stanley . Your line is open.
Oh, hey, thanks, so much just a couple quick ones. So first on the just.
Just a little bit more color on the EBITDA guidance changes.
<unk> sort of revenues and expenses, how do we break out sort of what changed before and I know you touched on it earlier, but just would love to hear that the Delta this quarter.
Sure.
Yeah. Good morning, Ron So as we look at as we look at it it still continues to be a really challenging time to try and forecast the full year a couple of things to keep in mind last quarter. We mentioned a couple of things with regard to where we were trending from a profit perspective kind of below and towards the bottom half of our preexisting range.
Driven by them.
<unk> unfavorable <unk> in Q1 related to our conference and bad debt expense.
Bad debt expense trends have continued into Q2 and just with the uncertainty from a macro perspective, that's creating a little bit of headwinds as well and then from a cost structure perspective.
Certainty around with legal expenses that I mentioned is also.
Presenting some uncertainty and then on the top line I did mention a little bit with regards to the mortgage segment and then a little bit with respect to some U S agent count activity as well. So those are kind of the puts and takes.
But given the recurring fee model we.
Feel like we've got a better shot in terms of our estimates and the revisions that we made represent our best estimates right now.
Got it helpful. And then just on the cash conversion in the quarter.
Looking at the operating cash flow was pretty pretty light maybe was there was there any one timers. This time around just because it's trending a lot lower than it was at this time last year.
So maybe if you could talk about any one timers, there and whats the right sort of cash conversion that we should be thinking about.
Sure.
Okay.
Yeah, so not any significant one time conversion is really just some working capital things that were kind of fluid flow through in the quarter.
As we look ahead. It was 100% franchise model. There is a reason why we're franchise across both brands and while the cash conversion is down a little bit from our adjusted EBITDA to free cash flow conversion for the full year, we're still kind of looked in that that 50% range.
Got it sorry, and if I could just sneak in one more.
So we've talked about before the $100 million annual mortgage revenue target.
Hum.
For the business and so forth just maybe hear how are you guys thinking about that is that because that's still on track is that something that could get delayed.
Just any update on that longer term growth opportunity.
Org.
Yes, I think that's still the long term opportunity for sure I think the macro economy right now.
The lack of Refis in the business because.
Rate lock is changed the dynamic a little bit in the short term.
We hope that we start to tick down I looked at it.
The 10 year and think there is some risk premium built into the mortgage rate today that is.
Economy settles in.
We're going to go into a recession, I think theres room for rates to come down which would improve but were focusing our franchisees.
Recruiting loan originators right now getting.
Those agent relationships that are the key to purchase money referrals. So as long as we continue to do that continue to focus on the right people to sell to and we're finding some great realtor partners as we've talked about on the call large independent brands Remax has et cetera that we still think have interest right now and we think that is going to lead to that long term opportunity.
It just might take a little bit longer.
Helpful. Many thanks.
Yeah.
Yeah.
The next question is from Shekhar with Bbeg. Your line is open.
Alright got Soham.
Yes, we can hear you caller. Please go ahead.
Great.
Hey, Thanks for taking the questions I wanted to maybe dive a little bit more into the U S agent count trends here.
Can you, maybe just give us a little bit more flavor for the competitive landscape today.
Your agent count sort of comparing to some of your competitors and I don't know if you want to sort of segment that by full service or other cloud based peers, but more color on that would be really helpful.
Nick wants to start.
Sure overall, when you look at the.
The industry as a whole we are seeing some level of contraction just in overall agent licenses.
But I've mentioned before keep in mind that it's somewhat of a lagging indicator because license renewals on a statewide basis are typically a 24 to 36 months renewal process and so if agents have elected to exit the business or many times.
They are moving their license prior to a renewal they will move it to a discount type brokerage or a no fee type of brokerage before they let it expire. So there is somewhat of a process that you generally see across the industry, but overall there is contraction, we see that amongst a number of competitors in the industry as a whole.
Our reoccurring revenue model combined with the level of production that our agents do helps us navigate changes in the market.
Plus our agents have twice as much experience and so the adaptability of moving through market conditions is a lot higher but yet we're not totally immune to it.
But overall, we're not seeing.
The number of licensees go up in <unk>.
Any part of the segment for the most part it's going down.
Got it Okay, and then I guess for you just on the I guess, the new updated agent Count Guide.
What are you sort of embedding here in the back half for the U S business because it seems like the strength is really coming from Canada, Canada and international So could you maybe just talk about what you are sort of modeling in the back half for U S agent count here.
Okay.
I can start just in general and then Karen maybe if you want to talk about the modeling pizza.
Canada continues to be pretty incredible growth story, and I think that's really driven by the amount of market share that we have across the entire country.
We have a very strong number one position and in many areas across the country very very strong number one position I think that helps contribute to the overall growth.
As far as globally highly.
Highlighted in the scripted remarks, a couple of countries all of which have one common theme, which is the culture, but yet there are some differences some are really investing in training.
Have some economic incentives.
Peru for example has a new reporting system, which just helps more or timeliness. So.
There are just a number of things that are unique when it comes to.
Each country.
Terry do you want to talk about the holiday piece sure. So as we look at agent Count we did it.
Adjust our agent count.
Expectations, given some of the strength that Nick was just mentioning across Canada and global and then as you know as we look at kind of the U S. We do expect that we're gaining a little bit of traction and the momentum with some of our growth initiatives and hope that the.
But we've seen kind of in Q2 is stabilizing on a year over year basis is going to improve a little bit sequentially as we get into the back half of the year.
Okay and then just quick last one on the July numbers is it fair to assume that the decline was driven by the U S business or did you see some decline in Canada as well there.
Yes.
Yes, so when we look at the July numbers and that's a good way to look at it I would say that July trends were pretty consistent with what we saw in Q2.
Great. Thank you so much.
Sure.
We have no further questions at this time I'll turn it back over to Andy <unk> for any closing remarks.
Thank you operator, and thanks to everyone for joining us on the call. Today. This does conclude our call have a great day.
Thank you ladies and gentlemen. This concludes today's conference call you may now disconnect.
Sure and thanks to everyone for joining us on the call. Today. This does conclude our call have a great day.