Q3 2023 Frontdoor Inc Earnings Call

Ladies and gentlemen, welcome to front dose third quarter 2023 earnings call today's call is being recorded and broadcast on the Internet.

Today's call is not Davis, Vice President of Investor Relations and Treasurer, and he will introduce the other speakers on the call.

This time, we will begin today's call. Please go ahead Mr. Davis.

Thank you operator, good morning, everyone and thank you for joining <unk> third quarter 2023 earnings conference call.

Joining me today are <unk>, Chairman and Chief Executive Officer, Bill Com, and Bryan <unk>, Chief Financial Officer, Jessica Ross.

The press release and slide presentation that will be used during today's call can be found on the investor Relations section of front doors website.

Which is located at investors <unk> front door at home Dotcom.

There is also an additional information about our front door brand at front door Dot com and in our new mobile App that you can download in the App store and at Google play.

As stated on slide three of the presentation I'd like to remind you that this call and webcast may contain forward looking statements. These statements are subject to various risks and uncertainties, which could cause actual results to differ materially from those discussed here today.

These risk factors are explained in detail in the company's filings with the SEC.

Please refer to the risk sections in our filings for a more detailed discussion of our forward looking statements and the risks and uncertainties related to such statements.

All forward looking statements are made as of today November one and except as required by law. The company undertakes no obligation to update any forward looking statements, whether as a result of new information future events or otherwise.

We will also reference certain non-GAAP financial measures throughout today's call. We have included definitions of these terms and reconciliations of these non-GAAP financial measures to their most comparable GAAP financial measures in our press release and the appendix to the presentation.

In order to better assist you in understanding our financial performance.

I will now turn the call over to Bill Cob for opening comments.

Ill.

Thanks, Matt.

What a quarter we crushed it.

Was just over a year ago when front door was experiencing some of the lowest margins ever as a result of an extremely challenging macroeconomic environment.

Our team responded to these challenges and took decisive action to improve the business.

Fast forward a year and we have had an exceptional turnaround in our financial performance third quarter revenue increased 8% to $524 million and our gross margin has rebounded to 760 basis points to 51%.

This drove a $48 million increase in adjusted EBITDA to a record high for a quarter of a $128 million.

Given these results we are raising our full year outlook for revenue adjusted and adjusted EBITDA and share repurchases for the second time this year.

Well if things continue to fall our way we have also done a lot of smart things to drive process improvements, which are contributing to better margins.

Jessica will describe these in more detail shortly.

The key message is we expect the benefit of these process improvement initiatives and cost trends to largely continue into next year.

Now I want to highlight an important point at our Investor day in March we laid out a target of $2 billion in revenue and at least $300 million and adjusted EBITDA for 2025.

We have already surpassed our adjusted EBITDA target and we are working extremely hard to close the gap on our revenue objectives between now and then.

Matthew Davis: Ladies and gentlemen, welcome to Frontdoor's third quarter 2023 earnings call. Today's call is being recorded and broadcast on the Internet. Beginning today's call is Matt Davis, Vice President of Investor Relations and Treasurer, and he will introduce the other speakers on the call. At this time, we'll begin today's call. Please go ahead, Mr Davis. Thank you, operator. Good morning, everyone. And thank you for joining Frontdoor's third quarter, 2023 earnings package call. Joining me today are Frontdoor's Chairman and Chief Executive Officer, Bill Cobb, and Frontdoor's Chief Financial Officer, Jessica Ross.

I believe front door is an extremely compelling investment.

And while I don't normally comment on our share price.

I want to call out our current valuation, which is at one of the lowest points in the last five years.

This is truly an inflection point for our front door and while some of this is market driven.

We are taking advantage of this opportunity to increase our 2023 share repurchase target to $125 million.

Now turning to slide five where I want to clarify the difference between our two brands let.

Matthew Davis: The press release and flight presentation that will be used during today's call can be found on the Investor Relations section of Frontdoor's website, which is located at investors.frontdoorhome.com. There's also additional information about our Frontdoor brand at Frontdoor.com. And in our next new mobile app that you can download in the App Store and at Google Play. As stated on slide three of the presentation, I'd like to remind you that this call and webcast may contain forward looking statements.

Let me be clear right upfront humira.

The American home Shield brands will continue to focus on selling home warranties, while the front door brand will now evolve to selling on demand home services.

You can think about American home Shield is our 12 month home warranty contract and front door as our pay as you go model.

It is our current assessment that the home warranty category is both a undifferentiated and a bit stale and we strongly believe that we have an opportunity to breathe new life into American home shield through our brand relaunch in 2024.

Matthew Davis: These statements are subject to various risks and uncertainty, which could cause actual results to differ materially from those discussed here today. These risk factors are explained in detail in the company's filings with the SEC. Please refer to the risk section. In our filings, there are more detailed discussion of our forward looking statements and the risks and uncertainties related to such statements. All forward looking statements are made as of today, November 1st, and except is required by law.

We want to celebrate with a whole home warranty can offer as our consumer research shows there are still millions of homeowners who are naturally inclined to buy our products because they want that financial protection and peace of mind for.

For when home systems and appliances inevitably break.

Now moving to slide six and our direct to consumer channel.

Let me be clear, we are keenly aware of the drop in our customer count as part of a larger category trends, but let me assure you that it is our top priority to turn that around.

Matthew Davis: The company undertakes no obligation to update any forward looking statements, whether as a result of new information, future events, or otherwise. We will also reference certain non gap financial measures throughout today's call. We've included definitions of these terms and recommendations of these non gap financial measures to their most comparable gap financial measures in our press release and the appendix to the presentation in order to better assist you in understanding our financial performance.

The current macro economic environment has resulted in a pullback in consumer demand for home warranties.

In the near term and prior to our rebrand early next year, we will be tactical with our approach. We will continue to utilize our discounting strategy, which is evolving to maximize demand conversion and in the fourth quarter. We are increasing the actual marketing spend behind our American home shield brands to drive brand.

Matthew Davis: I will now turn the call over to Bill Cobb for opening comes.

Awareness.

William Cobb: Bill, thank you, Matt and what a quarter we crushed it. It was just over a year ago when front door was experiencing some of the lowest margins ever as a result of an extremely challenging macro economic environment. Our team responded to these challenges and took decisive action to improve the business.

And the long term our strategy is grounded and Relaunching the American home shield brands to unlock the full potential of home warranties.

I strongly believe that the home warranty space continues to offer a massive growth opportunities I look forward to providing more specific details on how we plan to capture that demand at our next earnings call, but for now no that we will be supporting the brand relaunch with a new marketing campaign.

William Cobb: That's forward a year and we have had an exceptional turnaround in our financial performance. Third quarter revenue increased 8% to 524 million dollars and our gross margin has rebounded 760 basis points to 51%. This drove a $48 million increase in adjusted EBITDA to a record high for a quarter of $128 million. Given these results, we are raising our full year outlook for revenue adjusted and adjusted EBITDA and Sherry purchases for the second time this year.

Our goal is to bring some of that front door marketing magic to American home shield and from the early creative development that I've seen so far I think we are well on our way to doing that.

Now turning to slide seven and our real estate channel.

The National Association of Realtors, or nor recently released housing market statistics for September and the market remains severely challenged.

Existing home sales declined 22% through the first nine months of the year and our full year expectations have declined to just under 4 million homes as.

William Cobb: While things continue to fall our way, we have also done a lot of smart things to drive process improvements which are contributing to better margins. Jessica will describe these in more detail shortly. The key message is we expect the benefit of these process improvement initiatives and cost trends to largely continue into next year.

As you can see from this chart that is a substantial decline from the 6 million existing homes sold in 2021 as higher mortgage rates and home prices have diminished consumer affordability.

At the same time inventory remains tight.

<unk> also reported properties remained on the market for just 21 days in September and that all cash sales increased to 29% of the transactions.

William Cobb: Now I want to highlight an important point. At our investor day in March, we laid out in Target of $2 billion in revenue and at least $300 million in adjusted EBITDA for 2025. We have already surpassed our adjusted EBITDA target and we are working extremely hard to close the gap on our revenue objectives between now and then. I believe Frontdoor is an extremely compelling investment and while I don't normally comment on our fair price, I want to call out our current valuation, which is that one of the lowest points in the last five years. This is truly an inflection point for Frontdoor and while some of this is a market driven, we are taking advantage of this opportunity to increase our 2023 Sherry purchase target to $125 million.

A segment that has generally not been conducive to buying a home warranty.

This all adds up to an extremely challenging environment for our real estate channel.

Now turning to slide eight and the renewal channel.

While demand in our DTC and real estate channels remained soft.

We continue to be pleasantly surprised by the performance of our renewal channel, where our rates remained strong.

In the third quarter, our overall retention rate increased 90 basis points to 76, 2%.

This is especially impressive considering that we were implementing at 11% realized price increase this year.

We are building on the impressive work that the renewals team has done improved onboarding increased engagements throughout the customer journey and elevating the service experience through greater deployment of our preferred contractors in short we continue to take the right actions to sustainably drive higher retention.

William Cobb: Now turning to slide five or want to clarify the difference between our two brands. Let me be clear right up front. American Home Shield brand will continue to focus on selling home warranties while the front door brand will now evolve to selling on demand home services. You can think about American Home Shield as our 12 month home warranty contract and front door as our pay as you go model. It is our current assessment that the home warranty category is both undifferentiated and EBITDA.

Now, let's turn to slide nine of the web deck, where I will go into more detail on the front door brand monetization strategy.

We launched the front door brand earlier this year as a new growth engine to sell services to a fundamentally different segment of homeowners as I said at our Investor Day, we intentionally launched the brand quickly as a first mover advantage and to learn our way into a new market.

William Cobb: And we strongly believe that we have an opportunity to breathe new life into American Home Shield through a brand relaunch in 2024. We want to celebrate what a home warranty can offer. As our consumer research shows, there are still millions of homeowners ordinarily inclined to buy our products because they want that financial protection and peace of mind for when home systems and appliances inevitably break.

What we have found is that the essence of the brand remains strong which is comprised of app based customer interactions in the video chat feature with one of our experts.

Just six months since the launch of front door, we have over $1 3 million downloads and account registrations have grown to 133000.

But I wanted to be transparent with you we.

We went to market with a new version of our home service plan front door premium that did not sell the way we thought it would.

William Cobb: Now moving to slide six and our direct consumer channel. Let me be clear, we are keenly aware of the drop in our customer count as part of a larger category trend. But let me assure you that it is our top priority to turn that around the current macro economic environment has resulted in a pullback in consumer demand for home warranties in the near term and prior to our rebrand early next year.

So we have quickly made the decision to stop selling it.

Our offering in the market today is a lower priced product only $25 per year with unlimited video chats.

Our consumers to take advantage of the unique user experience with our experts.

So that's today.

William Cobb: We will be tactical with our approach. We will continue to utilize our discounting strategy, which is evolving to maximize demand conversion. And in the fourth quarter, we are increasing the actual marketing spend behind our American Home Shield brand to drive brand awareness. In the long term, our strategy is grounded in relaunching the American Home Shield brand to unlock the full potential of home warranties. I strongly believe that the home warranty space continues to offer massive growth opportunities.

Our strategy in the future is an on demand offering.

I believe this new focus based on our research and the success of our HVAC upgrade program will be a compelling proposition for a much larger group of homeowners, who won an Ala carte experience.

Our value proposition for front door is based on two key components.

First is on demand access to our network of experts that will allow homeowners to get repairs maintenance services and upgrades.

This is paired with a modern app based interaction that is anchored by a video chat with a live expert.

William Cobb: I look forward to providing more specific details on how we plan to capture that demand at our next earnings goal. But for now, know that we will be supporting the brand relaunch with a new marketing campaign. Our goal is to bring some of that front door marketing magic to American Home Shield. And from the early creative development that I have seen so far, I think we are well on our way to doing this.

Membership also includes discounts to appliances and systems as well as how to content.

We're still working on the exact products and timing for where what the front door brand will offer in 2024, but we are largely coalescing around three main categories on demand repairs maintenance services and upgrades for home systems and appliances.

William Cobb: Now turning to slide seven in our real estate channel. The National Association of Realtors or NAR recently released housing market statistics for September and the market remains severely challenged. Existing home sales decline 22% to the first nine months of the year and full year expectations have declined to just under 4 million homes. As you can see from this chart, that is a substantial decline from the 6 million existing homes sold in 2021 as high mortgage rates and home prices have diminished consumer affordability.

William Cobb: At the same time, inventory remains tight. NAR also reported properties remained on the market for just 21 days in September and that all half sales increased to 29% of transactions. A segment that has generally not been conducive to buying of a warranty. This all ends up to an extremely challenging environment for our real estate channels.

Starting with the repairs.

On demand repairs will address a real pain point for consumers when home appliances and systems inevitably break we are currently building out the booking flow within the front door app. So the consumer and contractor will have a simple and seamless olive garden experience.

Second we will provide on demand home maintenance for those who want to ensure their home continues to run well this could be anything from filter replacements to the tuning up your HVAC before the season changes.

And finally, we will offer on demand upgrades for when it makes more sense to replace our own system of our clients rather than fix it.

As validated by the Great success, we continue to see with our HVAC upgrade program.

Which was about $20 million of revenue in Q3.

Trending toward a total of $50 million for 2023.

Our value proposition here is to partner with our contractors and share our bulk buying power to provide discounted pricing on new appliances in home systems. This is a win for our customers contractors and for front door.

William Cobb: Now turning the slide eight in the renewal channel. While demand in our DTC and real estate channels remain soft, we continue to be pleasantly surprised by the performance of our renewal channel for our rates remain strong. In the third quarter, our overall retention rate increased 90 basis points to 76.2%. This is especially impressive considering that we are implementing an 11% realized price increase this year. We are building on the impressive work that the renewals team has done improved onboarding increased engagement throughout the customer journey and of elevating the service experience through greater deployment of our preferred contractors. In short, we continue to take the right actions to sustainably drive higher retention.

We will provide more details on the front door brand on our next earnings call, but I believe that we're onto something big here.

Yes.

We know we have great brand awareness and we now have a clear strategy for monetizing that demand through a suite of this way of paid services, we plan on offering next year.

In closing I am thrilled with the turnaround in our financial results, which reinforces my belief in the power of this business and the actions we've been taking.

We have demonstrated that we can quickly reestablish our margins through pricing and process improvement initiatives. We continue to take bold and decisive steps that will lay a strong foundation for future growth and I am very optimistic about where we're heading.

William Cobb: Now let's turn to slide nine of the web deck where I will go into more detail on the front door brand monetization strategy. We launched the front door brand earlier this year as a new growth engine to sell services to a fundamentally different segment of home arms. As I said at our investor day, we intentionally launched the brand quickly as a first mover advantage and to learn our way into a new market.

I will now turn the call over to Jessica to review our financial results Jessica Thanks, Bill and good morning, everyone. As Bill just mentioned, we are extremely clean, but our strong third quarter financial performance.

Our prior pricing actions continue to flat panel inflation is moderating and we are seeing a greater financial benefit from our comprehensive cost management.

William Cobb: What we have found is that the essence of the brand remains strong, which is comprised of app based customer interactions and the video chat feature with one of our experts. Just six months since the launch of front door, we have over 1.3 million downloads and account registrations have grown to 133,000. But I want to be transparent with you. We went to market with a new version of a home service plan front door premium that did not sell the way we thought it would.

Now turning to slide 10.

Revenue increased 8% versus the prior year period to $521 million.

This was driven by a 10% increase in price, which more than offset a 2% decline in volumes.

William Cobb: So we have quickly made the decision to stop selling it. Our offering in the market today is a lower price product, only $25 per year with unlimited video chats for consumers to take advantage of the unique user experience with our experts. So that's today. Our strategy in the future is an on demand offering. I believe this new focus based on our research and the success of our HVAC upgrade program will be a compelling proposition for a much larger group of homeowners who want an allocate experience.

Looking at revenue and might be Cowen Slide 11 third quarter revenue from our renewal channel increased 14% as a result of our prior pricing actions, allowing trial.

Real estate revenue decreased 23% and.

And direct to consumer revenue decreased 16% as a result of lower volume.

Other revenue increased $11 million driven by our growing on demand home services business, primarily our HVAC upgrade program.

Now, let's turn to slide 12.

Gross profit for the quarter increased $57 million to $268 million and our gross margin increased 760 basis points to 51%.

William Cobb: Our value proposition for Frontdoor is based on two key components. The first is on-demand access to our network of experts that allow homeowners to get repairs, maintenance services and upgrades. This is paired with a modern app-based interaction that is anchored by our video chat with a live expert. Membership also includes discounts to appliances and systems as well as how-to content. We are still working on the exact products and timing for what the Frontdoor brand will offer in 2024, but we are largely coalescing around three main categories.

This improvement was driven by higher realized price.

Continued process improvement initiatives.

Favorable cost developments.

In addition to higher service team and a lower number of capital.

Customer that was partly offset by inflationary cost pressure.

On slide 13, you'll see that our higher gross margin largely flowed through to net income which increased $43 million.

71 million and adjusted EBITDA improved $48 million to an all time high of $128 million.

William Cobb: On-demand repairs, maintenance services, and upgrades for home systems and appliances. Starting with repairs. On-demand repairs will address a real pain point for consumers when home appliances and systems inevitably break. We are currently building out the booking flow within the Frontdoor app so that consumers[inaudible] HVAC before the season changes. This could be anything from filter replacements to tuning up your HVAC before the season changes.

Let's now move to the table on slide 14, and I'll provide more context to the year over year improvement in third quarter adjusted EBITDA.

Starting at the top we have $37 million of favorable revenue conversion, primarily driven by our pricing initiatives.

We asked that private declines and lower volume.

Contract ethane costs decreased $22 million compared to the third quarter at 2022.

Our team has been working hard to advance a host of process improvement initiatives in response to the macroeconomic challenges we experienced throughout last year.

I am very pleased checkpoint and we are seeing increased traction from these initiatives, which led to a greater financial impact on our third quarter results.

The improvement in our contract claims costs versus the prior year period.

Mainly driven by four factors.

We saw greater financial impact from our collective process improvement initiatives.

Typically better cost management across our contractor network.

Two examples include a new high cost claims review process implemented last year that was extremely well during our peak summer season.

And our continued effort to increase our presenter prepared contractor deployment with <unk>.

Typically in our clients and penetrate that trial.

Meaningful cost improvement.

Second we had favorable claims cost development of $9 million in the third quarter compared to $82 million favorable adjustment in the third quarter of 2022.

As a reminder, last year, we had a large favorable development in the fourth quarter that included $18 million related to the prior third quarter.

William Cobb: [inaudible] Williams. Looking at revenue in more detail on slide 11, third quarter revenue from our Renewal Channel increased 14% as a result of our prior pricing actions flowing through. Real estate revenue decreased 23% and direct to consumer revenue decreased 16% as a result of lower volume. Other revenue increased $11 million driven by our growing on-demand home services business, primarily our HVAC upgrade program.

Third we have been transitioning to higher service fees, which benefits our gross margin.

And then finally, we had a slightly lower number of capital cost per customer in the third quarter.

Primarily in the appliance and planning trade.

These benefits helped to more than offset ongoing inflationary cost pressures.

After removing the positive impact of plant cost development, we saw inflation of about 4% in the third part of it versus the prior year period, well below what we have seen over the past year.

Now getting back to the table on slide 14, and our sales and marketing costs, which increased $10 million over the prior year period due to higher marketing spend for the strength of our brands.

General and administrative costs increased $4 million, primarily due to increased personnel costs.

And the interest and net investment income increased $4 million as a result of rising interest rates on cash deposits.

Before I leave this slide I would like to take a moment to go into more detail on why we beat our third quarter adjusted EBITDA outlook by approximately $45 million.

Bill and I have consistently said that we have taken a more conservative posture in our guidance given that we are still emerging from an extremely high inflationary environment.

That being said, we have been pleasantly surprised by the traction we are seeing from our cost reduction initiatives implemented over the past year.

Jessica Ross: Now let's turn to slide 12. Growth profit for the quarter increased $57 million to 268 million and our growth margin increased 760 basis points to 51%. This improvement was driven by a higher realized price, continued process improvement initiative, favorable cost development, a transition to higher service fees, and a lower number of service requests per customer. That was partly offset by inflationary cost pressure. On slide 13, you'll see that our higher growth margin largely flow through the net income, which increased $43 million to 71 million and adjusted EBITDA improved $48 million to an all-time high of $128 million.

We are also seeing unexpected favorability in our renewal, whether and cost inflation compared to our expectation.

For example, our third quarter outlook incorporated a much larger impact from hot weather.

Which did not play out the way we thought it would.

Now, let me provide more color as to why our actual results were favorable to our outlook, which is mainly from three areas.

The largest driver of our beat was $30 million and lower claims costs.

Which includes $9 million of favorable claims development.

The remaining portion as a result.

The impact of our process improvement initiatives.

He has been working very hard cross functionally Tim.

The operations over the past year and I am extremely pleased to see the manifestation of this work that really in the third okay.

Jessica Ross: Let's now move to the table on slide 14 and I'll provide more context for the year-over-year improvement in third quarter adjusted EBITDA. Starting at the top, we have $37 million of favorable revenue conversion, primarily driven by our pricing initiatives, partly offset by the decline from lower volume. Contract payments cost decreased $22 million compared to the third quarter of 2022. Our team has been working hard to advance a host of process improvement initiatives in response to the macro economic challenges we experienced throughout last year.

Yeah, five to 10 years.

Higher than expected revenue conversion primarily through Honeywell.

Sir.

Okay.

Across several areas, which is due to timing.

Let's now turn to slide 15 prior review of our statement of cash flows.

Net cash provided from operating activities was $139 million for the nine months ended September 30th.

Net cash used for investing activities was $23 million for the first nine months of the year and was primarily comprised of capital expenditures related to investments in technology.

Jessica Ross: I am very pleased to report that we are seeing increased traction from these initiatives, which led to a greater financial impact on our third quarter results. The improvement in our contract payments cost versus the prior year period was primarily driven by four factors. First, we saw greater financial impact from our collective process improvement initiatives, specifically better cost management across our contractor network. Two examples include a new high cost claims review process implemented last year that worked extremely well during our peak summer season and our continued efforts to increase our percent to preferred contractor deployment, specifically in our clients and plumbing trades that drove meaningful cost improvements.

Net cash used for financing activities was $88 million through September and was comprised of share repurchases and scheduled debt payments.

On Slide 16, you will see that our free cash flow with $116 million for the nine months ended September 30th.

We ended the third quarter with $320 million in cash.

This was comprised of $152 million of restricted net assets and unrestricted cash of $167 million.

Keep in mind that this is after returning $75 million and year to date to our valued investors to share repurchases.

Jessica Ross: Second, we had favorable claims cost development of $9 million in the third quarter compared to a $2 million favorable adjustment in the third quarter of 2022. As a reminder, last year we had a large favorable development in the fourth quarter that included $18 million related to the prior third quarter claims cost. Third, we have been transitioning to higher service fees, which benefits our gross margin. And finally, we had a slightly lower number of services across the customer in the third quarter, primarily in the appliance and plumbing trades.

Before I get to our outlook I would like to take a moment to catch on our capital allocation strategy.

We remain focused on growth and we will continue to prioritize investments to expand revenue both organic and through M&A.

Our second objective is to ensure we have a solid financial profile, which includes maintaining appropriate levels of liquidity to run the business and a prudent long term debt structure.

We currently have very modest levels of debt and we have an extremely strong net leverage ratio of one three times as of September 30.

Jessica Ross: Chase. These benefits help to more than offset ongoing inflationary cost pressures. After removing the positive impact of claims cost development, we saw inflation of about 4% in the third quarter versus the prior year period, well below what we have seen over the past year.

And finally, our third objective is to return cash to shareholders.

Let me be clear absent any acquisition, we will continue to return substantially all of our excess cash to shareholders.

This business is performing very well and we are pleased to be stepping up our full year share repurchase target to $125 million, which amounts to buying back approximately 5% of our outstanding shares in 2023.

Jessica Ross: Now, getting back to the table on slide 14 and our sales and marketing cost, which increased $10 million over the prior year period due to higher marketing spend for the Frontdoor branch. General and administrative costs increased $4 million, primarily due to increased personnel costs. And interest and net investment income increased $4 million as a result of rising interest rates on cash deposits.

Now turning to slide 18, and our fourth quarter and full year 2023 outlook.

We expect our fourth quarter revenue to be between 350 and $360 million.

Jessica Ross: Before we leave this slide, I would like to take a moment to go into more detail on why we beat our third quarter adjusted EBITDA outlook by approximately $45 million. Bill and I have consistently said that we have taken a more conservative posture in our guidance given that we are still emerging from an extremely high inflationary environment. That being said, we have been pleasantly surprised by the traction we are seeing from our cost reduction initiatives implemented over the past year.

Which reflects renewal revenue up 12%.

State revenue down 20%.

DTC revenue down 16%.

And other revenue at 4 million to $16 million.

Fourth quarter, adjusted EBITDA is expected to range between $20 million and $30 million.

This is in line with the fourth quarter of 2022, which included $25 million and favorable claims costs development.

Jessica Ross: We are also seeing unexpected favorability in our renewals, weather and cost inflation compared to our expectations. For example, our third quarter outlook incorporated a much larger impact from hot weather, which did not play out the way we thought it would.

Now when comparing to the third quarter. It is important to note that our fourth quarter outlook also takes into account a significant impact from seasonality relating to our revenue and cost.

Specifically, we expect a lower contribution from our HVAC upgrade program as well as a lower benefit relating to our cost reduction initiatives as the fourth quarter typically has a lower number of service requests.

Jessica Ross: Now, let me provide more color as to why our actual results were favorable to our outlook, which is mainly from three areas. The largest driver of our beat was $30 million from lower planes cost, which includes $9 million of favorable claims cost development. The remaining portion is a result of the collected impact of our process improvement initiative. Our team has been working very hard cross-functionally to improve its operations over the past year, and I am extremely pleased to see the manifestation of this work that really told us in the third quarter. Seven, it has a five to ten dollars from higher than expected revenue conversion, primarily through customer renewals. Third, our S18 is around five to seven dollars favorable across several areas, which was due to timing.

Jessica Ross: Let's now turn to slide 15 for a review of our statement of cash flow. Net cash provided from operating activities was $139 million for the nine months ended September 30th. Net cash used for investing activities was $23 million for the first nine months of the year and was primarily comprised of capital expenditures related to investments in technology. Net cash used for financing activities was $88 million through September and was comprised of share repurchases and scheduled debt payments.

Jessica Ross: On slide 16, you will see that our free cash flow was $116 million for the nine months ended September 30th. We ended the third quarter with $320 million in cash. This was comprised of $152 million of restricted net assets and unrestricted cash of $167 million.

Service requests space S and the number of service customer service request will decline, 10% to approximately 4 million.

Our full your SG&A target is between 580 and $590 million and includes $40 million of working marketing and related to the front door branch.

Matthew Davis: Davis. Keep in mind that this is after returning $75 million a year to date to our valued investors through fairy purchases.

This also includes a further increase in our marketing investment for the American home She'll brand, which is now slightly higher I've been 2022.

Jessica Ross: Before I get to our outlook, I'd like to take a moment to touch on our capital allocation strategy. We remain focused on growth, and we will continue to prioritize investments that expand revenue, both organic and through M&A. Our second objective is to ensure we have a solid financial profile, which includes maintaining appropriate levels of liquidity to run the business and improve this long-term debt structure. We currently have very modest levels of debt, and we have an extremely strong net leverage ratio of 1.3 times as of September 30th.

Based on these updated input we are raising our whole ear adjusted EBITDA range by $55 million to be between 320 and $330 million.

To put that in perspective. This is about 850 per cent increase over our 2022 resolved.

Our full your outlook also includes $60 million, an interesting come and reflects stock compensation expense of approximately $28 million.

And finally, we expect our full your capital expenditures to be approximately $35 million and the annual effective tax rate to be approximately 25%.

Jessica Ross: And finally, our third objective is to return cash to shareholders. Let me be clear, absent any opposition, we will continue to return substantially all of our excess cash to shareholders. This business is performing very well, and we are pleased to be stepping up our full-year Sherry purchase target to $125 million, which amounts to buying back approximately 5% of our outstanding shares in 2023.

For our normal practice, we will provide a more detailed 2024 outlook on our next earnings call.

But before I close I wanted to discuss a few major theme heading into next year.

On the revenue Frank we're still determining where we Wanna take price.

However, we are targeting a more modest level of realized price in 2024, as we are mostly focused on increasing our customer accounts and because inflation expectations have moderated.

Jessica Ross: Now, turning to slide 18 and our fourth quarter and full-year 2023 outlook. We expect our fourth quarter revenue to be between $350 and $360 million, which reflects renewal revenue up 12%, real estate revenue down 20%, DTC revenue down 16%, and other revenue up $4 million to $16 million. Fourth quarter adjusted EBITDA is expected to range between $20 million and $30 million. This is in line with the fourth quarter of 2022, which included $25 million in favorable claims cost development.

Additionally, we will continue to be smart about how we implement our pricing strategy using our dynamic pricing model to minimize customer churn.

Even without more price increases the momentum from our prior pricing actions will result in a low to mid single digit realized price increase next year.

Our customer account will obviously depend on the relaunch of American homes shield and how successful our on demand strategy plays out to the front door brand. So stay tuned for more details here.

Turning to gross margin we.

Jessica Ross: Now, when comparing to the third quarter, it is important to note that our fourth quarter outlook also takes into account a significant impact from seasonality relating to our revenue and cost. Specifically, we expect a lower contribution from our HVAC upgrade program, as well as a lower benefit relating to our cost reduction initiative, as the fourth quarter typically has a lower number of service requests. Now, turning to our full-year outlook, where we are increasing our 2020 through revenue range to $1.75 billion or an approximately 7% increase over 2022.

We have come off the massive wave download <unk> 600 basis points in 2022, and now projected to be 600 basis points in 2023.

Gross margins is starting to stabilize and we are really at an inflection point for the fitness.

With that in mind, we don't expect to see that level of volatility again in 2024.

Well there are some factors in 2023 that will likely not repeat next year, such as our larger realized price increase in favorable weather trends we.

We have other levers that are working to protect margin as we head into 2024.

These include the benefit of higher service fees.

Jessica Ross: This revenue range anticipates a nearly 15% increase in the renewal channel, a mid 20% decline in the real estate channel, and a low double digit decline in the DTC channel. It also assumes other revenue will increase to approximately $70 million as a result of growing on-demand services. We continue to expect approximately 11% growth from higher price, which will more than offset a 4% decline from lower volume. We also expect our number of home service plans to decline in the mid two upper single digits in 2023.

Continued impact of our process improvement initiative.

And similar level of cost inflation.

I will point out that our gross margins going forward are also subject to a product with me.

How much revenue will be derived from the new front door brands and our on demand products.

Finally R S G and a levels depend on where it's a little marketing budget N versus this year.

We are still working to exact numbers, but we expect that it will be more of a mixture between brands than a more dramatic increase or decrease in our total sense.

I hope that is helpful context, and again, we are currently finalizing our strategic plan and will share more details with you next quarter.

Jessica Ross: As a result, we continue to target ending the year with approximately 2 million home service plans. This includes about 460,000 first year customers across the D to C and real estate channels. We are increasing our full year growth process margin outlook to be between 48 and 49.5%. This also assumes that inflation will be around 4 to 5% on a net cost per service request basis. And the number of customer service requests will decline 10% to approximately 4 million.

In conclusion, we delivered extremely strong third imported my natural resolved.

We continue to work hard on building a strong foundation for the future and we remain very excited about where this business is heading and we look forward to 2024.

I will now turn it over his back over to Matt.

It's Jessica.

I would just like to point out that we're experiencing a bit of a delay on our phone call. So please bear with us during the Q&A processes, there might be a little bit of the way between questions and answers operator, but not a local.

Jessica Ross: Our full year SGNA target is between 580 and 590 million dollars and includes 40 million dollars of working marketing spend related to the front door brand. This also includes a further increase in our marketing investment for the American home shield brand, which is now slightly higher than 2022. Based on these updated inputs, we are raising our full year just to be but to range by 55 million dollars to be between 320 and 330 million dollars.

<unk>.

Thank you if you would like to ask a question. Please press staff followed by one on your telephone keypad. If for any reason you would like to and we've got a question. Please press staff look like too.

Ask a question. Please press start followed by one.

If you all using a speakerphone. Please ensure to usual handset I'm pleased to ensure that you have on muted locally.

First question today comes from the line of Mark She's from <unk>. Please go ahead marked two lines no wait.

Yeah. Good morning, Thank you <unk>.

Jessica Ross: To put that in perspective, this is about a 50% increase over our 2022 results. Our full year outlook also includes $60 million of interest income and reflects that compensation expense of approximately $28 million. And finally, we expect our full year capital expenditures to be approximately $35 million and the annual effective tax rate to be approximately 25%.

The I think last for Ya.

Sure thing a little bit of marketing.

20 million <unk>, the director consumer channel.

<unk> fluid through in the quarters or a leg grabs on the likely impact on.

<unk>.

Yeah Martin.

Going through the question.

There is a lag.

In the market and we will also outdoor spend three to four so overall or spend on Bergen Rover shield, which earlier in the year <unk> would be down versus last year is actually gonna be up. So we're trying to feel some growth as we head into the the relaunch early next year.

Jessica Ross: For our normal practice, we will provide a more detailed 2024 outlook on our next earnings call.

Jessica Ross: But before I close, I wanted to discuss a few major themes heading into next year. On the revenue front, we are still determining where we want to take price. However, we are targeting a more modest level of realized price in 2024 as we are mostly focused on increasing our customer count. And because inflation expectations have moderated. Additionally, we will continue to be smart about how we implement our pricing strategy using our dynamic pricing model to minimize customer churn.

Suddenly.

Yeah, we're going to be very bad so right now we're still gonna continue it is disturbing we are trying to put some more more greenspan behind what we call the good bad campaign.

All roads lead to the relaunch next year with a new mortgage campaign of Newark, and really we've got to get back to selling the virtues. If you will of a of a home warranty and that's what we plan to do.

Jessica Ross: Even without more price increases, the momentum from our prior pricing actions will result in a low to mid single digit realized price increase next year. Our customer count will obviously depend on the relaunch of the American home shield and how successful our on demand strategy plays out to the front door brand.

Next question today comes from the line of service you said, we're from Keybanc. Please go ahead, you're lying to spell it.

Thank you good morning, Bill Jessica congratulations on the very strong quarter. Two questions. So 2023 was largely driven by price wondering how you should think about the mix of plan growth versus pricing growth going forward. It sounds like it should be more balanced into the <unk>.

Jessica Ross: So stay tuned for more details here. Turning to growth margins, we have come off the massive swings down over 600 basis points in 2022 and now projected to be up 600 basis points in 2023. Our growth margins are starting to stabilize and we are really at an inflection point for this business. With that in mind, we don't expect to see that level of volatility again in 2024. Well, there are some factors in 2023 that will likely not repeat next year, such as our larger realized price increase and favorable weather trends.

Future and then on gross margins congratulations on the B you know despite a historically hot summer.

Can you talk about working with you guys done to mitigate the impact of weather and I guess, you would expect less volatility tied to whether on gross margin going forward. Thank you.

<unk>.

Jessica Ross: We have other levers that are working to protect margin as we head into 2024. These include the benefit of higher service fees, the continued impact of our process improvement initiative, and similar levels of cost inflation. I will point out that our growth margins going forward are also subject to our product mix, meaning how much revenue will be derived from the new front door brand and our on demand products. Finally, our SGNA levels depend on where a total marketing budget ends versus this year. We are still working to examine the exact numbers, but we expect that it will be more of a mix shift between brand, than a more dramatic increase or decrease in our total sense.

There's a delay right match [laughter] I'm.

Oh, sorry, sorry <unk>.

First of all congratulations to you and your your promotion so great. So great to hear from you and I'll take your first question and then we'll give the second one to Jessica and I'll take the pricing Grossman. The answer is yes, you are correct it'll be more balance you know when we look back at the <unk>.

Jessica Ross: I hope that is helpful context.

Our pricing strategy in 2022 were probably a little late and.

Yeah $100 million in cost increases with that last year, we had the price aggressively.

The voice and is moderated as he saw so that is coming down you know it's flowing through so we will have a more balanced approach we have not nailed down as Jessica said, our exact pricing strategy for 2024 as of yet we're still working on that but it will not be clearly at the levels that we have this year. So we'll have more to say I've added that.

Jessica Ross: And again, we are currently finalizing our strategic plan, and we'll share more details with you next quarter.

William Cobb: In conclusion, we delivered extremely strong third quarter financial results. We continue to work hard on building a strong foundation for the future, and we remain very excited about where this business is heading as we look forward to 2024.

<unk>.

So gross margin on alternative yes, hi, Serge yeah. Thanks for the question Yeah. Just in terms of margins you know we've talked a lot last quarter about things falling or way imagine really being driven by a lot of that whether favre ability that we saw I think I was thinking about this quarter were really just super excited that this is the business just for for me to get better.

Matthew Davis: I will now turn it over over to Matt.

Matthew Davis: Thanks, Jessica.

William Cobb: I would just like to point out that we're experiencing a bit of a delay on our phone calls, so please bear with us during the Q&A process, as there might be a bit of delay between questions and answers. Operator, let's now open up a line for questions. If you are using a speaker phone, please ensure to use your handset, and please do ensure that you have unmuted locally. Our birth question today comes from the line of marks used from tourists.

Bill payment a year ago, and really stuck with the team on execution. Our teams across the board has been focused on process improvement and if not just been one silver bullet I mean, it's been every team every function and what we really saw this quarter is a <unk> and a result, and if you know we talked about at various things.

Like the high cost things with you that was implemented last year, but it was really during the peak season that we really saw that come to life and we saw the benefits of that and so as we think about going forward <unk> seeing these external factors normalized but we're also seeing kind of be the result of the the hard work because our business has been doing you know really <unk>.

William Cobb: Please go ahead, Mark. Your line is now open. Yeah, good morning. Thank you. I think last quarter you talked about shifting a little bit of marketing spend, I think it was 20 million that was going to the director consumer channel. Did that flow through in the quarter? Is there a lag perhaps on the likely impact on new business? Yeah, Mark, thanks for the question. There is a lag by the time we got into market, and we've also upped our spend to Q4, so overall our spend on American home shield, which as we earlier in the year, we thought would be down versus last year is actually going to be up, so we're trying to fuel some growth as we head into the relaunch early next year.

Manifest thing and come with life, and we expect that to continue M. N N are more attentively as I looked at two four and beyond.

Thank you. The next question today comes from the line of Brian Fitzgerald from Wells Fargo. Please go ahead <unk>.

Thanks, guys. A couple of quick questions follow up on the price increases can you talk about the phasing is that a steady tailwind as we meter through 24 does it crescendo at some point and then the second question was just on the <unk>.

That ratio could you just can you mentioned 1.3 times do you have.

A bogey or a target you you'd like to keep that at thank you.

William Cobb: But as I said in the script, you know, we're going to be very tactical right now. We're still going to continue this discounting. We are trying to put some more marketing spend behind what we call the good bad campaign, but all roads are going to lead to the relaunch next year with a new marketing campaign, a new look and really we've got to get back to selling the virtues, if you will, of a home warranty, and that's what we plan to do.

Which one you wanted to I could I can I can take both just sounds <unk>.

Now it takes about 12 to 18 months for our pricing access to plow through and we took some really aggressive pricing actions and plenty of 22, even with the best thing about <unk> single <unk> single digit Uhm price increase flowing into 2024 from those actions. If those were thinking about next year. It is really.

Sergio Segura: Next question today comes from the line of Sergio segment from key bank. Please go ahead. Your line is now open. Thank you. Good morning, Bill. Jessica, congratulations on the very strong quarter. Two questions. So 2023 was largely driven by price, wondering how we should think about the mix of plan growth versus pricing growth going forward sounds like it should be more balanced into the future. And then on gross margins, congratulations on the beat, you know, despite a historically hot summer.

<unk> vs. Leveraging any at you know additional significant pricing increases, but again, we are finalizing our strategic plan and we'll come back to you with more on that on 2024 uhm from a <unk> a leverage ratio perspective, we really try to keep that between one and two tie.

<unk>. So we're feeling really good about where we're sitting right now, but it's something to continue to keep our eyes on.

Thank you appreciate it.

Thanks Fine.

The next question today comes from the line of <unk> from <unk> Oppenheimer. Please go ahead to your line.

Sergio Segura: Can you talk about work you've, you've got done to mitigate the impact of weather and I guess should we expect less volatility tied to weather on gross margin going forward. Thank you. I'm sorry, Sergio. First of all, congratulations to you on your, on your promotion. So great to, great to hear from you. I'll take the first question and then we'll give the second one to Jessica. I'll take the pricing question. The answer is yes, you are correct.

Alright, great.

I'd love to hear a little bit more about H S and kind of the marketing of the relaunch you plan to do I know there was.

Basically I'm seeing a lot more as an H S. A particular says so what's gonna change you know as you get into next year.

We launched the brand.

And then just if I could squeeze in one more in the front door side, how old are you thinking about either you know.

Sergio Segura: It will be more balanced. You know, when we look back at, you know, our pricing strategy in 2022, we're probably a little late and we, with this, you know, $100 million in cost increases, we have last year, we had to price aggressively. The inflation has moderated as you saw. So that is coming down, you know, it's flowing through. So we will have a more balanced approach. We have not nailed down as Jessica said, our exact pricing strategy for 2024, as of yet, we're still working on that.

Breakeven coins or losses.

Profitability of that and what do you mean by that is is your Justin prices you kind of drop the <unk>.

Premium model.

Working on that roughly $2 a month plan.

What are you actually need there as far as profitability breakeven et cetera.

Thank you can let me let me tell Ya both of those and then just give me something on the front door, let's start with the I just I think that we've talked about the categories softness and I think that some of the sticker shock from the from.

Sergio Segura: But it will not be clearly at the levels that we have this year. So we'll have more to say on that in the queue for earnings. Yes, hi Sergio. Thanks for the question. Yeah, just in terms of margins, you know, we've talked a lot last quarter about things falling our way and margin really being driven by a lot of that weather's capability that we saw. I think as we're thinking about this quarter, we're really just super excited that this is the business just performing to get better.

The price increases at all of his hesitate around this area.

The overall demand such real estate is just you know.

Mr. <unk> severe decline in real estate will will will work.

Sergio Segura: You know, Bill came in a year ago and really focused the team on execution. Our teams across the board have been focused on process improvement. And if not just been one silver bullet. I mean, it's been every team, every function. And what we really saw this quarter is the manifestations of those in our results. And if, you know, we talked about it's various things like the high cost main review. That was implemented last year, but it was really during this peak season that we really saw that come to light and we saw the benefits of that.

Work itself out so that will be part of the come back whenever that occurs we keep thinking.

Autumn is here, but it keeps doing you have a picture of it.

A new message and yeah, right I said in those scripts yeah. We want to if you will celebrate home warranty. So I don't think we have some brand I haven't done a good job of really getting back to the essence of Y at home a home warranty the financial protection the peace of mind that it brings I don't think.

Sergio Segura: And so as we think about going forward, we're seeing these external factors normalize. So we're also seeing kind of the results of the hard work as our business has been doing. You know, really manifesting and coming to life and we expect that to continue in our margins as we look to queue for and beyond. Thank you.

We've done a good enough job there and so our marketing team is working on re messaging at the same time as we always said we were running we liked the good bad approach. We think it's a fresh new approach. So I think it's gonna be a better a better focus on marketing Ah more impactful marketing approach.

Coupled with people rediscovering the categories and pricing slowing down if you will on the front door. Please.

Jessica Ross: The next question today comes from the line of Brian Fitzgerald from Wells Fargo. Please go ahead. Your line is now open. Thanks guys. A couple of quick questions. The follow up on the price increases. Can you talk about the phasing? Is that a steady tail in as we meter through 24? Does it crescendo at some point? And then the second question was just on the on the debt ratio. Jessica, you mentioned 1.3 times.

I I think what I, what I've been happy about we talked about the consumer response et cetera.

I'm disappointed and that's on me that the premium piece of we tried to come in with a second home service plan. We've got a good home service plan on American Idol Shield, we really want to zero in on this larger segment. The 42 million people that we talked about an investor day.

I'm pretty good million household rather the the whole on demand peace you heard his career for reference pay as you go Ala Carte, we think that there was really a market for people, who don't Wanna get locked into a contract I want to pay for a repair or upgrade their system and you're on a one time basis, and that's really what we're going to zero in.

Jessica Ross: Do you have a bogey or a target you'd like to keep that at? Thank you. So I can I can I can take both just on pricing and as you know, it takes about 12 to 18 months for pricing actions to flow through. And we took some really aggressive pricing actions in 2022, even with those were expecting about mid single mid single digit price increase flowing into 2024 from those actions. Those were thinking about next year, it is really us being focused on unit growth versus leveraging any, you know, additional significant pricing increases.

So for now we're really trying to engage.

Making money at a 25 dollar with unlimited checks, but we think it's a good lead into the to the brand.

Certainly the unique user experience with our experts were really proud of and we think it's going to enhance the brand longterm. So still working on the specifics of this as.

Jessica Ross: But again, we're finalizing our strategic plan and we'll come back to you with more on that on 2024. From a debt leverage ratio perspective, we really try to keep that between, you know, one and two times. So we're feeling really good about where we're sitting right now, but it's something to continue to keep our eyes on. Thank you. Appreciate it. Thanks, Diane.

As we bringing the booking up in as opposed to.

Booking engine into the App and.

And the like so we've got <unk>.

Yeah.

Excited about our strategy.

As Jessica said, we've got to bring the execution levels of the same level that we've had across the company is there anything you wanted to add to.

To add and I'm glad you asked me about questions H S and front door cause as we think about coin a business in longterm profitability. It really is about south van we are very pleased and thrilled with higher margins have rebounded. So quickly and we're really excited about especially like a lot of that has been our core but as we're thinking about the future and really.

Ian Zaffino: The next question today comes from the line of Ian Zaffino from Oppenheimer. Please go ahead. Your line is now open. I agree. You know, I'd love to hear a little bit more about AHS and kind of the marketing or the relaunch plan to do. I know there was basically I'm seeing a lot more ads on AHS in particular. So what's going to change, you know, as you get into next year and quote, quote, we launched the brand.

This business, it's gonna be about being innovative it's gonna be launching new products and offerings and going after them our customers, which is really about front door I think the margin profile of that product is going to be very different I think to my home uhm and on demand services perspective, and so if we're thinking about that longterm profitability Max.

Ian Zaffino: And then just if I could squeeze in one more in the front door side, how are you thinking about either, you know, break even points or, you know, losses or profitability of that. And what I mean by that is, you know, you're adjusting prices, you kind of drop the premium model, you know, working on that wealth of $2 a month plan. What do you actually need there as far as profitability, even, et cetera, thanks.

Necessarily again like I said earlier I can depend on what if that is coming from the front door, but we are excited about bells were excited about what I might do that right now and and what that's gonna look like going forward.

Okay. Thank you very much.

Thank you very much.

Okay.

Ian Zaffino: Thanks again. Let me take both those and then Jessica may add something on the front door piece. Let's start with AHS. I think that, you know, we've talked about the category softness and I think that some of the sticker shock from the price increases that all of us had to take around this area have heard the overall demand. But real estate is just, you know, as we said in this, severe decline.

Thank you Anne.

The next question today cut off of your line of <unk>.

From J P. Morgan. Please go ahead to your line is millington.

Hey, this is Danny <unk> Carpenter I just have two quick ones on the claims cost inflation could you maybe unpack that 4% three Q and talk about what components are being sticky if there and then on the second one on the success and on demand services outside of a track is there any other categories or services call out you're seeing success.

Ian Zaffino: And, you know, real estate will, will, will work itself out. So that will be part of the comeback whenever that occurs. We keep thinking the bottom is here, but it keeps dipping. You know, a new message and, you know, I said in the script, you know, we want to, if you will, celebrate home warranty. So I don't think we as a brand have done a good job of really getting back to the essence of why a home, a home warranty, the financial protection, the piece of mine that it brings.

And are most excited for it from a revenue opportunity perspective.

But if you take it further they'll take a second thanks, so just from a claim.

Perspective, yeah, we have been forecasting right, 9% compared to the 4% that we're seeing that quite I think a couple of things I just want a a concept, but I just wanna put out there.

There's a lot of contact the next business that operate on it the late fees that we talk about our pricing action claimed pops development and some of that is what you're saying this year just in terms of how we've seen in.

Ian Zaffino: I don't think we've done a good enough job there. And so our marketing team is working on remessaging at the same time, as I said, we're running, we like the good bad approach. We think it's a fresh new approach. So I think it's going to be a better, a better focus on marketing, a more impactful marketing approach coupled with people rediscovering the category and pricing, you know, slowing down, if you will.

Inflation and deflation manifest into our results Uhm. We've talked also about in terms of that you'd think about front door.

Cost inflation really it being comprised of three buckets, the contractor related car parts and equipment and Additionally, some of the impact that we're seeing on regulatory changes I think right now what we're seeing from inflation is it's really comprise they're heavily driven by two buckets, the contractor related costs and the parts and equipment and that's probably equally balanced between.

Ian Zaffino: On the front door piece, you know, I think what I've been happy about, you know, we talked about the consumer response, etc. Disappointing, and that's on me, that the premium piece that we try to come in with a second home service plan, we've got a good home service plan on American home field. We really want to zero in on this larger segment, you know, the 42 million people that we talk about an investor day, 42 million household credit.

The two of those which are really trending closer to P. P. I right now I'm at this 4%.

With regard to other services to your question to any so let me let me unpack this.

So the engine for US right now is upgraded specifically HVAC upgrades, we have a long way to go on that that is just touching the service we were thrilled.

Ian Zaffino: The whole on demand piece, you've heard us rip off and pay as you go, or I'll a car. We think that there's really a market for people who don't want to get locked into a contract, they want to pay for a repair or upgrade their system, you know, on a one-time basis. And that's really what we're going to zero in on. So for now, we're really trying to engage, you know, with making money in $25 with unlimited chats.

<unk> relations team, where contractors have done the marketing team in terms of reaching out.

Our customers in terms of getting in and a track upgrade and I won't go into right now we'll talk about this more in queue for the.

The changes that the E. P. A is bringing that it's gonna.

Basically for us a bunch of consumers deft upgrade your system, but I will get them done now we will talk about that in queue for upgrades.

Ian Zaffino: But we think it's a good lead-in to the to the brand. It's certainly the unique user experience with our experts. We're really proud of, and we think it's going to enhance the brand long-term. So still working on the specifics of the, as we bring the booking app in the booking engine into the app and the like. So we've got, we're very, you know, excited about a strategy. But, you know, as Jessica said, we've got to bring the execution level to the same level that we've had across the company.

Upgrades are the engine, we do think that there is opportunity real opportunity and appliance and water heater, we're getting the model down on a track and then moving to probably those two areas, whether we could get into pool spa and other things, but but to to think about behind a tracker appliances and water heaters.

<unk>, we've been doing appliance repairs in about 15 mortgage and we're working through the model and how that that whole piece worse that is showing good tracks and we will expand the number of markets. We're still working through what that is.

Ian Zaffino: Anything you want to add on the market? No, I'm just adding, I'm glad you asked, you know, both questions, H.S, and Brent Dore, because as we think about going this business in long-term profitability, it really is about both brands. We are very pleased and thrilled with, you know, how our margins have rebounded so quickly. And we're really excited about, especially like a lot of that has been our core. But as we're thinking about the future and really growing the business, it's going to be about being innovative.

Repair will be not only in the shorter term an expansion of markets, but as we are.

<unk> looking engine into the where people can call for repair.

They put it in Ala carte basis.

From that we think will be an additional good driver I think there'll be let me call have a nice little business on maintenance, we actually have a good business right now doing tune-ups around a track.

Ian Zaffino: It's going to be launching new products and offerings and going after more customers, which is really about front door. I think, you know, the margin profile of that product is going to be very different, I think, from a home and on demand services perspective. And so, as we're thinking about that longer-term profitability mix, it's really, again, like I said earlier, going to depend on what is that is coming from front door. But we are excited about both, we're excited about where our margins are right now and what that's going to look like going forward.

I think we're still working through we have other maintenance services I think we've got a sort through how we how we position those to customers and make those available but I think that is that is a part of it that's a natural part so I'm I'm excited from an on demand basis that we can we can look at these three areas and have a real opportunity in all of it you know.

It's pretty much a greenfield for us.

Thanks.

William Cobb: Okay, thank you very much. Thank you very much. Hey, thank you Ian.

The next question today comes from the line of Eric Sheridan from Goldman Sachs. Please go ahead your lungs no AP.

Thanks, so much for particular questions I'd be too if I could first on marketing longer term you know, you've obviously leaned into marketing intensity in the last 12 plus months and seem good returns on that how should be thinking about marketing levels of marketing R. O Y that you want to sort of take about for the medium to long.

Daniel Pfeiffer: The next question today, kind of a line of quote from JP Morgan, please go ahead. Your line is now open. Hey, this is Daniel Pfeiffer. I'm for Cory Carpenter. I just have two quick ones. On the claims cost inflation, can you maybe unpack that 4% and 3Q and talk about what components are being stickiest there? And then on the second one, on the success in on-demand services outside of HVAC, are there any other categories or services to call out your seeing success in or most excited for from a revenue opportunity perspective?

Term is sort of a cost input to drive to touch with growth.

You want to establish as a baseline for the business that'd be number one and then number two I'm curious just go a little bit deeper in the idea that you could be in the more individual service request business over the long term and how you think about the market opportunity there.

Governments would be key to capitalize on that potential shift. Thank you.

Daniel Pfeiffer: Thanks. Once you pick it for a little bit in a second. Thanks. So just from a claims cost perspective, yeah, we have been forecasting right 9% compared to the 4% that we're seeing this quarter. I think a couple of things I just want to a concept that I just want to put out there is, you know, one, there's a lot of concepts in this business that operate on as a late fees, right?

Okay. Let me take those industrial you want to add anything is in terms of the marketing investment. We have is Jessica pointed out earlier, we have two growth engines here next year, we will be spending the vast majority of our marketing money on American home Shield, we will we still working through the.

Daniel Pfeiffer: We talk about our pricing actions, claims cost development, and some of that is what you've seen this year, just in terms of how we've seen inflation or deflation manifests into our results. We've talked also about in terms of that you think about front door cost inflation, really it being comprised of three buckets. The contractor related parts and equipment and additionally some of the impact that we're seeing on regulatory changes. I think right now what we're seeing from inflation is it's really comprised or heavily driven by two buckets.

The exact mix will spend less on front door, but it is important.

Keep the vitality of the front door brand because they answer your second question in terms of on demand.

<unk> for that is gonna be cause customers.

Oh.

None ahl's customers thinking that front doors in place to go for repairs maintenance and upgrades. So the key is to continue to build a brand and make it as synonymous with this all the card offerings, that's gonna take us awhile.

Daniel Pfeiffer: The contractor related costs and the parts and equipment, and that's probably equally balanced between the two of those, which are really trending close to the CPI right now at this 4%. Now with regard to other services to your question, Danny, so let me unpack this. So the engine for us right now is upgrades, specifically HVAC upgrades. We have a long way to go on that. That is just touching the service. We are thrilled at what our contract relations team, our contractors have done, the marketing team in terms of reaching out to our customers in terms of getting an HVAC upgrade.

But we have to maintain a level of pressure for next year. So that that in terms of return will probably be a negative return next year.

But it will be part of our overall it fit within our overall equation in terms of our SG&A expensive cetera in terms of it so that his front door and that's how we think we can get to the <unk>. The other thing is the term on that market is much bigger than this at home warranty market and that's what makes us excited.

We have seen with this real estate situation.

People are staying in their homes longer well our systems are going to continue to break and so we do think that there is a big opportunity for people, who don't Wanna get locked into a contract.

Daniel Pfeiffer: I won't go into right now. We'll talk about this more in Q4. The changes that the EPA is bringing in that it's going to basically force a bunch of consumers to upgrade their system, but I won't get into that now. We will talk about that in Q4. But upgrades are the engine. We do think that there is opportunity, real opportunity in appliance and water heater. We're getting the model down on HVAC and then moving to probably those two areas.

You see on demand fees now as far as age us investment.

That will be.

More traditional sense of spending we have for the returns we wanted to generate so that it will be I won't get into specifics of what we're looking for in terms of cost or anything else.

Daniel Pfeiffer: Whether we can get into pool spa and other things, but the two to think about behind HVAC are appliances and water heaters. Then the repair piece. We've been doing appliance repairs in about 15 markets, and we're working through the model and how that whole piece works. That is showing good traction. We will expand the number of markets. We're still working through what that is. But repair will be not only in the shorter term and expansion of markets, but as we've put together looking at engine into the app where people can call for repair as they put it in all of cartbases.

That'll be an existing businesses and.

So we want to invest in.

We did not spend at the levels, we probably should have this year, but we're going to current debit sphere, and I think with a fresh new message and really.

Driving home the benefits of a home warranty I'm I'm excited.

<unk> one business will start to turn around we'll see on real estate and I'm really pleased with our renewals continue to continue to be so resilient.

Thank you as a reminder, if you would like to ask a question. Please presta followed by one on your telephone keypad.

Daniel Pfeiffer: Service. That we think will be an additional good driver. I think there'll be a, let me call it a nice little business on maintenance. We actually have a good business right now doing two and ups around HVAC. I think we're still working, do we have other maintenance services. I think we've got to sort through how we how we position those to customers and make those available. But I think that is that it's a part of it that's a natural part.

The next question is a follow up question from <unk> chest. Please go ahead marked your line is now open.

Police to ensure that you have unlimited lately.

Okay.

Thank you good morning.

Is there a particular seasonality to the on demand it better kind of Q2 two.

Daniel Pfeiffer: So I'm excited from an on demand basis that we can we can look at these three areas and have real opportunity and all of it. You know, it's it's pretty much a green field for us. Thanks.

Two three along with the HVAC or.

Should we think about that being more steady through the year.

I think that's an intriguing question I don't think we know we don't have a great answer for you know other than I think generally home services follow.

William Cobb: The next question today comes from the line of Eric Sheridan from Goldman Sachs. Please go ahead. Your line is now open. Thanks so much for taking the questions. Maybe two if I could first on marketing longer term. You know, you've obviously leaned into marketing intensity in the last 12 plus months and seen good returns on that. I should be thinking about marketing levels and marketing ROI that you want to sort of think about for the medium to long term is sort of a cost input to drive the type of growth.

Seasonal pattern, which is spring cleaning spring I Gotta get my <unk>.

Our house in order over the summer stuff breaks stressing the HVAC area. So I do think the seasonality would be consistent but I can tell you that we've got.

Got a great empirical study on this but.

But I think my senses this may be a little better as the year round business, but if it's as follows the pattern of our service request the seasonality would be the same.

William Cobb: You want to you want to establish as a baseline for the business that be number one. And then number two, I'm curious to just go a little bit deeper in the idea that you could be in the more individual service request business over the long term and how you think about the market opportunity there and what investments would be key to capitalize on that potential shift. Thank you. Okay, let me take those and just if you want to add anything as a in terms of the marketing investment.

And then on the real estate channel.

I I hear what you're saying about higher interest rates impacting activity there is some.

Indication, perhaps at least a year over year.

Purchase activity could be.

Daddy or even moving up possibly.

How much do you need kind of more days on on market to put.

Put pressure on the sellers or if you could just theoretically if the.

William Cobb: You know, we haven't as Jessica pointed out earlier. We have two growth engines here. Next year, we will be spending, you know, the vast majority of our marketing money on American home shield. We will, we're still working through the exact mix. We'll spend less on front door, but it is important to get keep the vitality of the front door brand. Because to answer your second question in terms of on demand, the catalyst for that is going to be customers.

Existing home sales flattened out or turned positive how.

How much of a help with that.

Yeah I I. The date is on the market is a bigger deal.

21 days on market, because it with that level of.

Of inventory that drive demand is high against that limited number of homes. So the seller doesn't feel.

William Cobb: All, you know, non-AHS customers thinking that front door is the place to go for repairs maintenance and upgrades. So the key is to continue to build the brand and make its anonymous with this all a card offering that's going to take us a while. But we have to maintain a level of pressure for next year. So that that in terms of a return will probably be a negative return next year. But it will be part of our overall fit within our overall equation, you know, in terms of our S DNA expense, et cetera.

It doesn't feel it's necessary to attach a home warranty I think.

Ideally with it's more like four to six months worth of inventory that probably has more ideal for us, but we're not sitting still you know just fields and the.

The real estate teams are really starting to turn their attention.

Trying to engage by our agents more and not just a seller agents.

To get that direct to consumer piece. We also have a big team lined up against trying to drive increased real estate.

William Cobb: In terms of it. So that that's front door and that's how we think we can get to the on demand piece. The other thing is the cam on that market is much bigger than just the home warranty market. And that's what makes us excited. You know, we have seen with this real estate situation that people staying in their homes longer. Well, systems are going to continue to break. And so we do think that there is a big opportunity for people who don't want to get locked into more contract to use the on demand piece.

Renewals so.

So there are various ways. We can go at this the whole of the overall real estate business, while we're working through.

This macro economic effect of the of the industry continuing to have.

Have a severe decline so and again the real estate business is Brazilian it's gonna come back we continue to hold our share within the amount of.

William Cobb: Now, as far as AHS investment, you know, that'll be in a more traditional sense of, you know, the spending we have for the returns we want to generate. So that will be I won't get into specifics of what we're looking for in terms of cap or anything else. But that'll be, you know, that's an existing business in a business we want to invest in. We did not spend at the levels we probably should have this year, but we're going to correct that next year.

Home warranty that are done into the real estate channels. So.

But having said that we are working across a lot of different dimensions to try to drive mucus.

Understood and then just the did you give specific numbers for sizing the weather impact on EBITDA.

Or the preferred contractor utilization.

William Cobb: And I think with a fresh new message and really driving home the benefits of the home warranty. I'm excited that the, you know, our DTC one business will start to turn around. We'll see on real estate. And I'm really pleased with how renewals continue to continue to be so resilient. Thank you.

How're you doing.

<unk>.

Here the weather version now will be definitely.

Favorite band Q3, compared to <unk>, and we talked about last thing about.

Okay.

Sorry last quarter, we talked.

About the decline in the cooling degree days and that being significantly lower this year with about three per cent compared to last year. So at last quite a T. Three so that should give you some flavor into her that that's definitely less of an impact and can you tell them. What we saw in the first half of the year.

Unknown Attendee: As a reminder, if you would like to ask a question, please press star followed by one on your telephone keypad.

Mark Hughes: The next question is a follow-up question from Mark Hughes from Trist. Please go ahead Mark, your line is now open. Please do ensure that you are unmuted locally. Thank you. Good morning. Is there a particular seasonality to be on demand? Is that a kind of Q2, Q3 along with the HAC or should we think about that being more steady through the year? I think that's an intriguing question. I don't think we know we don't have a great answer for you now.

And then the preferred contractor utilization.

And that was it that's about 83% this year and again, 1% change in a per cent to preferred.

About $5 million top it.

Excellent. Thank you.

Awesome. Thank you.

Ladies and gentlemen, thank you again for joining front door start cool to 2023 earnings call. Today's call is now completed.

Mark Hughes: Other than I think generally home services follow a seasonal pattern, which is spring cleaning, you know, spring, I got to get my get to get our house in order over the summer stuff breaks, especially in the HAC area. So I do think the seasonality would be consistent, but I can tell you that we've got a great empirical study on this. But I think my sense is this may be a little better as you around business, but if it just follows the pattern of our service requests, the seasonality would be the same.

<unk> 220 twenty-three earnings call today's call is.

Mark Hughes: And then on the real estate channel, I hear what you're saying about higher interest rates impacting activity there. Some indication perhaps at least year over year, some of the purchase activity could be steady or even moving up possibly. How much do you need kind of more days on on market to a pressure on the sellers or if you could just theoretically, if the existing home sales plant and outer turned positive, how much of a help would that be?

Mark Hughes: Yeah, I the days on market is a big deal. I know only 21 days on market because with that level of inventory that drive, you know, demand is high against a limited number of homes. So the seller doesn't feel, you know, doesn't feel it's necessary to attach a home warranty. I think what what, you know, if ideally with, you know, it's more like four to six months worth of inventory that probably is more ideal for us.

Mark Hughes: But we're not sitting still, you know, just fields and the real estate teams are really starting to turn their attention to turning gauge by our agents more, not just the seller agents to get that direct to consumer piece. We also have a big team lined up against trying to drive increased real estate are even renewals. So there are various ways we can go at this the whole of the overall real estate business while we're, you know, working through, you know, this macro economic effect of the of the industry, continuing to, you know, have this severe decline.

Mark Hughes: So, and again, the real estate business is resilient. It's going to come back. We continue to hold our share within the amount of home warranties that are done to the real estate channels. So, but having said that, we're working across a lot of different dimensions to try to thrive. Chris. Understood. And then Jessica, did you give specific numbers for sizing the weather impact on either DAW or the preferred contractor utilization? So are you, Jessica?

Mark Hughes: No. You're the weather version. Yeah, no, we definitely have a last favorite on Q3 compared to prior quarters this year. We talked about last quarter, they're seeing about, sorry, last quarter, we talked about the decline in the cooling degree days. And that being significantly lower this year was about 3% of compared to last year. So last quarter, Q3, so that should give you some flavor and so are that, that quite definitely less of an impact in Q3 than what we saw in the first half of the year. And then the preferred contractor utilization? So, and that was, that's about 83% this year. And again, 1% change in percent to preferred, drives about 5 million growth profit. Excellent. Thank you. Awesome. Thank you.

Matthew Davis: Ladies and gentlemen, thank you again for joining Front Door's third quarter 2023 earnings call. Today's call is now concluded. Front Door's third quarter 2023 earnings call.

Today's call is