Q4 2023 Frontdoor Inc Earnings Call

Operator: Ladies and gentlemen, the Frontdoor fourth quarter and full year 2023 earnings call will begin shortly. If you would like to submit a question at any time, please press star one on your telephone keypad. Thank you.

Ladies and gentlemen, thank you for standing by the front door fourth quarter and full year 2023 earnings call will begin shortly.

I would like to register a question at any time. Please press star one on your telephone keypad.

Operator: ?? Ladies and gentlemen, welcome to Frontdoor's fourth quarter and full year 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.

[music].

Ladies and gentlemen, and welcome to the front door its fourth quarter and full year 2023 earnings call today's call is being recorded and broadcast on the Internet.

Beginning today's call is Matt Davis, Vice President Vice President of Investor Relations and Treasurer, and he will introduce the other speakers on the call.

Matt Davis: At this time, we'll begin today's call. Please go ahead Mr. Davis.

Matthew S. Davis: Thank you, operator. Good morning, everyone. And thank you for joining Frontdoor's fourth quarter and full year 2023 earnings conference call. Joining me today are Frontdoor's Chairman and Chief Executive Officer, Bill Cobb, and Frontdoor's Chief Financial Officer, Jessica Ross. The press release and slide presentation that will be used during today's call can be found in the Investor Relations section of Frontdoor's website, which is located at investors.frontdoorhome.com. As stated on slide 3 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.

Matt Davis: Thank you operator.

Morning, everyone and thank you for joining front doors fourth quarter and full year 2023 earnings conference call.

Matt Davis: Joining me today are front doors, chairman and Chief Executive Officer, Bill Com and front doors, Chief Financial Officer, Jessica Ross.

Speaker Change: 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 don't front door home Dot com.

Speaker Change: As stated on slide three of the presentation I'd like to remind you that this call and webcast may contain forward looking statements.

Speaker Change: These statements are subject to various risks and uncertainties, which could cause actual results to differ materially from those discussed here today.

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

Matthew S. Davis: Please refer to the risk factor section 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, February 28, 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've 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 Cobb for opening comments. Bill. Thanks, Matt. And good morning, everybody.

Speaker Change: Please refer to the risk factors section in our filings for a more detailed discussion of our forward looking statements and the risks and uncertainties related to such statements.

Speaker Change: All forward looking statements are made as of today February 28, and except as required by law. The company undertakes no obligation to update any forward looking statements.

Speaker Change: Whether as a result of new information future events or otherwise.

Speaker Change: 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.

Speaker Change: I will now turn the call over to Bill Cobb for opening comments bill. Thank.

Bill Cobb: Thanks, Matt and good morning, everybody.

William C. Cobb: Let's start with 2023, where we smashed expectations and delivered record financial performance. As you can see from slide 4, we drove revenues 7% higher to a record $1.78 billion, despite a decline in overall... Demand. Gross margins rebounded 700 basis points to 50%, a nine-year high.

Bill Cobb: Let's start with 2023, where we smashed expectations and delivered record financial performance.

Bill Cobb: As you can see from slide four we drove revenues, 7% higher to a record $1.78 billion. Despite a decline in overall.

Bill Cobb: Hey man gross margins rebounded 700 basis points to 50% a nine year high.

William C. Cobb: Adjusted EBITDA increased 62% to an all-time high of $346 million. We generated $170 million of free cash flow, and we returned $120 million to investors through share repurchases. In short, the turnaround in our financial performance has been remarkable. So how did we complete such a successful turnaround? When I stepped into the CEO role 21 months ago, the company was struggling to respond to inflationary cost pressure.

Bill Cobb: Our adjusted EBITDA increased 62% to an all time high of $346 million.

Bill Cobb: We generated $170 million of free cash flow and we returned $120 million to investors through share repurchases.

Bill Cobb: In short the turnaround in our financial performance has been remarkable.

Speaker Change: So how can we complete such a successful turnaround when I stepped into the CEO role 21 months ago. The company was struggling to respond to inflationary cost pressures.

William C. Cobb: Since that time, I have brought in new leadership, we accelerated our pricing actions, we took decisive steps to improve execution, and we increased our retention rate. I am extremely proud of how everyone responded to these challenges, and to be perfectly transparent, the plan came together faster and better than we had hoped, notwithstanding that we had a lot of things fall our way in 2023. One of the main themes you will hear today is that when we experience a challenge in any part of our business, we do the research, we establish a strategy, and then we execute against that strategy.

Speaker Change: Since that time I brought in new leadership, we accelerated our pricing actions, we took decisive steps to improve execution and we increased our retention rates.

Speaker Change: I'm extremely proud of how everyone responded to these challenges and to be perfectly transparent. The plan came together faster and better than we had hoped notwithstanding that we had a lot of things fall our way in 2023.

Speaker Change: One of the main themes you will hear today is when we experienced a challenge in any part of our business. We do the research we establish a strategy and then we execute against that strategy.

William C. Cobb: This is what we did with our margins over the last two years, and this is now what we are focused on doing for our top line sales, which is a great transition to slide five. So, let me be clear, our top priority for 2024 is to focus on driving customer growth. We will do this by relaunching the American Home Shield brand, increasing direct-to-consumer sales, driving renewal rates higher, and expanding our on-demand revenue while positioning the company for an eventual turnaround in the real estate market. On the margin front, we feel very good about delivering a consistent margin profile in 2024 with the volatility of the past two years behind us. As a reminder, we had to take significant price increases to combat inflation and right-size our margins, which frankly impacted customer growth.

Speaker Change: This is what we did with our margins over the last few years and this is now what we're focused on doing for our top line sales, which is a great transition to slide five.

Speaker Change: So let me be clear our top priority for 'twenty 'twenty four is to focus on driving customer growth.

Speaker Change: We will do this by Relaunching, The American home Shield brand, increasing direct to consumer sales driving renewal rates higher and expanding our on demand revenue while positioning the company for an eventual turnaround and the real estate market.

Speaker Change: On the margin front, we feel very good about delivering a consistent margin profile in 'twenty 'twenty four with the volatility of the past two years behind us.

Speaker Change: As a reminder, we had to take significant price increases to combat inflation and rightsize, our margins, which frankly impacted customer growth now.

William C. Cobb: Now that inflation has come down and margins have stabilized, we do not need to continue to take double-digit price increases and can focus on growing our customer count over the long term. In addition to the objectives shown on this page, we have a host of initiatives designed to continue to build a strong foundation across our Contractor Relations, Procurement, and Technology groups. Many of these efforts are aimed at our longer-term goals, to enhance the customer experience, expand on-demand offerings, and improve operational efficiency, all with the ultimate objective of accelerating customer growth. Now turning to slide six and the significant long-term growth opportunity for home warranty. In the U.S., there are about 5 million homes that have a warranty.

Speaker Change: Now that inflation has come down and margins have stabilized we do not need to continue to take double digit price increases.

Speaker Change: Can focus on growing our customer count over the long term.

Speaker Change: In addition to the objective as shown on this page we have a host of initiatives designed to continue to build a strong foundation across our contractor relations procurement and technology groups.

Speaker Change: Many of these efforts are aimed at our longer term goals to enhance the customer experience expand on demand offerings and improve operational efficiency.

Speaker Change: All with the ultimate objective of accelerating customer growth.

Speaker Change: Now turning to slide six and the significant long term growth opportunity for home warranties.

In the U S. There are about 5 million homes that have a warranty.

William C. Cobb: We believe that figure could be approximately three times higher if consumers could better understand the value of a home warranty. As the category leader, it is our job to solve that problem and drive demand for our product. Let me quickly walk you through some of the main reasons consumers should buy a home warranty from American Home Shield. First, we offer homeowners financial protection from expensive repairs or replacements that will inevitably happen. The median savings account balance for American households is only $5,300, according to the last Federal Reserve survey.

Speaker Change: We believe that figure could be approximately three times higher if consumers could better understand the value of a home warranty as.

Speaker Change: As the category leader it is our job to solve that problem and drive demand for our products.

Let me quickly walk you through some of the main reasons consumers should buy a home warranty for American home Shield.

Speaker Change: First we offer homeowners financial protection from expensive repairs or replacements that will inevitably happen the.

Speaker Change: The median savings account balance for American households is only $5300. According to the last federal Reserve's survey.

William C. Cobb: So this aspect of our value proposition specifically appeals to those homeowners. Second, we offer customer convenience. You don't have to deal with climbing into your hot attic to see why your air conditioner is not working.

Speaker Change: So this aspect of our value proposition, specifically appeals to those homeowners.

Speaker Change: We offer customer convenience you don't have to deal with climbing into your heart advocacy, while your air Conditioner is not working.

William C. Cobb: Nor do you have to deal with finding a reliable and insured contractor. We have built a curated nationwide contractor network to support you. And unlike an insurance company, we typically don't just write you a check. We take care of covered repairs for you and get you back up and running. [inaudible] that the work will be done right and guaranteed so that you can feel in control of your home. Owning a home can be challenging, and the value proposition that we offer is still very relevant to consumers. Homeowners just want their systems and appliances to work, and that is exactly the service we provide. On slide 7, you will see that American Home Shield is the largest home warranty company with 2 million customers and 16,000 contractors and that we completed approximately 4 million service requests last year.

Speaker Change: Or do you have to deal with finding a reliable uninsured contractor.

Speaker Change: We have built a curated nationwide contractor network to support you and unlike an insurance company. We typically don't just write you a check we take care of covered repairs for you and get you back up and running.

And finally, our value proposition offers peace of mind.

Speaker Change: That the work will be done right and guaranteed so that you can feel in control of your home.

Speaker Change: Owning a home can be challenging and the value proposition that we offer is still very relevant to consumers.

Or is just want their systems and appliances to work and that is exactly the service we provide.

Speaker Change: On slide seven you will see that American home Shield is the largest home warranty company with 2 million customers and 16000 contractors.

Speaker Change: And that we completed approximately 4 million service requests last year.

William C. Cobb: We have built a virtuous flywheel where our size gives us leverage with our contractors and suppliers. This provides us with a superior margin profile, which we can then invest in the business. As the leader in the category, we have the opportunity to reset the industry by changing our approach to what a home warranty is and how we should go to market. We will do that by relaunching the American Home Shield brand to reignite unit growth, as shown on slide eight. Let me start by answering the question, why a relaunch and what exactly that means. To stay relevant, smart brands must evolve. This is especially true with category leaders who have been around for a while.

We have built a virtuous flywheel, where our size gives us leverage with our contractors and suppliers.

Speaker Change: This provides us with a superior margin profile, which we can then invest in the business.

Speaker Change: The leader in the category, we have the opportunity to reset the industry by changing our approach to what our home warranty is and how we should go to market.

Speaker Change: Yeah.

Speaker Change: We will do that by Relaunching, The American home Shield brand to reignite unit growth as shown on slide eight.

Speaker Change: Let me start by answering the question why our relaunch and what exactly does that mean.

Speaker Change: So stay relevant smart brands must evolve.

Speaker Change: This is especially true with category leaders, who have been around for a while American home shield has over 50 years old and we have built tremendous equity with millions of homeowners.

William C. Cobb: American Home Shield is over 50 years old, and we have built tremendous equity with millions of homeowners. But there is a time when even the best consumer brands must bring a fresh approach to the marketplace. Think Duncan or Domino's, Arby's, or Old Spice.

Speaker Change: But there was a time when even the best consumer brands must bring a fresh approach to the marketplace.

Speaker Change: Thank duncan or dominoes, arby's or old Spice.

William C. Cobb: It is now our time. So, let's get specific about what we mean by a brand relaunch. First, we are improving our brand positioning strategy. Our consumer research tells us that consumers are failing to understand the value a home warranty brings.

Speaker Change: It is now our time.

Speaker Change: So let's get specific about what we mean by a brand relaunch first we are improving our brand positioning strategy or.

Speaker Change: Our consumer research tells us that consumers are failing to understand the value of home warranty break.

William C. Cobb: As the category leader, we must do a better job of educating homeowners, and that is exactly what this brand new launch will accomplish. We will explain what it means to, quote, warranty your home, unquote, in a creative, memorable way. Second, we are improving how we execute that strategy with an innovative ad campaign, a new tagline, a new logo, as well as a new brand voice and visual identity that will launch in early April. Third, we will drive greater interest through the use of a celebrity spokesperson across our marketing channels. Fourth, the relaunch will be supported by a refreshed, more user-friendly website, which will launch in late March to support the early April media campaign.

Speaker Change: As the category leader, we must do a better job of educating homeowners and that is exactly what this brand relaunch will accomplish.

Speaker Change: We will explain what it means to quote warranty or home unquote, and a creative memorable way.

Speaker Change: Second we are improving how we execute that strategy with an innovative ad campaign.

Speaker Change: New tagline on new logo as well as a new brand voice and visual identity that will launch in early April.

Speaker Change: Third we will drive greater interest through the use of a celebrity spokesperson across our marketing channels.

Speaker Change: Fourth the relaunch will be supported by a refreshed more user friendly website, which will launch in late March to support the early April media campaign.

William C. Cobb: I am extremely excited about what the relaunch of American Home Shield can do for us. Now, turning to slide nine and an update on our real estate channel. The National Association of Realtors, or NAR, reported that existing home sales declined 20% in 2023 to 4.1 million homes, the lowest level since 1995. Mortgage rates increased to an average of 6.8% in 2023, a 22-year high, which impacted consumer affordability. At the same time, inventory still remains tight. NAR reported properties remained on the market for just 36 days in January, which is a slight increase from the 33 days a year ago but well below the normal level. We sell our products through real estate brokers. And last year, we had significantly fewer opportunities to include a home warranty as part of a home sale because of the challenging housing market.

I am extremely excited about what the relaunch of American home Shield can do for us now.

Speaker Change: Now turning to slide nine and an update on our real estate channel.

Speaker Change: National Association of Realtors or in our reported that existing home sales declined 20% in 2023 to $4 1 million homes, the lowest level since $19 95.

Speaker Change: Oregon rates increased to an average of six 8% in 2023, a 22 year high which impacted consumer affordability.

At the same time inventories still remains tight.

Speaker Change: <unk> reported properties remained on the market for just 36 days in January which is a slight increase from the 33 days a year ago, but well below normal levels.

Speaker Change: We sell our products through real estate brokers and last year, we had significantly fewer opportunities to place our home warranty as part of our home sale because of the challenging housing market.

William C. Cobb: In fact, our real estate channel sales in 2023 were less than half of what they were five years ago, as macro factors continue to be a drag on our revenue, profitability, and cash flows. As a result of these trends persisting over the last several years, we have taken steps to optimize our real estate channel spend. We have reduced the size of our sales team, worked to optimize agreements with our real estate partners, and continue to look at new and creative ways to market our products to drive sales. In short, it's a tough market.

Speaker Change: In fact, our real estate channel sales in 2023 were less than half of what they were five years ago as a macro factors continue to be a drag on our revenue profitability and cash flows.

Speaker Change: As a result of these trends persisting over the last several years, we have taken steps to optimize our real estate channel spend.

Speaker Change: We have reduced the size of our sales team worked to optimize the agreements with our real estate partners and continue to look at new and creative ways to market our products to drive sales.

Speaker Change: In short, it's a tough market.

William C. Cobb: But we will be well-positioned for when the market improves for all the warranties. Looking forward to 2024, there are signs the market will improve. NAR is projecting sales to increase to 4.7 million homes, and inventory levels could improve as more sellers enter the market.

Speaker Change: But we will be well positioned for when the market improves or a home warranty sales.

Speaker Change: Looking forward in 2024, there are signs of market will improve nor is projecting sales to increase to $4 7 million homes and inventory levels could improve as more sellers into the market.

William C. Cobb: However, we have not seen any material improvements in our real estate business so far this year, and until we see more tangible proof, it will continue to be a drag on our overall sales. Now, turning to slide 10, where we've continued to see impressive improvements in our retention rates over the last few years. By the end of 2023, our attention rate increased to 76.2%. While this includes a lower mix of real estate customers, retention rates definitely exceeded our expectations last year. And how have we done this?

Speaker Change: However, we have not seen any material improvements in our real estate business. So far this year and until we see more tangible proof. It will continue to be a drag on our overall sales.

Speaker Change: Now turning to slide 10, where we've continued to see impressive improvements in our retention rates over the last few years.

Speaker Change: For the end of 2023, our retention rate increased to 76, 2%.

While this includes a lower mix of real estate customers retention rates definitely exceeded our expectations last year.

Speaker Change: And how we've done this we've taken the steps to fully understand the customer lifecycle journey and have implemented a wide range of initiatives to improve retention, including better engaging our customers specifically during the onboarding process.

William C. Cobb: We've taken the steps to fully understand the customer lifecycle journey and have implemented a wide range of initiatives to improve retention, including better engaging our customers, specifically during the onboarding process. Expanding Dynamic Pricing to Minimize Churn. Continuing to improve the customer experience, with a large part of that effort coming from increasing utilization of our preferred contract. This has the dual benefit of lowering costs while delivering a better experience.

Speaker Change: Expanding dynamic pricing to minimize churn.

Speaker Change: Continuing to improve the customer experience with a large part of that effort coming from increasing utilization of our preferred contractors. This has the dual benefit of lowering costs, while delivering a better experience in fact, our customer five star ratings increased to an all time high in 2023.

William C. Cobb: In fact, our customer five-star ratings increased to an all-time high in 2023, while our one-star rating decreased to an all-time low. And finally, we increased the number of customers on auto pay to a record 86% in 2023, which makes them much more likely to renew their home warranty. We know there's more we can do to improve our customer service, and we are diligently working on those initiatives, but I am super proud of our team's accomplishments in this area. Now turning to slide 11, our on demand services. We have been making a lot of changes to this part of our business, which is approaching $100 million in revenue. And I want to take a moment to clarify how we think about on demand. We launched the new Frontdoor brand last year to provide a digital solution to expand our customer base. We built an app.

Speaker Change: While our one star rating decreased to an all time low.

Speaker Change: And finally, we have increased the number of customers on auto pay to a record 86% in 2023, which makes them much more likely to renew their home warranty.

Speaker Change: We know there's more we can do to improve our customer service and we are diligently working on those initiatives, but I am super drought of our team's accomplishments in this area.

Speaker Change: Now turning to slide 11 in our on demand services, we have been making a lot of changes to this part of our business, which is approaching $100 million of revenue and I wanted to take a moment to clarify how we think about on demand.

Speaker Change: We've launched a new front door brand last year to provide a digital solution to expand our customer base. We built an app, we are providing access to video chat with an expert and we have other services such as partner discounts available to our customers through the App.

William C. Cobb: We are providing access to video chats with an expert, and we have other services, such as partner discounts, available to our customers through the app. At this point, there are three parts to our on-demand business: upgrades, maintenance services, and appliance repair services. Upgrades are currently the largest part of our on-demand business. We expanded our HVAC upgrade program last year, which grew to $50 million.

Speaker Change: At this point there are three parts to our on demand business upgrades maintenance services and appliance repair services.

Speaker Change: Grades are currently the largest part of our on demand business, we expanded our HVAC upgrade program last year, which grew to $50 million.

William C. Cobb: This year we are targeting it to grow even more. Over time, we intend to further expand upgrades to include hot water heaters and appliances. Second, we offer maintenance services. This includes things like HVAC tune-ups, dryer vent cleaning, and carpet cleaning.

Speaker Change: This year, we're targeting it to grow even more overtime, we intend to further expand upgrades to include hot water heaters and appliances.

Speaker Change: Second is maintenance services. This includes things like HVAC, tune-ups dryer vent cleaning and carpet cleaning.

William C. Cobb: Over time, we are looking to expand into additional preventive maintenance offerings. Third, the appliance repair service that we are offering in a limited number of markets today. The plan is to expand into additional geographies while also looking to broaden our offering in our traditional trade. What I like about the approach we're taking is that we're doing it methodically and with a heavy focus on execution and delivering on near-term revenue. Additionally, we are investing in the tech resources and capabilities required to enhance access to these services through the app. In closing, 2023 was a terrific year for us.

Speaker Change: Over time, we are looking to expand into additional preventive maintenance offerings.

Speaker Change: Third appliance repair service that we're offering in a limited number of markets today the.

Speaker Change: The plan is to expand into additional geographies, while also looking to broaden our offering into our traditional trades.

Speaker Change: What I like about the approach. We're taking is that we are doing it methodically and with a heavy focus on execution and delivering on near term revenue.

Speaker Change: Additionally, we are investing in the tech tech resources and capabilities required to enhance access to these services through the app.

Speaker Change: In closing 2023 was a terrific year for US we took decisive action to improve execution that resulted in record financial performance.

Jessica P. Ross: We took decisive action to improve execution that resulted in record financial performance. I will now turn the call over to Jessica to cover our financial results in more detail. Thanks, Bill. And good morning, everyone.

Speaker Change: I will now turn the call over to Jessica to cover our financial results in more detail.

Jessica Ross: Thanks Al and good morning, everyone. It is amazing to see the progress <unk> has made since I last spoke at our Investor day 12 months ago.

Jessica P. Ross: It is amazing to see the progress Frontdoor has made since I first spoke at our Investor Day just 12 months ago. We took decisive actions to improve execution and combat a challenging environment, which contributed to growth margins rebounding to the highest levels in nearly 10 years, along with record adjusted EBITDA. I could not be more proud of our team and what we have accomplished together since I started 14 months ago.

Jessica Ross: We took decisive actions to improve execution and combat a challenging environment, which contributed to gross margins rebounding to the highest levels in nearly 10 years, along with record adjusted EBITDA.

Jessica Ross: I could not be more pads team and what we have accomplished together since I started 18 months ago.

Jessica P. Ross: Please turn to slide 12 and our fourth quarter financial summary. Fourth quarter revenue increased 8% versus the prior year period to $366 million. Net income increased 4% to $9 million, and adjusted EBITDA increased 35% to $45 million. Next, we will move to slide 13, where gross profit for the quarter increased 22% versus the prior year period to $177 million. And our gross margin increased 570 basis points to 48%. Let's now move to the adjusted EBITDA bridge on slide 14. Starting at the top, we have $29 million of favorable revenue conversion, driven by a 15% increase in price over the prior year period, partly offset by a 7% decline in volume. Contract claims cost decreased $4 million, which was better than expected.

Jessica Ross: Please turn to slide 12, and our fourth quarter financial summary.

Jessica Ross: Fourth quarter revenue increased 8%.

Jessica Ross: <unk> $366 million net.

Jessica Ross: Net income increased 4% to $9 million.

Jessica Ross: And adjusted EBITDA increased 35% $45 million.

Jessica Ross: Next I'll move to slide 13, gross profit for the quarter increased 22%.

Jessica Ross: Purion <unk> hundred $77 million.

Jessica Ross: Gross margin increased 570 basis points.

Yes.

Jessica Ross: Let's now move to the adjusted EBITDA Bridge on Slide 14.

Jessica Ross: Starting at the top we had $29 million at Dave.

Jessica Ross: Favorable revenue comparison, driven by a 15% increase in price over the prior year period.

Jessica Ross: That 7% decline in volume.

Jessica Ross: Contract claims costs decreased $4 million, which was better than expected.

Jessica P. Ross: This includes $10 million of favorable weather, a transition to higher service fees, and continued process improvement initiatives, which was partially offset by ongoing inflationary pressure, as well as a $19 million change in favorable claims cost development. Sales and marketing costs increased $17 million over the prior year period, primarily due to investments to drive growth in our direct-to-consumer channel and our Frontdoor brand. And finally, general and administrative costs increased $6 million, primarily due to increased personnel costs.

Jessica Ross: This includes $10 million.

Jessica Ross: <unk> weather.

Jessica Ross: A transition to higher service fee.

Jessica Ross: And continued process improvement initiatives, which is partially offset by ongoing inflationary pressure as well as a $19 million change in favorable claims development.

Jessica Ross: Sales and marketing costs increased $17 million over the prior year.

Jessica Ross: Year period, primarily due to investments to drive wireless and our tobacco consumer channel and our fan club brand and.

Jessica Ross: And finally general and administrative costs increased $6 million.

Jessica Ross: Primarily due to increased personnel costs.

Jessica P. Ross: Please turn to slide 15, where I'll review highlights from our 2023 financial results. Revenue increased 7% versus the prior year to $1.78 billion, net income more than doubled to $171 million, and adjusted EBITDA increased 62% to a record $346 million. Now turning to slide 16, where gross profit for the year increased 25% to $885 million, and our growth margin increased 700 basis points versus 2022 to 50%, which is also a nine-year high. Now moving to slide 17, where we will walk through the decisive actions we took to improve our margins in response to the challenging macroeconomic environment. First, we were aggressive about price in response to rising inflation, which resulted in an 11% increase in realized price in 2023. As a reminder, we typically sell 12 month contracts. So pricing actions take 24 months to fully show up in our financials. It takes about 12 months to impact all relevant contracts, and then another 12 months for those contracts to fully translate into earned revenue.

Speaker Change: Please turn to slide 15, where I'll review highlights from our 2023 financial results.

Speaker Change: Revenue increased 7% practice to prior year to $1 $78 billion.

Speaker Change: Net income more than doubled to $171 million and adjusted EBITDA increased 62%.

Speaker Change: $346 million.

Speaker Change: Now turning to slide 16 gross profit for the year increased 25% to $885 million and our gross margin increased 700 basis points versus 2022.

Speaker Change: 8%, which is also a nine year high.

Speaker Change: Now moving to slide 17, where we will walk through the decisive actions we took to.

Speaker Change: <unk> margins in response to the challenging macroeconomic environment.

Speaker Change: First we were aggressive about price in response to rising inflation, which resulted in an 11% increase in realized price in 2023.

Speaker Change: As a reminder, we typically sell 12 month contract.

Speaker Change: So pricing actions take 24 months to fully show up in our financials. It.

Speaker Change: It is about 12 months to impact all relevant contract and then another 12 months, but those contracts have following translate into earned revenue.

Jessica P. Ross: Second, we improved cost control and planning processes. Third, we leveraged our purchasing power with suppliers and contractors. And finally, we implemented a new review process for our highest cost jobs.

Speaker Change: Second we improved cost control and planning processes.

Speaker Change: We leveraged our purchasing power with suppliers and contractors and finally, we implemented a new review process for our highest cost jobs.

Jessica P. Ross: Let's now move to the adjusted EBITDA bridge on slide 18. Starting at the top, we had $126 million of favorable revenue conversion, driven by an 11% increase in price, partly offset by a 4% decline in volume. Contract claims cost decreased $52 million compared to the full year 2022.

Speaker Change: Let's now move to the adjusted EBITDA Bridge on Slide 18.

Speaker Change: Starting at the top we had $126 million of favorable revenue conversion driven by an 11% increase in price.

We offset by a 4% decline in volume.

Speaker Change: Contract claims costs decreased $52 million compared to the full year 2022.

Jessica P. Ross: This improvement was driven by a lower number of service requests per customer, which includes a $30 million impact from favorable weather. A $23 million change in claims cost development, as we have favorable claims cost development of $11 million in 2023, compared to a $12 million unfavorable claims cost development in 2022, a transition to higher service fees, and continued process improvement initiatives. All of that was partially offset by higher costs driven by inflation of 5%. Sales and marketing costs increased $46 million versus full year 2022, primarily related to the Frontdoor brand, as well as investments in the direct-to-consumer channel to drive sales. Customer service costs decreased $6 million, primarily due to a lower number of service requests. General and administrative expenses increased $15 million, primarily due to increased personnel costs.

Speaker Change: This improvement was driven by a lower number of services per customer, which includes a $30 million impact and favorable weather.

Speaker Change: A $23 million change in claims cost development as we had favorable claim cost development of $11 million in 2023 compared to a $12 million unfavorable claims cost development in 2022.

Speaker Change: A transition to higher service fees.

Speaker Change: And continued process improvement initiatives.

Speaker Change: All of that was partially offset by higher costs driven by inflation of 5%.

Speaker Change: Sales and marketing cost increased $46 million versus full year 2022, primarily related to the strength of our brand as well as investments in the direct to consumer channel to drive sales.

Speaker Change: Customer service costs decreased $6 million, primarily due to a lower number of service requests.

Speaker Change: General and administrative expense increased $15 million, primarily due to increased personnel costs.

Jessica P. Ross: And interest and net investment income increased $13 million as a result of rising interest rates on cash deposits. All of this culminated into a 62% increase in adjusted EBITDA in 2023. Let's now turn to slide 19 for a review of our Statement of Cash Flows. Net cash provided from operating activities was $202 million for the 12 months ended December 31st. Net cash used for investing activities was $32 million and was primarily comprised of capital expenditures related to investments in technology. Net cash used for financing activities was $137 million and was mainly comprised of share repurchases.

Speaker Change: And the interest and net investment income increased $13 million as a result of rising interest rates on cash deposits.

Speaker Change: All of this culminated into a 62% increase in adjusted EBITDA in 2023.

Speaker Change: Let's now turn to slide 19 for a review of our statement of cash flows.

Speaker Change: Net cash provided from operating activities was $202 million for the 12 months ended December 31.

Speaker Change: Net cash used for investing activities was $32 million and was primarily comprised of capital expenditures related to investments in technology.

Speaker Change: Net cash used for financing activities was $137 million and was mainly comprised of share repurchases.

Jessica P. Ross: We returned $120 million to our valued investors by repurchasing 3.6 million shares in 2023, or approximately 4% of our outstanding shares. You will also see that our free cash flow was $170 million for the 12 months ended December 31st. We ended the year with $325 million in cash. This was comprised of $157 million of restricted net assets and $168 million of unrestricted cash.

Speaker Change: We returned $120 million to our valued investors by repurchasing $3 6 million shares in 2023 or approximately 4% of our outstanding shares.

Speaker Change: You will also see that our free cash flow was $170 million for the 12 months ended December 31st.

Speaker Change: We ended the year with $325 million in cash.

Speaker Change: This was comprised of $157 million at restricted net assets and unrestricted cash of $168 million.

Jessica P. Ross: Now, before I get to our outlook, I'd like to review our current capital structure in more detail. We have an extremely strong financial position and a consistent capital allocation framework. Our number one priority is to focus on growth, and we will continue to prioritize investments that expand revenue, both organically and through opportunistic 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.

Speaker Change: Now before I get to our outlook I would like to review our current capital structure in more detail.

Speaker Change: We have an extremely strong financial position and a consistent capital allocation framework.

Speaker Change: Our number one priority is to focus on growth and we will continue to prioritize investments that expand revenue, both organic and through opportunistic M&A.

Speaker Change: 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.

Jessica P. Ross: We currently have a modest level of debt, and we have an extremely strong net leverage ratio of 1.2 times. And finally, our third objective is to return cash to shareholders. As a reminder, we have returned a total of $280 million through share repurchases since we initiated the program in 2021. This amounts to 8.1 million shares, or approximately 10% of our outstanding share count.

Speaker Change: We currently have a modest level of debt and we have an extremely strong net leverage ratio of one two times.

And finally, our third objective is to return cash to shareholders. As a reminder, we have returned a total of $280 million through share repurchases. Since we initiated the program in 2021.

Speaker Change: This amounts to $8 1 million shares or approximately 10% of our outstanding share counts.

Jessica P. Ross: Looking ahead, we are targeting $100 million of repurchases in 2024. Now turning to slide 21, where I will walk through our first quarter and full year 2024 outlook. We expect our first quarter revenue to be between $370 and $380 million, which reflects an upper single-digit increase in our renewal revenue, a decline in real estate revenue of approximately 20 to 25 percent, a roughly 20% decline in our D2C revenue, and a $5 million increase in other revenue to $17 million. First quarter adjusted EBITDA is expected to range between $40 and $50 million.

Speaker Change: Looking ahead, we are targeting $100 million every purchases in 2024.

Speaker Change: Now turning to slide 21, where I'll walk through our first quarter and full year 2020 for outlook.

Speaker Change: We expect our first quarter revenue to be between 370 and $380 million, which.

Speaker Change: Which reflects an upper single digit increase in our renewal revenue.

Speaker Change: A decline in real estate revenue of approximately 20% to 25%.

Speaker Change: A roughly 20% decline in our D to C revenue.

Speaker Change: And a $5 million increase in other revenue to $17 million.

Speaker Change: First quarter adjusted EBITDA is expected to range between 40 and $50 million.

Jessica P. Ross: The decline from the prior-year period is driven by an increase in marketing investments to drive DDC sales, which also reflects better pacing of marketing spend throughout the year and will set us up for our brand relaunch in the second quarter. I would also like to mention that this outlook does not include a significant impact from weather. While we experienced an increase in service requests due to the cold weather in January, this was largely offset by favorable weather in February.

Speaker Change: The decline from the prior year period is driven by an increase in marketing investments to drive DTC sales, which also reflects better pacing of marketing spend throughout the year.

Speaker Change: And we will set us up for our brand relaunch in the second quarter.

Speaker Change: I would also like to mention that this outlook does not include a significant impact from weather.

Speaker Change: While we experienced an increase in service requests in the cold weather in January this was largely offset by favorable weather in February.

Jessica P. Ross: Before I turn to our full-year outlook, I want to take a moment to address the 2025 outlook we provided at our Investor Day last year. At the time, we targeted $300 million of adjusted EBITDA by the end of 2025. We have absolutely exceeded that objective, two years earlier than we expected. We also shared a $2 billion revenue target. A lot has changed since then.

Speaker Change: Before I turn to our full year outlook I want to take a moment to address the 2025 outlook, we provided at our Investor day last year.

Speaker Change: At the time, we targeted $300 million of adjusted EBITDA by the end of 2025.

Speaker Change: We have absolutely exceeded that objective and two years earlier than we expected.

Speaker Change: We also shared a $2 billion revenue target.

Speaker Change: A lot has changed since then.

Jessica P. Ross: We provided that outlook at a time when we thought that the real estate channel was going to significantly improve, which has not happened. At this point, we are solely focused on delivering on our 2024 objectives. Once we assess how the AHS ground relaunch goes, as well as how market conditions evolve throughout this year, we will come back to you with an update on our 2025 goals. Now for our 2024 outlook.

Speaker Change: We provided that outlook at a time when we thought that the real estate channel that's going to significantly improve.

Speaker Change: Which has not happened.

Speaker Change: At this point, we are solely focused on delivering on our 2024 objectives.

Speaker Change: Once we have SaaS, how the Hs brand relaunch goes as well as how market conditions evolve throughout this year, we will come back to you with an update on our 2025 balls.

Speaker Change: Now for our 2024 outlet.

Jessica P. Ross: Starting with revenue, which we expect to range between $1.81 and $1.84 billion. This assumes a mid-single-digit increase in the renewal channel, a 10% decline in the G2C channel, and a 15 to 20 percent decline in the real estate channel. It also assumes other revenue will increase approximately 30% to $100 million, primarily driven by sales from our HVAC program.

Starting with revenue, where we expect it to range between $1 eight one and $1 8 billion.

Speaker Change: This assumes a mid single digit increase in the renewal channel.

Speaker Change: A 10% decline in the DTC channel.

Speaker Change: And a 15% to 20% decline in the real estate channel.

Speaker Change: It also assumes other revenue will increase approximately 30% to $100 million.

Speaker Change: Primarily driven by sales from our HVAC program.

Jessica P. Ross: Our revenue guide also assumes a mid-single-digit increase in realized price, which will be delivered through our dynamic pricing model to minimize churn. Due to the timing of our price increases, we would expect slightly more revenue at the beginning of the year, which will then taper as the year progresses. To be clear, we priced for a much higher rate of inflation than what we experienced in 2023. As a result, our growth margins rebounded back to normalized levels in the upper 40% range. Now that inflation expectations have moderated, we can turn our focus to growing our customer base, although this will be offset by a mid-single-digit decline in realized volume from lower customer counts.

Our revenue guidance also assumes a mid single digit increase in realized price, which will be delivered to our dynamic pricing model to minimize churn.

Speaker Change: Due to the timing of our price increases we would expect slightly more price at the beginning of the year, which will then taper as the year progresses.

Speaker Change: To be clear, we price for a much higher rate of inflation than what we experienced in 2023.

Speaker Change: As a result, our gross margins rebounded back to normalized levels in the upper 40% range.

Speaker Change: Now that inflation expectations have moderated we can turn our focus to growing our customer base.

Speaker Change: This will be offset by a mid single digit decline in realized volume from lower customer counts.

Jessica P. Ross: As a reminder, our 2023 customer count was down 6%, and we expect this to decline 1 to 3% in 2024 to approximately 1.95 million. As we look at this by channel, we would expect the largest decline to come from real estate. Additionally, our renewal channel is expected to slightly fall in 2024 as a result of a decline in our go-to-market channels flowing through. We expect our full-year gross profit margin outlook to be between 48.5% and 49.5%. It is important to note that we are lapping $30 million of favorable weather in 2023, which amounts to about 200 basis points of margin. It also reflects a slightly higher mix of on-demand services. So we are very much viewing this as delivering stable margins in our core business this year. Our guide also assumes that inflation will be in the mid-single digits on a net cost-per-service request basis. Additionally, the number of service requests is expected to decline 5% to approximately 3.7 million, which assumes a slightly higher incidence rate across a lower total number of customers.

Speaker Change: As a reminder, our 2023 customer account was down 6%.

Speaker Change: And we expect this to decline 1% to 3% in 2024 to approximately $195 million.

Speaker Change: As we look at this by channel, we would expect the largest declines have come from real estate.

Speaker Change: Additionally, our renewals channel is expected to slightly fall in 2024 as a result of a decline in our go to market channels flowing through.

Speaker Change: We expect our full year gross profit margin outlook to be between 48, five and 49, 5%.

Speaker Change: It is important to note that we are lapping $30 million of favorable weather in 2023, which amounts to about 200 basis points of margin.

Speaker Change: It also reflects a slightly higher mix of on demand services.

Speaker Change: So we are very much viewing that as delivering stable margins in our core business. This year.

Speaker Change: Our guidance also assumes that inflation will be in the mid single digits on a net cost per service request basis.

Speaker Change: Additionally, the number of service request is expected to decline, 5% to approximately $3 7 million, which assumes a slightly higher incidence rate across a lower total number of customers.

Jessica P. Ross: Our full-year SG&A target is between $580 and $595 million and includes a shift of marketing investments from the Frontdoor brand to the American Home Shield brand to support the remod. In total, we are essentially holding SG&A spend flat as we grow revenue. Based on these inputs, we expect our full-year adjusted EBITDA range to be between $350 and $360 million. Our full-year outlook also includes $11 million of interest income and reflects stock compensation expense of approximately $35 million. And finally, we expect our full-year capital expenditures to range between $35 and $45 million, and the annual effective tax rate to be approximately 25%. Turning to slide 22.

Speaker Change: Our full year SG&A target is between $580 million and $595 million and includes a shift of marketing investments in the front store brand to the American home Shield brand to support the relaunch.

Speaker Change: In total we are essentially holding SG&A spend flat as we grow revenue.

Speaker Change: Based on these inputs, we expect our full year adjusted EBITDA range to be between 350 and $360 million.

Speaker Change: Our full year outlook also includes $11 million of interest income and reflect stock compensation expense of approximately $35 million.

Speaker Change: And finally, we expect our full year capital expenditures to range between 35, and $45 million and the annual effective tax rate to be approximately 25%.

Speaker Change: Turning to slide 22.

Jessica P. Ross: Before I close, I want to make a very important point. 2023 was a truly exceptional year, one of outsized financial performance; adjusted EBITDA was up 62%. And as much as I would love to continue that performance, I don't think that is realistic.

Speaker Change: Before I close I want to make a very important point.

Speaker Change: 2023 was a truly exceptional year.

Speaker Change: One of outsized financial performance.

Speaker Change: Adjusted EBITDA was up 62%.

Speaker Change: And as much as I would love to continue that performance.

Speaker Change: I don't think that is realistic.

William C. Cobb: Instead, I look to our two-year adjusted EBITDA CAGR from 2022 through 2024, which is expected to be up nearly 30%. That's an impressive return. I will now turn it back over to Bill for a closing statement.

Speaker Change: Instead, I look to our two year adjusted EBITDA CAGR from 2022 through 2024, which.

Speaker Change: Which is expected to be up nearly 30%.

Speaker Change: That's an impressive return.

Speaker Change: I will now turn it back over to Bill for closing statements.

William C. Cobb: Thanks, Jessica. In closing, I want to leave you with the top reasons to invest in Frontdoor, Inc., as shown on slide 23. First, we are the leader in home warranties and have a massive growth opportunity. Second, we have a great core business that is supported by a recurring revenue model. And I believe our American Home Shield brand is at an inflection point for future growth. Third, our margins have rebounded, and we are looking to deliver a consistent margin profile in 2024. Fourth, we generate a significant amount of cash, and we use that to aggressively repurchase their shares. And finally, it is clear to me that Frontdoor's share price is significantly undervalued. When you look at slide 24, you can see that our adjusted EBITDA multiple is at an all-time low.

Speaker Change: Ill.

Bill: Thanks, Jessica in closing I want to leave you with the top reasons to invest in front door ache as shown on slide 23.

Bill: First we are the leader in home warranties and have a massive growth opportunity.

Bill: We have a great core business that is supported by a recurring revenue model and I believe our American home Shield brand is at an inflection point for future growth.

Bill: Third our margins have rebounded and were looking to deliver a consistent margin profile in 2024.

Bill: Fourth we generate a significant amount of cash and we use that to aggressively repurchase shares.

Bill: And finally, it is clear to me that <unk> share price is significantly undervalued when.

Bill: When you look at Slide 24, you can see that our adjusted EBITDA multiple is at an all time low.

William C. Cobb: We're currently trading at an approximately nine times multiple, well below our peak multiple of approximately 18 times, and also below our average of 13 times. Logic would say that our valuation has to improve as we continue to deliver strong financial performance, our growth initiatives take root, and as market conditions normalize. So, operator, let's now open the line for questions. Thank you. If you would like to ask a question, please press star followed by one on your telephone keypad. If you would like to withdraw your question, please press star followed by two. When preparing to ask a question, please ensure that your device is unmuted locally.

Bill: We are currently trading at approximately nine at an approximately nine times multiple.

Bill: Well below our peak multiple of approximately 18 times and also below our average of 13 times.

Speaker Change: Logic would say that our valuation has to improve as we continue to deliver strong financial performance our growth initiatives take root and as market conditions normalize. So operator, let's now open the line for questions.

Speaker Change: Thank you if you would like to ask a question. Please press star followed by one on your telephone keypad. If you would like to withdraw your question. Please press star followed by two one.

Speaker Change: One for Brian to ask a question. Please ensure your device is on mute locally.

Operator: The first question today comes from Jeff Schmitt with William Blair. Your line is open, please go ahead. Hi, good morning, everyone.

Speaker Change: The first question today comes from Josh Sorry, Jeff Schmitt with William Blair. Your line is open. Please go ahead.

Jeff Schmitt: Hi, good morning, everyone.

Jeff Schmitt: In the DTC channel it looks like Youre expecting revenues to decline, 20% in Q1, I think and then 10% for 24, what do you think it will take to turn growth positive. There is it a pricing issue they need do they need to come down is it more advertising you think or is it just a just a broader.

Jeffrey Paul Schmitt: In the DTC channel, it looks like you're expecting revenues to decline 20% in Q1, I think, and then 10% for the next 24. What do you think it will take to turn growth positive there? Is it a pricing issue? Do they need to come down?

William C. Cobb: Is it more advertising, you think? Or is it just a broader industry issue where you need consumer demand to be stronger? Keep going, Jeff.

Jeff Schmitt: And this reissue we meet consumer demand to be stronger.

Speaker Change: Jeff I don't know.

William C. Cobb: No, you've captured it pretty well. I think the industry is the biggest issue. We've had, you know, the real estate market, which really, really has an overlay on the entire industry. Since that has moved to such a strong sellers' market, it has really dampened real estate sales, which has had some impact on DTC. We haven't done a good job, as I said, of talking about the value of the homeowner guarantee. I think the brand is a little tired.

Jeff Schmitt: You captured it pretty well I think the industry is the biggest issue we have had.

Jeff Schmitt: Since the real estate market, which really really has an overlay to the entire industry.

Jeff Schmitt: Since that has moved to such is such a strong seller's market. It is really damn good real estate sales, which has had has had some impact on DTC. We havent done a good job as I said talking about the value of the home warranty I think the brands a little tired I think thats where were doing this relaunch.

William C. Cobb: I think that's why we're doing this relaunch. So I think that freshening up the brand, and I referenced some other brands that have done this that are category leaders. I think our pricing efforts, you know, by stabilizing. We had to get our margins right, as you know. So we're not looking for the significant price increases that we've taken in the past. So I think this combination of factors will begin to turn things around. We're excited about our relaunch beginning in about a month. And, you know, I honestly believe this is going to turn out.

Jeff Schmitt: I think that freshening, the brand and I referenced some other brands that have done. This that are category leaders I think our pricing efforts by stabilizing we had to get our margins right as you know.

Jeff Schmitt: So we're not looking for the significant price increases that we've taken in the past. So I think this combination of factors will begin to turn things. We're excited about our re launch beginning in the beginning about a month and.

Jeff Schmitt: I honestly believe this is going to turn but we tried to give you a guide that we felt was appropriate at this point and we got to prove it.

Jeffrey Paul Schmitt: But we tried to give you a guide that we felt was appropriate at this point, and we have to prove it as the year goes on. Okay, great. And then on the on-demand business, what type of profitability do you expect from that kind of growth over time? I'm sure you'll build that out and spend more.

Jeff Schmitt: As the year goes on.

Speaker Change: Okay, Great and then on the on demand business what type of profitability do you expect from that kind of over time I'm sure you build that out and spend more.

William C. Cobb: Maybe you won't see it in 24, but over time, help us maybe think about that. I would think the upgrade program would be pretty profitable, but then you have to repair the maintenance pieces. So how should we think about that profitability? Yeah, I'll take it first.

Speaker Change: Maybe you won't see it in 'twenty four but over time.

Speaker Change: Help us maybe think about that I would think the upgrade program would be pretty profitable, but then you have to repair the maintenance pieces. So how should we think about that profitability.

William C. Cobb: And then Jessica, if you want to jump in, you know, at this point, because a lot of the upgrades have been with a repair credit, which has dampened our margins. I think over time, we think it's going to be a healthy business, most likely lower than home warranties. But the dollar volume, we like the revenue volume.

Speaker Change: Yes, I'll take it first and then Jessica if you want to jump in.

Speaker Change: At this point.

Speaker Change: Because a lot of the upgrades have been with our repair credit which has dampened our margins I think over time, we think it's going to be a healthy business, most likely lower than home warranties.

Speaker Change: But the dollar volume we liked the revenue.

William C. Cobb: And I think, you know, I think what we're starting to build a culture of is by being very methodical, and continuous improvement is part of our daily efforts. We're going to help to build that margin profile over time. So we feel good about it in the long term. But for now, it's, you know, it's clearly nowhere close to the home warranty margins. I don't know, Jessica, if there's anything else you want to add? No, I think you've covered it, Bill. It's going to be a mess.

Speaker Change: Volume and I think.

Speaker Change: I think what we've what we're starting to build a culture of is by being very methodical in.

Speaker Change: This improvement is as part of our daily efforts, we're going to help to build that margin profile over time. So we feel good about it in the long term, but for now.

Speaker Change: It's clearly nowhere close to the.

Speaker Change: As a home warranty.

Speaker Change: Margins I know, Jessica if theres anything else.

You've had it at bell, Okay, that's going to be.

Speaker Change: Matt.

Jeffrey Paul Schmitt: Okay, great. Thank you. Thank you, Jeffrey. We now turn to Brian Fitzgerald with Wells Fargo. Your line is open, please go ahead.

Jessica Ross: Okay, great. Thank you.

Jessica Ross: Thanks, Kevin.

Jessica Ross: We now turn to Brian Fitzgerald with Wells Fargo. Your line is open. Please go ahead.

Brian Nicholas Fitzgerald: Thanks guys. You talked, and thanks for the color on the marketing outlook around the DVC business. I wanted to ask, are you seeing anything X in what you're doing?

Brian Fitzgerald: Thanks, Sanjay you talked and thanks for the color on the marketing outlook around.

Brian Fitzgerald: The DTC business wanted to ask are you seeing anything.

Brian Fitzgerald: Thats, what you are doing.

William C. Cobb: Kind of indigenously, are you seeing anything, any changes to note in the promotional environment in the quarter in terms of your activity or your competitors' activity? And then, comparing your 24 plan to 23 and the relaunch, could you talk a bit about your approach both to marketing and promotion around the D&C Channel? Is the phasing there, is it going to be centered right around April, maybe very similar to what we saw with the Frontdoor rebrand? Will we see it? Are you going to pursue that same kind of playbook and phasing around the relaunch this year? Yeah, okay.

Brian Fitzgerald: Indigenously or are you seeing anything any changes.

Note and promotional environment in the quarter.

Speaker Change: In terms of your activity or your competitors' activity and then.

Speaker Change: Compared to 24 planned to 'twenty three.

Speaker Change: And the relaunch could you talk a bit about your approach to.

Speaker Change: Marketing and promotion around DTC channel is.

Speaker Change: Phasing there or is it going to be centered or right around April may be very similar to what we saw with <unk>.

Speaker Change: With the front door rebrand should we see it.

Speaker Change: Are you going to pursue that same kind of playbook and phasing.

Speaker Change: Around around the relaunch this year.

William C. Cobb: So on the first one, on promotional levels, we've been aggressive with our discounting. I think that's been common throughout the industry. Nothing out of the ordinary in Q4, but I think it's been pretty consistent.

Speaker Change: Yeah, Okay. So on the first one on the promotional levels, we've been aggressive on our discounting I think thats been carbon throughout the industry nothing.

Speaker Change: Out of the ordinary in Q4, but I think it's been pretty consistent.

William C. Cobb: And, you know, with the, we've had to be more aggressive on discounting because of all the pricing actions we took. And we've talked about that. With regard to AHS, I think, you know, obviously, we're pointing a lot of things at April. But this is, and this is different than Frontdoor, we're trying to establish a new brand. We're trying to introduce, you know, build awareness, etc. We have a high awareness of American Home Shield.

Speaker Change: With <unk>, we've had to be more aggressive on discounting because of all the pricing actions, we took and we've talked about that with regards to IHS.

Speaker Change: Obviously, you are pointing a lot of things to April but this is and this is different than front door, we're trying to establish a new brand.

Speaker Change: We're trying to introduce build awareness et cetera, we have high awareness of American home Shield. This is going to be the start of a continuous effort to improve the value proposition for American home shield. So it kicks off with the with all the things I talked about a new logo and a refreshed website, new advertising celebrity and all that stuff, but that is.

William C. Cobb: This is going to be the start of a continuous effort to improve the value proposition for American Home Shield. So it kicks off with all the things I talked about, you know, a new logo and refreshed website, new advertising, celebrities, you know, all that stuff. But that is only part of the equation as we go forward. We've got to improve the value proposition. And that's what the plans are. We're not ready to talk specifically about what those are, but you'll, you'll hear more about that in the coming months.

Speaker Change: Only part of the equation as we go forward, we've got to prove the value proposition and that's what the plans are not ready to talk specifically about what those are but deals youll hear more about that in the coming months, yes, and the one thing that I would just add I think last year. We were because we were really focused on the front of our brand we had kind of lower marketing upfront. So that we can.

Jessica P. Ross: Yeah, and the one thing that I would just add, I think last year, because we were really focused on the Frontdoor brand, we had kind of lower marketing up front so that we could fund it in the towards the middle and back half of the year. This year, you're going to see better pacing in our spend throughout the year. Because in Q1 of last year, we really lowered our American Home Shield spending.

Speaker Change: Funded in the towards the middle and back half of the year. This year youre going to see better pacing and spend throughout the year.

Speaker Change: Because in Q1 of last year, we had really lower the American home shield spending were spending it.

Jessica P. Ross: We're spending it at a better level this year to lead into the relaunch. OK. And then one more question from me, if I could. Last quarter you had talked about potential improvements from an improved customer experience. Did that continue to play out through the quarter, and where do you think we are ending wise in terms of addressing the consumer experience improvement opportunities? Yeah, no, I mean, we landed the year with a really strong retention rate so that those process improvements continue to play through. We are really better engaging our customers through the onboarding process, and to end, as Bill talked about the work that we did to really understand the full customer service life cycle. We continue to use our expanding utilization of our dynamic pricing tool, which we really think is a competitive advantage for us. So we are seeing results, but it's something that we're not letting up on. Yep, it'll be okay. Thank you. I appreciate it.

Speaker Change: Better level this year to lead into the re launch.

Speaker Change: Okay.

Speaker Change: And then one more for me if I could.

Speaker Change: Last quarter, you had talked about retention improvements from from an improved customer experience does that continue to play out through the quarter.

Speaker Change: And where do you think we are inning wise in terms of.

Speaker Change: Addressing the consumer experience improvement opportunities.

Speaker Change: Yeah, No I mean, we landed the year with a really strong retention rates. So that we don't process improvements continue to play through.

Speaker Change: We are really better engaging our customers through the onboarding process end to end as bill talked about the work that we did to really understand the full customer service like lifecycle.

Speaker Change: Continue to use our expanding utilization of our dynamic pricing tool, which we really think is a competitive advantage for us. So we are seeing the results, but it's something that we're not letting up on.

Speaker Change: Okay.

Brian Nicholas Fitzgerald: Thanks, Brian. Thanks, Brian. We now turn to Ian Zaffino with Oppenheimer. Your line is open, please go ahead.

Speaker Change: Thank you I appreciate it.

Speaker Change: Thanks, Brian Thanks, Brian.

Speaker Change: I will now turn to <unk> with Oppenheimer. Your line is open. Please go ahead.

Ian Alton Zaffino: I agree. On SG&A, I was wondering if you could just maybe unpack that a little bit as far as the guidance in 2024. You know, what are the puts and takes here? Because I know you're doing a bunch of relaunches, which will... money. What are you doing, I guess, to offset that? you know, maybe walk us through that bridge.

Oppenheimer: Hi, great.

Oppenheimer: On the SG&A I was wondering if you could just maybe unpack that a little bit as far as the guidance into 2024.

Oppenheimer: What are the puts and takes here because I know you're doing a bunch of relaunches, which will cost money.

Oppenheimer: What are you doing I guess to offset that.

Oppenheimer: Maybe walk us through that bridge.

Jessica P. Ross: So I think big picture, and remember, we are essentially holding SG&A flat. There are some increases that are really just due to, you know, inflation in G&A. So really think about it.

Oppenheimer: So I think big picture and remember we are essentially holding SG&A flat. There's some increases that are really just data.

Oppenheimer: Inflation in G&A, So really think about it last year with the airframe door. This year. We are very focused on Hs, that's really a shift between the two I think the other thing just getting back to bills.

Ian Alton Zaffino: Last year was the year of Frontdoor. This year, we are very focused on AHS. That's really a shift between the two. I think the other thing, just getting back to Bill's, you know, comment on a culture of process improvement. I think knowing that we need to invest in growth, we've also been very intentional about managing costs across the business so that we can shift spend into investments for growth, such as marketing. So I am really feeling good about the direction into the year. Okay, and then if I could squeeze in one more on the retention side, you know, good job, I guess 50 basis points in improvement this year. What are we kind of expecting over the next several years? Like, where do we think we can get it? You know, how do we get there? Is it a matter of?

Oppenheimer: <unk> on a constant process improvements I think knowing that we need to invest in growth. We've also been very intentional about managing costs across the business. So that we can ship spend into investments for growth such as marketing. So I think we're really feeling good about the guidance of the year.

Oppenheimer: Yes.

Speaker Change: Okay, and then if I could squeeze in one more on the retention side.

Speaker Change: Good job I guess 50 basis points improvement this year.

Speaker Change: What are we kind of expecting over the next several years, where do we think we can get it how do we get there isn't a matter of.

William C. Cobb: You know, bringing auto pay up to the 90% level, you know, they basically help us understand like where to go and how you get there. Yeah, I don't think we're ready for a number. But, but I think, you know, we're, we're tasking ourselves that this has to be, you know, a continuous improvement approach to, to retention. And I think you pointed out, we've made great strides in auto pay, we're not done with that. We've made great strides in understanding the consumer journey. We've improved the percentage of preferred contractors, which is, you know, you heard about five stars at the highest, low stars at one star is at the lowest. These are all part of an effort within the company, a relentless effort to improve that retention rate, because we know that's really the lifeblood of the of the company. And so, you know, we got a lot of people committed to doing that. Yeah.

Speaker Change: They are bringing auto pay off.

Speaker Change: The 90% level.

Speaker Change: Help us understand like where it could go.

Speaker Change: In aggregate there thanks.

Speaker Change: Yeah, I don't think were ready for a number but but.

Speaker Change: But I think.

Speaker Change: We're tasking ourselves that this has to be.

Speaker Change: A continuous improvement approach to to retention.

Speaker Change: Sure.

Speaker Change: We've made great strides in auto pay we're not done with that we've made great strides in understanding the consumer journey, we've improved the percentage of.

Speaker Change: Preferred contractors, which is you heard about five stores are biased low stores when stores at the lowest these are all part of an effort within the company.

Speaker Change: Our relentless effort to improve that retention rate because we know that's really the lifeblood of the company and so we got a lot of people committed to doing that and I would just add again we.

Jessica P. Ross: And I would just add, again, we've got a very strong pricing team; we've really been leveraging dynamic pricing. And I think that's the muscle we continue to build and will get stronger and plays a big role in our retention rate. All right, great. Thank you very much.

Speaker Change: Got a very strong pricing team, we've really been leveraging dynamic pricing and I think that's a muscle we continue to build and we will get stronger.

Speaker Change: The big well and our retention rate.

Speaker Change: Alright, great. Thank you very much.

Ian Alton Zaffino: Thanks, Ian. Thanks, Ian. We now turn to Mark Hughes with Truist. Your line is open, please go ahead. Yeah, thanks. Good morning.

Speaker Change: Thanks, Jamie.

Speaker Change: Thanks, Dan.

Speaker Change: You May now turn to Mark Hughes with <unk>. Your line is open. Please go ahead.

Mark Douglas Hughes: Yeah. Thanks, good morning.

Mark Douglas Hughes: In the real estate channel, it seems like you've been seeing declines shallowing down 15% this quarter. But your guide, I think, for Q1 is down 20 to 25%. I hear what you're saying that you haven't seen a turn yet, but it seems like the industry data would look a little more upbeat than that, so I'm just curious to get your thoughts. Yeah, let me address that.

Mark Douglas Hughes: Real estate channel it seems like <unk> been the declines have been shallow and the down 15% this quarter.

Mark Douglas Hughes: But your guide I think for Q1 is down 20% to 25%.

Speaker Change: I hear what Youre, saying that you haven't seen a turn yet but it seems like the industry data would look a little more upbeat than that so I'm just curious.

Speaker Change: Yes.

William C. Cobb: I think that's a really good call out, Mark. What I was saying in the script was, the NAR data would indicate, you know, a 13% improvement in real estate sales for the year, continuing improvements in inventory levels, and the like. And we're rooting for that. We want that to happen.

Speaker Change: Could you call.

Speaker Change: Yes, let me let me address side I think that's a really good call out mark.

Speaker Change: What I was saying in the script was.

Speaker Change: The <unk> data would indicate a 13% improvement in real estate sales for the year.

Speaker Change: Continuing improvements in inventory levels, and the like and we're rooting them on.

Speaker Change: We want that to happen what the point was at this 0.2 months and we have not seen the merchant material change and obviously you saw the industry declined 20% last year, we were right in line with those numbers.

William C. Cobb: The point was, at this point, two months in, we have not seen a material change. And obviously, you saw the industry decline 20% last year; we were right in line with those numbers. And the macro on this particular channel is such that it almost drives, you know, what our home warranty sales will be. So I think we're encouraged by the NAR data. I think we're encouraged by my conversations with a number of top leaders in real estate. But we're just trying to point out that, at this point, we haven't seen the turn.

Speaker Change: The macro on this particular channel is such that it almost drives what our home warranty sales will be so.

Speaker Change: I think we're encouraged by the.

Speaker Change: By the <unk> data I think we're encouraged by my conversations with a number of top leaders in real estate.

Speaker Change: We're just trying to point out that at this point, we haven't seen the term.

Speaker Change: Yeah.

Jessica P. Ross: And then Jessica, you talked about inflation, claims inflation, I think 5% for the full year. It looks like the fourth quarter underlying claims are pretty good when you back out the change in the. Do you have the fourth quarter specific claims inflation number? It's five percent.

Speaker Change: And then just you talked about the inflation claims inflation I think 5% for the full year.

Speaker Change: Like the fourth quarter underlying claims had pretty good when you back out the change in the.

Speaker Change: Claims development.

Speaker Change: Thank you.

Speaker Change: Even when you adjust for the weather it seems like it's pretty good.

Speaker Change: Quarter specific claims inflation number.

Jessica P. Ross: It was 5% and 5% for the full year as well. Yeah, yeah. And we're really looking at it, you know, especially as we're heading into the year feeling that we're moving into normalized inflation there and holding at that mid single digit. Yeah, if I could just squeeze in one more, your price increases 15% this quarter. That was faster than the full year, and I think faster than last quarter. You've talked about maybe doing some pricing promotion, but you have, in fact, accelerated the pricing. What drove that?

Speaker Change: Yes, it's a 5%.

Speaker Change: It was 5% and 5% to 5%, yes, yes, and we're really lucky matters, especially as we're heading into the year feeling that we're moving into normalized inflation, there and holding at that mid single digit.

Speaker Change: Yeah, and if I could just.

Speaker Change: Squeeze in one more your price increase was 15% this quarter that was faster than the full year I think faster than last quarter you've talked about.

Speaker Change: Maybe doing some.

Speaker Change: Pricing promotion, but.

Speaker Change: In fact, the pricing accelerated what drove that.

Mark Douglas Hughes: Yeah, again, we took very aggressive pricing actions in 2022. And you're really seeing the peak of those actions hitting in Q4 of this year; you'll see that in Q1 of next year as well. And that's incorporated into our guide. And then you'll expect to vote for those to taper off. But that's still those 2022 actions flowing through just based on the way that those hit earned revenue.

Speaker Change: Yeah again, we took very aggressive pricing actions in 2022, and you are really seeing the peak of those actions hitting in Q4 of this year Youll see that in Q1 of next year as well and that's incorporated into our guide and then Youll expect for those to taper off but that's still about 2022 actions flowing through just based on the <unk>.

Speaker Change: But those hit earned revenue.

Speaker Change: Yeah, Okay. Thank you.

Sergio Roberto Segura: Thank you, Mark. Thank you, Mark. We now turn to Sergio Segura with KeyBank. Your line is open, please go ahead. Great. Thank you, and good morning.

Speaker Change: Thank you Margaret Thanks, Mark.

Speaker Change: Now to answer <unk> with Keybanc. Your line is open. Please go ahead.

Keybanc: Great. Thank you and good morning.

Sergio Roberto Segura: Congratulations on another strong quarter of gross margin expansion. I did notice that the guide does call for the 2024 guide does call for margins, and gross margins to come down a bit. So just wondering if there's any underlying conservatism with that outlook and any opportunities that you see in the business to expand gross margins from the 49% level they currently are at. Yeah, no. I think the big thing there is, remember, we are lapping $30 million of favorable weather, which accounts for about 200 bps of margin.

Keybanc: Congratulations on another strong quarter of gross margin expansion. They noticed that the guide does call for the 2020 guidance does call for margins.

Keybanc: Gross margins to come down a bit so just wondering if there's any underlying conservatism with that outlook and any opportunities that you see in the business to expand gross margins from 49% level. They currently are at.

Speaker Change: Yeah, No I think the big thing there is remember we are lapping $30 million of favorable weather, which accounts for about 200 bps of margin.

Jessica P. Ross: And we are really looking at that upper, you know, 40s as being normalized for the business, especially as we think about on-demand and the mix going forward. But we continue to be aggressive on process improvements. And so that guide really takes into account the $30 million plus the continued benefits that we are seeing from process improvements across the business. Yeah, I think, Sergio. I think you make a good point. I thought Jessica answered it completely.

Speaker Change: We are really looking at that upper forty's as being normalized for the business, especially as we think about on demand in the next coming forward, but we continue to be aggressive on process improvements and so that guy really takes into account the $30 million plus the continued benefits that we're seeing from process improvements across the business.

Speaker Change: Yes, I think <unk> I think you make a good point I know Jessica and so it's completely.

William C. Cobb: You know, it's one of those things where, you know, we got a lot, as I said in my script, notwithstanding the fact that we did get a few things break our way last year, including weather. So as we put together the plan for this year, as we put together the guidance for all of you, we have to take into account that, you know, we might have gotten a few breaks, like on weather. Look at what happened in January. And as Jessica said, it looks like February has offset that. But that's the kind of thing that, as you're forecasting these things, you got to be mindful that anomalies need to be factored in. Well, and I just think about our investor day last year, I feel like one of the biggest questions is, "When are we going to get back to 50-20?" Or when are we going to get back to those upper 40s?

Speaker Change: One of those things, where we've got a like I said in my script notwithstanding the fact that we did get a few things break our way last year, including weather was one of them. So as we put together the plan for this year as we put together the guidance for all of you.

Speaker Change: To take into effect that we might have gotten a few breaks like on weather look at what happened in January and there was Jessica said it looks like February is offset that but.

Speaker Change: But thats the kind of thing with that is as you are forecasting. These things together you have to be mindful of that.

Keybanc: I believe it needs to be factored out.

Keybanc: Think about our Investor day last year I feel like one of the biggest questions are when are we going to get back to 50 20 or when are we going to get back to about <unk> <unk>.

Jessica P. Ross: And again, just really proud of the team and the work that's been done to get us where we are today. Yep. Got it.

Keybanc: And again, just really proud of the team and the work that's been done to get us where we are today.

Speaker Change: Got it and if I could ask a second one just wondering what gives you the confidence to reaccelerate.

Sergio Roberto Segura: And if I could ask a second one, just wondering what gives you the confidence to re-accelerate customer growth in 24 without a really significant increase in marketing spend? You know, why not spend more aggressively with customer growth being one of your top priorities? Yeah, I mean, as Jessica said, if you look at the investment behind American Home Shield, it is up because we invested more in Frontdoor last year and took away from AHS. So AHS investment will be stronger in 2024. I think the other thing that gives me confidence is the whole of the program, and not just the marketing efforts in April but the things we're looking at to enhance the value proposition later in the year and into 2025. And that's why, in the words that I use, we're kind of on a relentless march now. The category's been stagnant or down, and I think the brand's gotten a little tired.

Keybanc: Customer growth in 'twenty, four without a significant increase in <unk> and.

Keybanc: And marketing spend.

Keybanc: Why not why not spend more aggressively with customer growth.

Keybanc: One of your top priority this year.

Keybanc: Yes.

Keybanc: As Jessica said, if you look at the investment behind American home Shield.

Keybanc: Is it is because we invested more in front door last year and took away from Manchester NHS investment will be.

Keybanc: We will be we will be stronger in 2000 and for the other.

Keybanc: The thing that gives me confidence is the whole of the program not just the marketing efforts in April but.

Keybanc: Things were looking at to enhance the value proposition later in the year and into 2025 and Thats why I think we're we're in my words that I used is we're kind of on a relentless March now.

Keybanc: The category has been stagnant or down.

Keybanc: The brand has got a little tired, we need to freshen it up we need to come out with.

William C. Cobb: We need to freshen it up. We need to come out with more things that are going to turn consumers' heads. And that's why I think we'll start to head north with our customer growth. A thoughtful thank you both, Bill and Jessica. Thanks. Thanks, Sergio. My final question comes from Cory Carpenter with J.D. Morgan. Your line is open, please go ahead. Good morning.

Keybanc: More things that are going to turn consumers heads and Thats why I think we'll start to head north with our customer growth.

Speaker Change: That's helpful. Thank you, both bill and Jessica.

Speaker Change: Thanks Akhil.

Speaker Change: Okay.

Speaker Change: Our final question comes from Cory Carpenter with Jpmorgan. Your line is open. Please go ahead.

Cory Carpenter: Hey, good morning.

Cory Alan Carpenter: I'm hoping you could talk about the level of consumer engagement you're seeing with on-demand services and then, as you shift your marketing spin to the AHS relaunch, what are your expectations in 2024 for on-demand? I know you were planning to build out in-app booking capability and some other stuff, but maybe just an update on where you are with some of those initiatives. Thank you.

Cory Carpenter: Could you talk about the level of consumer engagement youre seeing with on demand services.

Cory Carpenter: And as you shift your marketing spend too.

Speaker Change: Yes.

Cory Carpenter: Launch what are your expectations in 2024 for on demand I know you were planning to build out in that booking capability from other stuff maybe update on where you are with some of those initiatives. Thank you.

William C. Cobb: Okay, so from an engagement perspective, you know, the interesting thing about this part of our business is that it's a real partnership with our contractors. This is, you know, in the traditional home warranty business; our contractors execute the concept as we get service calls. And we're dealing a lot directly with the consumer and with real estate. This one is really getting contractors to go through upgrades, and it's really a partnership with them. So from a consumer point of view, we're still building that out in terms of, you know, how we engage with them. But I think the great thing about this particular part of the business is we can do things that don't cost a lot of money by just engaging with our contractors in the right way. And that's one of the core strengths of our company is that contractor network that we have, you know, the 2,500 or so preferred contractors and another 12, 13, 14,000 other contractors.

Cory Carpenter: Okay.

Speaker Change: So from an engagement perspective.

Speaker Change: Interesting thing about this part of our business is.

Speaker Change: It's real.

Speaker Change:

Speaker Change: Partnership with our contractors.

Speaker Change: Yes.

Speaker Change: And the traditional home warranty business.

Speaker Change: Our our contractors execute the concept as we get service calls that we're dealing a lot direct to direct to the.

Speaker Change: Humor and with real estate as this one is really getting contractors to go through upgrades and it's really a partnership with them. So from a consumer point of view, we're still building that out.

Speaker Change: In terms of.

Speaker Change: How we engage with them, but I think the great thing about this particular part of the business is we can do things that don't cost a lot of money by disengaging with our with our contractors and the right way and that's one of the core strengths of.

Speaker Change: Our company is the contractor network that we have.

Speaker Change: With 2500, or so preferred contractors in another 12 13 14000 other contractors. So that's where we are.

William C. Cobb: So that's where we are, and we're getting better at this. You know, we had a nice kick-up in HVAC last year, and we've got other things in the pipeline, as I mentioned. So I think this is one that is going to be a combination of consumer engagement and contractor engagement. Yeah, and then just from what we're expecting for 2024, other revenue is going to be up approximately 30% to 100 million. And the majority of that is really HVAC upgrades. But I thought Bill did a really nice job laying out the full portfolio of our on-demand services in his shared remarks. So also in there are things from other on-demand services such as HVAC tune-ups, and rekey as well.

Speaker Change: And we're getting better at this.

Speaker Change: We had a nice.

Speaker Change: Kick up in HVAC last year, and we've got other things in there.

Speaker Change: To come as I mentioned, so I think this is one that is both going to be a combination of.

Speaker Change: Consumer engagement and contractor engagement, yes, and then just from what we're expecting for 2024 other revenue is going to be up approximately 30% to $100 million.

Speaker Change: The majority of that is really HVAC upgrades, but I thought bill did a really nice job laying out the full.

Speaker Change: Folio of our on demand services in his shared remarks. So also in there are.

Speaker Change: Are things from the other on demand services, such as the HVAC tune up three key as.

William C. Cobb: So, you know, again, this is a great opportunity to also test it. We're learning a lot, but we're also seeing a lot of strength from the upgrade component of that business. Thank you both. Thank you, Cory. Ladies and gentlemen, this concludes our Q&A and today's Frontdoor fourth quarter and full year 2023 earnings call. We'd like to thank you for your participation. You may now disconnect your line

Speaker Change: As well so again this is a great opportunity to also test into it and we're learning a lot, but we're also seeing a lot of strength from the upgrade component of that business.

Speaker Change: Thank you Bob.

Bob: Thanks Jorge.

Speaker Change: Ladies and gentlemen, this concludes our Q&A todays <unk> fourth quarter and full year 2023 earnings call.

Speaker Change: Thank you for your participation you may now disconnect your lines.