Frontdoor, Inc.

Ladies and gentlemen, welcome to the Front Door's first quarter 2020 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. He will introduce the other speakers on the call. At this time, we'll begin today's call. Please go ahead, Mr. Davis.

Thank you, operator. Good morning, everyone. and thank you for participating in Front Door's first quarter 2020 earnings conference call. Joining me on today's call are Front Door's chief executive officer, Rex Tibbins, and Front Door's chief financial officer, Brian Turcock. The press release and slide presentation that will be used during today's call can be found on the investor relations section of Front Door's website, which is located at investors.frontdoorhome.com. As stated on slide three of the presentation, I'd like to remind you that this call and webcast may contain forward-looking statements. These statements are subject to various risks and uncertainties, which could cause actual results to differ materially from those discussed here today. These risk factors are explained in detail in the company's filings with the SDC. 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, May 6th, 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 may 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 the 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. Finally, we are all working remotely during this call and apologize in advance for any audio issues that might occur. Please bear with us if this happens during our remarks or Q&A portion of the call. I'll now turn the call over to Rex for opening comments. Rex? Thanks, Matt, and good morning, everyone.

Before I jump into our business results, on behalf of myself and the entire Front Door team, I want to extend my deep appreciation to those serving in the healthcare field, first responders, and those that provide essential services through grocery stores, pharmacies, home service contractors, and so much more. They have helped keep our nation going during this unprecedented time and are the true frontline heroes in America today. We'd like to thank them all for what they do and express our gratitude for their sacrifices. Turning to our business, Front Door had a strong first quarter both from a financial and operational perspective. I am especially proud of our team's early and decisive actions in response to COVID-19. They moved mountains, and we did not miss a beat operationally. I am certain that the increased focus and ingenuity we have developed from this crisis will result in us emerging as a stronger and more nimble organization. Earlier this year, I asked Raj Mehta, our former CMO, to take on a new role of being the Senior Vice President and General Manager of our American Home Shield and HSA business. I've relied on Roger's insightful counsel since I started, and I'm truly excited as he now focuses on the strategy and execution of our largest brands. In March, we hired Jason Marshall as our Chief Marketing Officer. Jason most recently served as CMO of Porch.com and has held several leadership roles at other companies such as SolarWinds and Party City. We look forward to Jason's driving growth and innovation across all facets and brands of our organization, especially as we reimagine the company from a digital perspective. Jason has deep expertise in digital marketing and technology. We are excited to have him on the team. Finally, in light of COVID-19 shelter in place orders, we accelerated the deployment of our stream technology to our contractors and real estate partners in March at no cost to them. We're already seeing the benefits of enabling remote services to help homeowners during these unique times. STREAM is beginning to teach contractors and customers alike what we already know. A good experience doesn't always mean having to be present in the home. Turning to slide five, I want to go into more detail about the actions Front Door has taken in response to the COVID-19 crisis. We've all been on quite a journey in the last few months. I'm incredibly proud of the Front Door team and the great job they have done in maintaining normal operations for our customers. Two of our house rules revolve around obsessing about customers and being owners. Our team is certainly living up to those rules. Our contractor services have been deemed essential by state and local governments. This allows us to keep our contractors, many of whom are small business owners, working and safely providing important repairs to homeowners. When COVID-19 emerged, our first priority was to protect our associates and their families. We moved quickly and formed a cross-functional business continuity team to lead the crisis response. Working around the clock, the team was able to virtualize our company a little over a week in March. We moved all of our approximately 23 employees to a work-from-home environment, including our four call centers, while transitioning to a new cloud-based contact center system at the same time. This transition was completed without any disruptions to our service. It was a massive undertaking that was only successful through the brute force of our technology, product and customer service teams that could not be more proud of their efforts. At Front Door, our employees are our most important asset. To be successful as a company, we need our employees to operate at full capacity and we don't anticipate any layoffs at this time. In fact, we're continuing to recruit and hire great talent across our business remotely. We are leaning into our contractor and real estate agent partnerships during this time. We will emerge from this stronger together. As I mentioned earlier, we expedited the rollout of our Streams technology, making it available free of charge to preferred contractors and leading real estate partners to transform how they interact with customers and clients now and in the future. Front Door will continue to work with local, state, and federal governments to advocate on behalf of our contractor network to ensure they remain categorized as essential services and provide our contractors with the resources and information they need to keep our customers and communities safe. This includes communications on how to prescreen customers, practice social distancing during service calls, and manage customer conversations. We also secured 200,000 PPE masks for distribution to our contractors who lacked the necessary protection equipment. Nearly all of our contractors are still operating, accepting jobs, and performing essential home services for our customers. In fact, some of these contractors that removed themselves from service due to COVID-19 concerns are coming back online. Our supply chain has not been materially impacted in light of the COVID-19 crisis. We have had sufficient access to parts and replacement appliances and systems. The average age for a system or appliance we repair is about 10 years, and the necessary parts are generally already in stock. We also source many of our replacement systems, such as hot water heaters and air conditioners, from companies that have production in the US and Mexico. While some of the production facilities in our supply chain have been impacted, we don't single source any parts or replacements and don't see any significant impact to our business at this time. While the situation remains fluid, our supply chain team is carefully monitoring the situation and our supply position on a daily basis. Finally, we continue to furnish essential home services to our customers. We're providing them with additional information when a service request is made and have established a separate hotline to address COVID-19 questions which has allowed us to maintain normal and safe operations. Although we do not see any significant changes in customer service request behavior in March, April claims incidents was below prior year. We are investigating if this reduction was due to mild weather or it was COVID-19 concerns driving some customers to postpone service requests to avoid having a contractor enter their home. We're also looking into whether customer sheltering at home could impact claims later this year. For example, We don't currently believe that increased usage of certain systems such as HVAC will result in an appreciable number or severity of claims. As you know, the developments around COVID-19 are consistently changing. We will continue to nimbly respond to developments in real time to mitigate the business impact. I will now turn to slide six, where I would normally provide an update on our 2020 objectives. However, in this environment, I felt it was more appropriate to focus on how we are navigating through this uncertain time. First, we're looking to mitigate the revenue impact from COVID-19. At this time, we believe our main exposure is within the first year real estate channel. We are closely watching the macroeconomic environment. We have seen industry reports that anticipate the second quarter of 2020 will be materially below 2019, but will then begin to recover in the back half of the year. This will clearly have an adverse impact on our home service plan sold to this channel. We also expect a delayed effect once the market reboots, as it can take a couple of months before we would expect to see a meaningful uptick in home service plan sales. Given this backdrop, our real estate group is leveraging our new sales team structure and deepening broker partnerships to increase our share of home service plans sold in the real estate market. We are also encouraged by real estate agents using our streaming technology to virtually show houses which we believe could lead to more sales of our service plans. Finally, we expect to reallocate a portion of the marketing dollars originally earmarked for real estate to further drive our direct consumer channel. Leaning into the DTC channel worked well for us during the financial crisis in 2008 and 2009. We believe this is a lever that will work for us today. In our direct consumer channel, demand continues to remain solid. We launched a new advertising campaign in April We have seen a sharp decline in advertising rates, especially in broadcasts. In response, we are increasing spend in areas where prices have greatly fallen and conversion remains strong. As advertising costs decline and viewership increases from consumers staying home more, we have seen our marketing efficiency improve. As you may recall, our DTC channel performs better from a retention perspective as well, which could provide some much-needed tailwinds for the next year. We're also seeing customer renewals remain strong during this time, as our overall retention rate was steady at 75% in the first quarter, and we have seen that trend extend through April. Our cross-functional teams continue to make progress on a wide-ranging set of objectives to improve our product, customer experience, and resulting retention. Efforts include reducing cycle time, improving customer satisfaction ratings, and addressing process gaps in our call centers. It is still too early to predict that these efforts will offset the potential impact of COVID-19 in 2020. However, we do believe that our value proposition of budget protection and convenience are enhanced during times of economic uncertainty and customers staying home more. We entered into this period of uncertainty with a strong balance sheet, substantial liquidity, Thank you for joining us today. Thank you for joining us today. continue to execute on our goals of higher efficiency and cost reduction. Finally, we are accelerating strategic initiatives. Given COVID-19, we have reprioritized several of our initiatives for 2020. We accelerated stream and the deployment of our cloud-based contact center system to assist with working in a remote world. We are still advancing our rollout of Can Do, but have pushed out the expansion into other trades by a quarter or two due to technology resources being pulled into other COVID-19 related projects. CanDo has been providing essential services as well. We have not seen a decline in demand. We just need to refocus some of our technology teams for the quarter. These are just a few examples of our organization's nimbleness as we are able to pivot our objectives and work across teams to get things done quickly. In conclusion, we entered this period of uncertainty from a position of strength, and our business is uniquely adept to successfully navigate these challenges. I'm incredibly proud of the team's effort to take quick and decisive actions that allowed us to maintain a consistent level of business operations. I believe this event will only make us stronger as a company. I'll now turn the call over to Brian, who will cover our financial results in more detail.