Frontdoor, Inc.

Ladies and gentlemen, welcome to Front Door's second quarter 2022 earnings call. Today's call is being recorded and broadcasted on the internet. Beginning today's call is Matt Davis, Vice President of Investor Relations and Treasurer, and he will introduce the other speakers on the call. At this time, we'll begin today's call. Please go ahead, Mr. Davis.

Thank you, operator. Good morning, everyone, and thank you for joining Front Door's second quarter 2022 earnings conference call. Joining me today are Front Door's chairman and chief executive officer, Bill Cobb, and Front Door's chief financial officer, Brian Turcotte. 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 SEC. 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. All forward-looking statements are made as of today, August 4, and, except as required by law, The company undertakes no obligation to update any forward-looking statements whether as a result of new information, future events, or otherwise. We will also reference certain non-GAAP financial measures throughout today's call. We have included definitions of these terms and reconciliations of these non-GAAP financial measures to their most comparable GAAP financial measures in our press release and the appendix to the presentation in order to better assist you in understanding our financial performance. Before I turn the call over to Bill for opening comments, let me start with a brief introduction. As many of you know, Bill has been chairman since the spin-off of Front Door, and he assumed the CEO role at the beginning of June. Bill is a tenured executive with over 35 years of business experience at world-class, market-leading companies. He has served on several boards and was the president and chief executive officer of H&R Block from 2011 to 2017. Prior to that, he had extensive corporate and marketing experience through various leadership roles at eBay, Pepsi, and Pizza Hut from 1987 to 2008. You can find more on Bill's background on Front Door's website. I am very pleased to now turn the call over to Front Door's new CEO, Bill Cobb, for opening comments.

Bill? Thanks, Matt, and hi, everyone. It is great to be here to speak with all of you. I look forward to getting out and meeting our investors over the next several months. and I am extremely excited about the opportunity to lead the next phase of Front Door's journey. Let me start on slide four by saying that over the last few months I have been able to meet with a broader group of Front Door associates and I continue to be impressed with the level of talent across the organization. I am also very bullish on the company's future. As we know, there is substantial demand for home repair and maintenance services across the United States. I am confident that we have a great business with a bright long-term future ahead of us. However, we are facing some significant near-term issues that are worse than I expected coming into this position. We are looking at a macroeconomic environment that continues to deteriorate, rapid cost inflation, declining consumer sentiment, and a dynamic global backdrop marked by war, rising geopolitical tensions, and global supply chain disruptions. So let me stay right up front. We are lowering our full year 2022 adjusted EBITDA to be in a range of $170 million to $190 million as a result of these factors. These are difficult times, and I have been struck by the magnitude of the impact on our financial outlook. But let me be clear, we will work our way through it and emerge stronger for it. I still completely believe in the future of this company, and the last two months in the job has only increased my conviction despite the tough outlook for 2022. Front Door competes in the growing home services space, has a great recurring revenue business model, a strong management team and a solid foundation as the leader in the home service plan category. Let's turn to slide five and review some of the changes that are currently underway at Front Door as we are moving quickly to improve execution Better Balance, Revenue Growth, and Earnings. Specifically, our teams are working on the following areas. First, we have determined that priority one is to zero in on rebuilding the core home service plan business. We are the leader in the home service plan category. We offer consumers both peace of mind and budget protection against inevitable and unexpected expenses and the inconvenience of breakdowns to major systems and appliances. Our home service plans do this by leveraging the convenience of our pre-qualified network of 17,000 contractors that we partner with. This is a great recurring revenue business with significant upside given our powerful marketplace model. That means that our new businesses will be transitioning to a supporting role. ProConnect has not performed up to our expectations and my team is working to complete the full study of how to improve our on-demand offering as it does not make sense to continue to lose money on the current approach. But to be clear, an on-demand offering remains an important element to realizing our long-term potential and that has not changed. We are extremely optimistic about how an on-demand approach still gives us the potential to broaden our reach to a much larger pool of customers than what we can capture today under a home service plan. We are looking to go much deeper into this market and completely restage our offering, as I think we can execute much better in this area. Now turning to Stream. We love the Stream technology's ability to remotely troubleshoot issues around the home and provide real-time feedback to our customers and contractors. However, going forward, we will be laser-focused on integrating Stream into the core business and less focused on selling this technology platform to third-party customers. This will have the added benefit of reducing our costs. Second, we have reorganized key parts of the company to increase our focus on execution. We now have clear and separate teams dedicated to marketing, sales, and product, which I will speak to in a moment. They are supported by operations, service, technology, and our other internal functions to create a seamless end-to-end operating model. Third, we are working to address the rapid acceleration in claims cost inflation. I have put together a cross-functional team across finance and contractor relations to really dig into this and reevaluate how we can better control our costs. Brian will go into the details more in a minute. And fourth, we are undertaking a comprehensive review of our total SG&A expense footprint. which is expected to be completed in the third quarter of this year. While we continue to generate positive cash flow and have a strong balance sheet, we have to adapt to the current business environment and reduce expenses. Now turning to slide six where I want to share some of the guiding principles that I am using to look at all aspects of the company. First, we will approach the business with a comprehensive focus on the customer and increased focus on our branding approach. While I generally feel good about our overall approach to growing the business, I don't believe we have executed up to our potential and we are not growing the market as well as we should. Our goal is to offer one straightforward, consistently great experience. We operate in a complex category and we must improve how we go to market. As part of this effort, we are also undertaking a broad customer segmentation study. This will give us better insights into how the customer's view of their home has changed since the start of the pandemic and the work from home expansion. Second, we will have a detailed and focused technology roadmap as we continue to digitize our business. This group is led by Tony Bacos, our chief digital officer, who is a well-known industry leader that came to us from Amazon. Tony has helped us to really focus our digital priorities at Front Door. We remain committed to investing in our digital transformation as it will help us drive a superior customer and contractor experience as well as cost savings over the long term. Third, we want to simplify all aspects of our business. One of my early impressions since becoming CEO is how complex our legacy internal processes and systems remain. We want to reinvent how we interact with customers, contractors, and other partners to reduce manual work. As we are in the process of reevaluating so many areas of our company, we plan to hold an investor day in early March of 2023. This will allow investors to meet the senior leaders of our management team and allow us to share more details on how we are transforming this company. Now turning to slide seven and a quick review of the business. Taking over the CEO role has provided me with a deeper understanding of the challenges our business is facing. As I mentioned earlier, I think we can do a much better job of executing specifically on the overall sales process to drive revenue growth across all of our channels. That is why I reorganized the company to better define roles and focus on building our brand and providing us with an end-to-end view of the consumer. We hired Kathy Collins as our Chief Marketing Officer. Kathy is an accomplished leader with broad experiences across all facets of marketing. She most recently served as chief sales and marketing officer for a large medical benefits provider. Prior to that, she held various roles around marketing, strategy, product development, and client experience at Lee Jeans, Massage Envy, and H&R Block. And she specializes in transforming brands of legacy businesses. We also hired Jessica Fields as our Chief Sales Officer. Jess will have responsibility for real estate and direct to consumer sales and business development across the Front Door portfolio. Jess was previously with Rocket Mortgage, where she was in charge of driving revenue and partnerships across the company. Prior to that, she had a variety of sales experiences at International Bank Card and Sears. With our prior real estate experience, Jess is bringing new ideas on how to improve our go-to-market real estate sales efforts. Additionally, Raj Mida has transitioned to lead home service plan product and pricing across all of our brands. Raj brings a wealth of home service plan experience, given his leadership roles in marketing, strategy, and product development at Front Door, American Home Shield, and ServiceMaster over the last 13 years. By realigning these teams, we expect to increase focus on the customer, develop a more consistent sales methodology, and improve accountability throughout the sales funnel. As part of this effort, we are evaluating changes to our overall marketing and branding strategy. We are also looking at our products, which should be transparent, simple, easy to understand and use. While still early days, We have already identified opportunities to execute better and drive more sales over time. In the near term, our revenue growth will be primarily impacted by the challenges we are facing in selling home service plans in our real estate channel. The record low days on market continue to support a strong seller's market, which in turn makes it difficult for us to attach our home service plan as part of a real estate transaction. This trend appeared to continue through June based on the most recent data from the National Association of Realtors. Existing home sales declined 14% year over year. Inventory data was mixed as the supply of homes increased to three months from two and a half months, yet the days on market declined again to just 14 days. And all cash offers increased from 23% to 25%. We believe that the real estate market has already entered a period of transition. Mortgage rates have increased to 5.5% and we are hearing commentary from our real estate brokerage partners that the market dynamics are quickly shifting as multiple offers are diminishing and inspections are becoming the norm once again. Let me be clear, we believe that the sales decline in our real estate channel is not permanent. and we are optimistic that improvements in these leading indicators will result in a more favorable market environment to sell home service plans as the real estate market normalizes. Regardless of market conditions, I believe that we can do a better job of executing in our real estate channel. Jess is working to change our sales culture and increase accountability. We are prioritizing leads in the strongest markets and aggressively deploying our field sales team to improve conversion. These changes are expected to improve our overall capture rate in all market conditions. In conclusion, there is a high level of energy across the company as we are moving quickly to make improvements at front door, and I am confident that we will turn things around. I have already made changes to our leadership team, We are aggressively addressing the challenging economic environment. We are taking steps to improve execution and substantially reduce costs. And we are reimagining the industry that we founded. Longer term, our opportunity to profitably grow the business has not changed. We remain extremely confident in the underlying fundamentals for the following reasons. First, demand for home repair and maintenance services continues to grow. and is supported by changing demographics and recent home nesting trends. Second, there is tremendous demand for digital transformation in the home services space. Third, there is massive potential to deepen Front Door's market penetration as we improve our branding. And finally, there is significant opportunity to grow through our on demand offering. I will now turn the call over to Brian to review our financial results.