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spk06: Ladies and gentlemen, thank you for standing by. The front door fourth quarter and full year 2023 earnings call will begin shortly. If you would like to register a question at any time, please press star one on your telephone keypad. Thank you. Ladies and gentlemen, welcome to Front Door'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.
spk07: Thank you, Operator. Good morning, everyone, and thank you for joining Front Door's fourth quarter and full year 2023 earnings conference call. Joining me today are Front Door's Chairman and Chief Executive Officer, Bill Cobb, and Front Door's Chief Financial Officer, Jessica Ross. The press release and slide presentation that will be used during today's call can be found on the Investor Relations section of Front 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, February 28th, 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?
spk01: Thanks, Matt, and good morning, everybody. Let's start with 2023, where we smashed expectations and delivered record financial performance. As you can see from slide four, 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. 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 pressures. 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. 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 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. 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. 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 warranties. In the U.S., there are about 5 million homes that have a warranty. 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 products. Let me quickly walk you through some of the main reasons consumers should buy a home warranty for 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. 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, 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. And finally, our value proposition offers peace of mind. 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 seven, 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. 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 does that mean? To stay relevant, smart brands must evolve. This is especially true with category leaders who have been around for a while. 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 Dunkin' or Domino's, Arby's or Old Spice. 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. As the category leader, we must do a better job of educating homeowners, and that is exactly what this brand relaunch 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 or user-friendly website which will launch in late March to support the early April media campaign. 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 normal levels. We sell our products through real estate brokers, and last year, we had significantly fewer opportunities to place a home warranty as part of a home sale because of the challenging housing market. In fact, our real estate channel sales in 2023 were less than half of what they were five years ago, as the 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, but we will be well positioned for when the market improves for our home warranty sales. 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. 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 retention 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? 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 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, while our one-star rating decreased to an all-time low. 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. 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 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 want to take a moment to clarify how we think about on demand. We 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 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. 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 is maintenance services. This includes things like HVAC tune-ups, dryer vent cleaning, and carpet cleaning. Over time, we are looking to expand into additional preventive maintenance offerings. Third, 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 into our traditional trades. 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. 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.
spk00: Thanks, Bill, and good morning, everyone. It is amazing to see the progress Front Door 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. 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 had $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. 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 front door brand. And finally, General and administrative costs increased $6 million, primarily due to increased personnel costs. 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 growth 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 is about 12 months to impact all relevant contracts, and then another 12 months for those contracts to fully translate into earned revenue. 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. 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. 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 had 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 front door 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 expense increased $15 million, primarily due to increased personnel costs. 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. 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 unrestricted cash of $168 million. 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 organic 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. 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. 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%, a roughly 20% decline in our D to C 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. 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 from the cold weather in January, this was largely offset by favorable weather in February. 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 and two years earlier than we expected. We also shared a $2 billion revenue target. A lot has changed since then. 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 brand relaunch goes, as well as how market conditions evolved throughout this year, we will come back to you with an update on our 2025 goals. Now for our 2024 outlook. Starting with revenue, where we expect it to range between $1.81 and $1.84 billion. This assumes a mid-single digit increase in the renewals channel, a 10% decline in the B2C channel, and a 15% to 20% 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. 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 price 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. This will be offset by a mid-single-digit decline in realized volume from lower customer counts. 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. Our full year SG&A target is between 580 and $595 million and includes a shift of marketing investments from the Front Door brand to the American Home Shield brand to support the relaunch. In total, we are essentially holding SG&A's 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. 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. Instead, I looked to our two-year adjusted EBITDA CAGR from 2022 through 2024, which is expected to be at nearly 30%. That's an impressive return. I will now turn it back over to Bill for closing statements. Bill?
spk01: Thanks, Jessica. In closing, I want to leave you with the top reasons to invest in Front Door 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 pairs. And finally, it is clear to me that Front Door'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. 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.
spk06: Thank you. If you would like to ask a question, please press star followed by 1 on your telephone keypad. If you would like to withdraw your question, please press star followed by 2. When preparing to ask a question, please ensure your device is unmuted locally. First question today comes from Jeff Schmidt with William Blair. Your line is open. Please go ahead.
spk04: Hi. Good morning, everyone. In the DTC channel, it looks like you're 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? Do they need to come down? Is it more advertising, you think, or is it just a broader industry issue where you need consumer demand to be stronger?
spk01: Keep going, Jeff. No, you've captured it pretty well. I think the industry is the biggest issue we've had since the real estate market, which really has an overlay to the entire industry. Since that has moved to such a strong seller's 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 home warranty. I think the brand's a little tired. I think that's why we're doing this relaunch. So 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, 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. We're excited about our relaunch beginning in about a month, and 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've got to prove it as the year goes on.
spk04: 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 as you build that out and spend more, 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?
spk01: Yeah, I'll take it first, and then Jessica, if you want to jump in. You know, at this point, you know, 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. And 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.
spk00: No, I think you covered it, Bill.
spk01: Okay.
spk00: It's going to be a mess.
spk04: Okay, great. Thank you. Thanks, Jeff.
spk06: We now turn to Brian Fitzgerald with Wells Fargo. Your line is open. Please go ahead.
spk05: Thanks, guys. You talked, and thanks for the color on the marketing outlook around the DBC business. I wanted to ask, are you seeing anything X what you're doing kind of indigenously? Are you seeing anything, any changes to note in 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 DC Channel? Is the phasing there? Is it going to be centered right around April? Maybe very similar to what we saw with the front door rebrand. Should we see it? Are you going to pursue that same kind of playbook and phasing around the relaunch this year?
spk01: Yeah, okay. So on the first one, on the promotional level, we've been aggressive on 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. And, you know, 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 to April. But this is different than Front Door. We're trying to establish a new brand. We're trying to build awareness, et cetera. We have high awareness of American Home Shields. 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, a refreshed website, new advertising, celebrity, 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. Not ready to talk specifically about what those are, but you'll hear more about that in the coming months.
spk00: Yeah, and the one thing that I would just add, I think last year we were, because we were really focused on the front door brand, we had kind of lower marketing up front so that we could fund it towards the middle and back half of the year. This year, you're going to see better pacing in our spend throughout the year.
spk01: Because in Q1 of last year, we had really lowered the American Home Shield spending. We're spending at a better level this year to lead into the relaunch.
spk05: Okay. And then one more question. For me, if I could, last quarter you had talked about retention improvements from an improved customer experience. Did that continue to play out through the quarter? And where do you think we are, inning-wise, in terms of addressing the consumer experience improvement opportunities?
spk00: Yeah, no, I mean, we landed the year with a really strong retention rate, so those process improvements continue to play through. 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 lifecycle. 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 the results, but it's something that we're not letting up on. Okay.
spk05: Thank you. Appreciate it.
spk01: Thanks, Brian.
spk06: Thanks, Brian. We now turn to Ian Zoffino with Oppenheimer. Your line is open. Please go ahead.
spk08: Hi, Greg. On the 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 cost money. What are you doing, I guess, to offset that and maybe walk us through that bridge? Thanks.
spk00: So I think big picture, Ian, remember, we are essentially holding SG&A flat. There's some increases that are really just due to, you know, inflation and G&A. So really think about it. Last year was the year of front door. 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 think really feeling good about the guide into the year.
spk08: Okay, and then if I could squeeze in one more on the retention side, you know, good job, I guess, 50 basis points improvement this year. What are we kind of expecting over the next several years? Like, where do we think we could get it? You know, how do we get there? Is it a matter of, you know, bringing auto pay up to, the 90% level, you know, basically help us understand, like, where to go and how you get there. Thanks.
spk01: Yeah, I don't think we're ready for a number, but I think, you know, we're tasking ourselves that this has to be, you know, a continuous improvement approach 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, win stars 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 company. And so, you know, we've got a lot of people committed to doing that.
spk00: Yeah, 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 a muscle we continue to build and will get stronger and plays a big role in our retention rate.
spk08: All right, great. Thank you very much. Thanks, Ian.
spk00: Thanks, Anne.
spk06: We now turn to Mark Hughes with Truist. Your line is open. Please go ahead.
spk03: Yeah, thanks. Good morning. In the real estate channel, it seems like the declines have been shallowing to 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.
spk01: Yeah, let me address that. 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 that on. We want that to happen. What 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 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 were just trying to point out that at this point, we haven't seen the turn.
spk03: And then, Jessica, you talked about the 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 claims development. It seems like even when you adjust for the weather, it seems like it's pretty good. Do you have the fourth quarter specific claims inflation number?
spk00: Yeah, it's a 5%.
spk03: it was 5% and 5% for the full year.
spk00: Yeah. Yeah. And we're really looking at is, 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.
spk03: Yeah. And if I could just squeeze in one more, your price increases 15% this quarter. That was a faster than the full year. I think faster than last quarter. You've talked about maybe doing some pricing promotion, but, uh, In fact, the pricing accelerated. What drove that?
spk00: 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 for those to taper off. But that's still those 2022 actions flowing through just based on the way that those hit earned revenue. Yeah.
spk03: Yeah. Okay. Thank you. Thanks, Mark.
spk06: Thanks, Mark. We now turn to Sergio Segura with KeyBank. Your line is open. Please go ahead.
spk10: Great. Thank you, and good morning. Congratulations on another strong quarter gross margin expansion. Did notice that the guide does call for the 2024 guide does call for margins. Justin Delacruz, 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.
spk00: Jennifer Gillissen, yeah no, I think the big thing there is remember, we are laughing $30 million of favorable weather which accounts for about 200 bits of margin. And we are really looking at that upper 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.
spk01: Yeah, I think Sergio, I think you make a good point. I thought Jessica answered it completely. You know, it's 1 of those things where we got a lot. I said in my script, notwithstanding the fact that we did get a few things break our way last year, including whether it was 1 of them. 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 effect. That, you know, we might have gotten a few breaks, like, on whether look at what happened in January. And that was Jessica said. It looks like February has offset that. But that's the kind of thing that as you're forecasting these things, you've got to be mindful that anomalies need to be factored out.
spk00: Well, and I just 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 those upper 40s? And, again, just really proud of the team and the work that's been done to get us where we are today.
spk01: Yep.
spk10: Got it, and if I could ask a second one. I'm just wondering what gives you the confidence to re-accelerate customer growth in 24 without a real significant increase in marketing spend. Why not spend more aggressively with customer growth being one of your top priorities this year?
spk01: Yeah, I mean, I think as Jessica said, if you look at the investment behind American Home Shield, it is up because we invested more in Front Door last year and took away from AHS. So AHS investment will be will be stronger in 24. I think the other thing that gives me confidence is the whole of the program, 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 I think we're, in my words that I use, we're kind of on a relentless march now. The category's been stagnant or down. I think the brand's gotten a little tired. We need to freshen it up. We need to come out with, you know, 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.
spk10: That's helpful. Thank you both, Bill and Jessica.
spk00: Thanks. Thanks, Sergio.
spk06: Our final question comes from Corey Carpenter with J.D. Morgan. Your line is open. Please go ahead.
spk09: Good morning. 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.
spk01: Okay. So from an engagement perspective, You know, the interesting thing about this part of our business is 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 direct to the consumer and with real estate agents. This one is really getting contractors to go do 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 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 12,000, 13,000, 14,000 other contractors. So that's where we, you know, 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 industry. to come, as I mentioned. So I think this is one that is both going to be a combination of consumer engagement and contractor engagement.
spk00: 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 the other on-demand services, such as the HVAC tune-ups, Reiki, as well. So, you know, again, this is a great opportunity to also test into it. We're learning a lot, but we're also seeing a lot of strength from the upgrade component of that business.
spk09: Thank you both. Thank you, Lori.
spk06: Ladies and gentlemen, this concludes our Q&A and today's front door fourth quarter and full year 2023 earnings call. We'd like to thank you for your participation. You may now disconnect your lines.
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