Frontdoor, Inc.

Ladies and gentlemen, welcome to Front Door's second quarter 2024 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'll 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 2024 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. There's also additional detail about our brand at frontdoor.com. and in our new mobile app that you can download in the App Store and at Google Play. As stated on slide three of the presentation, I'd like to remind you that this call and webcast may contain forward-looking statements. These statements are subject to various risks and uncertainties, which could cause actual results to differ materially from those discussed here today. These risk factors are explained in detail in the company's filings with the SEC. Please refer to the risk 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, August 1st, 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 Davis, and good morning, everyone. Front Door Inc. continues to operate consistently well, and this was a record quarter for financial performance. As you can see on slide four, in the second quarter, revenue grew 4% to $542 million. Our gross margin expanded 470 basis points to a record 56%. Adjusted EBITDA grew 31% to $158 million. Free cash flow more than doubled to $91 million. And we have used $83 million of cash to repurchase 2.5 million shares year-to-date through July. Now moving to slide five in our strategic objectives. To be clear, our number one strategic priority remains growing our customer base through more sales of home warranties. While we strongly believe in the long-term growth opportunity of the home warranty category, which I will return to in a few slides, We must face the near-term reality that macroeconomic headwinds are impacting home warranty sales. As a result, we are taking the prudent step of slightly lowering our outlook for member count, which Jessica will cover in her section. Our number two strategic objective is to continue growing our on-demand business. This has become a very important line of our business that has already proven its worth, and we're just getting started. And finally, our third strategic objective is to close the acquisition of 210 home buyers warranty. So let's move to slide six and a quick refresh on 210 and where the acquisition stands. As you heard me say in June, this is a great business. And as a leading provider of new home structural warranties, it's a perfect strategic fit for us. We will gain more customers. We will diversify our product portfolio into an adjacent category and we expect to generate significant synergies, all of which will generate long-term benefits. On the acquisition itself, our integration team continues to work with 210 to prepare for a smooth transition of ownership. In fact, our team has been in Denver this week. The main update for today, and this is really great news, is that the applicable federal Hart-Scott-Rodino waiting period to close a transaction has expired. Now, we continue to wait for regulatory approval from a handful of states. Bottom line, the acquisition remains on track to close in the fourth quarter. Moving to slide seven, let's now look at operational areas that are doing exceptionally well, starting with our on-demand business. This has proven to be a real success, and we think it presents a great opportunity with plenty of runway. We are realizing our vision of providing a consolidated ecosystem for all things home. We are reaching more homeowners through our virtual experts and network of independent contractors, effectively growing our share of wallet across our member base and leveraging these great partnerships to meet the repair, replacement, and maintenance needs of every homeowner. For example, our new HVAC program has taken off. For all of 2023, this program delivered $50 million of revenue, and we are on track to far surpass that number this year. We are also continuing to build out our technology capabilities to grow alternative revenue streams. Our new partnership with Moen is a great example of this. Front Door, through our independent plumbing contractors, is the exclusive provider for installing Moen water shutoff valves in California homes, insured by Farmers Insurance. This is a growing opportunity as farmers and other insurers are requiring these valves to prevent water damage. And it's not just in California. In fact, Moen and Farmers have asked us to expand into a number of other states before the end of the year. We'll have more to say about this during our Q3 earnings call in November. Now moving to slide A, customer retention continues to be another terrific story for us. Our second quarter retention rate grew to an all-time high of 76.6%. While this includes a lower mix of real estate customers, Our team has also done a great job of engaging members throughout the customer journey, improving customer service, expanding use of preferred contractors, and moving more members to auto pay, which finished last year at 86%. Now let's move to slide nine and a look at some of the cyclical issues that remain a challenge for our business. I believe this is a story of near-term realism and long-term optimism. As we've seen in recent earnings announcements from several leading companies, consumers are stressed, spending less, and this is impacting our category and many other sectors of the US economy. The good news for us is that American Home Shield, already the leading player in the category, has actually outperformed our top competitors nationally. This is based on our analysis of data from the California Department of Insurance. which maintains nationwide data on home warranty providers based in California. Additionally, real estate continues to be a major near-term headwind for the category. It's been a significant drag on our business for three years now, and it's likely to remain so for the balance of 2024. To that point, on slide 10, let's take a closer look at the real estate market today. In short, things are not improving. Last December, existing home sales were projected to be 4.7 million in 2024. However, that is not going to happen. According to the most recent report from the National Association of Realtors, the annual run rate of home sales has decreased to 3.9 million homes. That's a 5% decline year over year. And as this graph shows, this is amongst the lowest real estate activity in 30 years. NAR also said home prices grew 4% year over year to a record median price of $427,000. Mortgage rates also remain elevated and inventory remains low. While the current situation is bad, it will change. The real estate market has been through down cycles before, and it will come out of this one eventually. We will continue to make refinements that will have us better positioned when the market does turn. Turning to slide 13, to better understand the challenges facing home warranties, we completed a deep dive on the American Home Shield customer base in May. This analysis showed that AHS has wide appeal across key demographics, all ages, income, and ethnic segments. Let me be clear. The customer base for AHS is not aging out. About 60% of our customer base are boomers and Gen X, and about 40% skew younger between millennials, Gen Y, and Gen Z. In fact, AHS over-indexes with the primary home buying segment of 35 to 54-year-olds. Now, let's look at income on slide 14. AHS resonates with various levels of household income, and contrary to some perceptions, AHS is not an offering that skews toward lower-income households. In fact, our analysis shows that about half of our members have annual household incomes over $100,000, with the other half making less. In aggregate, the data on the AHS customer base also reveals that we have long-term opportunities to drive more targeted acquisition. On slide 15, we can see the race and ethnicity makeup of our member base. As we said, millennials are the sweet spot of future homebuyers, and the data indicates they are favorably disposed to home warranties. Within that millennial profile, while AHS currently over-indexes on Black homeowners, we believe there is even more opportunity with this segment as well as with Latinos. We'll have more to say about these opportunities during our Investor Day presentation. Now let's move to slide 16 and the comprehensive actions we are taking now to improve home warranty sales. In April, we launched the new marketing campaign for AHS, yielding strong results. Brand awareness is now at 50%, double our nearest competitor. Google searches for AHS are up 6%. AHS.com website sessions have increased over 30%. In essence, the brand relaunch is doing exactly what we hoped it would do, drive demand and brand engagement. We are also deploying programs in the short term to grow members, such as our focus discounting strategy. In March of 2023, we ran a 50% off promotion. What we learned is that members renewed 12 months later at a retention rate and stepped up price similar to those who were not initially discounted. With this learning, we ran another 50% off promotion throughout the month of July 2024 that yielded very positive results. With this success, we are confident in using time-bound discounts to acquire and retain new members going forward. Now, looking further out, we are moving to the next phase of the AHS brand relaunch, drilling down on educating consumers about the value of a home warranty and improving our targeting of homeowners at a point when they are most likely to convert, such as following the recent purchase of an expensive appliance. Moving to slide 17, here are the primary reasons we remain bullish about the long-term opportunity for home warranties. First, the market for home warranties is huge. 85 million homeowners. Through our research, we believe there are approximately 5 million homeowners with warranties today, yet we believe there is an opportunity to capture at least 10 million more. Second, this situation presents a massive opportunity to educate homeowners about the benefits of a home warranty. For millions of consumers being pinched by the cost of living, home warranties remain an excellent way to guard against unplanned expenses. Furthermore, our research shows that peace of mind is the number one reason our members own a home warranty. Third, U.S. demographics are conducive to future member expansion. Millennials are coming to the forefront as the primary group of homeowners, and we know we have significant opportunities with certain subgroups of this population. Finally, as the industry leader, we have a proven track record of innovation. The rapid rise of our on-demand offerings is a clear demonstration of how we're using technology to meet the needs of homeowners in the ways they want to be served. Together, all of these factors give us optimism about the long-term demand for home warranties. And on that high note, I'll now turn it over to Jessica for the financials of the quarter.