Frontdoor, Inc.

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.

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 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. 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 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.