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spk03: Good morning and welcome to the Anywhere Real Estate Year-End 2022 Earnings Conference Call via webcast. Today's call is being recorded and a written transcript will be made available in the investor information section of the company's website tomorrow. A webcast replay will also be made available on the company's website. At this time, I would like to turn the conference over to Anywhere Senior Vice President, Alicia Swift. Please go ahead, Alicia.
spk01: Thank you, Dennis. Good morning and welcome to the year-end 2022 earnings conference call for Anywhere Real Estate. On the call with me today are Anywhere CEO and President, Ryan Schneider, and Chief Financial Officer, Charlotte Simonelli. As shown on slide three of the presentation, the company will be making statements about its future results and other forward-looking statements during this call. These statements are based on the current expectations and the current economic environment. forward-looking statements and projections are inherently subject to significant economic, competitive, litigation, regulatory, and other uncertainties and contingencies, many of which are beyond the control of management, including, among others, industry and macroeconomic developments, the impact of such developments on consumer demand, and the incurrence of liabilities that are in excess of amounts accrued in connection with pending litigation. Actual results may differ materially from those expressed or implied in the forward-looking statements. Important assumptions and factors that could cause actual results to differ materially from those in the forward-looking statements are specified in our earnings release issued today, as well as in our annual and quarterly SEC filings. In October 2022, the company initiated a plan to integrate own brokerage group and title group. However, based on industry and business developments during the fourth quarter of 2022, the company has determined that its reportable segments will remain consistent at December 31st, 2022 with prior periods. For those who listened to the rebroadcast of this presentation, we remind you that the remarks made herein are as of today, February 23rd, and have not been updated subsequent to the initial earnings call. Now I will turn the call over to our CEO and President, Ryan Schneider.
spk02: Thank you, Alicia. Good morning, everyone. Over the past few years, Anywhere has made powerful progress on our transformations. We entered 2022 with real momentum, and even as the housing market worsened in the year, we leveraged our unique advantages, stayed focused on our priorities, and took quick actions that enabled us to deliver $6.9 billion of revenue and $449 million in operating EBITDA. We accelerated our cost reductions from a target of $70 million to realize over $150 million of cost savings in the year. We rigorously prioritized our growth investments in CapEx, and we capitalized on the improving competitive environment. We remain committed to growing our advantage positions in our existing businesses, especially franchise, luxury, and transaction services, along with simplifying the transaction for agents and consumers. Now, looking back on 2022, it was a rapidly changing year for housing with substantial declines in the market that got worse every single quarter. Effectively, all the market decline was from a drop in unit transactions. culminating with Q4 market volume down more than 30%. Higher mortgage rates continue to put pressure on affordability, and these higher mortgage rates are hurting this new supply of inventory, as many homeowners are locked into their current home with low mortgage rates. I've been incredibly proud how our great agents and franchisees have taken care of customers, even in the midst of this tough housing market, as they continue to demonstrate their value in the marketplace. 2023 looks like a volatile year. where the housing market will be meaningfully lower than 2022, driven by a substantial drop in unit transactions. Industry 2023 forecasts for transactions are typically in the 4 to 4.5 million unit range, down 10 to 20% from 2022. And remember, unit transaction declines have a disproportionate impact on our business, as unit declines also impact our mortgage and title opportunities. And we'll see what happens on the price side of the volume equation. Now we expect Q1 2023 market volume to be down around 30% versus 2022. But we expect those year over year quarterly in comparisons to improve throughout the year. And I still believe the outlook for housing over the decade is strong. And most importantly and potentially excitingly, right now we may be at or near a bottom already. We are all seeing a number of the housing indicators in the macro economy exhibit more stability. In our book, From December 2021 to November 2022, our year-over-year volume comparisons all showed open volume lower than our closed volume, effectively showing housing results decelerating. That flipped in December 2022. Both in December 2022 and January 2023, our open volume comparisons were higher than our closed volumes. So even with a tough and likely volatile 2023 market ahead, I'm increasingly optimistic about our position and the opportunities in front of us. So first, we are laser focused on changing how we operate our company to deliver greater efficiency and enhance our value proposition. We realized $150 million in cost savings in 2022, and later in this call, Charlotte will share the equally powerful efficiencies we are expected to drive in 2023. And our excitement in this area is not just about lower costs. It's about re-architecting our business for greater success in the future. We are re-imagining our real estate brokerage offices to be more efficient, flexible, and integrated with transaction services like title and mortgage, which means we can provide fewer but more impactful agent and consumer support costs. Building on our past investments to digitize our operations, we are automating processes across brokerage and title. removing work and friction for agents and consumers. And while we've lowered our marketing spend for 2023 given market conditions, we are excited how we're using a more digital marketing mix to deliver greater value for agents and franchisees. Second, we are rigorously prioritizing our growth investments, which include continuing to expand our powerful franchise business, leaning into our luxury leadership position, and driving innovation in our nationally scaled title and mortgage business. Most importantly, we like the better competitive environments that we have seen evolve in 2022 and the competitive differentiation we are achieving. We believe our results demonstrate a flight to quality and that there will be growth benefits for us when the market rebounds. We experienced record franchise sales in 2022, bringing in substantial new companies and helping our existing companies grow via M&A and agent recruiting. We continue to have strong growth in our Anywhere Advisors agent base, up 4% year over year organically. And most excitingly, in this better competitive environment, we're able to recruit at better economics than in the past few years. And as we've been sharing with you throughout the year, we continue to have record high agent retention in our own brokerage business. Finally, we've recently brought to market a new innovative multi-franchisee title called joint venture opportunity as part of our franchise value proposition and are in the process of launching the first three in Florida and California. So even in a challenging market, we like the flight to quality that we're seeing in the better competitive environment and our growth vectors, which together we believe will pay substantial dividends for us when the market recovers. Now I will turn over to Charlotte to discuss our results in more detail.
spk00: Good morning, everyone. 2022 was a challenging year for the housing market, but we are excited about the progress we've made and the position we are in to further our leadership in this industry. We continue to deliver meaningful operating EBITDA and have taken the necessary steps to improve Anywhere's financial and operational performance with our accelerated cost reductions and prioritization of our investments to drive growth. Now I will highlight our full year 2022 and Q4 financial results. Full year revenue was $6.9 billion and operating EBITDA was $449 million. Q4 revenue was $1.3 billion, down 33% in line with our transaction volume decline. Q4 operating EBITDA was $12 million, down versus prior year due to lower transaction volume, higher agent commission costs, and various other items like the sale of our underwriter business, offset in part by additional cost savings. Our business delivered well above that number in the quarter, but operating EBITDA was reduced by several specific items booked in Q4, including write-offs in our franchise business and at our GRA JV, as well as additional legal accruals. Cash on hand at the end of 2022 was $214 million, and full-year free cash flow was negative $159 million. due to a large negative working capital use in Q1 2022. This was driven by our 2021 outsized performance, which drove sizable accruals by year-end 21, which were paid in Q1 2022. We ended the year with a senior secured leverage ratio of 0.77 times and a net debt leverage ratio of 5.1 times. We are pleased with the progress we have made on our balance sheet. We have a long-dated maturity stack and have lowered our cost of capital. We redeemed the 2023 notes in November and now have limited debt maturities until 2026. Now let me go into more detail on our business segment performance. Our Anywhere Brands business, which includes leads and relocation, generated $670 million in 22 operating EBITDAs. Operating EBITDA decreased 81 million year-over-year, primarily due to lower revenue related to transaction volume declines, partially offset by decreases in operating and marketing costs. Our relocation business substantially outperformed 2021 and even exceeded its pre-COVID 2019 full-year performance, driven both by cost efficiencies and new client signings. Our Anywhere Advisors operating EBITDA was negative 86 million, down 195 million versus 2021. However, this business generated 287 million in operating EBITDA before intercompany royalties and marketing fees paid to our franchise business. Our agent base was up 4% year-over-year, like-for-like, and commission splits were up 203 basis points year-over-year. And for 2023, even as overall market volumes are anticipated to decline, we expect continued split pressure, driven mostly by continued agent mix, as the higher producing agents, who earn the highest splits, will continue to drive more of our volume. We will also have pressure from previous recruiting amortization. That said, 2023 split pressure is expected to look more like what we experienced in Q4 2022, where splits were about 130 basis points higher year over year. Pennyware Integrated Services delivered $9 million in operating EBITDA in 2022. Operating EBITDA declined $191 million year-over-year due to lower mortgage JV earnings, lower purchase and refinance volumes, and lower earnings due to the sale of our title underwriter business. As you have already seen in our 8K, December open transaction volume was down 35%. Our January open volume was down 31%. and we expect our Q1 closed volumes to be down about 30% year-over-year, which will drive our Q1 operating EBITDA unusually negative. Consistent with industry forecasts, we expect the quarterly volume numbers to improve throughout the year, but estimate that our annual transaction volumes will decline about 15% to 20%. With this range of volume declines, our 2023 operating EBITDA will be below 2022, But despite the weak housing market, we expect our operating free cash flow to be modestly positive, driven by favorable working capital, robust savings programs, focused investments, and judicious cash management. As Ryan has mentioned, we have a relentless focus on driving efficiency in this challenging housing market. In 2022, we once again demonstrated our ability to rapidly change with market conditions, delivering efficiencies and executing $150 million in cost savings. These are comprised of the original $70 million in savings we targeted in the beginning of the year and another $80 million we proactively drove in the back half as market conditions eroded. For 2023, we expect to deliver about $200 million in additional cost reductions, including carryover of approximately $50 million of actions taken in 2022. Let me give you more detail on how we are thinking about these cost savings programs. The largest part of our cost structure today is tied to our operational real estate footprint. This includes the physical brick and mortar of both our brokerage and title operations, but also the other support components like staffing, tools and resources, and other non-agent activities. As Ryan said, we are transforming our physical space locations both in quantity and in the way we deliver services to agents and customers. We are also advancing our technology and product solutions, which not only drive cost efficiencies for us, but also improve the agent value proposition. Second, we continue to reduce our operating costs to better match the housing market demand and changing how we work. We have lowered our headcount down 11% from June 2022 as we right-size for this market, Other examples of our savings programs include our ongoing efforts in procurement, ensuring our marketing spend is positioned to deliver the highest ROIs, identifying software synergies, and prudently managing other corporate expenses. As much as possible, these actions should not impact our agent and franchise partners, nor our plans to transform the consumer experience. However, these savings will be offset in part by inflation in our people costs, software costs, and litigation costs. driven by two class action jury trials, which are scheduled this year, to name a few. And while the housing market remains a challenge, we continue to prioritize investing for growth while driving efficiencies for today and tomorrow. We have made progress against the goals we shared with you at our Investor Day, both on our savings targets and in creating an improved agent experience, and look forward to sharing further progress against these goals in future calls. Now let me turn the call back to Ryan for some closing remarks.
spk02: Thank you, Charlotte. Anywhere responded to the challenging 2022 for housing with agility. We reimagined how we operate and strengthened our financial profile while continuing to make strategic progress and invest for growth. In 2023, we remain committed to growing our advantage positions, especially in franchise, luxury, and transaction services, and simplifying the transaction for agents and consumers. Standing here today in February, we really like what looks to be a better competitive environment for us. And potentially, most excitingly, based off the data in our book from December and January, we may have reached the bottom of the housing downturn. We really like our positioning to win, especially as the market rebounds.
spk04: With that, we will take your questions.
spk05: If you would like to ask a question, simply press star, then the number one on your telephone keypad. Your first question is from the line of John Campbell with Stevens. Please go ahead. Hey, guys. Good morning.
spk02: Hi, John.
spk06: Hey. I want to check back on the rule of thumb you guys have provided in the past around the 1% volume swing kind of equating to $15 million of EBITDA sensitivity. Is that still a good measure to consider? And then also on the $200 million, how should we be thinking about the net impact for the year?
spk00: Yeah, it's a great question, John. I think the $15 million is still pretty close. I think what I would say is when the volume declines are more heavily based in sides, that can impact our business a little bit more because there's a knock-on impact to title and mortgage. So it's definitely still a good analog to use. As far as the $200 million, I don't think that the flow-through is going to be different than what we've seen in other years. As you know, most of it flows through. However, we do have those offsets that I mentioned in the script, like the enhanced people costs and some inflation around software and litigation. So I can't give you an exact percentage, but the flow through is pretty consistent with what we've seen in previous years.
spk06: Okay. That's very helpful.
spk02: John, if I can build on that a little bit, I want to just double down on a couple of things there. One is Charlotte's point, and I said it in my script, You know, when the decline is all units, it is a disproportionate hit on us because it hurts the mortgage and title opportunities, right? And we clearly see that in our 2022 results when, you know, units were down pretty dramatically, both in the market and for us, right? So that's a big thing. The other thing on the cost thing is it does get to just the question how volatile 2023 is going to be. Right. You know, in terms of what happens on the cost side, because obviously 2022 is a pretty wild housing market. Right. We had all those unit declines. We had the rate environment change, political stuff, high inflation, you know, et cetera. And, you know, I chose the word volatile in my script for a reason. You know, you know, the biggest uncertainty is the housing market itself. Right. And, you know, lower unit transaction forecast. We'll see what happens on price. And depending on what happens with that will probably drive some of our cost base also. Right. Is, you know, We're rooting for a stronger year, but that would probably mean we'd bring some marginal costs back. If it's a more challenging year, then obviously we keep looking there. But there's also the uncertainty on the competitive side. I said we like the competitive environment that we've got that's evolved. And I think there'll be some real questions about which companies are going to prosper and which ones are going to struggle in a kind of tough year. And so we like our relative position, what we're seeing on the growth side. you know, we'll see if there's any, you know, opportunities there that that might create for us that would, you know, change our spending potentially, you know, and then, you know, another area of volatility for 2023 is, is with litigation, right? You know, Charlotte mentioned that that'll be a cost headwind for us. We've got these two class action jury trials, and then we got a couple other multiple defendant kind of industry class actions out there. And these are just the things we know about, you know, wild stuff in 2022 like ukraine the inflation stuff what the fed did on on rates you know we didn't know a lot of those stuff so end of the day you know this this what happens with units will make a big difference in our in all of our businesses effectively um you know including those title and mortgage results you saw in 22 and what happens with the macro and some of these other things will make a will make a difference on the cost side. But I think Charlotte's given you the right way that we're thinking about it right now. And, you know, just like Charlotte gave you our January results, we'll do our best throughout the year to keep you updated, just like, you know, we gave you our Q4 results, you know, six weeks ago, just so you had them and could kind of, you know, see what we're using as we plan kind of going forward.
spk00: Hopefully that helps. Yeah, sorry, John. The other thing I would say is Because of where the housing market has been in the back half of last year, the majority of that $200 million is identified. So I feel very good about where we're starting off the year from an identified perspective. The other thing I would tell you is it does not include the more draconian things that we did during COVID. So hopefully that helps round out your thinking on the savings programs.
spk06: Yeah, that's very helpful, and it's a very good point on the unit impact. I hadn't thought about that too much. One more here, just relative to your guidance for the full year, you guys said modestly positive free cash flow from operations. Charlotte, if we could dig into that for just a second. I know Cardus tends to have a pretty big influence on the working caps. If you could talk to expectations there, and then also just moving down the total free cash flow, what else should we be considering relative to the CapEx and maybe your capital allocation program?
spk00: Sure. So as far as CARDIS goes, it actually was a drain for us in the fourth quarter. Normally on a full year basis, we end up about zero on the securitization facility, give or take, small single digits one way or the other. We actually had a pretty big drain of almost $50 million. So that unwinds in the first quarter. Now, I can't tell you how we're going to finish the year, but like I said, the majority of years that will neutralize over the year and we'll end up on a zero basis. So it It'll benefit us in the first quarter and hopefully on the full year basis because of where we ended last year. So that's how I would think about the securitization. Some other working capital components to think about is all of our free cash flow working capital declines from last year really happened in the first quarter and for the reasons I called out in the script. So we don't anticipate having that impact us in the same way in the first quarter of this year. So working capital... instead of being a hit like it was last year, should actually be, you know, slightly positive for us. So other than that, from a CapEx perspective, you know, as I called out, we're being very judicious, and we still have a healthy CapEx forecast. It's on the lower end of what we've spent over the past, you know, sort of four or five years, but, you know, it's still very healthy, and that is obviously focused around two things. First, you know, driving our strategic goals, which is improving sort of the customer experience. And part of that happens in technology, and part of that happens on the facility side. So it's still a healthy but focused budget, but on the lower end of what you've seen us spend over the past four or five years.
spk05: Okay. Very helpful commentary. Thank you, guys.
spk03: Your next question is from the line of Brian McEvney with Zellman & Associates. Please go ahead.
spk08: Hey, good morning. Thank you. Charlotte, so on the cost savings, so realized $150 million this year, $200 million expected next year. So that's $350 million in total. I think that compares to an expectation or a target of $300 million that you laid out at the analyst day between 2022 and 2026. So can you talk about how much of the 22-23 dynamic is kind of structural cost actions that you were planning to take, you know, maybe just at a later point in time that are being pulled forward, or how much of the cost actions are more, you know, variable with the pullback in volume, such as marketing spend?
spk00: Yeah, that's a great question. So to your point, we had a goal of about $300 million, and you can see that we've already delivered or will expect to deliver about $350 million in these two years alone. How I think about it is it's kind of like two-thirds, one-third. So a lot of this is structural stuff that we are, you can call it pulling forward. I think, you know, we weren't really specific about which year these savings were going to happen when we did Investor Day. Anyway, I think this is the right cadence for how we would want to go attack some of those permanent structural savings. So I feel good about the progress against our goal. But to that point, a third of it probably is more variable tied to the housing market And to Ryan's point earlier, if the housing market comes back faster, some of that cost might come back faster too. So I kind of think of it as like 60-40 or two-thirds, one-third of sort of more structural savings versus tied to the housing market and variable or temporary.
spk08: Got it. Okay. That's very helpful. Thank you. And then one higher level one. So if we go back in time to The realty days, even ascendant days in the GFC, obviously very tough from a volume and profitability perspective. But there were some operational offsets in the numbers at the time. So commission splits to the agent went down. Commission rates to the consumer went up. Franchise royalty rates went up. So kind of partial offsets against the volume environment at that time. I guess I'm curious, as you look at the business today and going forward in this tough environment, Is it possible that some of those partial offsets flow into things, or is there any reason that it's, you know, different this time than previous volume declines? And I know your commentary on the split suggests continued upward pressure, at least modestly in 23. But just curious if there are kind of levers beneath the surface in a tough volume environment that may trend in a slightly better direction. Thank you.
spk00: That's a great question. Why don't I start off and let Ryan fill in with other thoughts that he might have. So the fact of the matter is, if you think of the royalty rates and if you think of average broker commission rates and things that are structural to this business, they're not really moving in a favorable direction because of either size consolidation and franchisees or the mix of homes that are being sold tend to be at higher price points these days, which tend to garner slightly lower average broker commission rates. So I don't anticipate those things changing unless the mix of homes that are being sold, you know, with inventory coming back on. And, you know, that may help us in the future, but I don't really see that helping us in 2023 per se. From a commission split perspective, you know, the good news is the competitive side of that is significantly more rational. And like I called out, the biggest impact that we're going to have in our splits is pure agent mix. So to the extent that, again, we get more home sale transactions, there's a hopeful benefit in the future that the agent mix kind of normalizes itself out and we have agents across the spectrum delivering the home sale transactions. If that was the case today, if we didn't have this agent mix hit, you'd probably see a significantly better profile on commission splits. But until that changes, you know, we kind of are where we are. So... Probably not the answer you wanted to hear, but that's kind of how I'm looking at it in the short term.
spk02: Yeah, I don't have a lot more to add on that, Ryan. I mean, if you just talk on the franchise side with a little more detail, you know, our top 250 franchisees are about 70% of our business right now, right? And, you know, our rebate tables are public, so you can see how, you know, the the more business that people do, the lower royalty rate that they earn. And, you know, that's up from, you know, whatever, you know, 65%, you know, five years ago, which is up from 57% 10 years ago, which is up from whatever it was, you know, back in the ascendant days that you're talking about. So I think that this concentration, you know, both on the franchise side and then, you know, the agent, you know, the best agents doing a higher percentage of deals, have both created a little bit of a different kind of ecosystem in the margin that probably makes it less likely that you get some of those effects that happened in the downturn 15 years ago.
spk04: Got it. That's very helpful. Thank you.
spk05: Once again, if you would like to ask a question, simply press star and then the number one on your telephone keypad. Our next question is from the line of Tommy McJoynt with KBW. Please go ahead.
spk07: Hey, good morning, guys. Thanks for taking my question. Could you talk a little bit about what's embedded in your guidance for the mortgage JV for next year, either directionally or in absolute EBITDA terms, if you want to be that clear?
spk00: Sure. Yeah, so as you know, it was a drain, obviously, on the year for us in 2022. Um, the, the good news is, uh, I do expect it to not be a drain in 2023. Um, and then that has a benefit of a year over year impact as well. So I don't, I don't imagine that we're going to be like, you know, making money like we did two or three years ago, but the good news is it shouldn't be a drain on us. Uh, it should be positive. And there's a, obviously a positive year over year benefit from that as well.
spk02: The mortgage is a place where the competitive environment, Tommy, is also likely to help us. You know, we've seen a couple people in mortgage make some pretty big strategic shifts that, you know, means we're doing some things on the recruiting and kind of building the depth of our kind of joint venture in a way that's pretty helpful, as you've seen some other people pull back. And so, you know, we're hoping to reap some of the competitive environment benefits on that next year, you know, even if it's, you know, obviously kind of been a tough business.
spk04: Thanks.
spk07: And then just my second question, can you remind us of some of the leverage covenants that you guys have on your revolver and some of your debts? And are there any concerns on with the lower EBITDA next year, you guys running into some breaching any of those covenants or do you guys feel like there's a pretty safe cushion?
spk00: That was a bit of a softball, but thank you for that one. No, at the end of the day, our most restrictive covenant is our senior secured leverage ratio at 4.75 times. And as you saw, we're at 0.77 times. So we don't have any concerns about breaching the senior secured leverage covenant. We do have a covenant that at total debt leverage of four times that we're unable to do share buybacks So we're clearly beyond that right now at 5.1 times. But I don't really consider that overly restrictive. And, you know, basically, at the end of the day, everything that we've done over the past two or three years to handle this refinancing in a strong and positive market at, you know, the best terms possible, you know, the significant transformation of the balance sheets. I guess the lesson there for everyone is take care of that when times are good, and then you'll be well-prepared when the housing market takes these cyclical dips like it tends to do. We feel really, really proud of what we've done over the past few years on the balance sheet, and it puts us in a good position to continue investing behind our strategic priorities. Obviously, we still have to focus on the cost. That's just the right thing to do for the business. But I'm not worried about those covenants.
spk02: Yeah, Tommy, that's one thing that I want to just double down on a bit here, which is, you know, when you look at our balance sheet today and I give Charlotte and our finance and legal and other teams, you know, all the credit for this. I mean, you know, we've seized the moment a couple times to basically put, you know, a couple billion of unsecured debt out to maturities like 29 and 30. You know, we've done other moves beyond that. We paid off our 2023 notes and, you know, we moved from a world where we used to have a lot of secured debt to the point where our secured debt is, you know, incredibly low, right? And hence you, you know, even in a tough year for housing, whether it's 22 or 23, you can see that our senior secured leverage ratio is quite far away from you know, our, um, you know, our, our kind of most restricted covenants and, and, you know, it wasn't an accident. There's a, when I talk about our transformation, the balance sheet part is, you know, as important as anything in this. And so, um, you know, it is, if, if we hadn't made those moves, we'd, we'd be having a pretty different conversation right now, staring at, you know, a tough 2023 for our industry and, But, you know, whether it's the lengthening of maturities, whether it's the massive shift to unsecured, whether it was, frankly, the pretty low rates that, you know, Charlotte and the team got, like, you know, in our lower interest expense than we used to pay, like, we're in a lot better position there. And, you know, that does give us the room to, even in what is looking like a pretty volatile and kind of wild year in 2023, you know, keep making some of these investments, keep simplifying the company, keep changing how we do, you know, you know, title and mortgage, keep investing to have, you know, franchise sales growth, things like that. So love the question, you know, still an important topic for us to stay focused on. We're never going to relax on the balance sheet side, but it, it's, you know, you know, being prepared for these kinds of challenges in the housing market and a cyclical business is, is why you want to get ahead of these things, and hopefully our owners feel like we've got the company in a very different position on the balance sheet side.
spk04: Agreed. Thanks, Ryan. Thank you, Tommy.
spk03: And we have come to the end of the Q&A session. And with that, this concludes the Anywhere Real Estate Year in 2022 conference call and webcast. We thank you for your participation. You may now disconnect.
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