RE/MAX Holdings, Inc. Class A

Good morning and welcome to the RE-MAX Holdings fourth quarter and full year 2020 earnings conference call and webcast. My name is Brandi and I will be facilitating the audio portion of today's call. At this time, I would like to turn the call over to Andy Schultz, Senior Vice President of Investor Relations. Mr. Schultz?

Thank you, Operator. Good morning, everyone, and welcome to RE-MAX Holdings fourth quarter and full year 2020 earnings conference call. Please visit the investor relations page of REMAX.com for all earnings-related materials and to access the live webcast and the replay of the call today. If you are participating through the webcast, please note that you will need to advance the slides as we move through the presentation. Turning to slide two, our prepared remarks and answers to your questions on today's call may contain forward-looking statements. Forward-looking statements include those related to agent count, franchise sales, financial measures and outlook, brand expansion, competition, technology, housing and mortgage market conditions, capital allocation, dividends, strategic and operational plans, and business models. Forward-looking statements represent management's current estimates. REMAX Holdings assumes no obligation to update any forward-looking statements in the future. Forward-looking statements address matters that are subject to risks and uncertainties that may cause actual results to differ materially from those projected in forward-looking statements. These are discussed in our fourth quarter and full year 2020 financial results press release and other FCC filings. Also, we will refer to certain non-GAAP measures on today's call. Please see the definitions and reconciliations of non-GAAP measures contained in our most recent quarterly financial results press release, which is available on our website. Joining me on our call today are Adam Contos, our Chief Executive Officer, Kerry Callahan, our Chief Financial Officer, Nick Bailey, REMAX Chief Customer Officer, and Ward Morrison, President of Moda Mortgage. With that, I'd like to turn the call over to REMAX Holdings CEO, Adam Contos. Adam? Thank you, Andy, and thanks to everyone for joining our call today. Looking at slide three, a surging housing market underpinned our strong fourth quarter results and provided a fitting capstone to what was an unforgettable year. Our employees are supporting our affiliates while working largely from home, and they will continue to do so until it is safe to return to the office on a larger scale, hopefully sometime later this year. I'm proud of our team and the terrific work they did in 2020. We remain encouraged by the trends we are seeing in our business. With a buoyant housing backdrop, expected contributions from our recent acquisitions, and an upward progress in our legacy business, we think we're poised for meaningful growth in 2021 and beyond. Highlights of the fourth quarter included revenue of $72.4 million, adjusted EBITDA of $23.8 million, adjusted diluted EPS of $0.47, total REMAX agent count increased up over 5% year-over-year, and finished at almost 138,000 agents. And model franchise sales finished on a high note, capping a record year. Turning to slide four. On our third quarter call, I spent some time discussing our overall M&A strategy and our exciting acquisitions of Wimlow and Gadbury Group. Since then, many people have asked us to frame up our future market opportunity. And in summary, we think it is sizable. Excluding the marketing funds, we generated just over $200 million in revenue in 2020, and the vast majority came from our REMAX brand. We think it's possible we could double that top-line figure over time from our existing opportunity set, with an incremental $200 million revenue opportunity evenly split between our mortgage and real estate business lines. Wood will provide a little more color on our mortgage opportunity in a few minutes. On the real estate side, in addition to possible acquisitions of independent regions, our drivers of organic growth include growing agent count, increasing agent productivity, taking market share, monetizing our technology domestically and globally, pricing, and much more. The acquisition of Gadbury Group also brings compelling incremental revenue opportunities. Additionally, as part of the technological transformation of RE-MAX, we have significantly invested in our data and analytics capabilities. There are exciting revenue opportunities for us in the data and analytics space, and as they come increasingly into focus, we will provide additional details as warranted. Lastly, M&A remains an important part of our growth strategy. We continue to explore intriguing complementary opportunities in and around our core business of franchising, mortgage, and real estate, which we believe would have the potential to expand our market opportunity significantly. Turning to slide five. The U.S. housing market continued to soar in January as closings grew 13.5% from a year earlier, according to the REMAX National Housing Report. Notably, while this increase was impressive, it does represent a step back from the blistering monthly sales pace, which has dominated housing since early summer. Based on the 53 Metro surveyed, January's year-over-year increase in home sales sold was more in line with the rate of sales increases we saw in the pre-COVID months of December 2019 and January 2020. On average, homes sold quickly last month with days on market averaging just 40 days, nearly three weeks less than the 59 days average from January of last year. But while the growth in sales moderated, other key metrics show the after effects of housing's 2020 record-setting second-half rebound. For example, January inventory dipped to the lowest level at any time in the 13-year history of the report. And January 2021 marked the fifth consecutive month of year-over-year inventory declines over 30%. January's supply of inventory totaled just 1.7 months and mirrored the report record set and matched three times last year. With inventory tightening, sales prices continued their unrelenting March higher. Median sales price of $285,000 was a record for the month of January and 11.8% higher than a year ago. Uncommonly low interest rates, the ascent of the millennial homebuyer and the prospect of working from anywhere are converging to shape a housing market unlike any other. Supply and affordability issues remain the greatest threats at the moment. Overall, we see the current trends in the housing market as a reason for optimism, and we remain confident that our brokers, agents, and loan originators are positioned to take full advantage of these mostly favorable conditions. With that, I'll turn it over to Nick. Thanks, Adam. Good morning, everyone. Looking at slide six, overall agent count grew at a nice clip, up more than 5% year over year. We added almost 7,000 agents worldwide during 2020, and especially impressive feat during a global pandemic. Our agent count performance outside the U.S. and Canada grew at a robust 16% during the year. We saw widespread growth globally with certain countries in Europe, South America, and Africa among the standout performers. We also added agents during the fourth quarter throughout Canada, finishing up almost 2% for the year. Again, another notable performance given our leading market share as well as the events of 2020. After a very solid third quarter, agent count in the U.S. held steady during Q4. Looking ahead, we remain focused on recruiting and retention and creating more opportunities for our affiliates. We expect the macro housing environment will remain robust in the coming year with strong demand outpacing supply. The battle for listings will stay highly competitive, and agents who are experienced, productive, and armed with seller-focused tools, such as our first app, should enjoy an edge in that regard. We believe our efforts will pay dividends in 2021, and we expect to grow our agent count, including the U.S. and Canada this year. We've made significant investments over the past few years to enhance and improve our value proposition, and we continue to invest heavily. To ensure we're delivering the tools, resources, and competitive advantages that help REMAX agents continue to outpace their competitors, we've looked at our fee structure and decided to make a small adjustment. Effective April 1st, 2021, and July 1st in New York State, the monthly continuing franchise fee in the U.S. company-owned regions will increase by $5 per agent. This investment will ensure continued expansion of the systems and services that help REMAX affiliates stand out in their market. Turning to slide seven, over the past couple of years, we've added powerful technology and talented colleagues via our acquisitions of Booge, First, and Gadbury Group alongside our Experiancer Next technology team. Our substantial organizational realignment last year to create a single unified tech team is now complete. This team of over 200 members maximizes collaboration, focuses on user experience, and operates with purpose, passion, and excellence. The goal is to harness our tremendous capabilities to deliver the best unified agent consumer experience possible. As we build out our platform, simultaneously simplify the user experience with expanding its capability set, we solicit and receive valuable feedback from our network. That constant feedback loop helps us drive adoption and keep us on track with effectively servicing the needs of our highly productive network. And we continue to see increasing adoption of our tools and technology. With almost 22,000 websites created on our Booj platform, our enhanced digital presence continues to drive business to our network of highly productive agents, which in turn contributed to a 50% year-over-year increase in leads in 2020. The first app is the best tool I've seen when it comes to helping agents identify existing contacts who are most likely to sell a home soon. Right now, with such a narrow pool of homes being listed for sale, I think the Purse app is an absolutely essential competitive tool. We've expanded our inside sales force and designed targeted marketing campaigns to help agents understand the product and its capabilities. We also believe adoption will increase as agents become more familiar with the app, and we look forward to sharing more and more of our agent success stories powered by Purse. As Adam alluded to earlier, our investments in data and analytics capabilities have been critical to the effectiveness of our robust tech offerings. Fragmented data is a fundamental industry challenge driven by rules, regulations, and the independent nature of our industry. We have standardized this data and clean data today is, in my opinion, the oxygen that powers agent success. It allows real estate agent websites to work, leads to be generated, and MLSs to be more abundantly available. Data also drives how consumers engage start to finish in the real estate process and ultimately drives more consumers to a REMAX agent. Our ability to harmonize and standardize fragmented data from across the industry improves all efficiencies within the consumer agent experience, and in the process, we control our destiny from a data and analytics standpoint. With that, I will turn it over to Ward. Thanks, Nick. Moving to slide eight, as Adam mentioned, Motto had a terrific year, our best year yet in our short history. In 2020, the Motto Network generated almost $2.5 billion in loan volume and helped 10,000 families finally realize their dreams of homeownership, effectively doubling 2019's results. We had three core areas of focus in 2020, franchise sales, unit profitability, and technology, and we achieved major milestones in each of them. We also continue to improve, innovate, and mature in virtually all facets of the business during this past year. Regarding franchise sales, we had a strong fourth quarter. In fact, it was our best quarter ever with 24 franchises sold. For the full year, we sold a record 71 franchises, up over 35% compared to 2019. Our strong performance is quite an achievement for any franchise, let alone one only in its fourth year of existence. We are making great progress in our lead generation and prospecting efforts, In addition to expanding within the REMAX network, we are selling to independent real estate companies and teams, as well as brokers and teams affiliated with other national brands. We expect to add to our momentum and have established a new annual franchise sales target, expecting to sell between 60 and 80 franchises this year. Once a franchise sale is completed, our customer success team constantly strives to improve the support process required to assist our franchisees to get licensed, open, and operational. With just over 140 open offices as of December 31, we anticipate that we should have about 200 open offices at the end of this year. But as excited as we are about Model's current momentum, it is only half of the mortgage story. We acquired Wemo last year in order to solve one of our franchisee's primary pain points, finding steady, dependable, and economic loan processing services. Model and Wemo now collectively form what you will increasingly hear us refer to as our mortgage business. And as Adam mentioned earlier, we believe this business could generate $100 million or more in annual revenue over time. We continue to believe we can open at least 1,000 model stores eventually, and perhaps many more than that, generating a $50 million-plus annual revenue opportunity. And furthermore, we believe Winglo's total available market opportunity is substantial, just as large as model's potential or even larger. This year, one of our primary areas of focus is the successful integration of Wienlo. We are currently ramping up resources to handle processing for our anticipated model loan volume. We have begun processing loans for a limited number of model franchisees and look forward to expanding that to more of the network throughout the year. The best in class Wienlo technology provides the only enterprise solution of its kind in the mortgage brokerage space. While purchased primarily to support auto-franchise deeds, Lean Low will continue to serve clients and market its products throughout the mortgage brokerage industry, serving as an additional channel of growth for REMAX Holdings. With that, I'd like to turn the call over to Carrie.

Thank you, Ward. Good morning, everyone. In addition to reviewing our fourth quarter performance, I want to expand on Adam's earlier comments about our growth trajectory and then outline our Q1 and FY21 outlook. Moving to slide nine, Increasing existing home sales and motto growth drove strong organic revenue performance during the fourth quarter, with much of that revenue flowing through to the profit line. Our key leading indicators, REMAX agent count, and motto franchise sales continued to grow. Fourth quarter revenue, profit, and margins all exceeded our expectations. And our cash flow generation remained solid as we converted 70% of adjusted EBITDA into free cash flow during 2020. Total revenue was $72.4 million, an increase of approximately $4.3 million, or 6.2%, compared to the fourth quarter of 2019. Organic revenue rose 4%, primarily due to increased broker fees from higher existing home sales, rising home prices, and motto growth, partially offset by reduced event income due to COVID-19 restrictions and previously announced agent recruiting initiatives. Acquisitions contributed to increased overall revenue, by 2.1%, and FX was negligible. Recurring revenue streams, which consists of continuing franchise fees and annual dues, were virtually flat to the fourth quarter of 2019, and, excluding the marketing funds, accounted for 61.8% of revenue in the fourth quarter of 2020, compared to 66.6% in the same period in 2019. Looking ahead, we are excited to be holding our annual agent conference next month. Due to the fact that the majority of agents will participate virtually, we anticipate that our Q1 revenue will be approximately $1.5 million less than our historical run rate and should be largely offset by associated cost savings. Also, for the full year 2021, we believe the runoff of legacy booze revenue should decrease both revenue and adjusted EBITDA by about $2 million this year. Looking at slide 10, selling, operating, and administrative expenses were $40.8 million in the fourth quarter of 2020, an increase of $5.6 million, or 15.9%, compared to the fourth quarter of 2019, and, excluding the marketing funds, represented 74.6% of revenue, compared to 69.2% in the prior year period. Selling, operating, and administrative expenses increased primarily due to higher equity-based compensation expenses and personnel costs, largely from acquisitions and discretionary bonuses. These increases were partially offset by cost savings measures implemented in 2020, as well as lower bad debt expense due to strong collections. Our cost savings initiative enacted last year has largely ended. The notable exception is that our travel and events related expenses are expected to be muted, at least initially, in 2021. Also, we anticipate legal expenses will run about a million dollars higher this year due to ongoing industry litigation. Moving to slide 11, we have been meaningfully reinvesting in our business for future growth over the past few years. We believe those investments will start making a positive difference in our financials beginning this year, and then even more so in 2022. As Adam mentioned earlier, we believe we are poised for meaningful growth in 2021. Even normalizing for the COVID-related fee waivers, we extended to our affiliates during the second quarter of last year. We expect to grow organically in the mid-single digits in 2021, in addition to expected top-line contributions from our Wienlo and Gadbury Group acquisitions. From a profit perspective, our business model has significant leverage. As we ramp up the top line, we expect margin expansion to resume likely next year. Also, as we mentioned last quarter, margins will be adversely impacted initially in 2021 due to our first Wienlo and Gadbury acquisitions, but that impact should lessen as the year unfolds and each acquisition gets closer to break even. Despite an estimated net investment in first Wienlo and Gadbury of between two and a half and three and a half million this year and other ongoing investments in our business, we expect to grow absolute dollars of adjusted EBITDA in 2021. We expect our new businesses from the past four years, Motto, First, Weimlo, and Gadbury Group, to individually and collectively flip from a net investment to positively impacting earnings over the next year. Alongside the expected improvement in our RE-MAX business, we would be disappointed if we didn't generate at least 10 million more in adjusted EBITDA in 2022 than we anticipate for 2021. This assumes no additional acquisitions and, of course, that the housing market remains as healthy next year as we expect it to be this year. Our business continues to generate a healthy amount of cash flow. We will remain disciplined and allocate capital to the best potential value-creating opportunities. Our capital allocation priorities remain unchanged. We plan to allocate capital to acquiring independent regions, reinvesting to drive future organic growth, exploring other strategic acquisitions and partnerships, and returning capital to shareholders. Turning to slide 12, the company's first quarter and full year 2021 outlook assumes no further currency movements, acquisitions, or divestitures. For the first quarter of 2021, we expect agent count to increase 4.5% to 5.5% over first quarter 2020, revenue in a range of $71 million to $75 million, including revenue from the marketing funds in the range of $18 to $19 million, and adjusted EBITDA in a range of $21.5 to $24.5 million. For the full year 2021, we expect agent count to increase 4% to 5% over full year 2020, revenue in a range of $300 to $310 million, including revenue from the marketing funds in the range of $71 to $74 million, and adjusted EBITDA in a range of 103 to 107 million. Now, I'll turn it back to Adam.