RE/MAX Holdings, Inc. Class A

Good morning and welcome to the RE-MAX Holdings Second Quarter 2021 Earnings Conference Call and Webcast. My name is Tabitha, and I'll be facilitating the audio portion of today's call. At this time, I'd 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 Second Quarter 2021 Earnings Conference Call. Please visit the investor relations page at remaxholdings.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 the 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. RE-MAX 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 second quarter 2021 financial results press release and other SEC 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, Terry Callahan, our Chief Financial Officer, Nick Bailey, President of REMAX, and Ward Morrison, President of Modern 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, we've posted record financial results in the second quarter, driven by a historically strong housing market, improved performance from our core operations and contributions from recent acquisitions. Continued execution on our strategy and the benefits of investments we've made in recent years are having an impact. With the recently closed acquisition of the REMAX Integra in North American regions, we're driving economies of scale and delivering a consistent, high-quality value proposition. and our greater size brings more opportunity to create shareholder value. We remain encouraged by trends and our key leading indicators. We make safe account growth as well as model franchise sales and open offices. We believe our strategy and investments set us up nicely for continued profitable growth. I'm very excited about where we are and where we are headed. Highlights of the second quarter include record revenue of $77.2 million and record adjusted EBITDA of $30.5 million, adjusted diluted EPS of $0.63, a net increase of over 8,000 REMAX agents year-over-year highlighted by growth across the board in the U.S., in Canada, and internationally, and a nearly 30% year-over-year increase in model open offices. Turning to slide four, the landmark acquisition of REMAX Integra's North American regions bring over 19,000 agents and 1,100 offices into our company-owned operations. On our February earnings call, we said we believed we could double the size of our revenue, excluding the marketing funds and profit, through executing on previously identified growth opportunities. The Integra acquisition was one of those opportunities and gets us roughly 20% to 25% of the way toward achieving that goal. A great start. This acquisition, the most significant in our history, given its size and cross-border market presence, is the latest step in the transformation we have been undergoing over the past five years. During this time, we have challenged, reinvented, and or transformed nearly every aspect of the company, from our branding to our executive leadership team. We've upgraded people, processes, and platforms at almost every level. We launched a new franchise brand, ramped up our tech capabilities to expand and diversify our product lines, modernized our marketing, and strengthened our core business. As a result, we're a larger, more formidable enterprise with greater opportunities for growth, all while staying true to the principles embraced by Dave and Gail Linegar when they founded the company nearly 50 years ago. Much of our transformation has occurred through strategic M&A activity. Looking ahead, we plan to focus on integrating the acquired Integra regions and paying down our debt. At the same time, with over $100 million of cash on our balance sheet, we can and will take advantage of strategic opportunities to expand even more. Acquiring independent REMAX regions and extending our company-owned footprint remains a top priority for capital allocation. At the same time, we also look for complementary acquisitions in the franchising and real estate channels with an eye toward adding value across the entire home buying life cycle. Moving to slide five, June presented an ideal trifecta for a hot housing market, record home sales and prices as indicated in our RE-MAX National Housing Report and an increase in inventory for the first time in 15 months. June, typically the biggest month of the year for home sales, saw sales soar more than 14% over a strong May. In fact, June sales topped every other month in the 13-year history of our National Housing Report, which spans 53 metro markets. The median sales price of $336,000 was also a report record, eclipsing the previous record of $320,000 set this April and tied in May by 4.9%. Meanwhile, in welcome news for frustrated buyers, the number of homes listed for sale grew 1.9% over May, the first increase since March 2020. Inventory, however, was still down 37.5% from June 2020. The fact that sales are up and inventory is increasing at the same time indicates that more sellers are coming into the market to list their homes, and buyers are lined up at the door, still hungry. Despite the pandemic, record high prices and limited inventory, buyers continue to take advantage of historically low interest rates and fight for a chance to become homeowners, a milestone that seemingly still appeals to every generation. Although some pundits are now forecasting a lower number of U.S. existing home sales than they were earlier, 2021 is still shaping up to be a strong housing market, one of the better ones we've seen in the past decades. The return of more sellers is a positive sign that may represent a small step toward a more balanced market, which would be good news for all. With that, I'll turn it over to Nick. Thanks, Adam. Good morning, everyone. Looking at slide six, overall agent count increased more than 6% year over year. We added over 8,000 agents worldwide since June 2020 with growth in each major geography. In fact, our combined US and Canadian agent count is the highest it has been in nearly three years since Q3 of 18, despite the immense competition and the unusual circumstances of the past year. The strong housing markets in the US and Canada are both an attraction and a confidence builder for agents. In the U.S., our agent count increased over 750 agents, up over 1% compared to last year. In Canada, our growth accelerated, and we added almost 1,800 agents, up more than 8% year over year. Our growth in Canada is particularly notable given our position as a market leader there. We believe the events of the past year have increased agent awareness on the importance of having a strong brand. Our national market share of more than 30% in Canada is a difference maker, especially during times of uncertainty. is also one of the many reasons we're excited about the acquisition of Integra's North American regions. These regions have experienced outsized growth in recent years and should be a positive driver in accelerating our overall organic growth rate. Right now, our focus is on integrating these regions as quickly and seamlessly as possible. The process, which began right after closing, is off to a terrific start. We're leveraging our experience with previous acquisitions to help these brokers and agents maximize the advantages of our company-owned regional operations. There's tremendous amount of enthusiasm among the brokers and agents in these acquired regions, and their excitement is shared by everyone in the REMAX corporate organization, and we say welcome aboard to all of them. Turning to slide seven, we continue to make good progress on the technology front, receiving acclaim for the efforts while we innovate and see increased adoption of our offerings. One of the highlights from Q2 was that our proprietary first app won a distinguished innovation award from Franchise Update Media. Our first app was a first-place winner in the annual Franchise Innovation Awards, which recognized franchisors that are creating and implementing the most original strategies for their franchisees. The first app uses machine learning to analyze an agent's friends, family, and acquaintances, and then identify those most likely to list their home in the coming months. It has been a real difference maker. For example, in terms of transaction size, REMAX agents who began using first prior to April 2020 increased their productivity by 9% on average versus the same period in 2019. The REMAX value proposition includes new ways for busy agents to automate and streamline tasks, creating more time for them to focus on helping customers. The FIRST app helps agents grow their business by helping them refine their contact list, predict those most likely to list their homes, and master strategic follow-up activities. In this low inventory market, FIRST is a game-changing tool exclusive to REMAX agents. When we initially encountered the first app, we saw possibilities to leverage, optimize, and innovate on top of its unique agent productivity suite. We thought to ourselves, can we repurpose this powerful software to help our brokers recruit and retain highly productive agents? And our team embraced this challenge, and I am happy to announce the answer to our question is a resounding yes. We will be unveiling the new recruiting capabilities of the first app at our annual broker-owner conference to be held in Austin, Texas next week. We're excited about this extension of the first capabilities and believe this is best-in-class, first-to-market product that is truly unique to the industry. This new offering is available only to the U.S. right now, and like most technologies, it's a work in progress and will be growing and refining the functionality over time. The recruiting functionality is free and exclusive to Renex franchisees. It's one more worthy addition to our leading value proposition. With that, I will turn it over to Ward. Thanks, Nick. Looking at slide eight, the U.S. mortgage market continues to enjoy a tremendous year. Fannie Mae is forecasting the U.S. will do over $4 trillion in mortgage originations in 2021, likely the second best year on record. This is good news for all mortgage market participants, including our motto franchisees, many of whom are enjoying a strong year to date. That momentum has carried over into our franchise sales. We're selling at a brisk rate, just a touch under last year's record pace. It is the continuation of the successful franchise sales track record we have consistently achieved since day one. We will celebrate our five-year anniversary this October, and during that time, we will have averaged better than one franchise sale per week. We are trending towards selling between 60 and 80 franchises in 2021, consistent with last year and in line with our expectations. Office openings have accelerated as expected. We're experiencing the echo effect of last year's inflection in franchise sales and are now witnessing a similar dynamic in office openings, which grew nearly 30% year over year in Q2. The model team does a terrific job of helping our franchisees navigate the licensing process and the multiple steps needed to get their model offices open. We make it as simple as possible, and it is a core part of the motto value proposition. I'm proud of the great work so many of our motto colleagues do behind the scenes. I know our franchisees certainly appreciate their efforts, and it shows in our results. We now have 164 open motto franchises, and we are within shouting distance of having 200 open offices by year end. A big area of organizational focus for us is the successful integration of Lean Loan. We acquired WEMO last year in order to solve one of our franchisees' primary pain points, finding steady, dependable, and economic loan processing services. Since acquiring WEMO last fall, we have built out our marketing strategy, sales journey, project management, and business operations structure. We continue to get licensed in more states with the goal of being licensed in as many of the 50 states as possible by the end of the year. We're also ramping up resources to handle processing for our anticipated model loan buy-in. We're processing an increasing number of loans for a growing portion of the model network each month and are trending in the right direction. The best-in-class Wemo technology provides the only enterprise solution of its kind in the mortgage brokerage space. Although it was purchased primarily to support model franchisees, Wemo will continue to serve clients and market its products throughout the mortgage brokerage industry, providing an additional channel of growth for REMAX Holdings. With that, I'd like to turn the call over to Kerry.

Thank you, Ward. Good morning, everyone. Moving to slide nine, a healthy housing market, momentum in our core businesses, the continued impact of our investments and strong collections, despite the pandemic, helped generate record financial performance during the second quarter. Our financial results exceeded our expectations in most categories, and we converted almost 70% of adjusted EBITDA into free cash flow during the past 12 months. With the recent closing of the Integra regional acquisition, the corresponding refinancing of our credit facility, and our key leading indicators pointing in the right direction, I believe we are positioned well for continued profitable growth. Total revenue was $77.2 million, an all-time quarterly high. Excluding the marketing funds, revenue was almost $60 million. Acquisitions increased overall revenue by nearly 3%, as we are seeing year-over-year growth for both Lemo and Gadbury. FX lifted revenue by just over 1%. Our organic revenue growth was up significantly, given the pandemic and the fee waivers we employed a year ago. The year-over-year comparisons are not particularly meaningful. What I do think is noteworthy is the momentum we see in our core business. Even after normalizing for the temporary COVID-19 fee waivers extended in Q2 of last year and setting aside broker fees, we still generated a mid-single-digit organic growth rate as many of our organic growth drivers contributed to the top line during Q2, including agent count growth, pricing, motto, first, more targeted use of agent recruiting incentives to name the most notable ones. If you exclude the Booge legacy runoff, our organic growth improves by nearly another 100 basis points. The magnitude of our top line growth is what drives our margin, and we saw that in Q2. we believe we'll see continued mid-single-digit organic growth for the foreseeable future. Looking at slide 10, selling, operating, and administrative expenses were $38.8 million in the second quarter of 2021, up significantly over the prior year. Similar to revenue, the year-over-year comparisons for SONA are not meaningful due to the pandemic. While our staff travel is picking up in response to the importance of in-person events and training that our customers are now eager to participate in, our spending levels remained well behind our pre-pandemic level in 2019. On the acquisition front, we continue to see margins from our acquisitions trending in the right direction. In fact, Gadbury has already started to generate a monthly profit ahead of our expectations. First and our mortgage business, which represents the combination of Wienlo and Motto, are both moving toward breakeven, and we expect each to start generating a monthly profit, likely sometime in the first half of 2022. Turning to slide 11, we took advantage of favorable market conditions and refinanced our credit facility last month. We increased our capacity, reduced interest costs, and generally improved the terms of the agreement. We raised $460 million in term loans, which allowed us to pay off our existing indebtedness and fund the $235 million acquisition of the RE-MAX Integra region. Plus, we expanded our revolving facility to $50 million, up from the previous $10 million cap. We also pushed out the timeframe of the agreement. The new term loan facility is for seven years, while the revolver has a five-year term. Financing the Integra acquisition exclusively with debt made the most financial sense in light of the attractive conditions in the debt market and should give us a more efficient capital structure going forward. After adding the expected EBITDA contributions from the acquired region, we expect our leverage to increase to a still comfortable level of approximately three times on a net basis and approximately four times on a growth basis. Moving to slide 12, the company's third quarter and full year 2021 outlook includes the financial results of the acquired Integra North American regions and assumes no further currencies, movements, acquisitions, or divestitures. For the third quarter of 2021, we expect agent count to increase 5% to 6% over third quarter 2020. Revenue in a range of $86.5 to $91.5 million, including revenue from the marketing funds in a range of $21.5 to $23.5 million, and adjusted EBITDA in a range of $29.5 to $33 million. For the full year 2021, we are increasing our revenue guidance due to the RE-MAX Integra North American acquisition. We are also increasing our adjusted EBITDA guidance due to stronger than expected second quarter results and the RE-MAX Integra acquisition. For FY21, we expect agent count to increase 5% to 6% over full year 2020. revenue in a range of $321 to $336 million, including revenue from the marketing funds in a range of $80.5 to $83.5 million, up from $300 to $310 million, and adjusted EBITDA in a range of $113 to $118 million, up from $103 to $107 million. Now, I'll turn it back to Adam.