RE/MAX Holdings, Inc. Class A

materials including our standard earnings presentation and to access the live webcast and the replay of the call today 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 and open offices financial measures and outlook brand expansion competition technology housing and mortgage market conditions capital allocation credit facilities, dividends, share repurchases, litigation settlement, 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 second quarter 2024 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 Eric Carlson, our Chief Executive Officer, and Carrie Callahan, our Chief Financial Officer. Our brand leaders, Ward Morrison and Amy Lessinger, are also here and will join us for Q&A. With that, I'd like to turn the call over to RE-MAX Holdings CEO, Eric Carlson. Eric?

Thank you, Andy, and thanks to everyone for joining us today. We had a good quarter with stronger than expected financial performance and several noteworthy conversions of real estate brokerages and teams. It's increasingly clear that our decisions over the past year to right-size our operations, settle industry class action lawsuits, strengthen our leadership team, replenish our cash, and prepare for the days ahead have been prudent and impactful. The notable industry business practice changes set to take place on August 17th, we continue to prepare our affiliates for the future. With 51 years of history, we've had plenty of experience with many shifts that have occurred in our industry, and the associated wisdom that we've gained continues to serve us well. Education and outreach, two core strengths of RE-MAX, have been our top priorities following the NARA announcement. More broadly, we're focused on our playbook, operating our business as efficiently as possible, maintaining a growth mindset, and delivering the absolute best customer experience. In what continues to be an uncertain time for housing and our industry, we remain focused on what we can control. We believe our second quarter financial results are proof that our efforts are making a difference. Kerry will get into the details shortly. But to preview some of our comments, collections are timely, and they continue to improve. Our cost management efforts have also been effective. We continue to see positive results from our growth initiatives, although not yet at a level to offset adverse industry-wide and macroeconomic forces. Our conversions, mergers, and acquisitions, or CM&A program, continues to add brokerages and agents to the RE-MAX network. In late June, we added a 60-agent independent office in Utah. About the same time, we're also excited to announce that a prominent unaffiliated brokerage in Ontario converted to Remax, bringing nearly 130 agents. Just a week later, another Canadian brokerage, formerly associated with a competitor, also converted, adding over 200 agents. That gain of 400 agents is a testament to the strength of our brand, what it represents, and our value proposition. It also reinforces the value of our CM&A program. From the start, we viewed the program as a long-term initiative. It's taking time to educate brokerage owners on the opportunities we have available to them, but our strategic marketing approach is paying off and gaining momentum. And if more conversions occur, even more brokerage owners who are considering a change should see RE-MAX as a viable, attractive option. Combine that exposure with the impending business practice changes, and we believe the coming months and years will offer a unique window of opportunity, both for those brokers looking to make a change and for us. With our half-century track record of success, RE-MAX is a desirable option, particularly in a time of uncertainty. Change brings opportunity, and we've positioned ourselves to capitalize on that. Both in the U.S. and Canada, our CM&A pipelines have many attractive prospects, and we aim to keep that momentum up. Our Teams initiative has also had success. We added several teams during the quarter, and we're seeing more of our broker-owners take advantage of the program. It's good to see larger opportunities converting. Year-to-date, our results are in line with expectations, which is positive in the current environment. We have a growth mindset, and we're working to get our top line moving in the right direction. While better results from our growth initiatives will help, we're also exploring other ways to innovate. To that end, we've identified additional opportunities that can drive revenue while also enhancing the customer experience, a powerful combination. For example, we recently launched MaxTech Lead Concierge. an optional program which delivers vetted, conversion-ready leads from Remax.com to our agents. We know that quality leads will mean more opportunities and more potential closings for our affiliates. MaxTech Lead Concierge solves two main issues with online leads. First, our agents will receive high-quality, pre-screened leads that are worth their time and attention. Second, consumers will enjoy a better customer experience by getting an immediate response from a live person. It's truly a win-win solution. The initial reception has been good, and we're optimistic about the possibilities, but we know we need to execute. Improving agent count is critical to a better top line, so network stabilization and growth remain a major goal, even if we face challenging cross-currents in the macro environment and industry. Now, on the positive side, we saw our international agent count rebound in Q2 after a bit of a sluggish start to the year. Having a presence in over 110 countries and territories means there are many puts and takes in agent count during any given quarter or year. So far in 2024, global growth has come largely from India, Central and South America. Successful recruiting and training programs, positive changes in country ownership, and conversion activity have helped create noteworthy momentum. In Canada, agent count was flat through Q2, but Q3 started strong in July. The Canadian housing market, like the U.S., is currently challenged. and that's reflected in our results. Unfortunately for RE-MAX, we have outstanding leadership in Canada, on both the corporate side and within our broker-owner base, alongside number one market share and brand awareness. We believe the composition of our Canadian network continues to strengthen as lower producers leave the brand and are replaced by more productive agents. In the U.S., our agent count has not yet stabilized. Given the big picture, at a time when some have forecasted significant industry-wide attrition in the agent ranks, perhaps 10% or even more this year alone, our results are more measured, but still below where we'd like them to be. With the implementation of business practice changes later this month, we expect part-time agents to have a tougher time than full-time agents. That dynamic plays into multiple REMAX advantages. Our powerful brand, combined with the most trusted, experienced, and productive network, create an advantage for franchisees, agents, and teams. Our iconic brand is the number one name in real estate. We have an unequal global presence, a distinct value proposition of services, and most importantly, the best agents and brokers in the business. And as I said before, Remax agents are the gold standard. There's a lot of confusion and uncertainty in the marketplace right now. That happens when things change, and when things change, people get uncomfortable. When you think about an agent's work, almost every customer or every house they deal with is slightly different. So we should be able to thrive in a little bit of uncertainty. And I think that's the great thing about REMAX agents. They're full-time, experienced professionals. They're productive, and they're the most trusted agents in the business. They know how to adapt to the marketplace. And we're pushing the envelope with our education, leaning in, and speaking loud about what agents should be doing in order to thrive. Plus, here's where our unmatched geographic footprint can really make a difference. We have more offices in more parts of the U.S. and Canada than anyone else. Not only are we providing industry-leading education from HQ, but we also have education and in-person collaboration taking place at over 3,200 REMAX offices in the U.S. and more than 900 offices in Canada. Local presence and a well-established culture of professionalism and productivity are true competitive advantages. Skill is essential in this market, and REMAX is the place for skilled agents. On the mortgage side, Motto continues to sell and open franchises. We're nearing our 400th sale lifetime to date and recently opened a franchise in our 45th state, New Hampshire. We continue to grow year over year despite some of the most challenging and market conditions the mortgage industry has ever faced. Here too, we've zeroed in on what we can control. To date, franchise sales are approximately 50% to REMAX affiliates, 20% to independent or other competitor real estate brokerages and teams, 20% to investors and 10% to loan originators. Also, while some of our franchises are understandably struggling currently, many other offices are doing quite well. These franchises are grinding, marketing their business, staying active in their communities, and in many cases, taking market share. Even in this market, slightly more than 4 million existing homes will be purchased this year, and that's a lot of associated loans being originated in addition to any refi activity. We want more than our fair share of them at Motto. Now similarly, WEMLO continues to get bigger and better. In fact, it recently processed its 6,000th loan to clear to close, or C2C status. Reaching this milestone is exciting for the WEMLO brand because growth like this validates the benefits to mortgage brokers providing our third party processing services. It's also proof to WEMLO's team of processors who serve as a seamless extension of their broker's teams while providing an enhanced customer experience from submission to closing. Wemo provides highly qualified, customer-centric processing talent, easy-to-use technology, and access to an extensive list of supported lenders and loan products to help our enterprise customers get fast, effective results. In closing, it's an unprecedented time for our industry given the pending changes. Additionally, market conditions remain mixed at best. With inventory and listings rising, while higher interest rates and resultant affordability challenges linger. But opportunity abounds. With our leading brands and the most productive and trustworthy professionals in the business, we like our position in the market and are very optimistic about our future. With that, I'll turn it over to Carrie.

Thank you, Eric. Good morning, everyone. Continued cost management amid a soft housing market highlighted our second quarter financial performance. Some of the notable quarterly financial metrics included total revenue of $78.5 million, adjusted EBITDA of $28.1 million, up 5.4% over Q2 of last year, adjusted EBITDA margin of 35.8%, an increase of 350 basis points over the second quarter of 2023, and adjusted diluted EPS of 41 cents. Looking closer at revenue, excluding the marketing funds, revenue was $58.4 million, a decrease of 4.8% compared to the same period last year, driven by negative organic growth of 4.5% and adverse foreign currency movement of 0.3%. Negative organic growth was principally driven due to U.S. agent count and reduced revenue from previous acquisitions, partially offset by higher broker fee revenue. Recall that previous acquisitions like Bouge and Gadbury have either wound down or are in the process of winding down. The increase in broker fee revenue was primarily driven by higher sales prices more than offsetting the impact from reduced agent count. Importantly, second quarter selling, operating, and administrative expenses decreased 13.3% to $34.9 million due to several factors, including lower personnel expenses, improved collections, favorable property tax expense and reduced legal and IT-related expenses. Reduced personnel expenses were largely a function of a difficult but necessary decision we made one year ago to streamline our operations, which also contributed to the reduction in IT-related costs. RE-MAX collections continue to improve this quarter and have been comparatively robust despite the challenges of the current housing market. This is an encouraging sign when assessing the overall health of our franchisees. Favorable property tax expense of about a half a million dollars was a one-time event. Lower legal expenses and miscellaneous reductions, eliminations, and efficiencies elsewhere across the enterprise all contributed to this quarter's strong results. From a capital allocation perspective, we remain pragmatic. We believe this is the prudent approach given that a second half of the year real estate rally has not yet materialized. Additionally, while we remain optimistic our industry class action settlement is currently being appealed. We continue to focus on replenishing our cash reserve in the near term. We believe we are trending to get our total leverage ratio or TLR under four and a half to one by the end of the third quarter, which importantly will enable us to regain access to our revolving credit facility. Further reducing our TLR by the end of this year remains a focal point for our entire company. Once our TLR returns to a desired level and we have sufficiently replenished our cash reserves, we expect to have many appealing capital allocation opportunities, including debt repayment, stock buyback, further cash replenishment, and strategically reinvesting in our business, among others. The cash generative nature of our 100% franchise business is perhaps our most attractive financial characteristic. Our third quarter and full year 2024 outlook assumes no further currency movements, acquisitions, or divestitures. For the third quarter of 2024, we expect agent count to change negative 1.5 to 0% over third quarter 2023, revenue in a range of $75 to $80 million, including revenue from the marketing funds in a range of $19 to $21 million, and adjusted EBITDA in a range of $24.5 to $27.5 million. For the full year 2024, we're slightly reducing our agent count guidance and narrowing our revenue and adjusted EBITDA guidance ranges. We now expect agent count to change negative one to positive 1% over full year 2023, revenue in a range of 305 to 315 million, including revenue from the marketing funds in a range of 78 to 82 million, and adjusted EBITDA in a range of 93 to 98 million. With that, operator, let's open it up for questions.