Re/Max Holdings Inc (RMAX) 2014 Q2 法說會逐字稿

Good afternoon and welcome to the RE/MAX second-quarter 2014 earnings conference call.

(Operator Instructions)

Please note this event is being recorded. I would now like to turn the conference over to Peter Crowe, Vice President, Investor Relations. Please go ahead.

Thank you, Operator. Good afternoon, everyone, and welcome to RE/MAX's second-quarter 2014 earnings conference call. Joining me today are our Chief Executive Officer, Margaret Kelly; and our Chief Operating Officer and Chief Financial Officer, Dave Metzger.

Please visit the Investor Relations page of Remax.com to access the live webcast and 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 2, I would like to remind everyone that on today's call, Management's prepared remarks and answers to your questions may contain forward-looking statements. Forward-looking statements address matters that are subject to risks and uncertainties that may cause actual results to differ from those discussed today.

Examples of forward-looking statements may include those related to agent count, revenue, operating expenses, financial guidance, housing market conditions, as well as non-GAAP financial measures. As a reminder, forward-looking statements represent Management's current estimates. RE/MAX assumes no obligation to update any forward-looking statements in the future.

We encourage listeners to review the more detailed discussions related to these forward-looking statements contained in our filings with the SEC and the definitions and reconciliations of non-GAAP measures contained in the second-quarter earnings press release, which is available on our website.

With that, I would like to turn the call over to RE/MAX CEO, Margaret Kelly. Margaret?

Thank you, Pete, and thanks to everyone for joining our call today.

Now, I want to highlight two key points about our second-quarter performance. First, we continue to grow despite mixed housing data. And second, we are very proud that the RISMedia Power Broker report and the Real Trends 500 survey have once again identified RE/MAX agents as the most productive agents of all national brands in the industry.

Now let me take you through the highlights on slide 3. We delivered strong agent growth, as we grew total agent count by 4.7%, adding 4,280 agents to our global network since the second quarter of 2013. Our recurring fee-based model continued to drive revenue growth, with solid margins and strong cash flow in the second quarter as compared to the second quarter of 2013.

Revenue increased 7.8% to $42.3 million. Our recurring revenue stream of annual dues, continuing franchise fees, accounted for 60.7% of our total revenue. Our adjusted EBITDA was up 13.7% to $24.2 million. Our adjusted EBITDA margin was 57.2% compared to 54.2% in Q2 of 2013. For the six months ended June 30, our adjusted EBITDA margin was 48% compared to 46.9% in the same period last year.

Our efforts to grow agent count while managing our expenses is delivering margin expansion. We delivered adjusted basic and diluted earnings per share of $0.46 and $0.45, respectively. And finally, we are well-positioned to return capital to shareholders. On August 6, we were pleased to announce a dividend of $0.0625 per share.

Turning to slide 4, you will see we continue to recruit agents to our network, ending the second quarter with 96,089 agents, up 4.7% from the second quarter of 2013. As we discussed on our first-quarter call, the content we created around our national advertising and recruiting campaign, Open Your Eyes to RE/MAX, has proven very effective in boosting agent growth. In the United States, we added 2,934 agents since second quarter of 2013. We continue to expand our network of agents in the US, with growth of 5.5% over second quarter of 2013. In Canada, we ended Q2 with 19,030 agents, a slight decrease of 15 agents from Q2 of 2013. RE/MAX agents continue to represent over 17% of the Canadian Real Estate Association membership. Finally, outside the US and Canada, we ended the second quarter with 20,797 agents, an increase of 1,361 agents, or 7% over second quarter of 2013.

On slide 5, let's look at the breakdown of agents in the US and Canada. The graph on the left shows agent count in the independent regions declined due to the acquisition of the Southwest and Central Atlantic regions and the subsequent conversion of those agents from independent to Company-owned. Represented by the green portion of the graph, we had organic growth of 792 agents, or 2.4%, in our independent regions since the second quarter of 2013.

The graph on the right highlights the agent growth in our Company-owned regions. Again, the majority of the growth is due to the acquisition of the Southwest and Central Atlantic regions, and the conversion of those agents to Company-owned. We also had strong organic growth of 2,028 agents, or 6.2%, since the second quarter of 2013, demonstrating our ability to grow agent count in our Company-owned regions.

Slide 6 shows our agent growth for the six months ended June 30. In the first six months of the year, we grew total agent count by 3.1%, a great first half of the year. In the US, we grew agent count by 3.3% over the first six months compared to 2.1% growth for the National Association of Realtors in the first half of the year. And with that, I'll turn the call over to Dave Metzger.

Thank you, Margaret.

Turning to slide 7, you will find a breakdown of our revenue streams. Overall, our second-quarter 2014 revenue increased 7.8%, or $3.1 million, compared to the same period in 2013. Our recurring revenue streams, continuing franchise fees, and annual dues accounted for 60.7% of our revenue for the quarter compared to 58.3% in the prior-year quarter, demonstrating the stability of our overall revenue.

Continuing franchise fees were $18 million in Q2, an increase of 13.8%, or $2.2 million, over the same period last year, largely driven by incremental contributions from the Southwest and Central Atlantic regions, which we acquired in Q4 of last year; and organic agent growth in the US. Annual dues were $7.6 million in Q2, an increase of $600,000 over Q2 of 2013, in part due to agent growth and the annual dues fee increase.

Moving to our third revenue stream, broker fee revenue increased 17.4%, or $1.2 million, compared to Q2 of 2013, mainly due to increased agent count and incremental contributions from the acquired Southwest and Central Atlantic regions. Broker fee revenue is the only portion of our revenue that is directly tied to transaction volume. Franchise sales and other franchise revenue was in line with the prior-year quarter at $4.6 million. Finally, brokerage revenue for our 21 Company-owned brokerage offices was $4.1 million in Q2, down $875,000 from the prior-year quarter as a result of reduced management fee revenue recognized by our own brokerage offices, and a reduction in the number of closed transaction [sides] and home sales volume in the owned brokerage offices.

Looking at slide 8, selling, operating, and administrative expenses were 46% of revenue in Q2 and decreased by $2.5 million compared to Q2 of last year. Personnel costs were generally in line with Q2 of last year. Professional fees decreased $2.1 million in Q2, primarily as a result of higher professional fees in Q2 of 2013 related to the IPO, offset by an increase in expenses related to ongoing public Company costs in the second quarter of 2014. Rent decreased by $400,000 in Q2, due to increased sublease income associated with our Corporate office and the renegotiation of leases at some of our owned brokerage offices. Other selling, operating, and administrative expenses were generally in line with Q2 of last year.

On slide 9, you will see in the graph on the left that adjusted EBITDA for Q2 2014 was $24.2 million, up 13.7% from the same period in 2013, primarily due to a $1.5 million contribution from the Southwest and Central Atlantic regions, and revenue growth of $1 million, primarily associated with agent count growth and fee increases. Foreign currency transaction gains also contributed to the higher adjusted EBITDA in Q2.

Offsetting the additional revenue was an increase in selling, operating, and administrative expenses of $600,000 after adjusting for expenses associated with the acquisition of the Southwest and Central Atlantic regions, as well as IPO, and other non-recurring expenses incurred in Q2 of 2013. The increase in expenses is primarily related to ongoing public Company costs.

During the second quarter, we generated approximately 14% of our revenue in Canada. Also the average Canadian to US dollar exchange rate decreased from Q2 of last year. As a result, operating income was negatively impacted by $313,000 on a constant currency basis. At the end of Q1 this year, our cash held in Canadian dollars was mark-to-market at approximately $0.90 for every CAD1.00. By the end of Q2, the exchange rate improved to approximately $0.94 for every CAD1.00. As a result, we had a foreign currency transaction gain in Q2 of $836,000 related to the cash held in Canadian dollars. We currently hold approximately CAD14 million that are subject to foreign currency gains and losses.

Looking at the graph on the right, adjusted EBITDA margin was 57.2% for the second quarter, up from 54.2% in the second quarter of 2013. Even after adjusting for the net positive impact of foreign currency, our margin would have been 175 basis points higher than Q2 of last year.

Turning to slide 10, the graph on the left shows net income of $14.5 million for the second quarter, an increase of 52% from the second quarter of 2013. The increase was driven by a $3.1 million increase in revenue, primarily attributable to agent growth and incremental contributions from the acquired Southwest and Central Atlantic regions; a decrease of selling and operating and administrative expenses of $2.5 million; a decrease in interest expense of $1.1 million, due to the refinancing of our senior debt facility last year; and an increase of foreign currency transaction gains of $1.2 million when compared to Q2 of last year.

These items were partially offset by a $2.6 million increase in the provision for income taxes as a result of RE/MAX Holdings' federal and state income tax obligations, which commenced on the IPO date. Based on adjusted net income, we reported adjusted basic and diluted earnings per share of $0.46 and $0.45 respectively for the second quarter of 2014.

Turning to slide 11, I'd like to give a quick overview of our cash and leverage positions. Our cash position as of June 30, 2014, stood at $84.6 million, down $3.8 million from December 31, 2013. In addition to our dividend, tax principal, and interest payments, we made an excess cash flow payment pursuant to the terms of our senior secured credit facility, of $14.6 million in April of this year. The balance on our term loan at the end of Q2 was $212.7 million, down $15.7 million from the end of last year, which gives us a debt-to-adjusted EBITDA ratio of 2.63 times and a net debt to adjusted EBITDA ratio of 1.58 times. As we continue to strengthen our balance sheet, we remain in a very strong position to opportunistically grow the business.

Now I'd like to turn it back over to Margaret to discuss the housing market and our outlook for the third quarter and for the full year.

All right. Thanks, Dave.

Turning to slide 12, housing data continues to be mixed, but on a positive note, we've seen existing home sales follow a normal upward seasonal trend in the spring and summer months. Looking at the graphs on the top half of the slide, which represents NAR's monthly existing home sales that are not seasonally adjusted, we had a slow start to this year compared to last year, but we did gain positive momentum in the last three months. Actual June sales were even slightly higher than during the strong selling season of June 2013.

The graph at the bottom half of the slide highlights monthly existing home sales going back to 2011. You'll note that a recovery took hold in 2012 and jumped to heightened levels in 2013. In June of this year, existing home sales trended above the high of 2012 and just below the high of 2013, demonstrating a positive trend for the housing recovery.

Coming into the quarter, the housing market was affected by constrained inventory and tight lending standards. Inventory rose during the quarter, and in June, the inventory was at its highest level in over a year. Additionally, price appreciation is beginning to slow, so moderate price appreciation and increased affordability are positive signs for both buyers and sellers in this market. Tight lending standards are still impacting the housing market. As banks and other lenders start to ease some of their restrictive lending standards, we will see a positive effect on the housing market, but as we've said before, making credit more available will take time to unfold. We are still encouraged that this topic is a main point of focus for the Federal Reserve and for the Federal Housing Finance Agency.

We will continue to work with NAR, who lobbies on behalf of the real estate industry on these issues. We believe this is a multi-year recovery that needs continued support from steady jobs growth, increased wages, stronger consumer confidence in a gradually recovering economy. We may continue to see mixed housing data this year, but the housing market is settling into a normal pace supported by sustainable growth.

On slide 13, I would like to share our outlook for the third quarter and for the full year. For the third quarter 2014, agent count is estimated to increase 4% to 5% over third quarter of 2013. Revenue is estimated to increase 7% to 8% over third quarter 2013. We estimate revenue growth will be driven by continuing franchise fees, annual dues, and broker fee revenue. Franchise sales, which had a strong quarter of master franchise sales last year, and brokerage revenue will be down slightly compared to Q3 of last year. Selling, operating, and administrative expenses are expected to be 48% to 50% of revenue and adjusted EBITDA margin is estimated to be in the 50% to 52% range. For the full year, we are maintaining our outlook and trending in a positive direction on all metrics. We estimate we will be closer to the high end of our outlook ranges for agent count, revenue, and adjusted EBITDA margin. For selling, operating, and administrative expenses, we are trending to the low end of our outlook range.

Turning to slide 14, our business model continues to demonstrate its resilience. Despite the mixed market conditions, we delivered a strong second quarter as a direct result of our franchise and recurring revenue-based model, which is backed by experienced and highly productive agents and brokers. With 60% of our revenue coming from recurring revenue streams, our earnings are more predictable and less susceptible to wide swings in market conditions. Our business model enables us to produce high adjusted EBITDA margins and generate strong cash flow, which gives us the capital flexibility to grow our Business organically, make selective investments for growth, and return capital to our shareholders.

And with that, Operator, let's open it up for questions.

(Operator Instructions)

Vikram Malhotra, Morgan Stanley.

Thank you. Hi Margaret. Congrats on the strong results this quarter. Could you just give us a bit more color on the SG&A, what drove the lower than anticipated SG&A, and is there a catch up at the back half that would keep the SG&A outlook the same for the full year?

Yes. Vikram, this is Dave. Yes. There are -- there were some expenses across multiple categories and departments that really are just timing and they've been pushed out, we think into the Q3, Q4. We have adjusted -- we have looked at those and it hasn't changed our guidance. We think it's just more of a timing on when those expenses will hit. And I think when you look at our full-year guidance, we've taken all that into account.

Okay. Then just on the organic agent growth trend, it seems like in the Company-owned regions you had -- was it 6% growth in the US and then in the independent regions, the agent growth was 2%. This trend has probably been there for a few quarters.

Can you maybe just remind us of some of the -- what are you seeing or what are you doing in the Company-owned versus what's not been done in the independent regions for the growth to be so wide -- the difference to be wide?

Sure. We've created some recruiting programs out there, Open Your Eyes to RE/MAX, a campaign called Missing You, which is to attract back some of our former RE/MAX agents to come back into our offices. We offer it to all of the regions across the board. Obviously, we implement it very strongly within the Company-owned regions.

A lot of our independent regions have their own recruiting programs or some programs that they have in order to attract agents in. They all just work at different rates and to get the agent back in. But all in all, we're all focused on growing our regions, but we definitely push it very hard in the Company-owned regions.

Okay. And then just last one, Dave, from me, can you just give us your updated thoughts on just cash utilization. I see you paid down debt, but just the puts and takes between visibility on buying back regions versus thoughts on maybe just being -- either upping the dividend or giving maybe a one-time special dividend given the cash you have on the balance sheet.

Yes. The way we're thinking about our cash position, and we do have about $84 million in cash on the balance sheet, is consistent with what we've been talking about. I think we're going to be consistent with that throughout this year. The first use is to acquire independent regions and I'll come back to that in more detail.

The second, reinvest in technology. We have some technology initiatives that we are considering for next year. And then we'll assess other acquisitions opportunities as they come up.

Then just increasing our dividend, probably that's not going to happen at this time. We've consistently said what our dividend is, and I think, going forward, we'll have to see what we do, but right now we are going to stay at the $0.0625, I believe. As far as the independent regions, Margaret and I are in constant contact and discussions with independent region owners and that dialogue will continue.

Okay. Okay. Great, guys. Thank you.

Thanks.

Sean Kim, RBC Capital Markets.

Hi. Good afternoon.

Good afternoon, Sean.

It seems like, internationally, your agent count has actually -- the additions internationally have actually accelerated in the second quarter. Can you give us some color on where you're seeing growth internationally? What regions are strong? Is China beginning to impact the numbers more?

Actually, no. China has not begun to impact quite yet. They are still working to create their infrastructure. And actually, we are anticipating we probably won't have any regional sales within China this year. We originally thought we would. We're looking at that more towards the first part of next year. But some areas we've had tremendous growth is Mexico, Argentina, Brazil are really starting to show increased agent count in those areas.

And Sean, this is Dave. Just keep in mind, while we are pretty impressed with our agent count growth internationally, that is still a fairly insignificant amount of our revenue. It's about 5%. So while we have those big gains there, it won't translate into big revenue in the near-term. Maybe over time, especially as China develops, but not right now.

Got you. Okay. And one question on Canada. Something like two-thirds of the agents in Canada are independent. Is there any possibility for you to buy in the regional rights there as well or is that really out of the question? Not possible?

They're independent.

I'm sorry. Yes. Independent regions.

In Canada.

Yes. In Canada. Because there's three regions out there. We own one and two are independent. Just like we look in the United States, we look to see who might be interested at whatever time to possibly sell their region. The regions up there are well-run and they continue to have 17% of the overall agents in the area, so they're a good job.

Okay. Great. Thank you.

Brandon Dobell, William Blair.

Thanks. I want to focus back on the agents for a second. Looking back over history, what's been the seasonality of the agent recruitment and should we expect that to be different this year than the past couple of years, given the pace of the housing recovery has slowed a bit?

We used to see that towards the end of the year, or sometimes the first of the year, recruitment was a little bit slower, but to be honest with you, if you look back over, since the recession started, over the last five or six years, it's really hard to look at what the new trend is going to be.

But a lot of agents are so incredibly busy in the spring and summer months, that for them, looking to go somewhere else isn't necessarily what their focus is, and it just all depends on what's going on in their market and in their office at the time. So what we've got to look at right now is what is going to be the trending in the years to come over the different months.

Okay. And then shifting to inventory trends a little bit. How much visibility do you have across the entire RE/MAX brand, both franchise, as well as Company-owned, in terms of listing inventory, changes in listing inventory, and then probably one step further, traffic or tours that the agents are setting.

I'm trying to get a sense of the trends that you can see in your Business and maybe predictors of September, October, November, going back to your comments, Margaret, about seasonal and non-seasonal factors around housing sales?

Yes. What our agents are seeing is, the biggest difficulty they have right now is obviously low inventory, despite the fact it's starting to grow again. What we see within those inventory levels is there are still a lot of homes that, I hate to say, are undesirable and so when you take those out, it makes the inventory even tighter. Tight lending standards are also making it difficult for some first-time home buyers to get into the market.

The other areas that are of concern to our agents is the availability of credit for them. So anecdotally, what we are hearing from our membership is it's been busy, things have picked up in the recent months. They're looking to see will that continue into the fall or will we go back into the normal trends where fall slows down into the winter months?

Okay. Then final one for me, focusing on the first-time buyers, I know it's still a pretty tough part of the market, and I would imagine more so given the average age of your agents. But is there anything specific that you guys are doing in terms of recruitment or technology advancements, that kind of thing, to focus a little bit more on those younger potential buyers out there? As we think about when that part of the market starts to come back, if you can grab out-sized market share?

Yes. What we do is we obviously focus on all buyers. It's a very unique time that there are four specific generations out there right now with four very specific and different needs. The interesting thing that we see is, normally, first-time home buyers are 40% of the market and right now they are only 28% of the market.

The biggest problem that they're having is credit challenges. You add on top of that low inventory and many of them have student debt and all of that really does have an impact on the first-time home buyers that are coming into the market. We're really hoping that FHA and some of the other government agencies will be able to loosen up some of the standards, not make them too loose, but make it so it is much more conducive for first-time home buyers to get into the market.

Okay. Thanks a lot. Appreciate it.

(Operator Instructions)

David Ridley-Lane, Merrill Lynch.

There's been a pretty marked decline in foreclosure and short sales so far this year. On the one hand, it's a healthy development for the housing market; on the other hand, it's fewer transactions. My question is, how much of this decline in foreclosures really impacts agent recruiting, agent growth, as perhaps a lot of those sales weren't being brokered anyway?

Distressed properties now are about 11% of the market. They were obviously much higher in the heat of the recession. What we're seeing though is a shift of the buyers. So many of the buyers at the time who bought the foreclosed distressed properties and the short sales were investors who were turning those into rental properties. What we're seeing now is the investor population has actually gone down significantly; only about 16% of the buyers out there are investors.

What they're doing is, they're actually fixing up the properties and then reselling them. So, it's just an interesting time, even though the distressed property percentage has gone down, the number of existing home sales is still estimated to be around 5 million, a little over 5 million, so it's just a change in the mix versus really a change in the number. Our agents actually know how to fluctuate with the market and help in all forms of sales out there.

Got it. Then I know there's some other things in the franchise sales revenue line. I was just curious how the actual franchise sales themselves were this quarter?

All right. Let me grab some numbers. The franchise sales are actually right in line with the way they were last year. Really the only changes we are seeing is, in previous year, we had more master franchise sales or country sales in the revenue line and we won't see that this year. We had China and Japan in the previous two years. Dave, anything?

Yes. Franchise sales were strong. The guys delivered and did what they did. They've done really well in this market, and like Margaret said, the revenue was [offset] a little bit by, that for the quarter-over-quarter comparison, was we didn't have some of the master country franchise sales in Q2.

Then we had a little bit of a pick-up in some approved supplier income. So all of it balances out to make it about pretty stable and right in line with where we thought we'd be. Keep it in mind, that line item is about 15% of our overall revenue. It'll always be very stable and consistent.

Got it. And then, just a numbers question, what's your estimate for 2014 CapEx?

Right now, I think we've spent about $700,000 so far, year-to-date. I think we'll probably be in the $1 million range right now, absent any other initiatives -- but nothing is necessarily on the board right now. So I think we'll be about where we have always been, about $1 million or so.

Great. And then the last one for me. How is the competitive landscape for agent recruiting right now? Are you seeing any changes around that? Thanks.

Not seeing a change, seeing it pretty much as it's been all year. NAR is growing so far this year, about 2.1%. We've obviously outgrown that. But we're seeing slow movement within the overall realtor population. But as we look at our own recruiting, it's interesting, we are seeing that about 15% of the agents that we are recruiting are actually former RE/MAX agents coming back to RE/MAX.

And we are seeing in the low 20% range, a lot of new people, not in real estate before, coming into the market. That number, actually, at first surprised us and we dug deeper into it, and we are realizing that, just like in the downturn when we had team leaders who had very large teams, as they started to have a decrease in their business, they didn't keep the teams as big as they had, and that's where a lot of our agent loss came from. What we're seeing now is, as those teams begin to grow again, we're getting new people into the business.

Got it. Thank you very much.

Thank you.

This concludes the question-and-answer session. I would like to turn the conference back over to Margaret Kelly for any closing remarks.

That is it. Thank you all for joining us on the call today.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.