Re/Max Holdings Inc (RMAX) 2015 Q2 法說會逐字稿

Good morning, and welcome to the RE/MAX second-quarter 2015 earnings conference call and webcast.

(Operator Instructions)

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

Thank you, operator. Good morning, everyone, and welcome to RE/MAX's second quarter 2015 earnings conference call. Joining me today are Chief Executive Officer and Co-Founder, Dave Liniger; and our Chief Operating Officer and Chief Financial Officer, Dave Metzger. 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 2, I would like to remind everyone that on today's call, our 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 materially from those discussed today. Examples of our 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, Dave Liniger. Dave?

Thank you, Pete, and thanks to everyone for joining our call today. We had a solid start to the year in the first quarter and that momentum continued in the second quarter. Our focus on recruiting and agent development along with a strengthening housing market delivered strong results once again. On slide 3, you will see we grew our total agent network by nearly 2,000 agents in the second quarter and by almost 6,000 agents since the second quarter of last year. Agent growth in the United States was at the high end of our expectations, and agent gain in Canada and outside the US and Canada exceeded our estimates. Our revenue, adjusted EBITDA margin, and selling, operating, and administrative expenses, all came in better than expected for the quarter.

Turning to slide 4, we ended the second quarter with 101,903 agents in our global network, an increase of 6.1% over the prior-year quarter. As we discussed on the previous slide, our agent growth in the United States of 4.9% over the prior-year quarter was at the high end of our expectations and, similar to the first quarter, was driven by additions in California, Florida, Texas, the Carolinas, and the Pacific Northwest. In Canada, we ended the quarter with 19,432 agents, an increase of 402 agents from the prior-year quarter. Agent growth continues to be driven by western Canada and the Ontario Atlantic regions. Finally, outside the United States and Canada, we ended the second quarter with 23,467 agents, an increase of 12.8% over the prior-year quarter driven by gains in Portugal, South Africa, Brazil, Argentina, and Spain.

Slide 5 shows the breakdown of RE/MAX agents in the US and Canada. The graph on the left highlights agent growth of 5.4% in US company-owned regions and 4.1% in the US independent regions. The graph on the right shows agent growth in Canada. In the second quarter, western Canada, which is Company operated and owned, had an increase of 228 agents or 3.7% over the prior-year quarter. Eastern Canada, which is comprised of two independent regions, gained 174 agents or 1.4% over the prior-year quarter, driven by agents in Ontario which were offset by a slight decrease in Quebec. Slide 6 highlights our year-to-date agent growth. We grew our global network by 4% in the first six months of the year compared to year-end 2014 agent count. The strong start to the year was driven by growth of 3.3% in the US and 7.3% outside the US and Canada.

Our momentum development program, which is designed to educate our brokers and agents on how to successfully recruit agents, profitably manage their business and plan for future business growth, contributed to agent growth in the US again in the second quarter. Due to our strong results in the first half of the year, we are raising our outlook for full-year total agent growth to 5% to 5.5%. We continue to be on track to deliver on our outlook for our other key metrics this year. With that, I will turn the call over to Dave Metzger.

Thank you, Dave. Turning to slide 7, you will find a breakdown of our revenue streams. Overall, our second quarter 2015 revenue increased 4.7% or $2 million compared to the same period in 2014. Broker fee revenue and franchise sales revenue exceeded our expectations this quarter and accounted for the positive variance from the Q2 revenue outlook we gave on our first-quarter call. The strength of US dollar against the Canadian dollar adversely affected second-quarter revenue by approximately $722,000 on a constant currency basis. Revenue from continuing franchise fees increased 1.4% compared to the prior-year quarter due to increased agent count, improved collections activity, and a portion of the revenue from the six brokerage offices sold in April that was previously reported in brokerage revenue and is now recorded in continuing franchise fees.

These increases were partially offset by changes in our aggregate fee per agent in the company-owned regions, a reduction due to the sale of the Caribbean and Central America regions on December 31, 2014, and negative FX impact. Temporary fee waivers for new agents recruited in conjunction with the momentum training program contributed to the decrease in fee per agent. As Dave mentioned, the momentum recruiting and development program has been a valuable addition to our service offerings and continues to get our brokers focused on growing their offices and increasing their profitability.

Revenue from annual dues increased 3% mainly due to an increase of 3,144 agents in the US and Canada since the second quarter of 2014. Revenue from broker fees increased by $1.2 million or 15.4% over the prior-year quarter, primarily attributable to increased agent count and increased transaction activity due in part to the improving US housing market. Franchise sales and other franchise revenue increased by $931,000 or 20.4% compared to the prior-year quarter mainly due to increased global regional franchise sales, specifically in China and Japan, and increased office franchise sales in the US and Canada compared to the prior-year quarter.

Revenue from our owned brokerage operations decreased $660,000 or 16.2% compared to the prior-year quarter, primarily due to the sale of the six brokerage offices at the beginning of the second quarter. On a year-to-date basis, broker fee revenue and franchise sales revenue drove our 5.1% revenue growth compared to the same six-month period in 2014. Broker fee revenue continues to provide us upside as we grow our agent network.

Looking at slide 8, selling, operating, and administrative expenses increased $255,000 or 1.3% compared to the second quarter of 2014, mainly due to increased personnel expense which was partially offset by lower rent expense. Personnel costs increased $444,000 primarily due to an increase related to merit-based compensation and increased equity-based compensation associated with equity awards granted in 2015. The increase was partially offset by a reduction to headcount that resulted from a reorganization in the fourth quarter of last year and a reduction in personnel costs related to the six previously owned brokerage offices. Rent expense decreased $271,000 or 8.7%, primarily due to the sale of the six brokerage offices.

On slide 9, you will see in the graph on the left that adjusted EBITDA increased 6.4% to $25.7 million for the second quarter, mainly due to the $2 million increase in revenue compared to the same period in 2014. We generated approximately 13% of our revenue in Canada in the second quarter. As a result of the strength of the US dollar against the Canadian dollar, operating income was negatively impacted by approximately $650,000 during the second quarter. Looking at the graph on the right, adjusted EBITDA margin was 57.9% for the second quarter, up from 57% in the prior-year quarter. In the first quarter of 2015, we started repatriating cash generated by some of our Canadian operations to the US on a monthly basis, which substantially reduced our mark-to-market exposure. That said, the continued strength of the US dollar still had a negative impact of approximately 43 basis points on our adjusted EBITDA margin.

Turning to slide 10, the graph on the left shows net income of $16.1 million for the second quarter, an increase of 10.7% over the prior-year period. The increase was primarily driven by a $2 million increase in revenue, a $617,000 gain on the sales of assets related to the sale of the six brokerage offices in April, and a $202,000 increase in equity and in earnings of investees, which is related to a mortgage business associated with some of our owned brokerage offices in the Pacific Northwest.

These items were partially offset by a decrease in foreign currency transaction gains of $799,000 when compared to the second quarter of 2014; a $255,000 increase in selling, operating, and administrative expenses; and a $328,000 increase in the provision for income taxes as a result of an increase in income before tax. Our effective tax rate remained consistent at approximately 18% during the second quarter of 2015 and 2014.

Based on adjusted net income, we reported adjusted basic and diluted earnings per share of $0.48 and $0.47 respectively for the second quarter of 2015 compared to $0.45 and $0.44 respectively for the second quarter of 2014. FX negatively impacted Q2 2015 adjusted basic and diluted EPS by approximately $0.01.

Turning to slide 11, our cash position as of June 30, 2015, was $80.3 million, down $26.9 million from December 31, 2014. In April, we paid a special cash dividend of $1.50 per share, which was an aggregate payment of approximately $45 million and funded from existing cash. We remain in a great position to act opportunistically from a leverage perceptive with a debt to adjusted EBITDA ratio of 2.3 times and a net debt to adjusted EBITDA ratio of 1.4 times. Our strong free cash flow generation continues to give us the ability to reinvest to grow the business as well as return capital to shareholders. Now I would like to turn it back over to Dave Liniger to discuss the housing market.

Thanks, Dave. Turning to slide 12. One month doesn't make a trend but nine months is worth paying attention to. With existing-home sales increasing year over year for nine months in a row through June according to NAR, the economic factors that impact the housing market has been improving for over a year and are starting to drive home sales. The graph on the stop of slide 12 highlights actual monthly existing-home sales. After a moderate start for home sales this year, we had a nice jump in May and then in June existing-home sales climbed to their highest level in over eight years.

Two key factors that are moving in a positive direction and contributing to recent gains in existing-home sales are jobs and availability of credit. An improving jobs market continues to increase consumer confidence, household net worth, and a belief in future wage growth. Also, credit continues to become more available and more importantly, consumers are becoming more aware that mortgage credit is available to them. The main constraint remaining on the housing market is inventory. As home prices increase, more homeowners will come into positive equity and potentially unlock inventory, but we continue to believe the real relief needs to come from homebuilders. The demand for housing is in place, but if we continue to see tight inventory we may see more pressure on affordability. There has been more focus on apartment construction so far this year, but new home starts and permits were up considerably in June, which bodes well for the new home sales in the future. Now I will turn it over to Dave Metzger to walk through our financial outlook

On slide 13, I would like to share our outlook for the third quarter and for the full-year 2015. For the third quarter of 2015, agent count is estimated to increase by 4.75% to 5.25% over third- quarter 2014. Revenue is estimated to decrease by 1% to 1.5% over third-quarter 2014. Selling, operating, and administrative expenses are estimated to be 50% to 51% of Q3 2015 revenue and adjusted EBITDA margin is estimated to be in the 51% to 52% range. There are a few items I would like to note regarding Q3. First, revenue guidance reflects the impact of the sale of the six brokerage offices in the Caribbean and Central America regions. After adjusting for the sale, revenue would have increased an estimated 1% to 1.5% over Q3 2014. We estimate the sale of these assets will positively impact adjusted EBITDA margin by 50 to 100 basis points in Q3.

Second, we estimate FX will negatively impact Q3 revenue by $700,000 to $750,000 and negatively impact Q3 adjusted EBITDA by 50 to 100 basis points. And lastly, we estimate continuing franchise fees will be down slightly from Q3 of last year partially due to the temporary fee waivers associated with the momentum training and recruiting program, a reduction due to the sale of the Caribbean and Central America regions, and the negative FX impact of the strong US dollar compared to the Canadian dollar. Franchise sales and other franchise revenue will be down compared to Q3 last year due to lower estimated international franchise sales revenue. Brokerage revenue is estimated to be down $1 million due to the sale of the six offices as just discussed. And annual dues and broker fee are estimated to be up in Q3 compared to last year.

For the full year, agent count is tracking to the high end of our estimates in the US and coming in stronger than expected in Canada and outside the US and Canada. As a result, we are raising our full-year agent count outlook to 5% to 5.5% from 4% to 5% over 2014. We are maintaining our full-year outlook for revenue, selling, operating, and administrative expenses, adjusted EBITDA, as well as project related operating and capital expenditures.

A few items to note regarding our 2015 outlook. First, our full-year revenue guidance includes the impact of the sale of the six brokerage offices in the Caribbean and Central American regions. After adjusting for the sale, revenue would have increased an estimated 3% to 4% over 2014. We estimate the sale of these assets will positively impact adjusted EBITDA margin by 50 to 75 basis points for the full year of 2015. Next, FX is estimated to negatively impact full-year 2015 revenue by $2 million to $2.5 million and negatively impact adjusted EBITDA by $3 million to $3.5 million or 100 to 150 basis points on a constant currency basis. Given our strong performance in the first half of year, we remain confident we will achieve our outlook for the full year. Now I will turn it back over to Dave Liniger

Turning to slide 14, we are very pleased with our performance the first half of the year. Our focused efforts helped us deliver our strongest six-month agent gain since the first half of 2006. We will continue to help our brokers recruit agents and develop those agents into the most productive in the industry. With that, operator, let's open it up for questions.

(Operator Instructions )

Ryan McKeveny, Zelman & Associates.

Nice quarter. When we think about the upside to EBITDA in both 1Q and 2Q and the increase in the outlook for full-year agent count, I was just wondering if you could go into a little more detail on the offsets that is leaving the adjusted EBITDA guidance unchanged rather than moving up slightly alongside the higher agent count guidance. Just more broadly, the ability to kind of leverage the cost basis as we move out into 2016 and beyond?

Ryan, this is Dave Metzger. There's a couple factors that come into play here. First, we've had strong agent growth across the whole network for the whole year. In fact, in US, we're trending toward the high side of our expectations. But our agent growth, we think in the next couple of quarters we'll get growth predominantly that led to the increase in guidance from Canada, which we thought was going to be flat, and international we'll have some pickup there. You're going to have some pickup in your agent count but you really won't have the pickup in the revenue per se associated because the international will get lower revenue from those. On the -- and so that's why we're not really having any pickup on the revenue side.

On the expense side, we did have some expenses in Q2 that were budgeted for Q2 that are going to be pushed to later in the year. Those expenses will still be incurred and because of that, we are maintaining our guidance on selling, operating, and administrative expenses, and margin. But we are trending towards the high side of the margin. Keep in mind it's halfway through the year. Our pivotal third quarter is coming up, and we'll see how we go there and then potentially we'll look at upping our guidance at that time. Some of the upside could come from if our broker fee continues to increase due to the improving market. Potentially there could be some franchise sales, particularly subregion sales, internationally, and then anything approved -- or associated with our approved suppliers. There is some upside there, and I think we'll have better insight to that and if there's going to be any upside to the margin as we get through to the end of Q3.

Great, thanks. You touched on this a little but with the SO&A expenses, this quarter was obviously very impressive, one of the lowest levels since you've been public. And I think the guidance implies maybe around $22 million of costs in 3Q, and it sounds like maybe some of that is just a shift from 2Q to 3Q. I was just hoping maybe you could describe a little on the quarterly fluctuations within that and just broadly looking out how you think about the cost structure. Obviously, the majority is fixed costs but just the ability to contain costs as revenue ramps higher in 2016 and beyond.

The predominant things that impacted the Q2 on the expense side was some of the IT projects that we had gotten to our budget. And we're just pushing some of those costs. We are about $600,000 to $700,000 under in Q2. It will be pushed into Q3, Q4. We had a little bit of marketing expense that has been pushed into Q3, Q4. There may be a little pickup in there. We'll see whether or not we really -- and that's a lot of the travel and entertainment that may be pushed but we may not actually incur that. And keep then in mind there was a one-time gain on the sale related to RE/MAX 100.

Also, I think that we feel pretty comfortable with our selling, operating, and administrative expenses on an annual basis in that high $80 million to $90 million range. And for 2016 as we start into our budget process for 2016, we will be looking to see where we can continue to reinvest in the business and we will have a better sense of that in our overall expense structure for 2016.

Okay. Thanks very much.

Brandon Dobell, William Blair.

I wanted to focus a little bit on the momentum program. Maybe get some color on how long you think you continue to push this. Do you see any change in the trajectory of maybe kind of what the components of the program may look like or its financial impact for you guys in the next, I don't know, two-three quarters?

This is Dave Liniger. The momentum has been very successful for us. It has helped our agent gain in both Canada and the United States. It's not a one-time program but will continue for a long period of time. The fee waivers occur during the first three months as the agents join us, but that's a good investment because the average agent stays with us over eight years. So the momentum will continue. It helped our recruiting dramatically. It remains to be seen whether that momentum will stay as good in the third and fourth quarter.

Okay. And as you guys think about agent recruiting, maybe some color on the types of agents that are joining you guys. Are there -- I know there has been a consistent trend of agents rejoining RE/MAX, but as you think about the mix between what you would consider to be highly productive or more kind of start-up agents, how has that trended and is there any particular strategy in place to kind of change the mix of the inbounds?

No. The mix is pretty much the same as it's been the last couple of years. About 13% of the agents are RE/MAX agents who are returning to the Company. 25% is a pretty normal number of newer agents that are coming from outside the real estate industry, and the balance are the traditional top producing agents that are joining us from both independents and national brands

Then final one for me. What's your take on agent reviews, Dave? I know that consumers are starting to push that direction in terms of one of the tools they may use to look for a listing agent or even a buyer agent. How do you guys think about the evolution of that opportunity or that risk, I guess?

Brandon, we embrace it. The consumers are going to have their say so one way or the other, and our agents are very professional, very successful so we rely quite heavily on referrals and repeat customers, unlike traditional brokers that have so many beginners. So we are all for agent ratings and rankings.

Okay. That's a lot. Appreciate it.

David Ridley-Lane, Bank of America Merrill Lynch.

On the plan project based operating expense of $3 million for the year, what was the total that came through in the first half and what's left to spend in the second half?

Year to date, our spend has been about $300,000, and in Q3 and Q4 it will be about $2.7 million is what we anticipate to get to the $3 million total that we had budgeted.

Got it. Okay. And then another strong quarter on the franchise sales front. I wanted to ask a little bit about franchise sales headcount. Is that up year over year? And given the strong results, what is your appetite to add to the franchise sales headcount?

You are talking about our franchise salespeople?

Yes. Absolutely.

Actually, we have had fewer franchise salespeople but the ones we have are more productive. That's the result of putting in a call center about a year ago using less expensive people to arrange appointments for our salespeople themselves, and that has proved to be very, very successful for us.

Got it. I know this may be tough to quantify but roughly how much of an impact did the momentum projects have for you on second-quarter revenue? Or first half revenue if that's easier to answer?

Actually, first half has been about $650,000 has been the impact. It will be about $1.3 million for the year

Got it. Perfect. Thank you very much.

Vikram Malhotra, Morgan Stanley.

Hi. This is Landon on for Vikram. Congrats on the quarter. I just wanted to start off by asking about any updated thoughts on region buybacks, if you've had any further conversations there, and maybe how you're thinking about the cash balance and leverage in conjunction with your conversations on that.

Yes. We continue to have discussions with the independent region owners. A lot of them are very focused on rebuilding their regions now, so there is a sense of optimism out there. We do keep in close contact with them on a very regular basis, educating them on the process, seeing what their feelings are on their exit, letting them know that we are there and available to do it. Both Dave Liniger and I and some other folks here have talked to them on a fairly regular basis and so I think they'll happen when they happen. I think the conversations have been maybe a touch more frequent, so that's good. The interest level, and they're feeling better about themselves and their regions because they've had some EBITDA pick up because they've added some agents.

You know, we are in a very fortunate situation. We have $80 million of cash on our balance sheet, and a significant part of that is cash available for acquisitions. We are obviously very well deleveraged so we have the opportunity should the need arise to lever up a little bit and still be within a very reasonable under 4 times, easily under 4 times leverage on a debt to EBITDA ratio. So we have the capacity built into the facility as well as cash on the balance sheet. Keep in mind, some of these acquisitions would not be that big and we could do them out of cash and save the leverage but we could also lever up a little bit and save the cash for other opportunities, reinvest in the business and things like that

And if that cash balance in absence of a region buyback just trends up over $100 million early next year, is another special dividend a potential or could that be a recurring item?

You know, we're looking at our capital allocation policy is that we're going to be very prudent and measured in our capital allocation. We will continue to focus on independent regions. Always going to really -- a real focus to reinvest in the business. That's not a huge amount of money but it could be a couple of million dollars a year. But very, very important, not only for today but the future. You know, we do look at other acquisition opportunities that are within our core competency, and when one comes up, we'll be positioned to take that.

And then we look at capital allocation, and we look at that very seriously every quarter, keep it in mind. The Board sits down to talk about that, but keep it in mind that we just increased our -- doubled our annual dividend and paid the special dividend just last quarter. At the appropriate time next year depending on where cash balance is and where we feel the acquisition opportunities are, the Board will sit down and reassess the capital allocation and dividends and things like that

Great. Great. And then just a last one on agent growth. Obviously, you are still seeing -- it was a good quarter on that front and your own regions are seeing markedly better growth than the other regions, but you're still lagging a bit behind the industry reported numbers. And I'm just wondering if you can explain that and if there might be a convergence between the two at some point?

You know, NAR is a barometer for what our growth can be but bear in mind that NAR's membership has a tremendous number of beginners and part-timers, and that when we recruit we are trying to recruit the top producers, so we don't tag along at the exact same rate as NAR. Sometimes we exceed them; sometimes we are slightly behind. The improving real estate market is really the basis for us improving our recruiting.

Great. Thank you very much

John Campbell, Stephens Inc.

Congrats on a great quarter. Just back to the dividend but more so just on the recurring dividend and just thinking about a payout ratio. I think you guys paid out about 1/4 of GAAP earnings last year with the dividend, and I think this year just ex the special dividend it looks like it's going to be 30% or so. Is there a certain payout ratio that you guys think about or is it more just based on free cash? I know you guys have talked about that 1.5% to kind of 2% yield range, but just curious how you guys and the Board are thinking about the payout ratio versus what you guys are comfortable doing.

It's all of those. We want to take dividends like the franchisers. We are looking at 25% to 30% of free cash flow. We will assess it each quarter and on an annual basis whether we want to increase it.

Got it. Okay. That's helpful. And just back to the sold brokerage offices, I think you guys said 50 to 70 bps of margin impact. What type of margin was that few million in rev coming on at? I'm just doing the back of the napkin here and it looks like mid-teens or so? Is that about right?

The brokerages in general do -- have done mid-teens. The particular brokerage that we sold, it was basically no margin contribution so there will be a minor pickup. And this was one -- the brokerage that we sold was less than a third of the overall brokerages that we have, so we'll see more margin pickup if and when we are able to divest ourselves of the remaining ones. The ones we had basically had no margin contribution.

Okay. That's helpful. And then last question from me. How much cash -- I might have missed this, but how much cash left to repatriate?

Zero. We do it on a monthly basis, so we bring that balance down on a monthly basis so we are not subject to the exchange rate now so we do it every month

Got it. Makes sense. Thanks, guys.

At this time, I am not showing any additional questions. I would like to turn the conference back over to Dave Liniger for any closing remarks

Thank you, operator, and thank you all for joining us on our call today.

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