Re/Max Holdings Inc (RMAX) 2015 Q4 法說會逐字稿

Good morning and welcome to the RE/MAX Holdings fourth-quarter and full-year 2015 earnings conference call and webcast. My name is Steve, and I will be facilitating the audio portion of today's call. At this time, I would like to turn the call over to Peter Crowe, Vice President of Investor Relations.

Thank you operator. Good morning everyone, and welcome to RE/MAX's fourth-quarter and full-year 2015 earnings conference call. Joining me today are our Chief Executive Officer and Co-Founder Dave Liniger; and our Co-Chief Financial Officers Karri Callahan and Dave Metzger.

Please visit the Investor Relations page of www.ReMax.com for all earnings-related materials and to access the live webcast and the replay of today's call. 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 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 fourth-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. Thanks to everyone for joining our call today.

Turning to slide 3, we continued our positive Momentum in 2015 by focusing on the three core pillars that create shareholder value: organic growth, acquisition and investment catalysts, and return of capital to the shareholders. In 2015, we executed on each pillar and delivered strong results. In order to drive organic growth last year, we focused on helping our franchisees recruit quality agents and emphasize franchise sales.

We will do the same in the future to drive agent growth. In 2015, we grew our agent count by 7% over year-end 2014, and we sold 946 RE/MAX franchises across the globe, an increase of 23.5% over 2014. Our focus on organic growth fueled our stable recurring revenue streams and, coupled with our disciplined approach to expense management, delivered margin expansion of 270 basis points over 2014 and generated $71 million in free cash flow.

Our investment catalysts drove further growth in 2015 and will continue to help drive shareholder return going forward. We continue to be very committed to reinvesting in the business, and our top priorities are training and technology.

Our Momentum broker and agent development program has seen strong adoption with over 50% of the company-owned offices having participated. In total, over 1,600 brokers in the United States and Canada have taken the program since its launch in October of 2014. Recruiting and developing quality agents is a core aspect of Momentum, and we believe the program has shifted the mindset of many of our brokers from expense management to profitable and sustainable growth of their businesses.

On the technology front, we will be rolling out a new version of www.RE/MAX.com mid year. We currently have the most visited website among real estate franchises, and we are continually looking to improve. Three key focus areas for the new site are improving the consumer experience on tablet and mobile, increasing lead generation and more agent promotion and branding.

Another growth catalyst for our business is acquiring independent regions. We announced earlier this week that we purchased the master franchise rights to the New York region. We are incredibly excited about the growth opportunity this region presents for us.

Our first goal is to make sure that our current franchisees and agents have the tools and services they need to achieve their goals. Our second goal is to simply grow the presence in New York. RE/MAX agents currently represent less than 2% of the agent population in the state compared to RE/MAX being 5% of the National Association of Realtors in the United States.

We believe there is a tremendous room to grow in New York. We're going to invest the time and resources needed to grow our brand and our market share this year and in the years to come.

Our third pillar is return of capital. Our Management team and our Board are committed to returning capital in a prudent and consistent manner.

We have paid a quarterly dividend since we went public over two years ago. We returned approximately $60 million in dividends in 2015, paying out 84% of our free cash flow. As part of our commitment to return capital, we recommended and the Board approved a 20% increase to our quarterly dividend earlier this week.

Turning to slide 4, our strong performance in 2015 is the result of our continued focus on franchise sales, agent recruitment and broker and agent development. We also maintained our disciplined approach to expense management.

We grew our total agent network by just over 6,800 agents in 2015, our largest gain since 2005. We sold our remaining owned brokerage offices to existing RE/MAX franchisees, so we are now 100% franchised across our global footprint of almost 7,000 offices.

Turning to slide 5, we ended 2015 with 104,826 agents in our global network, an increase of 7% over year-end 2014. As we discussed on the previous slide, our US agent growth of 4.9% over the prior-year quarter was at the high end of our expectations and was driven by additions in California, Florida, Texas, the Pacific Northwest and the Carolinas.

In Canada, we ended 2015 with 19,668 agents, an increase of 6,228 agents over the prior year. Agent growth was driven by gains in British Columbia and Ontario. Finally, outside the US and Canada, we ended 2015 with 25,240 agents, an increase of 15.4% over the prior year end driven by strong gains in Central and South America, specifically Mexico, Brazil and Argentina, as well as gains in Europe, notably Portugal, Italy and Spain.

Slide 6 shows the breakdown of RE/MAX agents in the US and Canada. The graph on the left highlights agent growth of 5.5% in US company-owned regions and 4% in US independent regions.

Franchise sales are a key contributor to agent growth in the US. We sold 166 franchises in the US company-owned regions in 2015, which is approximately 13% higher than our three-year sales average. Our focus on growing market share through franchise sales contributed to US company-owned agent growth in 2015 and should contribute to that agent growth in 2016 as well.

The graph on the right shows agent growth in Canada. For the full-year 2015, Western Canada, which is a company-owned operated region, had an increase of 292 agents or 4.7% over the prior year end. Eastern Canada, which is comprised of two independent regions, gained 336 agents or 2.6% over the prior year end, largely driven by agent gains in Ontario.

With that, I will turn the call over to Dave Metzger and Karri Callahan to discuss the financials. But before I do so, I wanted to remind everyone this is Dave's last earnings call.

As we announced in January, Dave will be leaving RE/MAX at the end of March to relocate to the East Coast to be closer to family. I want to reiterate the tremendous value he has brought to this company and how much we will miss his leadership and his contributions.

Karri, who is now Co-CFO, will become our CFO. Karri has broad financial experience, including her experience before joining RE/MAX and her tenure as our head of SEC reporting and corporate controller. I'm sure you will enjoy working with her.

Dave?

Thanks, Dave. Turning to slide 7, you will find a breakdown of our revenue streams. Overall 2015 revenue increased 3.4% or $5.9 million compared to 2014.

Revenue would have increased 5.4% year over year as adjusting for the sale of six company-owned brokerages in April 2015 and the sale and subsequent conversion of the Caribbean and Central America region to an independent region on December 31, 2014. Revenue from broker fees and franchise sales and other franchise revenue drove the year-over-year increase due to strong agent growth in the US and Canada, increased home sales volume, strong franchise sales in the US and higher income associated with our agent and broker events. The strength of the US dollar against the Canadian dollar and the euro adversely affected 2015 revenue by approximately $4.1 million on a constant currency basis.

Revenue from continuing franchise fees increased by $1 million or 1.4% compared to the prior year due to increased agent count and continuing franchise fee revenue recognized from the six brokerage offices we sold in April 2015, which were previously reported in brokerage revenue. These increases were partially offset by a lower aggregate fee per agent in the company-owned regions due to fee waivers associated with the Momentum program, the December 31, 2014 sale and subsequent conversion of the Caribbean and Central America regions to independent regions.

As Dave mentioned, we've seen positive results from the Momentum program, and our brokers and agents continue to adopt a program. As we discussed on the third-quarter earnings call, we will be extending the fee waiver incentives associated with the program in 2016 into company-owned regions. We want our brokers to learn, implement and master the program so they have the knowledge and tools to grow their offices, develop their agents and increase their profitability.

Revenue from annual dues increased $1 million or 3.4% over full-year 2014, mainly due to an increase of 3,441 agents in the US and Canada in 2015. Revenue from broker fees increased by $3.6 million or 12.7% over the prior year, primarily due to agent gain and increased home sale transaction activity.

Franchise sales and other franchise revenue increased by $2 million or 8.7% compared to full-year 2014, mainly due to increased office franchise sales in the US and higher income associated with increased registration and attendance at our annual convention and training programs throughout the year. Revenue from owned brokerage operations decreased $1.9 million or 12.1% compared to full-year 2014. The decrease is primarily attributable to the sale of the six brokerage offices at the beginning of the second quarter to an established and successful RE/MAX franchisee.

On slide 8, the bar on the left demonstrates the consistency of our stable recurring revenue streams. Continuing franchise fees and annual dues are shaded blue and account for 60% of our revenue. The percentage of recurring revenue will increase this year due to the sale of the owned brokerage offices.

Looking at the pie chart on the right, we continue to generate 95% of our revenue in the US and Canada. Revenue generated in Canada was negatively impacted by approximately $3.7 million in 2015 due to the strength of the US dollar against the Canadian dollar.

We now have just over 25,000 agents outside the US and Canada representing almost a quarter of our agent network. We've expanded into 39 new countries and almost doubled our agent count outside US and Canada in the last 10 years. While we continue to focus on growing our market share and revenue in the US and Canada due to the higher revenue and margin potential associate with those regions, our global expansion has been incredibly positive for the network and positions the RE/MAX brand well for the future.

Looking at slide 9, selling, operating and administrative expenses decreased $861,000 or approximately 0.9% compared to full-year 2014, mainly due to lower personnel-related expenses of partially offset by higher professional fees associated with our technology projects. Personnel costs decreased $3.3 million or 7% compared to full-year 2014, primarily due to a reduction in headcount that resulted from a reorganization in the fourth quarter of 2014, reduced personnel costs related to the six previously owned brokerage offices and a decrease in severance related expenses.

Professional fees increased $1.2 million or 14%, primarily due to our increased investment in technology projects and expenses associated with the secondary offering completed in November of 2015. Other expense increased $1.8 million or 7.7%, primarily due to a $2.7 million charge related to the resolution of litigation associated with the acquisition of the Southwest region in October 2013.

I will now turn the call over to Karri to further discuss the results of operations and the dividends.

Thanks Dave. Moving to slide 10, the graph on the left shows our adjusted EBITDA increased $7.6 million or 9.1% to $91.4 million for the full-year 2015, mainly due to an increase of $5.9 million in revenue as well as lower selling, operating and administrative expenses. As a result of the strength of the US dollar against the Canadian dollar and the euro, operating income was negatively impacted by approximately $3.7 million in 2015 compared to $1.4 million in 2014.

Looking at the graph on the right, adjusted EBITDA margin was 51.7% for the full year 2015, up 270 basis points from the prior year. Our mark-to-market exposure and the increased strength of the US dollar against the Canadian dollar and the euro had a negative impact of approximately $5.3 million or 179 basis points on our adjusted EBITDA margin for the full year 2015 on a constant currency basis.

Turning to slide 11, the graph on the left shows net income of $51.4 million for the full year 2015, an increase of 16.8% over the prior year. The increase was primarily driven by a $5.9 million increase in revenue and a gain of $3.4 million related to the sale of 18 company-owned brokerages to existing RE/MAX franchisees in 2015.

These items were partially offset by an increase in foreign currency transaction losses of $313,000 when compared to the full-year 2014, an increase in interest expense of $1.1 million and a $2.1 million increase in the provision for income taxes as the result of higher income before tax. Our GAAP effective tax rate increased slightly to approximately 19% during 2015.

Based on adjusted net income, we reported adjusted basic and diluted earnings per share of $1.65 and $1.64 respectively for the full year 2015 compared to $1.54 and $1.51 respectively for the full year 2014. FX negatively impacted full-year 2015 adjusted basic and diluted EPS by approximately $0.11.

Moving to slide 12, our cash positions as of December 31, 2015 was $110.2 million, up $3 million from December 31, 2014. In 2015, we generated approximately $75 million of cash from operations, which allowed us to return approximately $60 million in dividends, reinvest in the business and still grow our cash balance.

Our Board recognizes the strength of our business, and as a result approved a 20% increase to our quarterly dividend, which will now be $0.15 a share. Including this increase, we have increased our quarterly dividend by 140% over the past two years.

Now I will turn it back to Dave Liniger for comments on the housing market.

Thanks Karri. Turning to slide 13 existing home sales numbers for 2015 of $5.25 million make up the best year for existing home sales since 2007. The graph on the top left of slide 13 shows a steadily improving housing market with normal seasonality.

Looking at the other graphs, 2016 annual existing home sales are estimated to increase 1.7% while home prices are expected to increase by 3.4% over 2015 according to the National Association of Realtors. New-home starts are estimated to increase by 18% in 2016 according to the National Association of Homebuilders. These 2016 estimates along with what we see in our business point to a gradual growth of the housing market.

A balance of economic drivers and constraints are behind the gradual expansion of the housing market. The drivers include job growth, moderate wage growth, household formations, new-home construction, increased availability of credit and the low interest rate environment.

Overall, we saw solid jobs numbers in 2015, which has brought unemployment down to the lowest level in eight years. We also saw wages pick up slightly in 2015, and continued jobs growth should lead to further wage growth in 2016. If this occurs, we should see an increase in household formations, which ultimately bring more people into the market to purchase a home.

Mortgage lenders expanded access to credit in 2015 and say they will continue to do the same in 2016. Positive consumer sentiment coupled with low rates, availability of credit and increased new-home construction bodes well for the housing market.

As for constraints, we believe inventory and affordability will be the governors on the housing market. Inventory of existing homes continues to be tight, and builders while increasing their output have years to go before they make up for the lack of building during the downturn. Affordability pressures may come from multiple fronts, including home prices rising faster than wages and inventory shortages driving up prices.

Interest rates, while still at historic lows, may add pressure if raised further this year or in the future. Overall, the 2016 forecast points to a continued gradual expansion of the housing market.

Now I will turn it over to Karri to walk through our financial outlook.

Thanks, Dave. On slide 14, I would like to share our outlook for the first quarter and for the full year 2016.

Our 2016 outlook reflects the impact of the strengthening US dollar against the Canadian dollar and the euro as well as the sale of the remaining company-owned brokerages. In 2015, the Company generated 12% of its revenue in Canada and realized an average exchange rate of $0.78 US for every Canadian dollar. Our 2016 outlook reflects an annualized estimated exchange rate of $0.70 US for every Canadian dollar.

For the first quarter of 2016, agent count is estimated to increase by 5.5% to 6% over first-quarter 2015. Revenue is estimated to decrease by 2% to 3% from first-quarter 2015. Our Q1 revenue outlook reflects a decrease of $3.4 million in revenue due to the sale of the 21 brokerage offices.

After adjusted for the brokerage sales, revenue would have increased by an estimated 4% to 5% over Q1 2015. The remaining brokerages were sold as of January 20 of this year, so Q1 will be the last quarter we report brokerage revenue. We estimate FX will be negatively impact Q1 revenue by $500,000 to $750,000, and we estimate franchise sales and other franchise revenue will decline due to lower estimated international franchise sales revenue and fewer domestic franchise sales after a strong year in 2015.

Selling, operating and administrative expenses are estimated to be 56% to 57% of first-quarter 2016 revenue. As a reminder, it is normal for us to see higher expenses as a percent of revenue in Q1 due to the expense associated with our annual broker and agent convention in March and seasonality of revenue.

Adjusted EBITDA margin is estimated to be in the 45% to 46% range. We estimate FX will negatively impact Q1 adjusted EBITDA margin by 50 to 75 basis points.

Project related operating expenditures are estimated to be $750,000 to $1 million. And lastly, capital expenditures are estimated to be $1 million to $1.5 million. This includes project related capital expenditures of $750,000 to $1 million.

Turning to slide 15, for the full year 2016, agent count is estimated to increase by 4% to 5% over year end 2015. Revenue is estimated to decrease 3% to 4% over full-year 2015. After adjusting for the sale of the brokerage offices, the negative impact of FX and the incremental contribution of the acquired New York region, we estimate revenue would have increased by 3.25% to 3.75% over 2015.

Brokerage revenue is estimated to decrease approximately $12 million due to the sale of the 21 brokerage offices. We estimate FX will negatively impact full year revenue by $2 million to $2.5 million, and the New York acquisition is estimated to contribute $1 million to $1.5 million to revenue in 2016.

Selling, operating and administrative expenses are estimated to be 48% to 49% of 2016 revenue. The sale of the 21 brokerage offices is expected to decrease selling, operating and administrative expenses by approximately $11 million. We estimate we will have $4 million to $4.5 million of project related operating expense, an increase of approximately $2 to $2.5 million over 2015.

Adjusted EBITDA margin is estimated to be in the 51.5% to 53% range. We estimate FX will negatively impact full-year adjusted EBITDA by $2 million to $2.5 million or 50 to 75 basis points.

And lastly, capital expenditures are estimated to be $3.5 million to $4 million. This includes project related capital expenditures of $1.5 million to $2 million.

A few additional items to note. Due to the sale of our remaining owned brokerage offices, we will no longer report equity and earnings of investees on the income statement. This line item represented the earnings of a residential mortgage joint venture associated with one of our previously owned brokerage offices.

We earned $1.2 million from the joint venture in 2015. The loss of this income would have impacted 2015 basic and diluted adjusted earnings per share by an estimated $0.03.

We completed a secondary offering in the fourth quarter of last year. As a result of the offer, the number of outstanding shares of class A common stock increased from 12.4 million to 17.6 million, and the class A ownership increased from approximately 40% to 58.3%. Due to the change in ownership, we expect our GAAP effective tax rate to increase to between 23% and 25%.

Lastly, we acquired the master franchise rights for the state of New York earlier this week for $8.5 million. The acquisition brings 869 agents and 58 offices into the company-owned region.

It is important to note we receive between 15% and 30% of fee revenue from independent regions. By acquiring a region, we capture the additional 70% to 85% of revenue generated by the region. That is why these acquisitions are so attractive and so accretive to our business.

We estimate the New York region will provide an incremental $1.7 million in revenue and $1 million in EBITDA each year. The incremental contribution of New York will be slightly less this year due to the timing of the acquisition.

As Dave previously mentioned, based on our current market share, there is significant upside for us in New York. We will be investing the time and resources needed to support the region and provide the service we believe will allow us to grow over time.

Now I will turn it back over to Dave Liniger.

Turning to slide 15, our recruiting and development efforts delivered our best agent gains since 2005. The steadily improving housing market and the stability of our franchise model coupled with agent growth, franchise sales and acquisitions continues to fuel the growth of the Company. Our goal is to help our brokers recruit quality agents and develop those agents into the most productive in the industry.

With that, operator, let's open it up for questions.

(Operator Instructions)

Vikram Malhotra, Morgan Stanley.

Dave, first of all, Dave Metzger, it's been great working with you and congratulations on the next stage of your career.

Thanks Vikram.

I wanted to follow-up on the New York acquisition. If I am correct, would the value suggest a multiple of around $8.5 million or $9 million EBITDA?

Yes, that's correct.

And so given the penetration is fairly low, what's built into your guidance? And maybe just plans over the next few years in terms of how you can move the penetration up?

We will be putting a team on the ground there. First thing to do is to obviously get a RE/MAX person in there. One of our regional development people in there and talk to the brokers and the agents.

Then we will be looking at selling franchises, and I think they sold two over the last couple of years. So we will put a franchise sales person and then really make sure we get the Momentum program in there.

I think there's some tremendous upside to the New York region. It will take a little bit of time, but keep in mind, at their peak they had over 2,100 agents. So obviously we're going to be trying to drive the growth of that business and drive the top line which will bring that multiple down over time.

So in your guidance, are you assuming for this year that the penetration remains relatively flat because I'm assuming the New York base will grow as well the overall New York base.

That's correct, Vikram. Currently we're expecting relatively flat agent count and uptick to revenue in the $1 million to $1.5 million range. But we're really excited about the growth opportunity.

As Dave Liniger mentioned, right now we have under 2% of the agents from a NAR perspective. If we just doubled that, we would end up at about 3.5%, which would be additional revenue over time of about $2 million.

Maybe stepping back as a read across maybe to other discussions or conversations with other owners, if I'm not wrong, I believe you've been trying to get the New York region for a while. Can you maybe describe how this came about?

This is Dave Liniger, Vikram. As you know, I have a personal relationship -- friendship with all the independent regional owners going back 30 to 40 years. So it has continued to be a topic of discussion. We had an opportunity to go up to Quebec, Pierre Titley was the owner, and visit with him for a couple of days in the fall, started putting a proposal together and then over a period of time managed to get this closed.

Last one for me on the dividend increase, is the plan going forward to maybe make ongoing increases and/or do this with a combination of a special dividend?

This is Dave Metzger. Vikram, at every Board meeting, the Board sits down and we talk about the entire capital allocation process and talk about reinvesting in the business, independent region acquisitions and of course return of capital to the shareholders.

We do at every Board meeting, and we assess whether it's appropriate to increase the annual dividend and if it's appropriate to increase to have a special dividend. As we've talked about in the past, it's a really long-term disciplined approach to return of capital and our capital allocation.

I guess depending on what you're seeing out there in terms of either acquisitions or business opportunities, it could be either/or, or some combination?

Absolutely.

Okay, thank you. Bye.

Ryan McKeveny, Zelman & Associates

Thank you and congratulations on the good year. First question on the franchise sales side of things, I think if I heard you correctly, you're expecting 2016 to be slightly lower than what you achieved in 2015, which would appeared to be a very good year on the franchise sales side. So with that in mind, just wondering if you could talk through what you're seeing on the ground in terms of franchise sales.

And similarly, I think you alluded to this some, but within the New York region, I guess the opportunity there to expand the franchise sales I think you said they had done only two franchise sales in the last couple of years. So what's the opportunity there within the state? And geographically, is there a difference between New York State and your views of expanding within the New York City area? Thank you.

This is Dave Liniger. Obviously we are a marketing company, and so when you look at the incredible year we had selling franchises, we can't maintain that pace every single year. We need to be about at the normal route of about 700 to 800 franchise sales.

Often we will sell a very large number of franchises in a particular region, but we need to let them get open, established and recruiting before we putting in additional franchises in the area. So we're thinking we will have a little bit of a dip this year and then go back hard again.

As far as New York goes, it will take us just a little bit of time to gear up. New York is a registration state, and we're filing our franchise disclosure documents with them, but we already have a marketing plan that's in place. We have a marketing team and a sales center that's getting ready to move forward when we are designated legal to do so. And so we're going to be very aggressive with it.

Probably last half of the year, I would think we're going to make 6 to 10 franchise sales. They will be made where we have the interest in them, but we will work in both areas. We will work both of the major metropolitan area but throughout the state also.

So it will come as a comes. We're pretty successful at our franchise sales campaign, and so New York is not unique. It's just been underdeveloped.

And we're really excited about the opportunity especially since we have such great market penetration in New Jersey and Philadelphia and New England. This gives us a great opportunity to fill out the last part.

Great, thanks. That's very helpful. And then just second question. When we think about the EBITDA margin of the business, I know I think in the past you've just mentioned that it's a business that's going to operate in call it the low 50%-margin range. And looking at the forward guidance I guess on the revised -- on the revenue base that's impacted by headwinds, it seems that range of the 51.5% to 53% is in that low 50% range.

So longer term as we look out even beyond 2016, is that just the nature of the business where there's going to be costs that rise whether it's technology related or other things that limit the EBITDA margin from seeing significantly more expansion? Just any thoughts around that would be helpful. Thank you.

This is Metzger. I do think there's some opportunity for some margin pick up, but keep in mind that we have committed to reinvest in the business both on our IT project sides as well as reinvest in our people. We need good people, this is a high touch business. Over time, there is a possibility of some pickup in margin.

Another thing that I would say is we're really focused on growing our dollar EBITDA. We attribute 80% to 85% of our EBITDA to free cash flow, which is driving our shareholder value.

And so we're focused on that as well. There's a little bit of upside with respect to New York and just the timing of the growth in that region as well as franchise sales opportunity for upside as well.

And the last thing I would add in, just keep in mind from 2014 to 2015, we did get some margin pickup despite all the things we've been doing. And we're going to have some continued reinvestment in the business, and still we're going to maintain that low 50%-, 52%-margin range.

So we're able to do a lot of that. Maybe we would see some pickup like Karri indicated from some of those other things.

Okay, thanks very much. Good luck.

David Ridley-Lane, BofA Merrill Lynch

I wanted to add my thanks to Dave Metzger. He's been a real straight shooter and I wish him all the best.

In terms of questions, just as a modeling point, was there any unusual factors to be aware of in the free cash flow in 2016 or 2015 rather? Because I noticed a step up in the accounts receivable balance in the fourth quarter and I'm wondering if that's just timing and could reverse maybe in the first quarter of 2016.

That is primarily related to timing. There are a couple of one-time expense charges that hit in the fourth quarter that we don't expect to recur.

About $1 million related to costs incurred in conjunction with the secondary offering as well as a $2.7 million charge in conjunction with just the resolution of a litigation matter. So that's negatively impacting our free cash flow for purposes of 2015 and won't recur going forward.

Got it. Another quick modeling question. On the brokerage revenue line that you will have in the first quarter, is that about $700,000 if I've got my math right?

No. In conjunction with the brokerage operations, we've actually sold all 21 offices as of January 20, 2016. So it's about a $3.5 million reduction to revenue in Q1 of 2016 compared to the prior year.

Got it. One for Dave Liniger. We've seen days-on-the-market continue to decline. Inventory remains pretty close to cycle lows, but with mortgage rates down and jobs continuing to -- job growth continuing to be quite strong, the demand is going to be there this selling season but then the houses may not be.

So I'm curious to get your perspective. Are we going to see the listed inventory go up? And if not, how much of price is going to have to rise?

I don't see the inventory going up much at all. There's just a hesitancy on the part of a lot of people who have regained their equity or have very positive equity that ordinarily if homebuilders are sitting out there with six months inventory, they don't hesitate to put a resale property on the market because when it sells quickly, they can move into something that's already built. And unfortunately we don't have that, so people are very reluctant to sell before they can actually find something else to move up to.

I think what you're going to see is last year was the best year we've had in 10 years. It's continuing to be a very slow and steady recovery. Most of the economists six months ago were thinking we'd go up about 5% in transaction size this year. Almost all of them have dropped that back now to thinking it's going to be 1% to 1.5%, 2%.

The truth of the matter is, is there's plenty of market there. It's just up to an individual company and their sales force to take more than their fair share.

Got it. Thank you very much.

Thanks David.

John Campbell, Stephens.

Hey, guys. Congrats on a great quarter. And Dave congrats on the great run at RE/MAX, and we wish you well on your move back to the East Coast.

Thank you very much.

To your guidance calls, it looks like a little bit faster agent growth just in 1Q versus the full year. How should we think about the phasing of growth for the full year?

And then maybe if you guys can give us a little more detail or your thoughts around just the regional movements? Are you guys expecting that same general movement by international basically outpacing Canada up modestly and then US mid-single digits?

Yes. We've placed so many offices in so many regions in our global footprint that they are going to grow percentage wise much more rapidly than the United States will, probably 8% or greater this year. Unfortunately, our revenue-per-agent is much lower worldwide.

If you look at Canada, the Canadian market is probably going to stay reasonably flat for our sales associate growth. Actually we were a bit surprised last year that we grew by 600 and some agents because our saturation is so great. They obviously have some oil problems in Alberta, and we've seen some price declines in Alberta upwards of 20% from the highs in 2014, but we're not seeing much impact on the agents.

Vancouver is still very strong. Toronto is strong. All we can say is we think it's just going to be basically a very flat year.

In the United States, we seem to be able to organically grow somewhere around 4.5% to 5%, and I think that we can give guidance, but that's probably where will be this year. So all in all, it's going to be another good year compared to the last 10 years. It just means we have to keep doing what we do.

That's helpful. Thanks for that color. I know you guys have talked about this at length at times, but just curious what are your thoughts or how do plan on getting the international agent revenue-per-agent up?

That will be a long-term process. If you look at the difference in currencies and you look at the difference in business methods throughout the rest of the world, in most countries, they are not nearly as sophisticated as say the United States, Canada, Australia, New Zealand and so on.

But over a long term, it will definitely have a big impact. But over the short term, our fees-per-agent are so much greater in the USA and Canada, that's where our financial growth will come from. It is important to note that we get a great deal of foreign investors buying in the United States.

It's been a big stimulus for the last five or six years, probably slowing down just a little bit because of the strength of the dollar, but in my travels worldwide, it's pretty obvious that the world is very unsettled right now. Europeans are wondering what's going to happen in their countries, they would like a safe haven. If you go to Brazil and Argentina, very similar thoughts.

And so I think you will still see a flight to quality and safety, and the United States and Canada are those sources people want to come to. So we will continue to use international as a springboard. It will continue to help us over long term, but over short term, it just is not going to have a huge financial impact.

That makes sense. Dave, just back to the market, did you guys see an impact from [tread] in the quarter and maybe what you hearing from your team as far as recovery or normalization of the closing cycle?

We didn't see much of an impact to us at the headquarters financially. Many of our agents and brokers saw a lot of their closings get delayed by anywhere from a week to four weeks.

It didn't mean the closings didn't happen, it was just the uncertainty of the paperwork and the government overview. So I think we're through that cycle, but I don't think it had a real significant impact on anything.

Okay, great. Thanks guys.

(Operator Instructions)

Anthony Paolone, JPMorgan.

Thanks, and I would also like to echo the well wishes to you, Dave Metzger. It's been a real pleasure.

Thanks Tony. I've enjoyed working with you as well.

First question on the OpEx, now that the owned brokerages are gone, I'm presuming the bulk of the costs associated with that were like in personnel. Could you maybe help us with the run rate going forward on some of the OpEx line items? I'm guessing personnel becomes more of a fixed cost going forward now without the brokerage stuff in there.

The primary line items from a brokerage expense perspective are personnel. Of the total $11 million of brokerage, it's about $5 million.

They also had some significant rent expense as well, about $3.5 million. So those are the primary hitters of the reduction of brokerage expense of $11 million.

If you look at the run rate of our future selling, operating and administrative expenses, we are really committed to reinvesting in the business to grow the business going forward. So we're looking at 47% to 49% of revenue as the forward-looking run rate.

You said on the personnel side, the $11 million would come out, compared to for instance when I look at your $43.74 million of personnel costs in 2015.

About $5 million will come out on the personnel line item.

Okay.

And then on the rent expense of about $12 million consolidated, about $3.5 million will come out.

Okay, got it. Thank you. I think in the prepared comments, you mentioned Momentum and trying to continue to push the adoption of that. How much of the system is using Momentum? How much is left for folks to adopt there?

There's actually quite a bit. When we implemented Momentum first, the company-operated regions embraced it.

As a matter of fact, by now, about 50% of our offices in the company-operated regions are already on the process and are continuing to make it work. As we succeeded with it so well, many of the independent regions have picked it up, plus a few foreign countries have also picked it up.

So it's not a flavor of the day. It is a long-term, five-year project or longer. And so we continue to emphasize it at our quarterly regional franchise meetings, at our annual conventions, and we continue to upgrade the material and the information.

So it will help us. Obviously we are having good years in recruiting, and we don't just recruit anyone. We aren't a company where we can hire part-timers and so on, and so we have to put our emphasis on high quality, and Momentum has certainly helped us with that.

Lastly, your franchise sales were very strong, and your agent count growth came in better than what you thought at the outset of 2015. How much of the growth in agents comes from selling more franchises versus perhaps like the same store for lack of a better term?

On a annual basis, it's about 25% to 28% of the franchises sold in 2015. Agent growth came from those sales.

Many of those still have not opened. It takes often four to six months to open one. If you look at a two-year running average, it's over 50% of our agent growth comes from the franchises sold in that two-year period.

In a typical selling of franchise, do you typically see a franchisee sign up and then start to go out and recruit, or is it just the franchisee is moving an existing business over?

No. The way that RE/MAX works is very different than our franchise competitors because the agents have to pay the broker to work for them. The agent experience has to be fairly high.

So we don't do very many conversions of existing offices because about 80% of the agents in the United States are not qualified to work for us. And it's very tough on a small broker with 20 or 30 agents to buy and convert to us and fire 80% of the agents the first day and start over.

So most of our offices have been startups, competing managers from our competition or top producers that want to start their own. And so our startup is fairly slow. They come to training. They start leasing space. It takes them anywhere from 3 to 6 months to get their doors opened, and during that 3 to 6 month period, they start to do their recruiting.

Okay. Is it fair to say after a strong years of franchise sales, it gives you some backlog of growth in agents because those folks will start getting up and running? Is that how to think about it?

Yes, that's correct.

Okay, thank you guys.

There are no further questions at this time. Mr. Liniger, I turn the call back to you.

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

This concludes today's conference call. You may now disconnect.