Ladies and gentlemen, welcome to Frontdoor’s Third Quarter 2018 Earnings Conference Call. Today’s call is being recorded and broadcast on the internet. Beginning today’s call is Matt Davis, Vice President of Investor Relations and Treasury, and he will introduce the other speakers on the call. At this time, we will begin today’s conference call. Please go ahead, Mr. Davis.

Thank you, operator. Good afternoon, everyone, and thank you for joining Frontdoor’s third quarter 2018 earnings conference call. Joining me on today’s call are Frontdoor’s Chief Executive Officer, Rex Tibbens; and Frontdoor’s Chief Financial Officer, Brian Turcotte. Before I review the agenda and turn the call over to Rex and Brian, at about 3 pm central time today, Frontdoor issued a press release, reporting our third quarter 2018 financial results. The purpose of today’s call is to provide investors with further details regarding Frontdoor’s financial results as well as provide a general update on the Company’s progress. The press release and a slide presentation that will be utilized during today’s call can be found on the Investor Relations section of Frontdoor’s website, which is located at www.frontdoorhome.com. I’d also encourage all of our listeners to visit our website to find out more about our Company. As stated on slide two of the presentation, I would like to remind you, this call will contain forward-looking statements. Investors should be aware that any forward-looking statements are subject to various risks and uncertainties that could cause actual results to differ materially from those discussed here today. These risk factors are explained in detail in the Company’s filings with the Securities and Exchange Commission. Please refer to the Risk Factors section of our registration statement on Form 10 and other filings for a more detailed discussion of forward-looking statements and the risk and uncertainties of such statements. All forward-looking statements are made as of today, and except as required by law, the Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. We will reference certain non-GAAP financial measures throughout today’s call and we have included definitions of these terms in…

Thanks, Matt, and good afternoon, everyone. Let’s start with our third quarter highlights on slide four. After more than a year of hard work by teams across every area of the Company, we completed the spinoff from ServiceMaster on October 1st. I’m truly grateful to all those involved in the spinoff, and I want to thank all the employees and partners who put in the extra effort to execute the spinoff as planned. Now, with the spinoff behind us, I remain even more steadfast in my belief that Frontdoor possesses a great core business, led by its four market-leading brands: American Home Shield, HSA, Landmark and OneGuard with an even brighter future. As we continue to grow quickly, it is imperative that we have a systems, processes and people in place to enable to continued growth and evolution. To that end, we have recently added three key leaders to our team as well as one new Board member, and I will provide more detail on their background, shortly. Before doing so, let me first turn to the financial highlights for the quarter. In the third quarter, we continued to see strong topline growth. We delivered a 9% increase in organic revenue to $377 million, which was helped in part by an improvement in the customer retention rate to 76% for the quarter, up from 75% in the prior year period. Net income of $49 million was down 7% and pro forma EPS of $0.58 per share was down 8% versus the prior year period and reflects the impact of higher claims costs versus the same period in 2017. Turning to slide five. I wanted to take a moment to address the many actions we are taking on the initiatives we laid out in the second quarter to strengthen the core…

Thanks, Rex and good afternoon. Let’s now turn to slide eight and I will review our third quarter 2018 financial results. Third quarter 2018 revenue increased 9% to $377 million, driven primarily by a 7% increase in the number of home service plans, which now totaled 2.1 million and a higher average price per plan compared to the prior year period. As a reminder, the components of total revenue growth have historically been split between about 80% volume and 20% price. And that is basically the same for this quarter with the 9% growth comprised of seven points for volume and about two points for price. I will now provide more detail on the revenue contribution among our three primary customer channels, existing customer renewals; first-year real estate sales; and first-year direct-to-consumer sales. Revenue from customer renewals was up 10% over the third quarter last year, primarily due to improvement in customer retention to 76% this year versus 75% prior year. First year real estate revenue was up 6% versus the prior year period, driven by a mix shift toward higher priced home service plan offerings. First year direct-to-consumer revenue was up 10%, driven by 7% growth in new home service plans over the prior year period. Gross profit declined 2% versus the prior year period to $176 million due to the increase in claims costs, Rex mentioned earlier. Higher claims costs and increase in other operating costs that I will review in moment resulted in net income of $49 million pro forma earnings per share of $0.58 and adjusted EBITDA of $86 million. Turning to slide nine. You will see an adjusted EBITDA bridge in the third quarter of 2017 to the third quarter of 2018 and the factors impacting the results. Starting on the left. The 9% increase…

Thanks, Brian. As a reminder, during the question-and-answer session, we encourage you to ask any questions that you may have, but please note that guidance is limited to the outlook we provided in our press release and webcast presentation. Operator, let’s open up the line for questions.

[Operator Instructions] Our first question is from Paul Fanelli from G. Research. Please go ahead.

I just wanted to focus on the parts sourcing and replacement. Can you give any further color on sort of when we can see those improvements in parts sourcing and improving replacement rates, when we’ll see those cost start to normalize or how long it will take for this improved sourcing to really filter through the system?

It’s Rex. I think, over -- every quarter we get stronger and stronger. It’s about making sure we have the right supplier network. And then, we will continue to see those -- I think you are referring to the appliance replacement rate continue to gradually move down. I think, it’s over the next couple of quarters that you will continue to see the improvement back kind of to historic levels, if you will.

And then, just one follow-up. You’ve touched -- in the prepared remarks you touched on pushing some of the decision-making down to sort of on more frontline basis. Can you just go maybe into a little bit more detail on what that looks like and how you hope to have that maybe drive some margin improvement?

So, having the right systems and process in place really allows us to make quick decisions via technology that we can then push those -- the decision-making down to the front line. So, if you go online or call us, we will have a lot more robust way of taking care of customers in terms of figuring out the problems ahead of time and then knowing the contract and then knowing what things we need to do from a visibility perspective, be able to identify trends, those type of things. So, if you are a front line associate, you will have the power of the information simply to better help the customer.

Our next question is from Chris Gamaitoni from Compass Point. Please go ahead.

I wanted to focus again on the gross margin. For the fourth quarter, I’m calculating roughly implied 35% level. Is that correct?

Our gross margin?

The gross margin percentage. Yes.

That could be right. I’m focusing more on EBITDA margin at this point. But there would be growth by the way. Gross margin pressure in -- I think it’s a little higher than that now that I look at my notes. You’re pretty close for gross margin.

And is that being driven completely by your expectation of replacement issues, the plumbing price increases or is there another actuarial adjustment that you expect to incur in fourth quarter?

No, it’s not an actuarial adjustment. It is continued pressure that we see in Q3, the inflationary pressures continuing into Q4. And also October was a very unique month where we had a very hot beginning to the month and had more AC claims than we normally would have. And then it turned cold in the back half of October. So, we had going on for the first time in the year. So, that just the continued inflationary pressures led us to believe that we would have a little more pressure in Q4 than normal. But to be very clear, we’re going to continue invest in our sales and marketing to drive unit growth and in customer service to drive revenue growth going forward, and we do expect to return to our more margin with the initiates, Rex mentioned, going forward.

Okay. So, you assume to return on the same in the growth side or is that through improvements on the other lines to drive the EBITDA margin…

That’s growth margin we’re talking about through the improvement. We’re still going spend on the SG&A side, we’re still going to spend to drive growth and revenue growth going forward.

And have you have any early feedback about the elasticity of consumer renewals with the price increases that you mentioned?

Yes. Certainly for raising prices, we have not seen any negative impact from that yet. But, again, early days, and we continue to raise prices. Remember that as the customers home service plan comes up month on month, we’re measuring those renewal rates. But, so far they are following in line with our expectations.

And it’s the way for the annual renewal for the people that are monthly direct debit, is that how it works?

Right. You sign up for a 12-month home service plan and as that gets closer to month number 12, majority of our customers are never [indiscernible] contracts. So, we remind them that their renewal is coming, and that’s where call on -- of any pricing change.

Our final question is from Ian Zaffino from Oppenheimer & Co. Please go ahead.

Brian, just a quick question on that, the guidance on the top line. I noted you kind of move that around a little bit. I would have thought, with rising cost you would maybe accelerate the price increases, which will get you an upward adjustment on the revenue guidance. Just kind of curious, looking at the top end of the range, what were their puts and takes there?

It’s Rex. I will actually take that one. So, when we make pricing adjustments, keep in mind that it takes for those to flow through. As I mentioned earlier, as I make, -- rate prices in January, but your contract doesn’t come up renewal till June, you have another 12 months from there until you can see the full revenue impact as we recognize revenue one [ph] at a time.

But, I guess, when I look at the previous guidance for the topline, the top end average has come down. Is that -- you have to 1.27 billion, now you have 1.26 [ph] wanted to know the driver of that was?

Yes. I thought we had forecasted -- that’s how we have forecasted 9% organic revenue growth for the year, Ian. So, I would have to check on that.

Okay. All right. That was the only question. I appreciate that. But final question would be how do we sort of -- what’s the timeline for the on-demand product? As we trying to look for a model -- I know you said we’re not going to give guidance into next year, but how should we be thinking about maybe the ramp in the on-demand product, what will be some of the milestones we as investors or analysts should be looking for?

Sure. So, as I said earlier in the remarks, 2019 is about building out the business, so it’s about getting a robust playbook in place where we understand the unit economics and how the business would work. And then, we would start to scale the business over a couple of cities and really asset test if you will in 2019. 2020, we have a strong playbook in place. We really start to scale across the geographies where it makes sense to have an on demand business, certainly in major metropolitan areas. And then, 2021 is then time that we begin to really optimize the business from there. So, from a financial perspective, we don’t see a material impact in 2019, it’s really in 2020 when we think the industry, the material impact. We were at $1.25 billion business in revenues. So, it’s going to take quite a while before you start to see the revenue impact from that.

Ian, it’s Brian, again. I checked our Investor Day, and we said 8% to 10% organic revenue growth for 2018. We fell right in the middle of that. But you are right, the upper range would have been closer to 1.27 but we are right in the middle of our range.

This concludes the question-and-answer session. I would like to turn the floor back to Mr. Tibbens for any closing comments.

Thank you. Thank you again for your interest in Frontdoor. We have a great core subscription based business model that is growing fast, generating a high level of free cash flow and has significant upside opportunity. We are taking aggressive actions to strengthen our core processes and systems for the future. We are well-positioned to be a leader in the broader $400 billion U.S. home services market. Thanks again, and we look forward to updating you on our progress in 2019.

This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.