RE/MAX Holdings, Inc. (RMAX) Q2 2015 Earnings Report, Transcript and Summary

Good morning and welcome to the Re/Max Q2 2015 Conference Call. All participants will be in a listen-only mode. [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 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.

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 U.S. 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 U.S. and Canada. The graph on the left highlights agent growth of 5.4% in U.S. company-owned regions and 4.1% in the U.S. 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 growth of 3.3% in the U.S. and 7.3% outside the U.S. 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 U.S. 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 the U.S. 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 our offices and increasing their profitability. Revenue from annual dues increased 3% mainly due to an increase of 3,144 agents in the U.S. 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 impart to the improving U.S. 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 U.S. and Canada compared to the prior year quarter. Revenue from our own 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 in headcount that resulted from the 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 U.S. 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 U.S. on a monthly basis which substantially reduced our mark to market exposure. That said, the continued strength of the U.S. 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 sale of assets related to the sale of the six brokerage offices in April, and a $202,000 increase in equity in an earnings of investees, which is related to a mortgage business associated with some of our own 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 perspective 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 markets.

Thanks, Dave. It 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 NOR, the economic factors that impact the housing markets has been improving for over a year and are starting to drive home sales. The graph on the top 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 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 basis points 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 basis points 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 U.S. 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 sale of the six offices as just discussed. And annual dues or 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 U.S. and coming in stronger than expected in Canada and outside the U.S. 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 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 basis points to 150 basis points on a constant currency basis. Given our strong performance in the first half of the 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 6-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.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question is from Ryan McKeveny of Zelman & Associates. Please go ahead.

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

Yes, sure. Ryan, this is Dave Metzger. There is a couple of factors that come into play here. First, we have had strong agent growth across the whole network for the whole year and in fact in the U.S. we are trending towards the high side of our expectations, but our agent growth we think in the next couple of quarters, we will get the growth predominantly that led to increasing the guidance from Canada, where we thought – which we thought was going to be flat and international will have some pickup there. So, you are 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 this. And so that’s why we are not really having any pickup on the revenue side. On the expense side, we did have some expenses in Q2. They were budgeted for Q2. They are going to be pushed to later in the year. So, 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 will see how we go there and then potentially we will 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 sub-region sales internationally and then anything approved – associated with our approved supplier. So, there is some upside there. And I think we will have better insight to that. I know there is going to be any upside to the margin as we get through to the end of Q3.

Great, thanks. And 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 have been public. And I think the guidance implies maybe around $22 million of cost in 3Q and it sounds likes 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 cost, but just the ability to contain cost as revenue ramps higher in 2016 and beyond?

Yes, I mean, the predominant things that impacted the Q2 on the expense side was some of the IT projects that we had – we have got into our budget. And we are 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 have a little bit of marketing expense that has been pushed into Q3, Q4. There maybe a little pick up in there. We will see whether or not we really – and that’s a lot of the travel and entertainment that maybe pushed, but we may not actually incur that. And then keep in mind, there was a one-time gain on sale related to Re/Max 100. Also, I think that we feel pretty comfortable with our selling, operating and administrative expenses on the annual basis in that high 80s to $90 million range. And for ‘16, 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 and our overall expense structure for ‘16.

Okay, thanks very much.

Our next question is from Brandon Dobell of William Blair. Please go ahead.

Thanks. Good morning, guys. Wanted to focus a little bit on the Momentum program, maybe you give some color on how long you think you continue to push this to see any change in this 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?

Well, this is Dave Liniger. The Momentum has been very successful for us. It’s helped our agent gain in both Canada and the United States. It’s not a one-time program that 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 and it had helped our recruiting dramatically and it remains to be seen whether that momentum will stay as good in the third and fourth quarter.

Okay. Can you guys think about agent recruiting, maybe some color on the types of agents that are joining you guys, either another spin-up consistent trend of agents for rejoining Re/Max, but as you think about the mix between what you would consider to be highly productive or more kind of startup agents, how is 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 independent and national brands.

And then final one for me, what’s your take on agent reviews, Dave, I know the consumers are starting to push that direction in terms of one of the tools they may use to look for listing agent, not 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 have had so many beginners. So, we are all four agent ratings and rankings.

Okay, thanks a lot. Appreciate it.

Our next question is from David Ridley-Lane of Bank of America Merrill Lynch. Please go ahead.

Sure. So, on the plan project-based operating expense the $3 million for the year, what was the total that we came through in the first half and what’s the spend in the second half?

Year-to-date, our spend has been about $300,000 and in Q3 and Q4 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, wanted to ask a little bit about franchise sales headcount, is that up year-over-year and given the strong results what’s your appetite to add to the franchise sales headcount?

You are talking about our franchise sales people?

Yes, absolutely.

Actually we have had fewer franchise sales people, 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. And I know this maybe tough to quantify, but roughly how much of an impact did the Momentum projects have for you on the second quarter revenue or the first half revenue if that’s easier to answer?

Actually first half it’s 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.

Our next question is from Vikram Malhotra of Morgan Stanley. Please go ahead.

Hi, this is Landon on for Vikram. Congrats on the quarter. Just wanted to start off by asking about any updated thoughts on region buybacks if you have had any further conversations there and maybe how you are thinking about the cash balance and leverage in conjunction with your conversations on that end?

Yes. I mean 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 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 fillings are on their exits, letting know that we are there and available to do it both Dave Liniger and I some other folks here have talked to them on a fairly regular basis. And so I think they will happen when they happen. I think the conversations have been maybe a touch more frequent, so that’s good interest level. I mean they are feeling better about themselves in their regions because they have had some EBITDA uptick because they have added some agents. 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 low de-levered so we have the opportunity should the need arise to lever up a little bit and still be within a very reasonable under four times easily under four times leverage on a debt to EBITDA ratio. So we have the capacity built into the facility as well as cash in the balance sheet. Keep in mind some of these acquisitions would not be that big and we could them on cash and save the leverage but we can also lever up a little bit and save the cash for other opportunities, reinvest in the business and things like that.

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

We are looking at our capital allocation policies that we are going to be very prudent 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 here. But very, very important not only for today, but the future we do look at other acquisition opportunities that are within our core competency. And when one comes up we will 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 and 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 depended on where cash balance is where we feel the acquisition opportunities are the Board will sit down and reassess on the capital allocation and dividends and things like that.

Great. And then just 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 are still lagging a bit behind the industry reported numbers and I am just wondering if you can explain that and if there might be a convergence between the two at some point?

Well, NOR is a barometer for what our growth can be, but bear in mind that NOR’s membership has a tremendous number of beginners. And when we recruit, we are trying to recruit the top producers. So, we don’t tag along at the exact same rate as NOR, 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.

Our next question is from John Campbell of Stephens, Inc. Please go ahead.

Hey, guys. Happy Friday and congrats on a great quarter. Just back to the dividend, but more so just kind of on the recurring dividend and just thinking about a payout ratio, I mean, I think you guys paid out about a fourth of GAAP earnings last year with the dividend and then I think this year just ex the special dividend looks like it’s going to be about 30% or so, but 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 kind of comfortable doing?

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

Got it. Got it. Okay, that’s helpful. And just back to this all 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 am just doing the back of the math here and it looks like mid-teens or so, is that about right?

But 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 is one – the brokerage that we sold was less than the third of the overall brokerages that we have. So, we will see more margin pickup if and when we are able to divest ourselves of the remaining ones, but the ones we had basically had no margin contribution.

Okay, that’s helpful. And then the 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 and so we are not subject to the exchange rate now. So, we do it every month.

Got it. 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.