Good morning and welcome to the RE/MAX Holdings second quarter 2016 earnings conference call and webcast. My name is Dan and I will be facilitating the audio portion of today's call. At this time, I would like to turn the call over to Andy Schulz, Executive Director of Investor Relations. Mr. Schulz, please go ahead.

Thank you, operator. Good morning, everyone, and welcome to RE/MAX's second quarter 2016 earnings conference call. 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 two, 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, housing market conditions, revenue, operating expenses, financial guidance 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 our second quarter earnings release, which is available on our website. Upon the conclusion of our prepared remarks by our Chief Executive Officer and Co-Founder, Dave Liniger, and our Chief Financial Officer, Karri Callahan, we will open the call for Q&A, at which time we will be joined by Adam Contos, our Chief Operating Officer, and Geoff Lewis, our President. With that, I'd like to turn the call over to RE/MAX CEO, David Liniger. Dave?

Thank you, Andy. And thanks to everyone for joining our call. It is a pleasure to be with you here today as we share our second quarter results. We had a solid quarter, one which continued the momentum we saw in the first quarter, both in our business and in the housing market, and positions us for further success in the back half of the year. Our ongoing focus on the three pillars of value creation – organic growth, reinvestment and acquisition catalysts, and returning capital to shareholders – continues to deliver positive results. Before I discuss our second quarter highlights on slide three, I want to briefly discuss our approach to organic growth in more detail. Our organic growth is fueled by our 43-year focus on selling franchises and attracting and retaining the best agents and we had notable achievements on both fronts during this past quarter. I'm pleased to announce that we obtained the necessary approval to begin selling franchises in New York and we've already made our first sales. The New York region, which we re-acquired in the first quarter, represents a multi-year above-average organic growth opportunity. As we have previously discussed, we will likely sell only a handful of franchises in New York this year. After selling a franchise, it generally takes the new owner four to six months to open their office and then another few months before they see agent count growth. That's why we don't expect any incremental agent growth from New York this year, but we do anticipate ramping up slightly in 2017 and thereafter. We're pleased with the good work our New York team is doing and the positive reaction we are receiving from our franchisees in the state and we're excited about the long-term organic growth opportunities in the region.…

Thank you, Dave. Turning to slide seven, you’ll find a breakdown of our revenue streams. Overall, second quarter 2016 revenue decreased 2% to $43.4 million, primarily due to the sale of the company-owned brokerages. Revenue would have increased 5.3% after adjusting for the sale of the company-owned brokerages. Organic growth increased revenue 4% and the acquisitions of New York and Alaska combined added 1%. These increases were more than offset by the sale of the brokerages, which negatively impacted revenue by 7% year-over-year as well as FX, which reduced revenue a nominal amount. Recurring revenue, which includes continuing franchisees and annual dues, increased $1.7 million or 6.7% over Q2 of last year. Recurring revenue accounted for 64.3% of total revenue in the second quarter of 2016, up from 59% last year, primarily due to the sale of our company-owned brokerages. Revenue from continuing franchisees was $19.8 million, an increase of $1.6 million or 8.6% compared to second quarter 2015, primarily due to agent count growth and the acquisition of the New York and Alaska region. Revenue from annual dues was $8 million, up $200,000 or 2.2% due to agent count growth, partially offset by the impact of the strong US dollar against the Canadian dollar. Revenue from broker fees was $10.4 million, an increase of approximately $1.1 million or 12.3% over last year, driven primarily by higher agent count and by increased sales volume. Franchise sales and other franchise revenue was $5.1 million, down $400,000 or 6.5% compared to the prior-year quarter, primarily due to a decrease in global sub-regional franchise sales. International franchise sales were unusually strong during the second quarter of 2015. We have continued to successfully execute on domestic franchise sales during 2016 and we expect that performance to continue. However, last year was a banner year…

Thanks, Karri. Turning to slide 12, the housing market continues to exhibit solid fundamentals and still has room for improvement. It's been five years since the worst part of the housing crisis occurred and the landscape is set up for the industry to remain positive. Many of the underpinning dynamics in our industry are improving. Job growth has been generally steady. Wages are rising, but not increasing at the rate of house prices. Household formations are better than they’ve been for several years, but first-time buyers have had a tough time getting into their initial purchase. However, we finally saw some encouraging news on that front in June. The National Association of Realtors recently reported the share of first-time buyers purchasing homes in June 2016 was the highest recorded since July of 2012. Housing starts are trending up, but remain off of their historic pre-recession levels. Overall, mortgage availability has been improving and rates recently hit a record low and looked to remain at low levels. Inventory continues to be the biggest challenge and it's a real constraint, most notably on the West Coast. Affordability is a concern in some regions, especially for first-time buyers. The good thing is demand is very strong. We believe the supply equation will eventually be solved as more homebuilders return to building homes across all price points instead of focusing on apartment buildings. Although our network of professional agents still succeeds in a market such as this, a market with improved inventory offers even greater opportunities. Now, I’ll turn it back to Karri to walk through our financial outlook.

Thanks, Dave. Turning to slide 13, the company's third quarter and full year 2016 outlook reflects the sale of the company-owned brokerages, the acquisitions of the New York and Alaska regions, an estimated exchange rate of US$0.74 for every Canadian dollar, and assumes no further acquisitions or divestitures. For the third quarter of 2016, RE/MAX expects agent count to increase 5.5% to 6% over third quarter 2015, driven by strong agent growth outside the US and Canada; revenue in a range of $43.5 million to $44.5 million; selling, operating and administrative expenses in a range of 46.5% to 47.5% of Q3 2016 revenue, with project-related operating expenses in a range of $750,000 to $1 million; adjusted EBITDA margin in a range of 54% to 55%; and capital expenditures in a range of $1 million to $1.5 million, which includes estimated project-related capital expenditures of $750,000 to $1 million. Turning to slide 14, we're reiterating our full year 2016 outlook and increasing our agent count guidance. We expect agent count to increase by 5.5% to 6.5% over 2015, up from 4% to 5% driven by strong agent growth outside the US and Canada; revenue in a range of $169.8 million to $171.6 million; selling, operating and administrative expenses in a range of 48% to 49% of 2016 revenue – included in selling, operating and administrative expenses are project-related operating expenditures in a range of $3.5 million to $4 million, down from $4 million to $4.5 million – adjusted EBITDA margin in a range of 51.5% to 53% – we are currently trending above the midpoints of both our revenue and adjusted EBITDA margin ranges – and total capital expenditures in a range of $3.5 million to $4 million including project-related CapEx of $2 million to $2.5 million. One final housekeeping note. We are now expressing our revenue guidance as a range of absolute dollars instead of as a percentage change relative to the prior year’s results. This is purely a change in format and not a change to our full-year guidance. Now, I'll turn it back over to Dave.

Turning to slide 15, that concludes the successful first half of 2016. RE/MAX is performing as we had planned, with our core business fundamentals and growth pillars firmly intact. Agent count growth is healthy, particularly in the United States and Canadian markets. We have commenced selling franchises in the recently acquired New York region and we're laying the foundation there for success in years to come. Finally, we continue to prudently reinvest in our business to enhance our value proposition and to support future growth. With that, operator, Adam and Jeff have joined Karri and me, and we would like to open it up for questions.

[Operator Instructions] Our first question comes from the line of Vikram Malhotra from Morgan Stanley. Please go ahead.

Thank you. Congrats on a strong quarter, guys. Just for the first question on the dividend and just how you're thinking on potentially a special, if you can just update us on that.

Hey, Vikram. It’s Karri. We continue to prudently manage the business and have the same capital allocation philosophy that we've had historically. So really looking at reinvesting in the business, the acquisition of independent regions, other potential growth opportunities around real estate and franchising, and then return of capital to shareholders. So we’ve consistently executed on that, actively meet quarterly and discuss it and we’ll follow that same philosophy and process going forward.

And then just – maybe a question for Adam. As you’ve sort of spent more time in your new role now, anything that surprise you to the positive; and then maybe on the other side, any areas you feel you want to invest more time in?

Good morning, Vikram. It’s positive around here quite a bit. And when we look at the business and talk to our customers to see the continued slow, but steady, growth in the housing market, but what we’re looking at very closely is how do we generate business for the customers, bringing leads to the table as well as building the business efficiencies around the different aspects of the operation. So we continue to evolve the technology, which is always exciting to me – it’s a great place to play – as well as getting down in the trenches with the agents and the brokers to see how we can continue to push their profitability and help them grow their business.

Okay, thank you. And then just last one, Dave, for you, big picture question. We’ve heard of some softness or at least some deceleration in several of the multifamily markets on the coast, any read across to the housing market in general and any thoughts on the homeownership rate?

Well, Vikram, the luxury market, the high-end market has slowed a little bit, but fortunately for RE/MAX, we’re diversified across all income brackets, and so it has not affected our profitability at all. There’s a concern whether prices are too high, places like San Jose or San Francisco, whether that will adjust or not. But we don't see anything disastrous in the future. And what was the last question you wanted to know?

Your views on the homeownership rate.

We’re now at a 50-year low. I think that that is going to reverse itself fairly quickly. New first time buyers are starting to buy again. Traditionally, it’s 40% of the business. Right now, it’s 33% of the business, so it’s upticking. The problem for most people is finding the affordable housing in the lower price ranges to get their foot in the door.

Okay, great. Thank you very much.

Your next question comes from the line of Brandon Dobell from William Blair. Please go ahead.

Thanks. Maybe leveraging off the previous questions, Dave, any specific geographies within the US that you saw, I guess, I’d call it, outsized agent count growth or maybe geographies like around the high-end markets where you’re not seeing as much agent growth as you would like?

Our best regions in the US this year, Florida has grown 378 agents; California, 332; Texas, 262. And with that, lots of opportunity to continue to grow in those markets. So I think those are our best markets right now. We really don't see any markets that are not having any success. We've seen pretty much gains across every region.

Okay. Yesterday, in their call, one of your peers talked a little bit about just a more competitive market for agents, given the rise of some of the smaller technology-driven competitors and just a good market. Are you guys in your company-owned or the franchise regions – independent regions seeing any step-up in the competitive dynamic? Is it getting harder to retain your people?

It isn’t harder for us to retain our people. We’ve got such a strong brand and a pretty loyal group of people with us. The competition started increasing when RE/MAX started in the business 43 years ago and it's just gotten more and more competitive all along the way. It's a fairly inexpensive business with low barriers to entry for a small boutique firm to get started. It’s not a great deal of investment. So every time the market gets better, lots of smaller companies pop up. Every time the market goes the other way, they disappear. So we’re holding our own or actually doing very good on our agent growth and on our franchise sales, so we’re excited about this market.

Okay. And then final from me, as you think about the investments in technology or technology processes moving through the back half of this year into 2017, maybe if you could give us some idea on what your priorities are from a technology point of view. Is it agent facing or more back-office facing and how should we think about, I guess, how we see the impact of those technology investments on the P&L?

Hey, Brandon. It’s Karri. I’ll address the second part of your question and then turn it over to Adam. So with respect to project-related investments, we’re expecting about $3.5 million to $4 million this year, expect to be a low 50% margin company this year and for the foreseeable future. So from that perspective, that’s kind of what the P&L looks like. I’ll turn it over to Adam to talk through the priorities.

Good morning. We continue to invest in our technology as probably do most of the people in the industry. But we’re quite heavily focused on building the business efficiencies, making sure that the brokers can spend their time on the recruiting and retention. So their communication with us is constantly enhanced through the technology as well as the value that we deliver to the agents both through delivering the consumer to them, which is kind of the consumer portal type intention, as well as the training that we offer through RE/MAX University and the electronic deliverables that we have there. So they all play together really from those three components to enhance the value proposition that we continue to build upon.

Okay, great. And thanks a lot.

Your next question comes from the line of John Campbell from Stephens Inc. Please go ahead.

Hey, guys. Good morning. Just want to dig in a little bit more on the revenue guidance. So if we take the year-to-date results and then just take the midpoint of the guide, for 3Q, it looks like it implies 4Q down about 7%. That seems pretty conservative, especially considering that you guys have raised the guide for the agent growth for the year. Am I missing something there? I know you guys called out the lower franchise sales. So, I guess, would it be pretty safe to assume that franchise sales will be down pretty sharply in 4Q?

Yeah. So there’s couple of things to think about from that perspective. The agent count guidance that we raised is really driven primarily by agents outside of the US and Canada, which really contribute a nominal amount to our topline revenue growth. So agent count in the US is really right in line with our expectations of 4% to 4.5%. And that’s driving 85% of our revenue. So from that perspective, we feel really comfortable with the core business. 65% of our revenue is recurring in nature. The upside and downside as well is really driven by the non-recurring revenues, so franchise sales and broker fee primarily. So as you look at last year, we did have some significant franchise sales in our global operations that we don't expect to recur. So you’re right, expect franchise sales to be down a little bit this year, but still driving on an apples-to-apples basis without the brokerages, low to mid-level revenue growth for 2016.

Okay. That’s helpful. And then, Adam, I know you set a pretty difficult comp for those guys for last year. So congrats on that. But, Dave, can you maybe give us a little bit of an update on the independent region buy-out, the pipeline? Are you guys involved in any conversations as of now?

We’re always continuously talking to the independent regional owners. I think they’ve been encouraged because of being able to pay a bit higher ratios for New York and Alaska. And so, the conversation continues. At the time of the IPO, I said, I thought we would get two to three regions in our first five years. Alaska was very small. New York was significant. I still think there's two or three of them out there in the same time period. So we’re optimistic.

Okay, that’s helpful. And then just thinking about the stock, you guys do carry a pretty good multiple. Is it typically guys are looking for cash? Is that a retirement vehicle for most guys? Are they looking for cash? Is there ever a potential for you guys to mix in a little bit of cash or mix in a little bit of stock for those buy-outs?

In every one that we've negotiated, we've offered to let them stay in for parts of the business exchanging RE/MAX stock for whatever. And almost every case, the people are retiring and they want to diversify their income, they’re going to have to pay capital gains, and so nobody has taken us up on a stock swap of any kind. If it would come up, we would certainly entertain it.

Okay, great. Thanks, guys.

Your next question comes from the line of Ryan McKeveny from Zelman & Associates. Please go ahead.

Hi. Thank you. Nice quarter. With the strong agent count growth and the recruitment and retention you guys are showing, could you just talk about the types of agents that you’re taking on, whether it's directly from competitors, whether you're seeing an increase in newer and younger agents actually entering the business for the first time? And then, similarly, sort of the stereotypical person that you would be selling your new franchise to, is this someone who's experienced and potentially an agent of a different entity that wants to spin off on their own? Any thoughts there would be helpful. Thank you.

Ryan, our mix has stayed pretty consistent over the years. We certainly get a large percentage of our agents from competitors. They look at our brand, the power of the brand and the opportunity to make more deals. Our Momentum program that we started a couple of years ago is kind of interesting. The averages still says the average agent that joins us is about eight years experienced. However, in the Momentum program, about half of the agents coming in have less than a year’s experience, definitely millennials. And that's encouraging to us. We have – a very small part of our people are really young and not very well trained yet, and so our brand helps them a lot. But if you look at the other half, they average about 13 or 14 years’ experience. So the averages are staying the same. But we need to keep bringing the younger generation in because there are so many people in the real estate industry who are older.

Got it. And on the franchise sales side, is it a similar dynamic where many are very experienced agents?

Yes. We have traditionally sold franchises almost completely to startups – a manager of a competitor who wants to own their own business, a top producing agent or a team that says, ‘hey, we’d like to strike out on our own.’ And so, conversions haven't been much of an impact on us. Almost everything is a startup. It's really interesting for me. We do a franchise training program for all new franchisees for a week every month. And over the last two or three years, I've been surprised to see how diverse the buyers are and how the ages are trending down pretty dramatically.

Thanks. That’s really helpful. And my last question, on the franchise sales, understand this year will be down some from last year. But as you think about that longer-term and the opportunity in the US domestically, how do you think about that? Is there a limit at some point where it’s just incrementally more challenging to sell and grow new franchise offices or is there plenty of runway in your view?

There’s lots of runway. We have about 5%, 5.5% of the National Association of Realtors membership in the United States. In Canada, we are at 18%. And so, the Canadian market is going to be very slow. It’s just saturated. However, in the United States, we’re less than halfway to reaching our goals, which is 10% of the membership of NAR. In a market like Denver, we really can't sell anymore franchises. We have great market share. There’s just no room and we’d rather have all of our offices full and prosperous than sell 50 new franchises and have them all half-borne, nobody making any money. But most of our markets are certainly wide open to continue to sell franchises.

Okay. Thanks very much.

Your next question comes from the line of David Ridley-Lane from Bank of America Merrill Lynch. Please go ahead.

Sure. Curious, have you fully ramped up in terms of staff levels where you want to be in New York or do you see a little bit of incremental expense in the back half from that program?

David, we started ramping up when we started negotiating the contract at the end of last year. And so, we put a team together that was perfectly set up for them. And so, our expenses are not going to change dramatically. Bear in mind, though, as far as income, our income is not going to go up very quick because we sell franchise, they’re a startup, it takes them three or four months to open, and then they start recruiting agents one or two at a month. So we’ll make a handful of franchise sales this year. And then, those sales will impact agent growth next year and will start to sell even more franchises.

Got it. And then, I think I understand the full year agent count guidance. But the third quarter does look a little low. Is there something to be aware of or a reason why third quarter wouldn't follow kind of typical seasonal patterns?

When we look at agent count, we’re really doing kind of a bottoms-up approach and looking at all the factors that are impacting the business. So we feel confident that US is performing really consistent with our expectation. The real unknown is global just because of the strong performance that we’ve had outside of the US and Canada.

Sure. Okay, thank you very much.

[Operator Instructions] Your next question comes from the line of Bose George with KBW. Please go ahead.

Hey, guys. Good morning. It’s actually Chas on for Bose. I just want to ask on the broker fees revenue line. That was up 12% year-over-year. I think NAR transaction volume was up 8% year-over-year. So I was wondering, is that just your outperformance in that line or is that New York and Alaska coming through there at an increased rate or is it pointing to something else?

Yeah. So there’s a couple other things. New York and Alaska are contributing to that outperformance. And then there's one other small piece that’s impacting that. Just with respect to some of the revenue that previously was recorded in our brokerage line item, it’s now being reflected in broker fee. But we’re really pleased with how transactions and volumes have performed across the network, especially in certain markets like the Northeast, California and the Pacific Northwest. So broker fee provides continued upside to us and we saw the effect of that in the second quarter.

Okay. And then just kind of on your general US market share, it seems like some competitors might be dropping a little bit of share. Ex what you're trying to do in New York, does it seem like you're picking up share nationally and where might that be itself?

It's pretty universal across the United States. We try to measure our market share as percentages of agents of NAR. Do bear in mind that our agents outproduce the competition between 2 and 2.5, 3 to 1. And so, when we pick up 2,000 agents in the United States, that’s the equivalent of picking up 6,000 of the typical agents across the market. So that just gives us a continual upward trend and we just keep growing market share as far as agents go.

Okay. And then, I think before you had mentioned that you were expecting an increase in in the franchise fees per agent of about $5 this summer, is that still the case? Has that been put through?

Yeah, that is the case. So we did implement that fee increase on July 1. So we’ll see that potential impact just in the company-owned regions. That’s $5 per agent per month in the company-owned regions. So we’ll see that impact throughout the rest of the year impacting the US.

Right, okay. And I just want to ask one more on the franchisees, when you look at that compared to the US and Canada agents, the ratios, the dollars per US and Canada agents has gone up fairly nicely. Understand that New York and Alaska are in there now and rates [ph] are a little different. But I would've thought that there would be a little more flatness in that line item because of the Momentum program. Can you just talk about the puts and takes that might drive that franchising fees per agent?

Bear in mind that the Momentum program has now been in place for almost two years and we waived some fees for the agents on the Momentum for three months. Now, we’ve got a steady stream of people that are joining under the momentum program. So the initial hit that we took of the first group that joined is now just a reoccurring thing. So it doesn't ramp up. It doesn't continue to accelerate.

Okay. Makes sense. Thanks, guys.

And there are no further questions in the queue at this time. I turn the call back over to Andy Schulz.

Thank you, Dan. And thank all of you for joining us on the call today. This concludes our call. Have a great day.

This concludes today's conference call. You may now disconnect. Q –Name : Text A –Name :

Thank you. I'd like to turn the floor back to you for any final remarks. End of Q&A :

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