Good morning and welcome to the RE/MAX Holdings Second Quarter 2017 Earnings Conference Call and Webcast. My name is Lisa 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, Vice President of Investor Relations. Mr. Schulz, please go ahead.

Thank you, operator. Good morning, everyone and welcome to RE/MAX Holdings’ second quarter 2017 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 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 second quarter earnings press release, which is available on our website. Joining me today are our Co-CEO and Co-Founder, Dave Liniger; our Co-CEO, Adam Contos; and our Chief Financial Officer, Karri Callahan. We will conduct a Q&A session immediately following our prepared remarks. With that, I would like to turn the call over to RE/MAX Co-CEO, Dave Liniger. Dave?

Thank you, Andy and thanks to everyone for joining our call today. Turning to Slide 3, our momentum from the beginning of the year continued into the second quarter. Our total agent count increased nearly 6% year-over-year and we surpassed 115,000 agents worldwide. In the U.S. and Canada combined, we increased our agent count almost 3% compared to the second quarter of last year adding over 2,300 agents. In the 2017 REAL Trends 500 annual survey, RE/MAX agents were twice as productive on average compared to agents at other large brokerages. And our overall revenue increased more than 12% year-over-year as we continue to see the benefits from our 2016 regional acquisitions, the incremental contributions from Motto, and solid organic revenue growth from RE/MAX. Moving to Slide 4, for the third year in a row, RE/MAX has more agents and teams named America’s best real estate agents than any other brand according to REAL Trends. 1 out of every 5 agents included in this year’s survey is a member of our network. Our agents are incredibly dedicated to their clients and this ranking confirms that many of the industry’s best are affiliated with RE/MAX. Additionally, the National Association of Hispanic Real Estate Professionals annually recognizes the industry’s leading Hispanic real estate agents and brokers from across the country. For the third year in a row, the number of RE/MAX agents included in the ranking far surpassed the number of agents of any other national real estate brand. RE/MAX continues to attract and retain agents who are highly productive and those who aspire to be highly productive because of our multiple competitive advantages, including our unique agent-centric high commission model, the most productive agents of the national brand, number one market share and unmatched global footprint and the number one name…

Thanks, Dave. Good morning, everybody. Turning to Slide 6, according to the July edition of the RE/MAX National Housing Report, which is based on MLS data from 53 metro areas, monthly home sales have increased over 2016 in 4 of the last 6 months. As a result, we believe the U.S. housing market is on pace for a strong year. The prevailing theme remains the same. Sellers are benefiting from limited inventory and getting top dollar for their homes, while buyer demand remains strong and home sales continue to grow. Our National Housing Report shows actual June sales were 1.4% above last year and the National Association of Realtors is predicting solid continued growth in existing home sales for 2017. The combination of robust demand and record low inventory resulted in higher sales prices. The estimated median sales price of $245,000, up 7.5% over June of last year set our RE/MAX National Housing Report record. In fact, prices increased in 50 of the report’s 53 markets, with 10 metro areas increasing by double-digit percentages. Inventory remains constrained, although it improved slightly since May. The number of homes for sale in June 2017 was down 15.2% year-over-year. Based on the rate of home sales in June, the supply of inventory was 2.8 months compared to 3.2 months in June 2016. Additionally, 52 of the 53 metro areas surveyed reported a supply of less than 6 months illustrating a decidedly sellers market right now. Homes continue to sell at a brisk pace with the average days on market dropping to 47 compared to 54 days in June of last year. Days on market is the number of days when a home is first listed in an MLS and the sales contract is signed. Although the market favors sellers currently, buyers should not…

Thanks, Adam. Good morning, everyone. Turning to Slide 9, our agent centric model and unique 100% franchised business delivered strong financial results during the second quarter. Overall, second quarter 2017 revenue increased $5.4 million or 12.5% to $48.8 million. We continued to execute on each of the core business drivers that propel our organic revenue growth. Increasing our global agent network, expanding the Motto Mortgage pricing and franchise sale. Our focus on these levers led to organic growth of 5.2% over the prior year quarter. The remaining growth was driven by the acquired region demonstrating our ability to successfully acquire, integrate and grow far more independent region. The inherent leverage in our business model was again apparent this quarter as double digit revenue growth drove double digit earnings growth with margin expansion from the second quarter of last year. Earnings growth was driven by the acquired regions, agent count growth and fee increases partially offset by investment in Motto and a decrease in revenue from preferred marketing arrangements. Lastly, the positive cash flow characteristics of our business model are evident as we generated nearly $32 million in free cash flow during the first half of 2017, an increase of 27% over the comparable period of 2016. Turning to Slide 10, you will find a breakdown of our revenue stream. Recurring revenue which includes continuing franchise fees and annual dues accounted for 64.7% of total revenue in the second quarter of 2017, essentially the same as last year. Revenue from continuing franchise fees was $23.3 million, an increase of $3.4 million or 17.3% compared to second quarter 2016 primarily due to contributions from the acquired region, fee increases in the company owned regions and agent count growth. Revenue from annual dues was $8.3 million, up 3.4% over Q2 2016 due to…

Turning to Slide 16, execution on our core business drivers coupled with the robust housing market led to increasing agent count and double digit revenue growth in the quarter. Our ability to expand our network require independent regions and grow Motto Mortgage provides us with more levers of growth. We are focused on expanding the industry’s most productive network and strengthening the value proposition of our brands which will ultimately drive our business forward. With that operator, let’s open it up for questions.

[Operator Instructions] Our first question comes from the line of Ryan McKeveny from Zelman & Associates. Your line is open.

Hi. Thank you and good morning. Quick question on the domestic agent count, the growth of 2.6% this quarter when thinking about that that going forward in the context of total guidance which a lot of the growth is being driven outside of the U.S., how do you think about that in terms of potential reacceleration to back towards the 3%, 4% agent count growth, is it a function of things like inventory being so low that it’s maybe somewhat limiting the growth in agents in the industry, anything to give context on the kind of cause of the deceleration there and the outlook going forward? Thank you.

Good morning. This is Adam. It’s something obviously that we keep an eye on. We always look at agent count as something that’s going to happen between 3% and 4% or obviously closer to 3% and 4% now. But it does have a lot of factors it have to do with the marketplaces as well as the seasonality. So mid-year the agents are working hard, they are trying as much as they can and they are focused heavily on the market especially this market, it’s a challenging market at this point, but it is growing and we do see with the growth in the market, we see new people entering the market that’s the variable that we have to deal with. Having the experienced agents that we have, getting newer people trained you as they do – rotate through the marketplace as well as dealing with them on those sides of the transaction. So a lot variables, there is not a single that you would figure out when it comes to actively participating in the movement of agents. And – but it’s a daily task that our agents go through and we work with them every day and are excited about what we can do with them. So not concerned about it, but we certainly keep an eye on it and are working with our brokers everyday to meet the acceleration of the agent growth.

Great. Thanks for that, Adam. And one bigger picture topic, certainly the debate around technology in the industry and what brokers and different companies are providing to their agents are doing on their own in terms of their websites, lead generation things of that sort. You maybe just give us a refresher on what you guys have done, the investments you have made in technology just given such a intense focus from the industry on that topic? Thank you.

Hey, Ryan, this is Dave. We have always had an open attitude about the technology. It’s pretty hard for us to dictate to our agents and say as a company we want everybody to use iPhones. Our people are very independent and there is certainly a large group that would say not only I do that, I want to use Android. So, the main things we have done in the last year or two has been enhanced the remax.com site which has done extremely well. We are in the top 10 most visited real estate sites as a matter of fact we are the only traditional real estate company that’s even in the top 15. So right now, we have increased our back office program. We have invested heavily in that and the .com. However, we look at every technology offering that comes out to be quite honest with you. We have to rely on a lot of vendors and often the vendors are not quite as responsive to our needs as if we had something in-house. So we continue to investigate is there a possibility of doing better by doing things more of it in-house hosting our own .com sites instead of relying on somebody, no decision yet. We just keep studying the situation if we find a good idea we will certainly adopt it.

And Ryan, this is Karri. Just to add on to what Dave was talking about with respect to our recent investments in remax.com. We are really seeing some good return on that investment right now. If you look at 2016 compared to 2015 obviously keep in mind that one of the key comparative advantages for RE/MAX is the fact that we provide our agents with free leads and because of our investments in remax.com, we are actually seeing leads in 2016, up close to 10% from the prior year. And then also we have made a concerted effort in terms of a complete and comprehensive redesign of our agent websites, really designed to drive SEO and more leads to our agents and leads coming from those redesign agent sites. In 2016, we are also up over 200%. So, from a return on at the recent investments that Dave was talking about, we feel really good about the progress we have made there. And as Dave said, we continue to evaluate how we are going to evolve not only technology but the broader value proposition around marketing and training and just overall tools we provide to the network.

Great. That’s very helpful. Thanks so much.

Your next question comes from the line of John Campbell from Stephens Incorporated. Your line is open.

Hey, guys. Good morning.

Good morning.

Just looking for a little bit more color on Motto, how many of you guys signed up to date and how much of an incremental investment is that in the back half, is that the $1 million to $1.5 million you guys called out?

Yes. So, in terms of Motto, sales today as we mentioned in the scripted remarks was 43. We are really, really still excited about Motto. It continues to perform right in line with our expectations. As we said, we expect that the sales would be uneven and in the second quarter we were really focused on making sure that the current cohort of franchisees got up and operational and that’s exactly what happened. We have got about 20 of them up and running right now and we are really excited about it. From a financial perspective, in terms of the impact on the rest of 2017, we continue to believe that revenue is going to be in the low single-digit millions of dollars with a net investment on the expense side and all of that’s reflected in the Q3 and full year outlook.

Okay, that’s helpful. And then you guys called out ‘14 just I think 17 months kind of delay before you see the full ramp of revenue, is that a little bit extended from what you guys originally were calling for, I think it was maybe 12 months or so?

It’s really pretty consistent. I mean, it’s going to range a little bit, but it’s in the ballpark and pretty consistent.

Okay, that’s helpful. And then Karri I think it’s helpful as you guys kind of breakout the impact from the recently acquired regions, can you run back through that. I want to make sure I get that down right and then maybe give us any kind expectations as far as impact over the next couple of quarters whether you see that accelerating or decelerating?

Sure. I mean, in terms of if you look at the revenue growth for the second quarter, up about 12.5% close to 8% of that is from the acquired regions and a little over 5% of that is good strong organic growth just because of the multiple levers that we have from an organic growth perspective now around agent count growth as well as Motto. So, we have got about a full year for the big independent regions. They weren’t acquired until December of last year. And so we are going to see that trend materially continue through the back half of 2017.

Okay, great. And then last one for me just a follow-up to that, I mean, obviously you guys get the natural impact as you acquire that region over, I guess over a year, but just curious about kind of the reaccelerating the organic trends within those regions. So, obviously you guys will try to spruce up the recruiting a little bit and then mainly just curious about franchise sales. I know once you guys get into those regions you push hard to grow out the franchise sales as well?

Hey, it’s Adam. I will hop on that question. We are really excited about what we do with respect to the consistency we created in the regions that we acquire and how it does it the existing regions and that’s where we see a great deal of the benefit out of this obviously in addition to the cash flow there, but ultimately we have got an amazing franchise sales department that is operating at very high speed including a call center and outside sales force and things like that. And they did it. They do a great job. They are very strategic in their operation and that’s what might proceeds to the organic agent growth throughout those new regions. That moves it into the onboarding in the servicing, where we have really done a great job recently of reevaluating and making sure that those are operating at a high efficiency and are helping to grow those new offices throughout the region. So, it’s a full machine that kind of works together, but it’s something that we have proven out in franchising and works very well for us. So, we have accomplished those transitions in the newer regions with respect to implementing our systems and processes and now it’s getting that flywheel moving and keeping at a velocity at this point.

Yes. And just to add on to what Adam was talking about, this is Karri. We did see really strong initial franchise sales in the acquired regions. And then also keep in mind from an agent count perspective, the acquired regions are up about 3.5% from the end of the second quarter last year, but the vast majority of that agent count growth is coming in the first 6 months of 2017. So, that really demonstrates the ability to execute that Adam was just talking about.

Okay. And just one small follow-up, so you are running your franchise sales and I guess other franchise revenue at about $25 million, pretty flat over the last, if my model is right over the last 3 years, do you expect that to maybe accelerate a little bit into 2018 or is that $25 million a kind of good run-rate to think about?

Yes, I mean, you got to keep in mind, John, right, that, that is one of the variable components of our revenue structure. And so it is going to – it’s going to be variable. We didn’t talk about some headwinds in that line item in the fourth quarter of last year that we saw play out exactly as we thought again just because of the variability in that line item through the first 6 months of this year. So, obviously, the multiple levers that we have right now from an organic growth perspective with Motto, we hope over the long-term can help accelerate that line item, but that’s a lon-term play.

Okay, great. Thanks, guys.

Our next question comes from the line of Vikram Malhotra from Morgan Stanley. Your line is open.

So, just wanted to check on the overall U.S. agent growth where are we versus the prior peak both at NAR level and versus RE/MAX?

I think, we are well over 60,000 U.S. agents right now. And I believe at the height of our market 10 years ago, we were probably 25,000 more and so we have made very good progress in the last 4 years of starting to bridge that gap again.

Okay. And then just going back to some other regions that you have acquired over the last 5 years and can you maybe share some statistics it does where is RE/MAX as a percent of NAR in terms of penetration and then maybe some of the key markets like Texas for example, what’s the progress been in increasing that penetration for the regions you have acquired?

So I mean, I can give you a little bit of context on that, Vikram. So as you look at the recent acquisitions, New Jersey was about 6% NAR and we continue as I just mentioned to grow that region. The other recent regions had very strong penetration in both Kentucky and Tennessee, but we see a lot of good growth opportunity in Georgia as well. So, we have really focused on continuing our strategy and executing on it in terms of recruiting and retention and franchise sales and that’s what we focus on in terms of recruiting the most productive and the most professional agents in the industry. We always know that we are going to lag NAR a little bit and we are focused on executing our strategy and recruiting the right agents into the RE/MAX network that are going to take market share over time.

Okay. And then just last one, any update on maybe institutionalizing sort of an increase in either the fees or dues, I remember, we have had a couple of increases the last few years, but any thoughts on sort of institutionalizing I think like you have in Canada

Yes. So, one of the things that we always look at is using price power judiciously and as we rollout enhanced value to the network, so last year was significant investment from a technology perspective and as a result we did increase continuing franchise fees in the own regions, $5 per agent per month either this year we are increasing annual dues effective July 1, 2017 up to $410 per month. And again, that’s consistent with what we have said in the past in terms of our evaluation of looking at the tools and services that we provide to the network and using pricing power judiciously, but also strategically to move the business forward.

Okay, great. Thank you.

Our next question comes from the line of David Ridley-Lane from Bank of America/Merrill Lynch. Your line is open.

Sure. Within the franchise sales and other revenue line just so we can get an apple-to-apples comparison, what was the impact from the loss of the preferred marketing arrangement?

Yes. It’s roughly about $0.5 million in the quarter.

Okay. And I heard you that the benefit for the Motto franchise sales and recurring fees is tracking in line to get to this low single-digit millions for the full year, would the benefit from Motto also in the quarter be somewhere in the $0.5 million range?

I mean, again, it’s probably a little bit less than that again what I mentioned earlier is that we are really focused in the quarter in terms of the operational aspect of Motto and getting this initial cohort of franchisees up and running, but did have good strength in terms of franchise sales in the RE/MAX network as well.

Got it. And then have you seen an increase in competition for agents so far in 2017 and any thoughts about your own agent retention? Thank you.

It’s Adam. I mean, there is always a great deal of competition for agents, particularly in the accelerating markets and when there is a lot of attention paid to the industry particularly and we have seen a lot of that lately. So, yes, there is – it’s not easy to get agents to move companies, it’s something that brokers work on everyday and it’s a process of them according to the relationship with the agents and demonstrating the value and that’s what we focus on delivering to them constantly. So, it’s going to always be the key driver of our business is recruiting and retaining agents, selling franchises and organic growth. So, we focus daily on delivering the value to help the quality agents in the marketplace, see us as the long-term home for their business. So, it’s hard to quantify if it’s harder or easier, it’s always harder everyday is the way we look at it. And that’s what we work on everyday is to do deliver that value preposition.

Thank you very much.

Our next question comes from the line of Bose George from KBW. Your line is open.

Hey, good morning. All my questions have been answered, but just wanted to see if you wanted to give an opinion on the Redfin, just whether you think that has any impact on the market?

This is Dave. I don’t see any impact in the relatively short term period. In the industry over the last couple of years, there has been dozens and dozens of companies that are trying to break in, get a piece of the action or whatever it might be. We don’t really comment on our competitors. We try to build our own story. There is plenty of market out there for everybody. It’s up to us to make sure we keep our portion of it and grow our portion of it and other people fight over the rest.

Okay, it makes sense. Thanks. Appreciate it.

Our next question comes from the line of Brandon Dobell from William Blair. Your line is open.

Thanks. Good morning. Maybe if you could provide your thoughts on whether it’s Zillow’s Instant Offers or Redfin now, just that kind of Instant Offer, I wouldn’t call it appraised, but seems like a relatively new phenomenon at least for this cycle off in the opportunity for consumers to sell in a relatively short amount of time? How you guys think about that as an alternative product or a risk in opportunity and what your strategy might be around it?

Brandon, it’s Adam. As the markets change, we see different entrants coming to them and leave them systematically and this is a good market to be trying new ideas. There is a lot of money sitting there that is being pushed into our marketplace. So that’s an exciting indicator for us, because it shows that people have a lot of interest in real estate. It’s a good place to be operating. So, if you remember we buy the houses and getting off of the off-ramps on the highway and seeing those signs around throughout the different housing cycles. It’s quite similar to that. However, it’s a new take on those things. Zillow is doing a great job of testing that in the marketplace and in fact, they have generated some business for a lot of our agents and brokers by doing so by generating seller leads or seller listings. So, we are watching all of these different companies come and go in the marketplace. Again, it’s exciting to see people experimenting with different things and it’s something we want to try out, then we would venture into it, but at this point we are going to sit and watch and continue to grow our business and help our agents take advantage of those shifts in the marketplace.

Okay, thanks. And I guess one more would be as you think about if you have visibility into the mix of the type of business that the agents are doing or that your franchisees are doing on the listing side versus buy side already trends you can talk about the productivity year-on-year for the first half of the year. I was trying to get a better sense of how you view the agent’s performance or what you hear from the franchise operators about the mix of business, productivity etcetera, etcetera, will be helpful? Thank you.

This is Dave. The mix is staying pretty much the same thing with a base of hundred and some thousand agents around the world. They continue to do business on with identical away as a year ago, not much has changed. Some of our agents do more listings in sales and vice-versa, but no change in the mix at all, the biggest problem of course is multiple offers when a well-priced listing comes on the market, anything in the lower to mid range of properties is selling very fast to any place in the country. If you get into the luxury market, it is getting a little better, but those are the things we are staying on the market as they always have a year, 1.5 year or 2 years, so not much different. Productivity of our agent is right in line with what it was a year ago. Our agents are averaging about 17 or 18 transactions as a year, which is more than twice most of our other competitors, but no acceleration there. It would accelerate if we add more inventory. It would certainly accelerate if the builders would build more single-family houses in the lower priced ranges that is coming. They are increasing that volume, apartments are overbuilt in many places now. So, the builders are going back to looking at single-family, but not much of the change from a year ago.

Okay, thanks a lot. Appreciate it.

Our next question comes from the line of Anthony Paolone from JPMorgan. Your line is open.

Thanks. Good morning. I appreciate the comments about the RE/MAX system and your agent competitiveness in the marketplace, but if you think about just the top line at your franchisees and that driving the revenue ultimately back to you, how do you think about just commission rates and the potential of those maybe coming down over time and I think you guys have been around for a long time and it moved from like 6% to 5% in the 90s like anything to glean from that perhaps where that goes going forward?

This is Dave. I have watched the cycle of commission rates up and down for quite some time. And every time the market gets really hot, the competition from discounters or people who want to work for a little bit less, certainly [indiscernible]. There are a couple of factors that are interesting in this cycle versus say 5 years or 10 years ago and that is that the number for sale by owners has declined dramatically. If you go back 10 years ago for sale by owners were close to 18%, 19% of the market. And today that’s probably only 7% or so and that’s despite a lack of inventory you would think it will be easy for them to sell by owner, it isn’t. The real estate industry has gotten much more complex, the litigation, the disclosure, the inspections that are required. And so it’s more difficult than ever for sale by owner to succeed. So we are actually picking up that portion of the market we didn’t used to have, so on/off I think our market is going to stay about what it is for another 1 year or 2 years.

Okay. And can you remind us how RE/MAX franchisees you have at this time?

It’s right around 7,000 globally and about 3,700 domestically in the U.S.

Okay. And as we think about Motto is the addressable unit versus that kind of wind up with that 3,700 or is the scope of Motto franchise different than the scope of the typical RE/MAX franchise, just trying to understand the universe there?

Yes. It’s quite a bit different. For an office to produce enough transaction sites, they justify the investment and a good return on the investment, we feel that our office sites needs to be 15 to 20 agents or more. And so if you look at that that means it’s probably a third of our offices in the United States would be qualified to open a Motto franchise right now if they wanted to. But as the offices open and grow in 2 years or 3 years later they get the 15 or 20 agents. Those then also will be eligible. What’s happened is that our first people they got in are the risk takers. We have now got 20 of those offices open. And obviously, a lot of people standing by waiting to ask them their questions; is it working for you, is it profitable, how hard was it to do. And so one of the things we will be doing is some panels with these existing people that have already open at our summer managers conference here three weeks from now in San Francisco, we will again have opportunity with our biggest brokers who will meet in November which is 200 and 300 of our best brokers that get together annually for a private meeting. And then of course the convention at [indiscernible] we will be opening Motto up to competitors who have well-run companies. And so at that time I think we will start seeing outsiders buying into the system.

Okay. But then – so then to think about in terms of like your penetration rates thus far early days, that would take like about a third of 3,700 and you signed up 43 as you mentioned, so call 2% or something like that, is that kind of a fairway to think about it just within your system so far?

Yes, definitely.

Okay, thank you.

And there are no further questions at this time. Mr. Schulz I will turn the call back over to you.

Thank you, operator. And thanks for everyone for joining the call today. Have a good one.

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