Good morning, and welcome to the RE/MAX Holdings Preliminary Third Quarter, Fourth Quarter and Full Year 2017 Earnings Conference Call and Webcast. My name is Kim 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, sir.

Thank you, operator. Good morning, everyone. And welcome to RE/MAX Holdings Preliminary Third Quarter, Fourth Quarter and Full Year 2017 Earnings Conference Call. We are working to file our third quarter Form 10-Q and 2017 Form 10-K with the SEC as promptly as possible. Both documents will be available on our Investor Relations page at remax.com once filed. 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. Moving to Slide 2, please remember our prepared remarks and answers to your questions on today's call 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 include those related to agent count, franchise sales, revenue, operating expenses, financial guidance, housing market conditions, dividends, non-GAAP financial measures, as well as other statements regarding our strategic and operational plans and business models. And information concerning the outcome or implications of the special committee investigation and its impact on the company were on the company's historical financial statements and the effect of any remedial measures taken in response to the investigation. 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 our third and fourth quarter preliminary financial results press release which includes more detailed discussions about these forward-looking statements including factors that could cause results to differ materially from the forward-looking statements and the definitions and reconciliations of non-GAAP measures contained in the third and fourth quarter…

Thank you, Andy, and thanks to everyone for joining our call today. RE/MAX was created 45 years ago last month based on a simple premise, create an environment where productive agents could come together, motivate each other and see their results soar. Some in the industry claim we started a revolution. The concept seems so logical, a truly entrepreneurial agent-centric model. But it was groundbreaking at the time. Almost half a century later, that original business model is still going strong. All around the globe, over 119,000 RE/MAX agents in more than 100 countries and territories are delivering great outcomes to buyers and sellers. Now the rest of the real estate industry seems to be trying to catch up. Many competitors are now also focused on being agent-centric. And although, 2018 has been described as the year of the agent, our commitment to the best agents in real estate has been our focus since day one. This is what has made us so successful. We are #1 in the world. Nobody in the world sells more real estate than RE/MAX based on residential transaction size. Our network, our business model and our foundation have never been stronger, and I'm excited about the prospects for continuing our momentum. Next week, I'm headed to our R4 annual conference where agents and brokers gather to exchanged their ideas and discuss the latest developments in real estate. We will have robust attendance this year. Yet another sign that RE/MAX brand continues to strengthen every day. I could not be more excited to go to R4 this year. We have a brand people know. A growing global presence, a collection of unique competitive advantages and, most importantly, the most dynamic agents and brokers in the business. The path we are forging today grows from the…

Thanks, Adam. Good morning, everyone. We issued our preliminary third quarter, fourth quarter and full year 2017 results yesterday afternoon. So hopefully, everyone has had a chance to review. Instead of discussing our financials line by line, I'd like to draw your attention to a few key topics. All of our standard quarterly results slides are included in the earnings presentation available on our website. I'm also happy to answer any additional earnings questions you might have during our Q&A session. During Q3, we continued to execute on our core business drivers, increasing our global agent network, expanding Motto Mortgage and growing previously acquired independent regions, despite the financial headwinds resulting from the hurricanes last year. Turning to Slide 10, the third quarter 2017 hurricanes were extraordinary storms, which directly impacted thousands of our associates. We are inspired by how the entire RE/MAX network rallied to help those in need and their communities and we continue to support our impacted associates. Given the magnitude of destruction from these historic storms, we waived certain fees for those who were directly affected. The fee waivers were for a limited time based on individual facts and circumstances. Total fees waived reduced Q3 revenue and adjusted EBITDA by approximately $1.7 million and reduced Q3 adjusted EPS by an estimated $0.03 per diluted share. We continued these limited time fee waivers for a much smaller subset of impacted associates during the fourth quarter, resulting in a reduction of Q4 revenue and adjusted EBITDA of approximately $300,000. Turning to Slide 11. We announced in November, we acquired the master franchise rights for the Northern Illinois region, which includes Chicago, for $35.7 million. We funded the acquisition using cash on hand. With this acquisition, we added almost 2,300 agents in more than 100 offices into the company-owned…

Thanks, Karri. Turning to Slide 16. In conclusion the fundamentals of our business remain solid, and I believe, our foundation has never been stronger. Our competitive advantages are multiple and significant. We have an outstanding business model and management team, supporting the world's best agents and brokers. We remain confident in our strategy and long-term business plan. And we are excited about driving our business forward. With that, operator, let's open it up for questions.

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

Just a couple of quick ones. So on the domestic agent count growth, I just wanted to focus on that for a minute. We've seen deceleration there in the last few years, and it seems to have kind of picked up in terms of the decel in rate of growth in the back half of '17. So curious if you can just talk about the dynamics around the domestic agent comp growth, the recruiting environment, whether there is kind of macro factors at play or just the competitive dynamics of the brokerage industry. And then, ultimately within that guidance for 2018 of 5% to 6% total agent count growth, if you can give any thoughts around the magnitude of how the domestic agent count growth might fit into that guidance?

Good morning, Ryan and thanks for the kind words. Great to talk to you today. Yes, we -- obviously, that's one of the fundamentals of our business is agent growth. So we keep a close eye on it. And as you probably hear throughout the industry, competition for the agents is as fierce as ever, however, we continue to stay on top of and ramp up our value proposition that we are delivering to the field. You look at NAR agent growth, it was 5.5% year-over-year while we did 2.3% in U.S., which is typical of our system. We typically lag NAR when it comes to agent growth because we are very selective in the position in the market that we pursue in the agents. We want high productive, professional, experienced agents and that's what we continue to go after. With the turnover rate in the industry right now and the fierce competition that you're talking about, I think what you're going to see is, you're going to see consistent numbers from what we've been seeing recently. So we just finished a 44-city speaking tour, the Profit/Ability tour where we met with a great deal of our broker owners throughout North America and the sentiment for gaining agents is strong. There was a lot of excitement amongst the brokers and a lot of dynamics in the market that they have to be excited about. So I think we're confident that what we are -- what we've seen is what we're going to continue to see, and we continue to iterate on our business model to provide the highest quality product and service to our agents.

Thank you, that's helpful. And then one on the 2018 EBITDA guidance. So the margin guidance of 50.5% to 52.5%, that's, as you mentioned, likely to be down from the 53% in 2017, down from '16. So I know you mentioned, just the ongoing investments and such, but I was wondering if you can give a bit more color because generally speaking, we view RE/MAX as having somewhat fixed cost structure for the most part so I think generally people expect some leverage in that model. So can you maybe call out the moving pieces there impacting that margin to potentially be lower in '18 versus '17?

Good morning, Ryan, it's Karri. No, it's a great question. One thing to keep in mind is that about 50% of our cost structure is in personnel. And as Adam mentioned in the scripted remarks, there are some initiatives that will drive personnel higher this year. We are really focused on innovation, technology and making sure that we enhance the overall value proposition and the new strategy function that's been established under Pete Crowe's leadership is going to result in some additional investment in personnel. And then we are also continuing to focus on technology and tools that we're offering to the network, really focused on automation and leveraging digital and social capabilities for our network, which will result in some additional investment as well as just some overall foundational technology investment. So we're really looking to leverage the other financial characteristics of the business -- free cash flow -- to put that back into the business. But do expect to see a little bit of reinvestment to pull the margins down, just a little bit. But again, focused on long-term growth.

And your next question comes from the line of Vikram Malhotra with Morgan Stanley.

Just wanted to clarify now that sort of the roles are separate. I know you can't give -- I'm not asking for more information on the specifics of the investigation. Just going forward, will Dave be involved in sort of -- say, negotiations for buying back regions or the day-to-day operations. Maybe give us a bit color what his role will be?

Good morning, Vikram, and thank you. Likewise, I look forward to seeing you in person one of these days. Dave has stepped back from day-to-day operations. The executive team that we have in place has been heavily involved in day-to-day operations for quite some time, as it is. And with respect to the continued future-looking discussions of acquisitions, things like that, the executive team has been a primary driver in those to begin with. Dave built those relationships over the years, however, we've continue those relationships quite well and have very good relationships with the different independent regional owners. So the dynamics of that process, I don't believe will change. Dave will be handling some major events, some speaking engagements, things like that. But we're running the show here, myself and the executive team, and we're quite confident in the direction of the organization, as a result.

Okay. And then just on Motto. Seems like you've have had pretty good success. Can you maybe just -- are all the 70 franchises, are they all with existing RE/MAX agents or owners? And then, can you maybe just talk about how you see this sort of trending over the next 12 months or so?

I'm going to toss this over to the brand President of Motto, Ward Morrison. So Ward, do you want to take that?

Yes, Vikram, great question. The majority are still within the RE/MAX family but we have opened it up, as we talked about, and are getting interest from a few other different customer types that we're excited about. So although that number still remains small compared to the RE/MAX's, we're excited to open up our customer base to varying types.

So just in that 70 there are a very modest number that are owned by non-RE/MAX?

Yes, that is correct.

Got it. And just to clarify, lastly, it's still a fixed fee per office, right? That's the case for both RE/MAX run Motto and non-RE/MAX's.

Yes, Vikram,, that is correct. It's a time-based fixed-fee model so as they move along our franchise agreement life cycle, increase over time and the reach the maximum amount and then stay at that level.

And your next question comes from the line of John Campbell with Stephens Inc.

Congrats on the conclusion of the investigation. I know it's something you guys worked hard on. You guys have -- the $2 million or so of franchisee waivers obviously, you'll get that uplift this year. And then, you've got the $5 million from the Northern Illinois buyout. And Karri, I think you said $3 million drag from the accounting changes. But if you guys do sell kind of the same level of Motto franchises that you expect to this year that probably offsets the $3 million. But if I back all of that out of guidance, I'm getting to kind of core business organic growth of about 2%. Does that -- so first, does that sound about right, is that math right? And then secondly, if you guys maybe can talk about to the assumptions of home sales trends this year, and what's that -- what's in guidance?

Sure. So John, just thinking through that a little bit. On an organic basis, we've said historically that we expect to be kind of in the mid-single-digits from an organic growth perspective. We think that the revenue recognition changes are going to adversely impact that by about 100 basis points. So we're going to be a little bit low than that -- lower than that but not as low as what your model is suggesting. And then with respect to just overall kind of housing trends and how we see that? I mean we're still very -- we are still confident in terms of just overall housing trends. As Adam mentioned in his scripted remarks, we're still seeing strong demand with some constraints of buy. But overall, our distributed franchise model looking at 3,700 offices spread out across the U.S. we think mitigates some of that risk. And all of that has been really baked into what we have come out with from a top line guidance perspective.

Okay, I guess just kind to kind of segue way off of that. So January was down a little bit, it looked like, year-over-year as far as units. Are you expecting unit growth within guidance for the full year?

Yes. So we are -- if you looked at 2017 versus 2016 and just terms of transactions, we trended pretty consistent with our U.S. agent count growth in the U.S. And so that's -- we're expecting somewhat similar trends as we go into 2018.

Okay, and then on the New York region. Can you just provide any kind of updates there. How many new franchises have you sold since you took over? And then maybe how much faster you're growing agents and kind of where we are as far as penetration? I know you guys kind of target that 5% or so of state agents?

Yes, good morning, it's Adam. We're, we're excited about New York. It seems to be going quite well. We've seen about 10% agent growth in 10 franchise sales there. The region has gained traction. And the expectation is about 10 per -- franchises per year in growth in that region. Keep in mind, it's a very good opportunity for us, but it's not a huge region, if you will. But we're seeing, what we think to be, quite a successful operation occurring there and that's what we expect to continue.

Yes, just building on top of what Adam was talking about. I think the other thing that's important to note with New York as well as even other independent regions that we acquired in '16 is that they are really performing really consistent to our expectation. And so we're really excited about kind of that above average organic growth that New York, we think, will bring over the long term. And everything is performing very much in line with what we thought.

And your next question comes from the line of Jason Deleeuw with Piper Jaffray.

On the guidance with the agent growth, it's implied to slow as the year goes on. Just any thoughts or details around that, just kind of in the recruitment strategy that you have. Just looking for a little bit more detail on that.

First of all, good morning, Jason, and thank you. I don't necessarily know that we're going to see slowing agent growth throughout the year. We are throughout the U.S. and as Karri said, in so many different markets that different markets have seasonalities and changes and things like that. But consistently across U.S., we don't anticipate slowing agent growth throughout the year. The key focus of our organization is expanding our franchise network and growing agents. And of course, reinvesting in the business to continue to provide value to those franchisees and agents. So we're going to continue to iterate on our value proposition, especially with the new strategy and product position that we've created with Executive Vice President, Pete Crowe. As well as, we -- since the last call, we rolled our brand refresh. So there is a great deal of excitement in the marketplace, brokers and agents have a lot to get excited about. And people want something fresh and new and that's what we're providing to them, even with our 45-year old iconic position in the marketplace. But we operate from a position of strength in this and we still feel, absolutely, that we are the best place for the producing agents to be.

Got it. And then just -- a question we get a lot is, how important is the technology to agent recruitment? I mean, generally agents are focused on the economics, but technology is becoming a bigger part of the process. So how important is that in recruitment from -- and is there any like a distinction between the CRM technology and lead generation solutions?

It's something we talk about and strategize on every day. We are highly invested in the productivity of our agents as well as the tools that help boost that productivity, and it's something we're very excited about. We look at auto -- look at technology as providing a few things. One is, it provides exposure to the agents and the brand and their brand in the marketplace. And another thing it does is, it automates a lot of that process now. So we've been involved quite heavily with a couple of different initiatives, one with BombBomb, with a product called, Social Prompt, that we rolled out exclusively to our network this past fall, which allows automated production and distribution throughout the social channels of different product for those agents that they can modify on the fly and get out the door from their phones. We also have heavy involvement with AdWorks in increasing our agents' exposure, gathering that attention online digitally. So we know that those things help build our agent's business and provide greater exposure to the customer base. So we are super excited about that. We also constantly look at other initiatives and are excited about continuing to explore and rollout those initiatives throughout this year. Keep in mind also, we do still have the #1 real estate website when it comes to franchisors. The franchise brands, we had over 90 million people go to our website this past year and we are super excited about that. So technology is a big piece. But fundamentally, the business is still the business. It's a people business, it's a complicated process to buy and sell a house. And that demands the attention of a highly skilled operator to help the home buyer or seller to accomplish that effectively. We still see multiple offers across-the-board in the markets throughout the -- really around the world -- but predominantly in the U.S. and Canada. And that really means that you have to have a good person behind you in that process. So fundamentals of the business haven't drastically changed but the technology helps them execute on those nets, that's the balance that we keep.

And your next question comes from the line of David Ridley-Lane with Bank of America Merrill Lynch.

Wanted to ask on Canada, so that market had new mortgage regulations, which went into effect -- started this year -- poised to be a further headwind in the market. I did note that your Canadian agent counts were down slightly on a sequential basis in the fourth quarter. Have you risk-adjusted your 2018 guidance for the potential of an accelerated downturn in Canada?

Good morning, David, this is Karri. If you look at Canada, it continues to be a very strong point for the RE/MAX network. We do have about 70% of the equivalent of the National Association of Realtors up in Canada. And we've always consistently said that we think that agent count growth is going to be around flat to slightly up. And that's really what is baked into our guidance for next year. We continue to see actually pretty strong volume there. And we're watching that market closely. But continue to believe that because of the overall strength of the brand in Canada that the assumptions are reasonable.

And then on Motto franchises, can you give us the revenue contribution for 2017 if you have that. And then on Motto's profitability, should Motto get to breakeven in 2018 and maybe have a little profit as well?

Yes, thanks, good morning. So in terms of Motto from a financial perspective. It really operated in 2017, like we thought. So low single digits of millions of dollars on the revenue line and in that investment. We do expect that 2018 will also be a net investment for Motto. That's partially driven by some headwinds from the revenue recognition guidelines. But regardless, we continue to be really excited about Motto. Ward and his team have done a fantastic job getting to 70-plus sales now and continue to expect comparable sales growth in 2018.

And then just quick numbers question. The pro forma tax rate you're using for adjusted net income, that was 38%. What's -- what is the new adjusted tax rate?

Yes, it should be closer to about 25%.

And your next question comes from the line of Bradley Berning with Craig-Hallum Capital.

On the EBITDA margin, one follow-up question on that. It's look like in 1Q, there is a greater year-over-year comparison challenge there than the overall year number. So can you talk through what are the moving parts in 1Q that kind of differ for the year? Are there any additional hiring timing that happens to be in 1Q or are there any comp or professional fees regarding the investigation issues that get into 1Q. Can you just kind of walk through the moving parts of that first?

Sure, absolutely. So the biggest driver, actually, is a severance charge that we expect to record of about $1.9 million. So if you strip that out, you should get back to relatively consistent margins in terms of what we've seen on a historical basis in Q1.

Yes, that makes more sense, understood. And then, on the M&A side of the equation for the other regions, can you talk about appetite? Can you just help us understand kind of that the pipeline of activity over time, what is the interest level?

Good morning, Brad, it's Adam. That's something, obviously, that we're always interested in, the reacquisition of the independent regions. Currently there are 9 regions, about 28,000 agents that would be available in the marketplace. It is a very opportunistic or lumpy approach, I guess, if you will, that we look at, in that. We maintain our relationships with those regional owners quite regularly. We are, obviously, quite interested in their regional growth, because it is part of our system to begin with. In all reality, it's up to the timing on the whole thing. Are they ready? Is the time right for them to come to the table with us? But we're always available and talking to them. Do we have timing on any of that? No, we don't. It happens as it happens. We've had great success over the past several years with seeing them come to the table and being able to execute on those. So we'll continue to look for future involvement with them at the table when it comes to the M&A discussions and we are always available to talk.

One quick follow-up on that is, do you see that those parties are more interested in generational transitions or do you think that they are more interested in the sales route over the longer term not necessarily asking for near-term perspective. So just kind of curious as to how do you think most of those regions feel about those kind of 2 dynamics?

I think it's a combination. It just depends on the personality and the infrastructure that they've built around those things. It's some yes, some, no type response. Whether or not that affects their desire to come to the table to discuss with us is not to be seen at this point. Again, it's opportunistic. It's on their part as well as relational on our part. Not something you can really forecast.

Yes, understood. And then real quickly on Motto. Just -- help us think through the dynamics of the timing of the revenue ramp on these, without adding new growth, per se, what is the revenue ramp from '17 to '18 to '19, just on the existing stuff that you've already sold. Just to help us all think about the magnitude of the contribution, how that changes as these -- not asking you for a sales forecast on new sales, just thinking about how the revenue works on the existing franchises you've already sold?

Yes, so this is Karri. I think if you think about 2017, we had low single-digit in terms of millions of revenue. As you look forward, 2018, kind of low-to mid-single-digit. And then in outlier years getting more into the mid-single digits in terms of the revenue contribution.

[Operator Instructions] And your next question comes from the line of Bose George with KBW.

This is Tommy on for Bose. Just wanted to get you guys take on how you guys were able to implement sort of the regular agent fee increases that you guys do on a regular basis, just given that housing markets are pretty tight now, even though you might expect sales to be up next year. Just if you're getting sort of any pushback from getting those through to agents?

Good morning, Tommy, it's Adam. It's something that we really take a hard look at before we implement. Obviously, we give quite a bit of a lead time when it comes to doing that. And frankly, any agent fee increases that we introduce to the marketplace are very nominal to begin with, we talked about $2.50 a month or something like that per agent. And that is just a portion of -- a very small portion -- of what an agent's monthly expenses boiled down to be in operating their business. When you look at everything that goes out the door, $2.50 is less than a cup of coffee on a monthly basis. So in all reality, it's -- if you provide and continue to increase the customer experience which is the experience that we provide to the agents and brokers -- and increase the value -- I think that people are okay with nominal adjustments. If they can reinsert that into their business and see growth in their business as a result. And that's our goal, is anytime we do something like that, we want to make sure that we've provided far more value to our customer base in doing so. Generally, we do -- some people say, okay, why are you doing this? In all reality, once we discuss it or if anybody even does question it, you know they realize, okay, you are providing me higher value and this is a very teeny, tiny function of my business expenses. So we're okay with it. We feel it helps us to run our business better and provide more value to them and that it drastically outweighs that nominal increase.

Got it. And separately, it looks like a lot of the year-over-year growth that you guys have in agent count is coming from the international, outside of the U.S. and Canada. Could you just remind us if there is any sort of difference in the fee structure there or the kind of expected revenue that you guys get from those agents?

Yes, no, it's a great question. So In terms of agent count outside of the U.S. and Canada, on a per agent basis, in terms of revenue, they really contribute about $200 per agent. That compares to in our own region in the U.S. and Canada about $2,500 per agent. So there is a difference in terms of revenue. But as Adam talked about earlier, the power of the brand and the global presence of the brand is really important and we believe with kind of just overall trends in globalization, expanding that global footprint is a key competitive advantage for the company and for the brand around the world.

Got you. If kind of the trend continues where that almost mid-teen percentage year-over-year, then it could become a bigger part of the pie eventually.

Eventually. Yes, it's absolutely a long-term, strategic opportunity for us. And it's something that we look at on a regular basis.

And there are no further questions at this time. I'll turn the call back over to the presenters for closing remarks.

Thank you, Kim, and thanks to all for joining us on the call today. That concludes our prepared remarks. Have a great day.

Ladies and gentlemen, this concludes today's conference call and you may now disconnect.