Good morning, and welcome to the RE/MAX Holdings Third Quarter 2018 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, Vice President of Investor Relations. Mr. Schulz?

Thank you, Operator. Good morning, everyone, and welcome to the RE/MAX Holdings Third Quarter 2018 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. Our prepared remarks and answers to your questions on today's call may contain forward-looking statements. Forward-looking statements include those related to agent count, franchise sales, financial measures and guidance, brand expansion, competition, technology, housing market conditions, dividends, strategic and operational plans, and business models. Forward-looking statements represent management's current estimates. RE/MAX assumes no obligation to update any forward-looking statements in the future. Forward-looking statements address matters that are subject to risks and uncertainties that may cause actual results to differ materially from those projected in forward-looking statements. These are discussed in our third quarter financial results press release and other SEC filings. Also, we will refer to certain non-GAAP measures on today's call. Please see the definitions and reconciliations of non-GAAP measures contained in our third quarter financial results press release, which is available on our website. Joining me on our call today are Adam Contos, our Chief Executive Officer; and Karri Callahan, our Chief Financial Officer. Ward Morrison, President of Motto Mortgage will join us for the Q&A. With that, I'd like to turn the call over to RE/MAX Holdings' CEO, Adam Contos. Adam?

Thank you, Andy. And thanks to everyone for joining our call today. Looking at Slide 3. Our business continued to grow during the third quarter despite the larger-than-expected slowdown in home sales we witnessed in September. We believe we are experiencing a rebalancing market which will likely be a headwind near term but should prove to be a healthy shift over the long run. Consumers are resetting expectations and the curve back to equilibrium is not always smooth. Fortunately for us, we have an amazing brand, a stable business model, and most importantly experienced highly productive agents, many of whom have seen and performed well in changing markets like this. They are thinking positively and looking to act opportunistically, more on that in a moment. Here are some highlights of the quarter. Total agent count, one of our key operating metrics grew more than 5% as we added over 6,300 agents year-over-year and reached a new all-time high. RE/MAX ranked in the top 10 of all franchise brands for the third consecutive year and was the leading real estate franchise for the 10th straight year in the 2018 Franchise Times top 200+ survey. Motto expansion continued, highlighted by the recent sale of over 100th franchise. And reaching that milestone in the first 2 years is a rarity for any new franchise brand. Our Adjusted EPS increased 38%, driven by strong top line growth, favorable timing of expenditures and the 2017 U.S. tax reform. And we continue to make strong progress, building up the booj platform which will reshape the future of real estate technology at RE/MAX. Turning to Slide 4. The headline for the RE/MAX National Housing Report for September 2018 accurately summed up the current housing story. Home sales tumbled 12% as prices remained at record levels. Rising home…

Thank you, Adam. Good morning everyone. Overall, we had a solid third quarter despite the slowdown in September transactions. As you know, our model is largely dependent upon dues and fees tied to overall agent count. Although we are not immune to macro or micro pressures, we do believe we are more insulated than most. Only about 20% to 25% of our revenue is dependent upon the number of transactions. Our third quarter revenue grew almost 12%, driven by contributions from our recent acquisitions and organic growth. Adjusted EBITDA was up almost 14% compared to the prior year due to strong top line growth and favorable timing of expenses as we continue to invest in Motto's growth and our strategic RE/MAX technology initiatives. We also generated a healthy amount of free cash flow, converting almost 60% of adjusted EBITDA to free cash flow on a trailing 12-month basis. Moving to Slide 9. Revenue increased 11.8% to $54.9 million in the third quarter. Acquisitions increased revenue by over 6%. Organic growth added another 6%, partially offset by a 0.3% decline from foreign currency movements. The company waived approximately $1.7 million in fees for hurricane-impacted associates during the third quarter of 2017. Excluding the impact of these fee waivers, organic revenue growth was 2.5% and driven primarily by agent count increases, Motto expansion and rising average home prices. Our Q3 results highlighted the variety of contributors to top line performance, including agent count growth, rising average home prices, Motto expansion, pricing and the acquisitions of booj and Northern Illinois. Looking at Slide 10. Selling, operating and administrative expenses were $27.5 million for the third quarter of 2018, down $4.4 million or almost 14% over the prior-year quarter. Last year's third quarter expenses included a $3.7 million loss related to subleasing a portion…

Thanks, Karri. Turning the Slide 12. In conclusion, we had a solid third quarter, highlighted by double-digit revenue and adjusted EPS growth, our sale of our 100 Motto franchise and contributions from the strategic acquisitions of booj and Northern Illinois. RE/MAX Holdings remains well-positioned to grow over the long term and our brokerage and agents are motivated to take advantage of the changing market conditions. With that operator, let's open it up for questions.

[Operator Instructions]. Your first question comes from the line of Bose George with KBW.

This is Tommy on for Bose. We saw the U.S. agent count actually contract a bit in the third quarter. Did you see any acceleration in that contraction as we kind of went into September where the close transactions really tumbled? And can you comment on what you've seen in October so far?

Yes, hey, good morning, Tommy, it's Karri. So we have seen some acceleration into -- into September. I think there's a couple things to know with regards to agent count. As Adam mentioned, we are seeing some competitive pressures and then just with the -- with the market dynamics changing and just the velocity of participants entering into the market. Our net debt -- net adds are -- came down a little bit more in September than what we've seen with a slight increase in terminations. With that said, we've got to remember that RE/MAX isn't for everyone. A RE/MAX agent can be successful anywhere, but not all agents can work at RE/MAX. So even though we don't really control the macro and what's going on from a macro perspective, what we're hearing from our network is that the network is really leaning in. Given the experience and quality attributes of our network, we think that they're well-positioned for the changing market environment.

Got it. The margins held in better than I expected in the third quarter, at around 53.7%. And actually that was an increase year-over-year. But from the guidance that you guys put out in -- for the fourth quarter, it looks like you're expecting a bit of a contraction. So can you say what sort of changed there between the third quarter and the fourth quarter that enabled you to kind of expand margins? And it looks like they're coming back down.

Yes, so there is a couple of things. I think, as we look at September in terms of transactions. We did see a trend in terms of a slowdown in transactions, actually starting in August. The magnitude that we saw however in September was a little -- was definitely larger than we anticipated. And albeit the information for October is preliminary, that trend is continuing and putting pressure on broker fee in the -- in October and into the fourth quarter. And then also in terms of the investments that we're making in technology from a strategic perspective, still on track in terms of everything that we're doing with booj. However, the ramp up in Q3 was just a little bit slower than we anticipated and we anticipate seeing some of that come through into Q4. So those are the two biggest components.

Okay. And then last one for me, a bit of a big picture one. With a lot of capital coming into the space and the value of your agent base, can you comment on if you'd be open to selling the company if the right offer comes along?

Good morning, Tommy, it's Adam. That's not something we'll comment on at this time. We love our company, love our agents and we're going to continue to drive forward and continue to be the best real estate company in the world. So not something we're willing to comment on at this time.

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

I was wondering if you could parse out some of the impacts on the agent growth, kind of the net new adds versus attrition, is it mostly a function, the slowing agent count growth, is that mostly a function of the net new adds. I was just hoping if you could give a little color there?

Yes. Hey, good morning, Jason, it's Karri. So in terms of the puts and takes, we are seeing a slowing a little bit in terms of the new add. But if we look kind of quarter-over-quarter, our churn is actually down. So the terminations are up a little bit, net adds are down. But overall, net-net, the overall churn is actually a little bit better this year in Q3 than it was last year.

Good, that's good to hear. And then, I was just wondering if we could get kind of a higher level just strategic update. I mean, there's a lot of volatility going on in the real estate industry from a volume standpoint and with all the capital that's come in. But your business model is steady and you're continuing to grow. So there's always opportunity in that volatility. I know you have the booj effort and -- but is there anything else strategically that you're thinking about that you could be opportunistic on?

Good morning, Jason, it's Adam. You're right. There is a lot of opportunity in the marketplace. And I just spent the past 6 weeks traveling around North America speaking with a lot of our brokers about that. The marketplace is busy. There's a lot of noise. There are a lot of people that have entered the marketplace because it is opportunistic. That's evidence that we're in the right place. So we look at it as -- we're doing the right thing. We've been continuing to heavily reinvest in the company, particularly with booj, which we're really excited about, as well as with Motto. We've made a lot of strides, as I talked about in the earlier part of the call. And we're super excited about Motto, we're super excited about booj, and I think our network is as well. So right now what we do with all the volatility is we flex the strength of our network. And the top-producing agents continue to see that this is the place to be and in fact I've been communicating with one that just joined us for all of these same reasons recently. So it's a time for those to focus and to really hone in on the things that matter in this space. And that's when you see the separation in the marketplace between the high-producing and professional organizations and those that dabble in the business.

Yes, and I think the only thing that I would add on to what Adam -- Adam was saying is just we're always looking at how we improve the value proposition of what we're offering to our network. And that could be anything from improving -- helping our franchisees from a profitability and an efficiency perspective and anything that would potentially be complementary to booj in terms of just improving the efficiency, the productivity and the effectiveness of our agent base as well.

Your next question comes from the line of Thomas Maguire with Zelman & Associates.

We touched on this a little bit. Just understanding the macro stat and top line is going to be what it's going to be, I guess how should we think about the ability to manage the expense structure kind of going forward? Now, you're still investing today. You highlighted some initiatives including booj but just 2019 and even beyond that if we didn't see acceleration of growth, do you pull back on these investments you're making in technology? Or is it just something that happens kind of regardless of the environment?

Yes, I know. It's a great question. This is Karri. I mean, so in terms of obviously 2019, we're in the midst of our annual planning cycle and we'll definitely have more information on that in February. With regards to the top line, I think there's a couple of things to keep in mind. We do have a couple of different levers that we can pull in terms of -- in terms of driving the top line, not just agent count or anything that's impacting us from a macro perspective but Motto as well. And as we look at 2019 and beyond, we're really starting to scale Motto. And the net investment that we've seen over the last couple of years should come down which will free up dollars to invest elsewhere in terms of helping to continue to deliver on that value proposition. With that said, we're also always looking at how we optimize the current cost structure to make sure that we are freeing up the capital, managing the profit line but continuing to invest. So obviously, as we look to the future, we're cautiously optimistic with the rollout of booj. There is a lot of excitement in the network on that. Motto continues to perform well and in line with our expectations. And then whatever is going to happen from a macro perspective is going to happen. But if we can get some acceleration modestly from transactions, continued home price growth, we think we'll be well-positioned.

Great. Thanks. And then just kind of drilling in the vein of technology here. In the past you've talked about leads you're generating for you agents from remax.com. And if I look back a couple of years ago, those are -- at least those are growing pretty nicely. Just can you update us on this initiative? And just how do you think about the ROI from the website investments you're making and just for the end-user kind of the ROI for the agents or what benefit they're seeing on that?

We continue to iterate and make course adjustments on how leads are generated, how we end up. A big part of leads right now is kind of how you distribute, how you cultivate those and how you get really the agents to functionally work those leads. So we continue to iterate on that. We're proud of our web presence. Over the past 12, 14 months we've gone from number 11 to number 6 on the Internet, which is a huge accomplishment. That in and of itself obviously creates a great deal of volume, good lead opportunities as well as lead quality as you continue to increase there. So we continue to work in the laboratory to maximize those opportunities, which is one of the things that we're really excited about with booj is the lead processing, the CRM and lead management that occurs that we're -- we've been working with our agents and brokers on further development for. So it's going in a good direction. We're happy with it. But we're really, really excited about what we have to offer with the booj platform when it comes to that.

Your next question comes from the line of Stephen Sheldon with William Blair.

So it sounds like the lower revenue guidance is probably weakness in broker fees. You've seen good low double-digit growth there over the last 3 quarters. I get there is even more significant headwinds in terms of industry volumes. But industry volumes have been pretty weak overall this year. So I guess any color on why that's catching up with you more now in the fourth quarter? Are even the more productive agents on your platform starting to see their, I guess, productivity taper some?

Yes, good morning, Stephen, it's Karri. So I mean right now we're just really trying to be pragmatic based on what we have seen in terms of preliminary October -- excuse me, October results in terms of -- in terms of transactions. And so, we're not really seeing a whole lot of diversions between the cohorts of our agent base. But just given the overall macro trends, I mean we really like our, the agent-centric model. And we think that it does help provide differentiation for us. However, we're just not immune to overall macro trend. And it's just uneven. From a overall macro perspective we think that we're moving more towards a state of equilibrium which we think is good for housing long term. But right now it's going to be a little bit choppy. And based on the feedback we're hearing from our network and what we have seen in the data, it's just our best estimate of what we think the fourth quarter is going to look like.

Got it. That's helpful. And then on the booj platform rollout, that sounds like that's on schedule for this upcoming summer and that you're -- you're getting some good feedback. But how should we think about the potential financial impact of that rollout, especially in the context of the 2019 key selling season? Do you think the rollout will happen soon enough where it can be utilized and help with productivity, recruiting and retention efforts in 2019? Or are you expecting that to have I guess more of an impact in 2020?

Hi, it's Adam. With respect to the excitement, the ability to recruit and retain agents as well as help agents more efficiently and effectively manage their business with the booj platform, we do think that that's going to have a good impact, positive impact on agent growth, on our ability for our brokers to demonstrate and attract with their value proposition. The agents have been so heavily inundated with technology options and overwhelmed with just the noise in the marketplace that it's nice to provide clarity to them and single-point directional tactics that they can utilize, and that's ultimately what the booj platform is about, is to keep people from having to log into so many different technology platforms and help them be more efficient in their business. We know the agents want to do more deals in less time, that's what agents want and that's our goal, is to help them with that. As well as when we partner with brokers our goal is to help them to manage their cost structure better. And if we can help them by providing more of those technology pieces that they pay for, so be it. So we think it's going to be mutually beneficial to our marketplace. And I'll let Karri jump in on any sort of -- no, no, not going to jump in. But there's really not any impact on the cost structure for us simply because we currently do provide technology pieces right now that come out of what we've allocated to technology and that is unlikely to change.

So I guess the second part of that still, do you think that could have an impact on financial results in 2019? Or do you think that's more of a 2020 impact?

Yes, I mean potentially. Yes, I mean as we look at acceleration of agent count and as we look at ability to really drive top line, there's absolutely potential and we're excited. And the network is very much leaning into booj. As Adam mentioned in the scripted remarks, our annual broker conference in August, all of the booj sessions were packed, there's a lot of buzz. We've got close to 2,000 agents who have raised their hands to be part of the alpha program. So there's a lot of excitement around it. Remains to be seen a little bit. And we'll have -- we'll have more of a visibility in 2019 here in the coming months.

I'll add just one thing also that I watched a video the other day of an agent that -- I mean a high-producing agent, team leader that joined RE/MAX. And one of the reasons why this agent joined, part of it was because of booj. A great deal was the brand, affiliation with the #1 global real estate company. But booj was mentioned in there like as the, I think the third thing that this agent was super proud of. So it is showing some magnetism and some excitement. And ultimately, that does lead to future growth of the organization.

Got it. Very helpful. And then I guess as we're heading in the 2019 can you maybe provide an update on the pipeline for additional franchise sales for Motto? And then I think you've talked about a low to mid-single-digit million dollar contribution this year from Motto overall. So how do you think about the potential financial contribution in 2019 especially as the open franchise count continues to trend up here?

Yes, we're excited about Motto right now. Obviously this year we still are on track to do tons of Mottos and we think 2019 will be similar. But we are very excited about the number of open offices. We're seeing volumes increasing. We're seeing traction of better and more quality lows. We think there's going to be some opportunities coming forward based on interest rates going up because the lion's share of the Motto has been sold to real estate companies who are connected to the purchase money transaction. We think they're not going to be as impacted as the traditional industry that with refinances sort of going away. So we're excited about what we see. And we believe growth can continue moving forward.

Yes. In terms of -- in terms of the contribution, I mean you're right, this year in terms of kind of low to mid-single digits in terms of million dollars of revenue contributions. As we see, we've got about 70 Motto offices open today and 12 months from now they should be paying the full complement of monthly fees. So that should continue to grow. And then from a cost structure perspective, we'll continue to scale the cost structure. And net-net investment should go down over time.

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

So I wanted to just check on get a sense of how you think independent regional owners will think about their business from here on? And really what I'm trying to get a sense of is do you think there's incremental opportunity for the RE/MAX in terms of acquiring some of the remaining independents that were later and later in the cycle?

Hi, Vikram, it's Adam. As we've previously stated in some of the other calls and conversations, we continue to be in contact with those independent regional owners constantly. We have a great relationship with them, great communication. And it still remains kind of a lumpy opportunity for us. As opportunistic as these folks are, they also understand the marketplace, the ebb and flow of what happens in any cycles and any changes, things like that. And they continue to strengthen their business model as we do ours here at headquarters. So it still is tough to say where they're at. We constantly obviously would like for that to happen, but it's up to them more than us. And as a result, we continue to be partners with them in the grand scheme of things. And we're ready to go when they're ready to go. And so that's about the best answer I can give you. But we're all in it together, and we're all in communication, and if something comes up we'll be sure to let you guys know.

Okay. And just in terms of other drivers for top line, can you give -- can you update us on plans to increase the annual dues kind of across the U.S. in a more standardized way as well as any franchise fee increases you expect near-term?

Yes. Right now we don't have any plans to do that on the table at the moment. We did make sure that we're partnering with our brokers during these, any sort of ebb and flow or moderations that occur in the marketplace. And part of that is balancing pricing. So anyhow, that's -- right now we don't have any plans for anything, but we always look at our options.

Dues and franchise fees essentially remain like similar over the next year or 2 as of now?

Yes. We really just haven't made a decision. I mean pricing is one lever that we can pull in terms of driving the top line. But as Adam said, given some of the choppiness in the market right now, we're really focused with partnering with our franchisees, and we'll continue to evaluate that as we enhance the value proposition and as there are changes in the marketplace.

Got it, okay. And then just last question. In terms of agent share gains, the last 2 -- last maybe year or so we continue to see sort of NAR remain at levels higher than kind of the RE/MAX U.S. agent growth. There's a bit of divergence there. And I think part of the rationale was the selectivity that you laid out. I'm wondering, in choppier times are you seeing a little bit of reverse of that? Are people more gravitating towards a brand like RE/MAX? Any anecdotes you could share?

No, I mean it's -- the divergence has always kind of been in existence in the space since we go after a very select pieces of pie. And when you hit the choppier times, I think everybody to an extent examines the efficiencies of their business, so it's -- I guess it's going to have to be a function of how long do the -- how long does the moderation continue, how long does the choppiness continue as to any increase or decrease in that divergence in the marketplace. So hard to say right now. We continue to work with our brokers. They're really excited about their opportunity go after the high-producing agents right now. And in fact it was -- it was interesting to go speak with them for last 6 weeks because I keep hearing this positive tone of, hey, this is when we go out and when you get the good people. So -- we're hearing that, but overall when it comes to the ebb and flow of the total agent count in the industry, I don't know that that's going to have much of an effect on it.

Your next question comes from the line of Brad Berning with Craig-Hallum.

A couple part question on regards to the competitive environment. And the first question has to do with when you think about lead generation, you invested in CRM, you've invested in the mortgage side, and you've been investing a little in the lead generation as well. How do you think about the iBuyer programs? And do you think about the digital platforms out there as being lead generators? And do you need to do more of a competitive strategic response to that? Or do you simply wait out the capital hiring kind of process that's been flooding the market and till those agents get more mature and they want to go somewhere where more productivity, that they get a better payout ratio on and so you just pick up experienced agents as the rest of the industry is your training ground? How do you think about those kind of couple elements to your competitive response over time?

Hi, good morning, Brad. Yes, it's -- I mean, couple different questions there. Let me address the iBuyer piece first. We continue to watch that. It's -- first of all, iBuyers have been in the marketplace for decades just under different types of names and, but they haven't had the capital investment that they're experiencing right now. And that is an interesting aspect with respect to how it impacts agent lead generation in and of itself. Some of the competitors have been using agents for this process, others have not. And we keep an eye on all of those different things and maintain a great deal of competitive intelligence when it comes to what's going on with the iBuyers. Obviously we're not jumping into that piece at this time and don't have necessarily any intent to, but we are always opportunistic and looking for things that we can do that is a good investment for our shareholders. But when you kind of trickle through to the lead generation, digital lead generation, things like that, some of the iBuyers were created for the purposes of generating seller leads, and a lot of our agents have been part of that process in working with that generation of those business models. So it is kind of a hand-in-hand community in our space regardless of the varied business models. And we continue to be part of that, our agents continue to evolve with it. And that's the beauty of us having these high-producing agents, is the experts come to them and say what do you think. So we'll continue to evolve our lead generation, continue to evolve our lead cultivation. But ultimately it's fascinating because when I talk to a lot of our million dollar GCI producers, we call them the Diamond Club, and these are folks that are over $1 million a year in gross commission, you hear a lot of them say, I don't buy electronic leads, I go out and I make my leads through community involvement. Because ultimately this is a boots on the ground business where everything is a micro market and everything has to do with the relationships you build in the communities. So lot of mixture there. The ebb and flow of the industry isn't necessarily going to be based on that, it's going to be based on what are the big agents doing to make business. They look at a combination of different factors in generating their business, and that's what we're heavily involved with is making sure that we're part of that.

Your next question comes from the line of John Campbell with Stephens.

This is Carter taking the place of John. On that agent count, and excuse me if I missed this because you guys covered a lot on the agent growth, but what's driving the international growth? And how long do you think you can run it at double-digit year-on-year growth?

Well, international growth is -- I mean, we're super proud of that. That is a long-time effort. It takes decades to stimulate, generate and continue to grow internationally in a healthy manner for an organization. That's not something that just kind of happened overnight for us, as you guys know. So it has to do with a great deal of servicing on behalf of headquarters here, a lot of outreach to those international regions as well as a lot of the momentum that's being created around the world. You look at Europe, just fascinating, amazing growth going on there. That's a lot of hard work by the regions involved in the -- the marriage of the brand and the professionalism and the evolution of the industry in those places. So we anticipate continued trends in international growth. Housing continues to gather steam internationally and be a huge part of the economic conditions of families around the world. So we're well-positioned to continue in that space and utilizing our footprint for future benefit.

Got it. That's helpful. Thank you. And one more question on margins. We'll obviously get the update in full details next year, but for modeling purposes, just broadly speaking, how should we think about the phasing of margin next year. I know margin has compressed a little bit this year. So actually Q4 coming up just how to think about margins going forward.

Yes, I mean if you think -- if you look at Q4 kind of from a run rate perspective to Q3, the expense cost structure looks comparable, maybe a little bit higher given a little bit of a push from the -- from booj investment slipping out of Q3 and into Q4. And as we as we look at 2019, still a lot of work to do there and we'll have some more information into -- into February. But looking -- looking at nominal margin expansion as we move forward, maybe call 10 as a basis point in the future.

And we have no further questions in the queue at this time. I would now like to turn the call back over to Mr. Schulz's.

Thank you, operator. And thank you all for joining us on the call today. That concludes our remarks. Please have a great weekend.