Good morning, and welcome to the RE/MAX Holdings Fourth Quarter 2018 Earnings Conference Call and Webcast. My name is James and I will be facilitating the audio portion of today's call. At this time, I'd 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 RE/MAX Holdings fourth quarter and full year 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 fourth quarter and full year 2018 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 most recent quarterly 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, we are pleased with our fourth quarter performance as our differentiated business model continue to grow in a correcting market. Highlights of the quarter included: revenue increased almost 5% to $50.8 million; recurring revenue streams, which consist of continuing franchise fees and annual dues, increased almost 4% and represented over 67% of total revenue during the quarter. Adjusted EBITDA was $23.3 million, down compared to Q4 of last year, due to investments in our business and higher severance costs and adjusted EPS was $0.49 per share, up 9%. For full year 2018 we increased agent count, revenue, adjusted EBITDA and free cash flow while continuing to invest meaningfully in future organic growth opportunities. We achieved all of this despite U.S. existing home sales decreasing more than 3% for the year. These results illustrate how our differentiated business model, tied primarily to recurring fees based on RE/MAX agent count and Motto office count, is more insulated and resilient to fluctuations in transaction volumes. In 2018, total agent count increased over 4% to a new record high of over 124,000 agents worldwide. We had our best year of global franchise sales in over a decade. Motto expansion continued and we now have almost 80 offices opened. Revenue grew almost 10% to nearly $213 million. Adjusted EBITDA increased to over $104 million and adjusted EPS increased 22% to $2.25 per share. Turning to slide 4. In 2018, RE/MAX continued to be recognized for its industry leadership by many well-respected third parties and in annual surveys. The accolades included citations for agent productivity, industry influence, brand power and franchising results. This trend continued into the New Year as RE/MAX once again was ranked as the leading real estate…

Thank you, Adam. Good morning everyone. Overall, we had a solid fourth quarter amid a shifting market. Our fourth quarter revenue grew almost 5%, driven almost exclusively by contributions from recent acquisitions and Motto. Adjusted EBITDA was down $2.3 million compared to the prior year, primarily due to continued investments in our business and some severance. We also continued to generate a healthy amount of free cash flow, converting over 65% of adjusted EBITDA to free cash flow on a trailing 12-month basis, which provides us with flexibility entering into 2019. Moving to slide 11. Revenue increased 4.8% to $50.8 million in the fourth quarter. Acquisitions increased revenue by 4.7%. Organic growth added another 0.3%, partially offset by a 0.3% decline from foreign currency movements. Looking ahead, our diversified revenue streams provide multiple opportunities for us to grow. Even in an environment of flat agent count growth and existing home sales, we think we can grow organically at a low single-digit rate, particularly given Motto's contribution. Moreover, if improvements in U.S. existing home sales increases in agent count growth, an acceleration of the pace of Motto expansion or a combination of these factors were to occur that could move us up closer to a mid-single-digit rate of organic growth. Looking at Slide 12, selling, operating, and administrative expenses were $30 million in the fourth quarter of 2018, an increase of $2.3 million or 8.2% compared to the fourth quarter of 2017 and represented 59.1% of revenue compared to 57.3% in the prior year period. SO&A expenses increased primarily due to investments in technology and the cost to support booj's legacy operations, as well as higher severance and equity compensation expenses. These increases were partially offset by decreased acquisition expenses and professional fees. Even in a lower growth environment, we believe…

Thanks Karri. Turning to Slide 14, in conclusion, we entered 2019 from a position of strength and with great momentum. We're moving forward knowing RE/MAX agents perform well in virtually any market. We are actively focused on enhancing the value of marketing, training, and technology tools offered to our network including the first booj developed RE/MAX tech products that will roll out this year. Interest in owning a Motto franchise remains high and we continue to feel good about our pipeline. With that operator, let's open it up for questions.

[Operator Instructions] And your first question comes from the line of Thomas Maguire from Zelman & Associates. Go ahead please. Your line is open. Q – Thomas Maguire: Hey good morning and nice job navigating a tough environment here. I just wanted to touch on the agent count may be digging into the comments you made on the domestic side. I understand part of it's just not cross-selling, but can you just talk to anything else going on out there in may be just the competitive environment? And then just more broadly on the investments you're making, are those having any impact on recruitment now at all? Or do we need to wait another year to have those show up or kind of are we partially offsetting the challenging macro is that right now? A – Adam Contos: Hey good morning Thomas, it's Adam. Yes well we can't control the macro, we can control how we continue to iterate on the Motto, how sticky it is. So we've made a lot of reinvestment into our space in really what we call the three Ts. First one being the tools, our marketing platforms like our user generated content video marketing tool allows our agents to create their own 15-second videos and really magnify their presence in the marketplace. The second one is training. We've mentioned, we reinvested in the momentum program which we're -- we have a heavy rollout going on and really getting -- working closely with our brokerages in order to continue to strengthen their business model with kind of recruiting environment. And the third one is technology. Obviously you're aware of the booj acquisition last year and throughout 2019, we're rolling out the different platforms there. So we're continuing to iterate on the business model in order to create a more sticky environment. Obviously, we want the highest performing agents in the marketplace and with low unemployment as well as NAR being at the peak a significant amount of churn on low end there. I think we're doing really well in this environment with respect to where agent count is and where we see it going. Q – Thomas Maguire: Got it, thanks guys, have a good day.

Your next question comes from the line of Jason Deleeuw from Piper Jaffray. Go ahead please. Your line is open. Q – Jason Deleeuw: Yes, thanks for taking the question. I just want to get a sense for the expected model revenue contribution. I'm just trying to -- if agent counts kind of flattish maybe down a little bit for U.S. Canada. And then, I'm trying to kind of think about how we get to the organic low single-digit revenue growth rates that's the target for the year? It sounds like Motto is a big contributor. So can you just help us think about the Motto revenue kind of the franchise sales and then how many of the 78 are now paying the full monthly fee? A – Karri Callahan: Hey good morning Jason, it's Karri. So we're really excited about Motto. And continue to think that the pipeline is strong and really trying to differentiate the customer base that we're going after as well. So do anticipate from a franchise sales perspective in 2019 sales to be comparable to what we're looking at in 2018, so kind of around that 50-50 mark. Really now focusing on the number of Motto franchises that are open and ramping up to pay that full complement of fees. So looking at 2019, Motto contributing a good kind of 1% of growth in terms of organic kind of looking at that mid-single digits in terms of millions of dollars of revenue contribution to the top line. Q – Jason Deleeuw: Great. Thanks for that. That’s helpful. And then I'm just trying to get a sense in terms of competitors and the challenges that they -- the brokers and their agents may be experiencing with the slowing housing market. Are you seeing any of that yet? And in past cycles, how long has it take -- I mean, how long as the market needed to be weak before you would start to be RE/MAX gaining ground on some of the competitors?

Good morning. It's Adam. So the -- we're in a competitive environment that nobody in our marketplace has ever seen before. And really what this does is it magnifies the strength of the producing agents. We, obviously, spent a lot of time talking to the brokers, our wonderful franchisees and the agents out there, and what we're hearing is those that are focused on their business model or actually strengthening their business. And with the equilibrium occurring in the marketplace, the increase listings and things like that, we're going to continue to see the market shift. But it's going to be the strong agents that really seem to do well in this marketplace, which is why we're pretty happy about the strength of our business model and how it continues to amplify the capabilities of these strong agents.

Yes, and I think the thing that I would add on to that is what we're hearing from the network right now is a lot of cautious optimism in terms of where the market is going to go. And we look at just the overall quality of our agent base, the productivity differentials that we have and overall competitive advantages. And we just think that we're well-positioned to navigate a tricky market like we're in right now.

Okay. Thanks for the color.

Your next question comes from the line of Anthony Paolone from JPMorgan. Go ahead please. Your line is open.

Thanks and good morning. If we could stay on some of the feedback from the system. What's the sense you're getting in terms of competitors peaking splits up closer to where you all have traditionally been? And whether that's marginally making it proper to recruit?

Good morning, Tony. The competitive marketplace is really with respect to splits has leveled out many years ago. This isn't something really new. Competing on fees is really not the way to approach recruiting in this marketplace, and I think most of the brokers out there regardless of the brand understand that. They -- nobody wants to get into a race to the bottom, and I don't think you see a whole lot of people engaging in that anymore, really what people are competing on is value. In fact a lot of the splits are starting to reset to some historical levels as particularly with team involvement things like that. You're seeing some people even go back to 60/40 and 50/50 in some different aspects depending on how the business is generated. So ultimately what it blows down to is what is the value being offered by the broker to help the agent increase their business and that's where we've been really magnifying our efforts with our training tools and technology that we're offering out there and ultimately the biggest challenge for any brand is to make sure that the brokers and the agents are understanding and operating with those tools in order to maximize their business.

So you think your franchisees are feeling as much competition from things like having to compete on either guest fees or just the economics of the model and its instead kind of just -- these are the things like technology and things of that nature that's ramped up the competition?

People always compete on price. But ultimately what ends up helping the agent is how much value they can put into their business in order to increase their business. That's what the agents after is, is increasing their profitability, doing more deals, saving time and having the freedom of that independent business model, that is really the wonderful part of this space. So, if people want to compete on price, they end up competing on price. But ultimately what they want to do is they want to compete on what is the value of the brand that it brings to the agent. And it's all in what are your priorities in your business. Is it to save money or is it to make money? And we look at it is our business model is designed to help people make money.

Okay. And then on the investment side, how does the acquisition pipeline work? And do you think 2019 is the year we see something either on the independent region side or also potentially outside of that in some other area?

Hey, good morning, Tony. So with regards to the independent regions, they continue to be very strong partners of ours and some of our key customers we work well collaboratively with them and really have continued to win some of the investments that Adam was talking about. We actually will be meeting with them as we go off to Las Vegas next week for our annual international agent convention. And so continue to have those strong partnerships, they will continue to be opportunistic as they always have. But it also remains to be a key priority for us in terms of capital allocation and how we look at deploying capital to give us some of the best returns. So, they'll continue to be opportunistic. Obviously, from an overall strategic perspective, we're always looking at things in terms of iterating on our value that Adam was just talking about in terms of how to deploy capital to maximize growth opportunities.

Okay. And then just last item on CapEx. I think you guys ramped it up a little bit in the second half of 2018, any sense of what you expect to spend in 2019?

Yeah. So we did ramp up a little bit in the back half of 2018. As we look at 2019, looking to continue that ramp up probably kind of close to that, call it $10 million range of CapEx investment spend next year -- for this year.

Okay. Great. Thank you.

Your next question comes from the line of Bose George from KBW. Go ahead please. Your line is open.

Hey, guys. This is Tom McJoynt on for Bose. I want to ask on the Marketing Funds acquisition in January, can you just confirm that that's not impactful on both net income and EBITDA? And then if that is the case, just want to sort of get a reason why -- what the reason was for buying that? Is there any potential to trim costs over time or somehow get that to produce some income?

Hey, good morning, Tom. It's Karri. So, yeah, confirmed on the first question in terms of no impact to net income or to EBITDA. And then with regards to the Marketing Funds, really those funds based on the terms of our franchise agreements they -- the funds are contractually encumbered. We use those to really help survive some of our key competitive advantages around the number one brand in real estate. And so the plan will be -- that will be unchanged over time. And that that will continue and we'll continue to deploy those -- that capital in the future always like we've done it in the past.

Okay. Thanks. If I take the mid-point of guidance ranges and back out the Marketing Funds piece to get apples-to-apples with 2018 then that implies roughly flat adjusted EBITDA margin in 2019 and that's based on about 1% or 2% revenue growth. Is the sense that 2019 is going to be another year of a good amount to spend on tech, product development, and other initiatives?

Yes, I mean as you look at the margins you're right. It's generally flat, but we're actually really pleased with that. I mean obviously it's a little bit of a challenging market, but the inherent leverage in the business absolutely is there. So, if we look at the investments that we're making, it still can really help to accelerate agent count growth in the U.S. If we can get some additional acceleration in terms of Motto and obviously if the macro changes a little bit, there's leverage in the business for sure. But we will continue to invest and we think the strength of the business Motto really enables us to do that without really adversely impacting the margin profile.

Okay. Thanks. And then just last one on housekeeping. Equity-based comp has accelerated over the past year. What's the outlook for that heading into 2019?

Yes. So the -- if you look at 2018, kind of, as a baseline, that's a good run rate for 2019. Part of that uptick is related to some equity-based compensation that was specifically tied to the booj acquisition and that will continue into 2019.

Got it. Thank you.

Your next question comes from the line of Stephen Sheldon from William Blair. Go ahead please, your line is open.

Hi, good morning. I guess first on the changes you talked about to the brokerage support structure. Can you provide some more detail on the changes made? And I think the severance could be at least partly related to that. So, much was the severance in the fourth quarter? And are any additional severance charges embedded in the guidance for either of the first quarter and for 2019?

Good morning Stephen. Yes, we're really excited about the service model change that we've made recently. And particularly what that refers to is how we service the franchisees and what we've done is we've gone in and segmented our customer base, so that we can better service them directly to their needs in order to really create a higher level of accountability and also a greater deal of focus on growing their business. So that includes everything from, kind of, restructuring our regional outlay of the U.S. going from 10 regions to four larger regions and providing more specialized employees in each of those regions and reallocating a lot of manpower to be specifically trained on certain aspects of leadership and development training brokerage accountability and technology training. So, we're really excited about that. The feedback we're getting from the field is our franchisees are quite excited about it as well. It helps them focus on the things that they need to do. So, we'll continue to roll that out through 2019 and make the adjustments that we need to on it. But at this point, it's pretty positive outlook on it.

Yes and then Stephen just as a follow-up to your question on severance. So, we did have some cash severance charges in the fourth quarter, a little over $1 million. So, if you were to adjust that out, it would take the Q4 margin closer to around 48% for the quarter. And then we do expect some additional cash severance charges in Q1 a little north of $500,000 which is also reflected in the guidance that we've given.

Got it, that's helpful. And then just on the 2% sequential decrease in agent count in U.S. I know that agent counts declined sequentially in the fourth quarter last two years, but the degree, obviously, it was a little bit bigger this year and I'm guessing some of that's the housing environment. But can you just talk about what drove that between the pace of recruiting or just any change in the pace of turnover? Just any detail on that.

Sure. So as we look at kind of the funnel in terms of new adds, we're definitely seeing some pressure there as we look at the macro environment. Obviously with existing home sales down and then also looking at just the broader economic backdrop in terms of full employment. You couple that with the fact that either RE/MAX really isn't for everyone and our franchisees have learned -- they learned some pretty tough lessons as part of the recession, so they've been very selective also in terms of their recruiting efforts given the market. And so we're definitely seeing some pressure in terms of the top end of the funnel. But from an overall retention perspective and turnover churn perspective that's pretty stable. So with that said from a backdrop, despite what's going on from a macro perspective, we're still really focused on what we can control and we're really focused on not only the technology initiatives from booj but the service model that Adam was talking about and some of the other digital and social marketing initiatives that we have going on. And so we think right now it's still -- there's still a lot of enthusiasm around the RE/MAX network.

Okay. And then I guess just one last one. I was just curious your thoughts on how the pace of housing activity has impacted Motto franchise sales? It sounds like December was really solid in terms of sales, but just given that Motto gives your existing franchisees another way to monetize transactions. Have you seen higher interest levels in Motto from no existing RE/MAX franchisees has the pace of housing activity slowed? And maybe they have a little bit more time and resources to look at it? And I guess along those lines is there a cap on how many Motto franchises you could on board at any particular time?

Hi. This is Ward. On the last question, there is no cap on what we can on board at this time. We just add more resources as necessary. The excitement continues so we sold a little right around 120 since inception. The pace continues like we talked about it about 58-year, but it's a great way for our brokers to diversify their revenue which we think can -- may lead to more success to them. So we're excited about the opportunity. We continue to sell not only within the RE/MAX brand, but outside the RE/MAX brand. So we even sold to some of our competitors like the great Sotheby's team this year, some independent real estate companies, some loan originators looking set up on their own shops. So we're very, very optimistic about 2019. We know the brokerage channel in general compared to the mortgage banking channel is continuing to grow. So those are all positive signs from Motto in 2019 and beyond.

Thanks. I appreciate the color.

Your next question comes from the line of John Campbell from Stephens. Go ahead please. Your line is open.

Hi, guys, good morning. Adam or Karri or both of you guys, you both spoke to kind of the recent slowdown in domestic agent growth. It's good to hear that the churn has been stable and I guess the pressure is coming from the gross adds. And it sounds like you guys have put some organizational changes in place to kind of rejuvenate agent growth next year? But is there anything else out there that gives you just kind of greater confidence around reacceleration next year? I mean, is there particular regions that might have gone from independent to company-owned that have a lot of potential, just anything else you can provide there.

Good morning, John. Yes, we have -- when you look across the U.S., we've seen some strength kind of in the northeast and it's kind of interesting you'll look alike the salt states and that's where we have actually seen a little bit of strength in agent growth and capability of that. But ultimately when you look at our new broker servicing model that we've just rolled out, we're pretty optimistic about how does that really keeps people pointed towards that north star of recruiting and growing the business tying that into the three core deliverables of RE/MAX beyond the brand the training, the marketing tools and the technology. We've really -- like you said, we've refined our business model. We've refined our -- essentially our value proposition to the marketplace into our franchisees and it's so much easier to talk about when it comes to that. And ultimately, business runs on some very few solid focused fundamentals and that's what we've gotten back to. So we're pretty bullish on that. Although, you're right, we can't control the macros. But what we can do is we can control our focus and our effort on how we attack those. So seeing it the growth potential through some of the different regions that we have acquired recently is a good upside to that.

Yes. And I think the other thing that I would add is we're starting to hear some anecdotal information around broker's ability to recruit successfully because of what's coming from the booj platform. And so it's one of many different value propositions that we're offering. But we do think that over the long-term, it can be an accelerant in terms of where agent count growth goes in the future. Obviously, with the rollout not being planned until later in the summer, we want to make sure that we have an effective rollout and that it's the best experience possible. So still too early to tell, but at least anecdotally we're getting some good feedback.

Okay. That's helpful. And then on the international growth, I mean, that continues to be very impressive. I just want to dig in on that opportunity for a second. So first what's the average revenue per agent international versus U.S. and Canada?

Yes. So outside of the U.S. and Canada, it's closer to about $250 per agent. We have some of that growth. It's been great to see we're actually starting to see it contribute in terms of overall organic growth a little bit more than we have in the past, so a little under 1%. But good growth opportunities for sure.

And how does that compare to the U.S., Canadian?

So U.S. it's about a tenth. So U.S. and Canada and owned regions closer to $2,500 per agent on an annualized basis.

Okay. And then what are some steps you guys might be able to take over time to kind of get that revenue per agent up? I know some of it is -- the broker fees are going to be probably difficult relative to domestic? But are there other basically fixed fees that you could take higher over time?

I mean, we always look at pricing and just also looking at just different value that we can provide on a global basis. As we think longer-term about technology, education and other just value proposition items once we really have similar foundation built here in the U.S. and will always look at how we can deliver that value in exchange for growth opportunities overseas.

Okay. And then last one for me. I just want to make sure I heard you guys correctly. You said you expect franchise sales to become similar to what you had in past years, is that -- are you referring just to Motto or is that overall franchise sales?

What I was referring to earlier was specific to Motto and kind of directionally with the rest of the network. 2018 was a banner year with a second best year in the company's history aside from 2006. So we might see a little bit of retraction from that. But don't expect it to have a meaningful different impact to overall financial results.

Okay. Great. Thanks, guys.

Thanks.

[Operator Instructions] Your next question comes from the line of Chris Gamaitoni from Compass Point. Go ahead, please. Your line is open.

Hi, thanks for taking my call. As you speak about the competitive environment being about the service quality provided to the agent. I was wondering if you had a view on or an estimate of the percentage of agent’s sales within your network to come from leads that you provide. Or it's maybe purchased leads versus their own sphere of [influence]? A – Adam Contos: Good morning, Chris, and welcome to the club here. I'm glad to have you on here. I think the -- with respect to our network, the beauty of our network is our agents are generally full-time producing agents that have been in the business for quite some time. So a great deal of the leads and the business that they create comes from the repeat and referral network. And ultimately what that boils down to is we've got agents who had a nurtured group of customers for quite some time. Most of them are on -- their second, third, fourth transaction with these particular agents and that's always really been the strength of our network is that. It isn't necessarily the lead factories or the portals or anything like that. That being said, our agents being full-time professionals do generally use multiple streams of lead generation both from like remax.com and what we call LeadStreet which is our internal lead cultivation platform when we get millions of visitors all the time on our website on a monthly basis. But they also are huge customers in the different portals as well purchasing leads as well as purchasing marketing on those. So really across-the-board with RE/MAX, you can't necessarily point your finger at one particularly lead generation piece. Other than I think the strongest lead generation piece for RE/MAX agents in general is the repeat and referral…

Yeah. We -- generally as a matter of company policy, we don't comment on speculation or rumor. So read the articles, but that's all we got. Q – Chris Gamaitoni: Okay. And just one housekeeping. Just we don’t have prior years to understand outflows. Just what's the cadence of the Marketing Fund revenue? Is it like the seasonality?

So, it's pretty consistent with our continued franchise fees revenues. So, it's based on -- it's more recurring in nature. So, there should be some information that was including -- included in the back of the earnings presentation to give you some historical perspective, both on an annual and on a quarterly basis. Q – Chris Gamaitoni: All right. Thank you.

Thanks, Chris.

There are no further questions at this time. I'll turn the call back over to our presenters.

Thank you, James and thank you all for joining us on the call today. Have a great weekend.

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