RMAX
#Thank you, <UNK>, and thanks to everyone for joining our call.
It is a pleasure to be with you here today as we share our second-quarter results.
We had a solid quarter, one which continued the momentum we saw in the first quarter, both in our business and in the housing market, and positions us for further success in the back half of the year.
Our ongoing focus on the three pillars of value creation, organic growth, reinvestment and acquisition catalyst and returning capital to shareholders continues to deliver positive results.
Before I discuss our second-quarter highlights on slide 3, I want to briefly discuss our approach to organic growth in more detail.
Our organic growth is fueled by our 43-year focus on selling franchises and attracting and retaining the best agents, and we had notable achievements on both fronts during this past quarter.
I am pleased to announce that we obtained the necessary approval to begin selling franchises in New York, and we've already made our first sales.
The New York region, which we acquired in the first quarter, represents a multi-year above-average organic growth opportunity.
As we have previously discussed, we will likely sell only a handful of franchises in New York this year.
After selling a franchise, it generally takes the new owner four to six months to open their office and then another few months before they see agent count growth.
That's why we don't expect any incremental agent growth from New York this year, but we do anticipate ramping up slightly in 2017 and thereafter.
We are pleased with the good work our New York team is doing and the positive reaction we're receiving from our franchisees in the state, and we are excited about the long-term organic growth opportunities in the region.
On the agent front, real estate agents affiliated with RE/MAX have once again dominated the 2016 Real Trends America's Best real estate agents ranking.
RE/MAX agents accounted for 22% of those listed in the industry's largest agent ranking based on homes sold in 2015, the most of any national brand.
RE/MAX agents are often recognized for their outstanding service and dedication to their clients.
With RE/MAX agents representing more than one in five of America's best real estate agents, consumers understand that RE/MAX agents have the experience to get the job done in today's market.
Now looking at slide 3, our quarterly results included the best quarterly agent count increase in over a decade.
We were particularly pleased with this quarter by growth in the United States and Canada, markets where revenue per agent is the highest in our global network.
We added over 3,200 agents during the second quarter and over 8,000 agents since the second quarter of last year.
Combined agent count growth in the US and Canada was at the high end of our expectations, while international agent count growth exceeded our estimates.
Turning to slide 4, we ended the second quarter with 109,960 agents in our global network.
Growth accelerated as we grew our total agent network by almost 8% compared to the second quarter of 2015.
Importantly, combined agent count growth in the US and Canada was 4.5%, at the high end of our expected range.
Agent count growth outside the United States and Canada increased just over 4,500 agents, or about 19%, since second quarter 2015.
About two-thirds of that growth came from Europe with the bulk of the rest coming from South American countries, evidence that the RE/MAX brand and agent-centric model has broad appeal in and outside of North America's borders.
Slide 5 shows agent count growth within the United States and Canada broken down by Company-owned versus independent regions.
The graph on the left highlights our agent growth of 4.7% and 3.7%, respectively, in our US Company-owned and independent regions after adjusting for the acquisitions of New York and Alaska.
The graph on the right shows agent growth in Canada.
Canadian agent count grew almost 5% since last year, more than we expected due to the strength of our brand, a robust housing market, and the conversion of a very large competing brokerage.
Western Canada, which is Company-owned, increased by 261 agents, or 4.1%, compared to the prior-year quarter.
Eastern Canada, which is comprised of two independent regions, added 643 agents, or 4.9%, compared to the second quarter of 2015.
The increase was driven by the conversion of a large competing brokerage mentioned earlier.
Although the housing market in Canada is still strong, we continue to watch for growth to moderate in certain markets like Vancouver and Ontario.
Additionally, we represent approximately 18%, a very healthy percentage, of the total realtor population in Canada.
So we expect relatively flat to low growth there compared to other countries and regions in our network.
Slide 6 shows our year-to-date agent growth through June 30.
We have added over 5,000 agents, increasing our total agent count almost 5% since year end.
Combined agent count growth in the United States and Canada was 3% year to date.
Our recruiting success is the direct result of the growth mindset of our franchisees and the overall strength of our network and our brand.
We continue to provide the most productive agents and those aspiring to be the most productive agents in the business with world class tools, technology, and training to enable and promote their success.
Whether it is our Momentum broker and agent development program or connecting consumers with agents through remax.com, we continue to reinvest in our business with the goal of increasing the value proposition we offer our franchisees and agents.
With that, I will turn the call over to our CFO, <UNK> <UNK>.
Thank you, <UNK>.
Turning to slide 7 you will find a breakdown of our revenue streams.
Overall second-quarter 2016 revenue decreased 2% to $43.4 million, primarily due to the sale of the Company-owned brokerages.
Revenue would have increased 5.3% after adjusting for the sale of the Company-owned brokerages.
Organic growth increased revenue 4%, and the acquisitions of New York and Alaska combined added 1%.
These increases were more than offset by the sale of the brokerages, which negatively impacted revenue by 7% year over year as well as FX which reduced revenue a nominal amount.
Recurring revenue, which includes continuing franchise fees and annual dues, increased $1.7 million, or 6.7%, over Q2 of last year.
Recurring revenue accounted for 64.3% of total revenue in the second quarter of 2016, up from 59% last year, primarily due to the sale of our Company-owned brokerages.
Revenue from continuing franchise fees was $19.8 million, an increase of $1.6 million, or 8.6%, compared to second quarter 2015, primarily due to agent count growth and the acquisitions of the New York and Alaska regions.
Revenue from annual dues was $8 million, up $200,000, or 2.2%, due to agent count growth, partially offset by the impact of the strong US dollar against the Canadian dollar.
Revenue from broker fees was $10.4 million, an increase of approximately $1.1 million, or 12.3%, over last year, driven primarily by higher agent count and by increased sales volume.
Franchise sales and other franchise revenue was $5.1 million, down $400,000, or 6.5%, compared to the prior-year quarter, primarily due to a decrease in global subregional franchise sales.
International franchise sales were unusually strong during the second quarter of 2015.
We have continued to successfully execute on domestic franchise sales during 2016, and we expect that performance to continue.
However, last year was a banner year for overall franchise sales, driven by global franchise sales.
Consequently we should see modest declines in franchise sales and other franchise revenue year over year in both the third quarter and the full year.
Looking at slide 8, selling, operating, and administrative expenses were $18.8 million for the second quarter of 2016, down $0.9 million or 4.5% compared to the second quarter of 2015, primarily due to the sale of the Company-owned brokerages and decreased severance costs, partially offset by investment in our New York region as well as increased employee and legal costs.
On slide 9, you will see in the graph on the left that adjusted EBITDA decreased 2.8% to $24.9 million for the second quarter, compared to the same period in 2015.
The decrease was primarily due to the sale of the Company-owned brokerages, adverse FX impacts, and the strong global subregional sales in the second quarter of 2015, partially offset by agent count growth.
Additionally our adjusted EBITDA margin decreased slightly from 57.9% in Q2 last year to 57.4% in Q2 of this year.
Turning to slide 10, the graph on the left shows adjusted net income of $14 million for the second quarter, a decrease of approximately $300,000, or 1.9%, over the prior-year period.
Adjusted basic and diluted earnings per share were both $0.46 for the second quarter of 2016, compared to $0.48 and $0.47, respectively, for the second quarter of 2015.
Turning to slide 11, our cash position as of June 30, 2016, was $97.6 million, and our free cash flow through the first six months of the year was $24.9 million.
We remain in a great position to act opportunistically from a leverage perspective with a debt to adjusted EBITDA ratio of 2 times and a net debt to adjusted EBITDA ratio of 1 times.
We continue to deploy our capital thoughtfully in accordance with our strategic priorities.
We are focused primarily on reinvesting in the business, reacquiring independent regions, and other M&A opportunities close to our core competencies of franchising and real estate and returning capital to shareholders.
Earlier this week, our Board of Directors approved a quarterly dividend of $0.15 per share.
The quarterly dividend is payable on August 31, 2016, to shareholders of record at the close of business on August 17, 2016.
Now, I'd like to turn it back over to <UNK> to discuss the housing market.
Thanks, <UNK>.
Turning to slide 12, the housing market continues to exhibit solid fundamentals and still has room for improvement.
It's been five years since the worst part of the housing crisis occurred, and the landscape is set up for the industry to remain positive.
Many of the underpinning dynamics in our industry are improving.
Job growth has been generally steady, wages are rising but not increasing at the rate of house prices.
Household formations are better than they've been for several years, but first-time buyers have had a tough time getting into their initial purchase.
However, we finally saw some encouraging news on that front in June.
The National Association of Realtors recently reported the share of first-time buyers purchasing homes in June 2016 was the highest recorded since July of 2012.
Housing starts are trending up, but remain off of their historic pre-recession levels.
Overall mortgage availability has been improving, and rates recently hit a record low and look to remain at low levels.
Inventory continues to be the biggest challenge, and it's a real constraint, most notably on the West Coast.
Affordability is a concern in some regions, especially for first-time buyers.
The good thing is demand is very strong.
We believe the supply equation will eventually be solved as more homebuilders return to building homes across all price points instead of focusing on apartment buildings.
Although our network of professional agents still succeeds in a market such as this, a market with improved inventory offers even greater opportunities.
Now, I'll turn it back to <UNK> to walk through our financial outlook.
Thanks, <UNK>.
Turning to slide 13, the Company's third-quarter and full-year 2016 outlook reflects the sale of the Company-owned brokerages, the acquisitions of the New York and Alaska regions, an estimated exchange rate of $0.74 US for every Canadian dollar, and assumes no further acquisitions or divestitures.
For the third quarter of 2016, RE/MAX expects agent count to increase 5.5% to 6% over third quarter 2015, driven by strong agent growth outside the US and Canada.
Revenue in a range of $43.5 million to $44.5 million, selling, operating, and administrative expenses in a range of 46.5% to 47.5% of Q3 2016 revenue, with project-related operating expenses in a range of $750,000 to $1 million.
Adjusted EBITDA margin in a range of 54% to 55% and capital expenditures in a range of $1 million to $1 million, which includes estimated project-related capital expenditures of $750,000 to $1 million.
Turning to slide 14, we are reiterating our full-year 2016 outlook and increasing our agent count guidance.
We expect agent count to increase by 5.5% to 6.5% over 2015, up from 4% to 5%, driven by strong agent growth outside the US and Canada.
Revenue in a range of $169.8 million to $171.6 million.
Selling, operating, and administrative expenses in a range of 48% to 49% of 2016 revenue.
Included in selling, operating, and administrative expenses are project-related operating expenditures in a range of $3.5 million to $4 million, down from $4 million to $4.5 million.
Adjusted EBITDA margin in a range of 51.5% to 53%.
We are currently trending above the midpoints of both our revenue and adjusted EBITDA margin ranges.
And total capital expenditures in a range of $3.5 million to $4 million including project-related CapEx of $2 million to $2.5 million.
One final housekeeping note, we are now expressing our revenue guidance as a range of absolute dollars instead of as a percentage change relative to the prior-year's results.
This is purely a change in format and not a change to our full-year guidance.
Now I'll turn it back over to <UNK>.
Turning to slide 15, that concludes a successful first half of 2016.
RE/MAX is performing as we had planned, with our core business fundamentals and growth pillars firmly intact.
Agent count growth is healthy, particularly in the United States and Canadian markets.
We have commenced selling franchises in the recently acquired New York region, and we are laying the foundation there for success in the years to come.
Finally, we continue to prudently reinvest in our business to enhance our value proposition and to support future growth.
With that, operator, <UNK> and Geoff have joined <UNK> and me and we would like to open it up for questions.
We continue to prudently manage the business and have the same capital allocation philosophy that we have had historically.
So really looking at reinvesting in the business, the acquisition of independent regions, other potential of growth opportunities around real estate and franchising, and then return of capital to shareholders.
So we've consistently executed on that, actively meet quarterly and discuss it and we'll follow that same philosophy and process going forward.
Well, <UNK>, the luxury market, the high-end market has slowed a little bit, but fortunately for RE/MAX we're diversified across all income brackets.
And so it has not affected our profitability at all.
There's concern whether prices are too high, places like San Jose or San Francisco, whether that will adjust or not, but we don't see anything disastrous in the future.
And what was the last question you wanted to know.
We're now at a 50-year low.
I think that is going to reverse itself fairly quickly.
New ---+ first time buyers are starting to buy again.
Traditionally it's 40% of the business.
Right now it's 33% of the business, so it's upticking.
The problem for most people is finding the affordable housing in the lower price ranges to get their foot in the door.
Yes.
Our best regions in the US this year, Florida has grown 378 agents, California 332, Texas 262.
And we've got lots of opportunities to continue to grow in those markets.
So I think those are our best markets right now.
We really don't see any markets that are not having any success.
We've seen pretty much gains across every region.
It isn't harder for us to retain our people.
We've got such a strong brand and a pretty loyal group of people with us.
The competition started increasing when RE/MAX started into business 43 years ago, and it's just gotten more and more competitive all along the way.
It's a fairly inexpensive business with low barriers to entry; for a small boutique firm to get started it's not a great deal of investment.
So every time the market gets better, lots of smaller companies pop up.
Every time the market goes the other way, they disappear.
So we're holding our own; we're actually doing very good on our agent growth and on our franchise sales, so we're excited about this market.
<UNK>, it's <UNK>.
I'll address the second part of your question and then turn it over to <UNK>.
With respect to project-related investments, we're expecting about $3.5 million to $4 million this year, expect to be a low 50% margin company this year and for the foreseeable future.
So from that perspective, that's what the P&L looks like.
I'll turn it over to <UNK> to talk through the priorities.
There's a couple things to think about from that perspective.
The agent count guidance that we raised is really driven primarily by agents outside of the US and Canada, which really contribute a nominal amount to our top line revenue growth.
Agent count in the US is really right in line with our expectations of 4% to 4.5%, and that's driving 85% of our revenue.
From that perspective we feel really comfortable with the core business.
65% of our revenue is recurring in nature.
The upside and downside as well is really driven by the nonrecurring revenues, so franchise sales and broker fee primarily.
As you look at last year, we did have some significant franchise sales in our global operations that we don't expect to recur.
So you're right, expect franchise sales to be down a little bit this year.
But still driving to, on an apples-to-apples basis without the brokerages, low to mid-level revenue growth for 2016.
We're always continuously talking to the independent regional owners.
I think they've been encouraged because of being able to pay a bit higher ratios for New York and Alaska, and so the conversation continues.
At the time of the IPO I said I thought we would get two to three regions in our first five years.
Alaska was very small.
New York was significant.
I still think there's two or three of them out there in the same time period, so we're optimistic.
In every one that we've negotiated we've offered to let them stay in for parts of the business, exchanging RE/MAX stock for whatever.
In almost every case the people are retiring and they want to diversify their income.
They're going to have to pay capital gains, and so nobody has taken us up on a stock swap of any kind.
If it would come up, we would certainly entertain it.
<UNK>, our mix has stayed pretty consistent over the years.
We certainly get a large percentage of our agents from competitors.
They look at our brand, the power of the brand, and the opportunity to make more deals.
Our Momentum program that we started a couple years ago is interesting.
The averages still says the average agent that joins us is about eight years experience.
However, in the Momentum program, about half of the agents coming in have less than a year's experience.
Definitely millennials, and that's encouraging to us.
We have a very small part of our people are really young and not very well trained yet, and so our brand helps them a lot.
But if you look at the other half, they average about 13 or 14 years experience.
So the averages are staying the same, but we need to keep bringing the younger generation in, because there's so many people in the real estate industry who are older.
Yes.
We have traditionally sold franchises almost completely to start-ups; a manager of a competitor who wants to own their own business, a top-producing agent or a team that says we'd like to strike out on other own.
So conversions haven't been much of an impact on us.
Almost everything is a start-up.
It's really interesting for me, we do a franchise training program for all new franchisees for a week every month, and over the last two or three years I've been surprised to see how diverse the buyers are and how the ages are trending down pretty dramatically.
Oh, there's lots of runway.
We have about 5%, 5.5% of the National Association of Realtors membership in the United States.
In Canada we are at 18%, and so the Canadian market is going to be very slow.
We've saturated.
However, in the United States we're less than halfway to reaching our goals, which is 10% of the membership of NAR.
In a market like Denver, we really can't sell any more franchises.
We have great market share, there's no room, and we'd rather have all of our offices full and prosperous than sell 50 new franchises and have them all half full and nobody making any money.
Most of our markets are wide open to continue to sell franchises.
<UNK>, we started ramping up when we started negotiating the contract at the end of last year.
And so we put a team together that was perfectly set up for them.
And so our expenses are not going to change dramatically.
Bear in mind though as far as income, our income is not going to go up very quick because we sell a franchise, they're a start-up, it takes them three or four months to open, and then they start recruiting agents, one or two a month.
We'll make a handful of franchise sales this year, and those sales will impact agent growth next year and we'll start to sell even more franchises.
When we look at agent count we're really doing a bottoms-up approach and looking at all the factors that are impacting the business.
So we feel confident that US is performing really consistent with our expectation.
The real unknown is global just because of the strong performance that we've had outside of the US and Canada.
There's a couple of things.
New York and Alaska are contributing to that outperformance, and then there's one other small piece that's impacting that, just with respect to some of the revenue that previously was recorded in our brokerage line item, it's now being reflected in broker fee.
But we're really pleased with how transactions and volumes have performed across the network, so up especially in certain markets like the northeast, California, and the Pacific northwest.
So broker fee provides continued upside to us, and we saw the effects of that in the second quarter.
It's pretty universal across the United States.
We try to measure our market share as percentages of agents of NAR.
Do bear in mind that our agents outproduce the competition between 2 and 2.5, 3 to 1.
When we pick up 2,000 agents in the United States, that's the equivalent of picking up 6,000 of the typical agents across the market.
So that just gives us a continued upward trend, and we just keep growing market share as far as agents go.
That is the case.
We did implement that fee increase on July 1, so we'll see that potential impact just in the Company-owned regions.
That's $5 per agent per month in the Company-owned region.
So we'll see that impact throughout the rest of the year, impacting the US.
Bear in mind that the Momentum program has now been in place for almost two years, and we waived some fees for the agents underneath Momentum for three months.
Now we've got a steady stream of people that are joining under the Momentum program.
So the initial hit that we took of the first group that joined is now just a recurring thing, so it doesn't ramp up, it doesn't continue to accelerate.
