Good morning, and welcome to the RE/MAX Holdings' First Quarter 2024 Earnings Conference Call and Webcast. My name is Briana, 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, Senior Vice President of Investor Relations. Mr. Schulz?

Thank you, operator. Good morning, everyone, and welcome to RE/MAX Holdings' First Quarter 2024 Earnings Conference Call. Please visit the Investor Relations section of www.remaxholdings.com for all earnings-related materials, including our standard earnings presentation and to access the live webcast and the replay of the call today. 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 and open offices, financial measures and outlook, brand expansion, competition, technology, housing and mortgage market conditions, capital allocation, credit facility, dividends, share repurchases, litigation settlement, strategic and operational plans and business models. Forward-looking statements represent management's current estimates. RE/MAX Holdings 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 first quarter 2024 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 Erik Carlson, our Chief Executive Officer; and Karri Callahan, our Chief Financial Officer. Our brand leaders, Ward Morrison and Amy Lessinger, are also here and will join us for Q&A.

Thank you, Andy, and thanks to everyone for joining us today. In the short time that's passed since our last call, several events of note have taken place. On the housing front, the industry appears to be in the early stages of recovery. Industry reports and feedback from our network tell us that demand remains robust, and the supply of for-sale homes continues to rise, providing some relief to frustrated buyers in this most unusual housing market. However, interest rates have moved up, impacting the number of transactions and adding uncertainty about whether the Fed will cut interest rates later in the year as some had expected and hoped would be the case. While there are many factors currently affecting the real estate market, one thing remains constant: RE/MAX agents leverage their skills, experience, and competitive advantages to serve as many customers as they can. A key difference between our business model and that of many of our peers is that our model incentivizes agents to help buyers and sellers reach their housing goals, while some other models have sent their agents to recruit other agents, many of whom aren't productive. In contrast, our agents' commitment and drive sustain the RE/MAX culture of productivity, which was recently confirmed by a widely respected industry survey. The 2024 REAL Trends verified best brokerages rankings revealed that RE/MAX agents at large U.S. brokerages on average outbilled the competition 2:1 in residential transaction sides last year. In the survey of over 1,300 participating large brokerages, RE/MAX agents averaged 11.8 transaction sides, more than double the average of other agents. Furthermore, when brokerages are ranked by transaction sides per agent, 88 of the top 100 are RE/MAX firms. This marks the 16th straight year in which the REAL Trends data confirms that RE/MAX leads in average per agent productivity. Known for being skilled, experienced, and very competent, our agents have made RE/MAX the world's most productive real estate network as measured by residential transaction size. Additionally, RE/MAX agents in the U.S. and Canada have been voted the most trusted for several years in a row, and trust is a top consideration among consumers when selecting their real estate agents. Our industry-leading trust and productivity are key competitive advantages. Our iconic brand is the #1 name in real estate. We have an unequaled global presence, a distinct value proposition of services, and most importantly, the best agents and brokers in the business. As I said previously, RE/MAX agents are simply the gold standard. Our competitive advantages should serve us well considering recent industry developments taking place amid a lot of noise and misinformation. To recap, on March 15, the National Association of Realtors announced a proposed nationwide settlement agreement that would release NAR, association-owned MLSs, and most of its membership from liability in multiple seller-initiated commission lawsuits. The proposed settlement includes a payment by NAR as well as several changes in business practices in our industry. A few proposed business changes that are most relevant to RE/MAX affiliates are expected to go into effect mid-July 2024. First, while offers of compensation to buyers' agents are still permitted by the agreement, they cannot take place in the MLS. Second, written agreements will be required for MLS participants. Notably, about 20 states already require written buyer agency agreements. Let me stress, we continue to remain steadfast in our support of buyer agency and buyer broker compensation, emphasizing the significant advantages of having buyers and sellers represented by trustworthy, seasoned real estate professionals. These skilled agents ensure that consumers receive guidance and advocacy while navigating the complexities of the home buying and selling process. This representation generally drives better outcomes and experiences for the consumers involved. From an operational perspective, we quickly moved to communicate with RE/MAX affiliates and help them understand the changes. Our RE/MAX brand President, Amy Lessinger, immediately held informational sessions for our brokers and agents. With 51 years of history, we've witnessed many sudden changes in our industry, and the wisdom that comes with experience continues to serve us well. Education and outreach are two core strengths of RE/MAX, and they were our top priorities following the NAR announcement. Now in preparation, we have developed and deployed materials and resources to help our affiliates navigate the post-settlement landscape. From education and consultation to marketing and consumer messaging, RE/MAX will continue to support affiliates in every possible way. We advised our network that there are four primary focuses they should concentrate on. First, RE/MAX affiliates should continue to conduct their business with the confidence of being released and protected from liability related to these industry lawsuits, pending final court approval of the RE/MAX settlement slated for hearing next week on May 9. Second, they should start preparing for the two proposed NAR rule changes expected to take effect in July. This includes updating their marketing materials, higher presentations, and buyer representation agreements. Third, they should continue to speak to their clients in a clear, transparent manner about the value they provide and how they are compensated. Fourth, they should stay updated on ongoing industry developments. The terms of the proposed NAR settlement will change some aspects of the business, but RE/MAX agents are well positioned to navigate these changes, and we will help guide them as they evolve. Given the extensive experience within our network, our affiliates can lean on and learn from the RE/MAX community. That's the power of a network filled with full-time, productive professionals. In our settlement announcement, many have asked us how the proposed NAR changes might impact the industry. Only time will tell; all commissions are negotiable as they always have been. Ultimately, the responsibility to set fees and clearly communicate value lies with the individual brokerages, teams, and agents. That has always been the case within our network. We're moving intentionally and methodically, given these unusual times. We're in a period of transition and uncertainty, and we'll have a better read on how these developments will impact the industry and RE/MAX as the year unfolds. In the meantime, we'll continue to operate our business as efficiently and effectively as possible, maintaining a growth mindset and staying laser-focused on delivering the absolute best customer experience. We're leaving no stone unturned. We're challenging each process and function to improve not only the velocity but our outcomes. These efforts should yield measurable results in the aggregate, and we believe we have additional revenue opportunities and the potential for margin improvement driven by control over operating costs. Now as we said last quarter, this will take time, but we are moving with a requisite sense of urgency. We've got a great foundation to build upon. Our team and our affiliates are passionate about our brands, about each other, and about innovating, growing, and simply getting better each and every day. We recently held our annual agent convention called R4 in Las Vegas with thousands of attendees from 60 countries. The event was both inspiring and reassuring. Personally, at my first R4, I spent most of my time listening, trying to learn as much as possible from our network and other industry leaders. It was a fantastic experience. Our agents and brokers are not only confident and enthusiastic but also excited about the opportunities ahead and can't wait until next year's event. Regarding our growth initiatives, we continue to iterate, digging into the details, gaining insight and uncovering additional opportunities. To date, we've seen positive results, though they aren't large enough yet to overcome the overall contraction currently being experienced throughout the real estate industry. We launched our expanded teams initiative on April 1, and we're seeing the first brokerages unlock the benefits by adding the required six new team members. Notwithstanding the macro pressure, our conversions, mergers, and acquisitions program continues to add brokerages and agents to the network. It also continues to evolve as we work through our pipeline of compelling prospects, identifying new targets and developing new approaches. We are laying the groundwork, which should serve us well when the market resumes its growth cycle. Now on the mortgage side, despite one of the most challenging end-market conditions the mortgage industry has faced in recent history, we continue to grow. We're focused on what we can control: recent franchise and loan originator convention had good participation despite the market conditions. Attendees were excited about the future prospects of the mortgage industry. Motto is going through its first renewal process as the original cohort of franchises are completing their seven-year franchise terms, and we're off to an encouraging start. With that, thank you, and I'll turn it over to Karri.

Thank you, Erik. Good morning, everyone. Effective cost management amidst a challenging housing market summed up our financial performance for the first quarter. Some notable quarterly financial highlights included total revenue of $78.3 million, adjusted EBITDA of $19 million with an adjusted EBITDA margin of 24.3%, and adjusted diluted EPS of $0.20. Looking closer at revenue, excluding the marketing funds, revenue was $58.1 million, a decrease of 9.3% compared to the same period last year, driven by negative organic growth. Organic growth decreased principally due to a reduction in event-related revenue and lower U.S. agent count, partially offset by higher mortgage segment revenue. With respect to events, recall that last year, we celebrated our 50th anniversary at our annual agent convention, which led to exceptional attendance and revenue. This year's conference was smaller by comparison. Selling, operating, and administrative expenses decreased 6.9% to $45.7 million, primarily due to lower expenses from our annual convention and reduced legal expenses, partially offset by higher equity-based compensation expenses. From a capital allocation perspective, we continue to be disciplined and patient, particularly given the current uncertainty regarding rate cuts that appear less likely to occur in the second half of this year and our pending settlement that is not yet finalized. Though housing appears to be rebounding, it is a slow process. For these reasons, we continue to be responsible stewards of capital and think it's best to focus on replenishing our cash in the near term. Simultaneously, we believe we still have the financial flexibility to pursue growth opportunities where we see the greatest potential for return. Our second quarter and full year 2024 outlook assumes no further currency movements, acquisitions, or divestitures. For the second quarter of 2024, we expect agent count to change from negative 1.5% to 0% compared to the second quarter of 2023, with revenue in the range of $75 million to $80 million, including revenue from marketing funds in a range of $19 million to $21 million. Adjusted EBITDA is expected to be in a range of $24 million to $27 million. For the full year 2024, we project agent count will change from negative 0.5% to positive 1.5% over the full year 2023, with revenue expected in the range of $300 million to $320 million, including revenue from the marketing funds in a range of $78 million to $82 million, and adjusted EBITDA expected in a range of $90 million to $100 million. With that, operator, let's open it up for questions.

Our first question today comes from Soham Bhonsle with BTIG.

Maybe first one for Amy or Erik, it doesn't matter. Do you feel like the NAR settlements are enough to sort of satisfy the DOJ's concerns as you speak to folks around the industry, or do you think they may look to include some other additional stipulations before we get final approval?

Yes, Soham, this is Erik. I'll turn it over to Amy for some additional insights. We can't speculate on what the DOJ might be thinking. While there are changes in the settlement, it aligns with our commitment to transparency in transactions and representation on both sides, buy and sell. Recently returning from R4, Amy may have more to add here. Agents and brokers are discussing the changes and their potential impacts, along with what RE/MAX and the industry are doing to support them. They are receiving inquiries from customers about how this affects compensation and the value they provide. From RE/MAX's standpoint, we feel confident because we have full-time, highly productive agents who excel in negotiations and deliver significant value. We're making necessary adjustments to some business practices, and it's encouraging that these changes are already being implemented in about 20 states. While those states may not perfectly represent every scenario, they can guide us in shaping our future direction. Regarding the DOJ, it's difficult to predict their actions, and we'll leave that to them. I'm sure they will make the right decisions. Meanwhile, we are focusing on what we can control. Amy, perhaps you can share more from your field experience?

Sure. In talking to our brokers out there, they are highly focused on ensuring they're educating their agents, and we've provided a lot of support there. And I'll echo Erik's sentiments in the fact that our agents are already experienced, but they're probably getting a few more questions from buyers and sellers than they have in the past. I think we welcome the conversation, and our agents welcome the conversation. We've always believed in transparency in the transaction, and I think that it's absolutely right and perfect that we're already prepared. We had already prepared education leading up to this. So our brokers in the field, I think that's a point of differentiation as well. They are at the local level, supporting their agents on a day-to-day basis. We have provided them with education through our RE/MAX University platform where they can hold classes and bring everyone up to speed on what they need to do to facilitate discussions about what it means to be represented in a transaction and how compensation works.

And then Amy, I guess just curious, are you seeing any pushback from buyers on the commission rate early on? Or are we still sort of status quo?

It's interesting. So far, we are not widely hearing that. We reported that 90% of buyers last year engaged in being represented. In the U.S. in particular, buyers are used to being represented, and they understand the value of having representation; their interests are protected. They value local market expertise, the ability for an agent to negotiate on their behalf really streamlines the process. The questions that we're getting are about what it means to be represented. We've always been able to negotiate on their behalf, and commissions have always been negotiable. However, I think we're diving a little deeper into what true buyer representation means.

Okay. And then maybe one long-term one. As we sort of think about the next 3 to 5 years, I think the consensus seems to be that there will be fewer agents in the industry, but those that remain are going to be more professional in nature, which is, I guess, positive for the RE/MAX model. But it also means that competition for some of those best agents is going to probably intensify as well. Could you maybe just talk about what changes or potential refreshes you may have to do for the RE/MAX model as we try to adapt to enhanced competition for the best agents in the industry?

Look, Soham, I appreciate the question. I think that we compete for the best agents in the industry today. So I think it's something that has been part of our 51-year history, and we're good at it. Not to say that we're not going to have to evolve, which is what I talked about in my opening comments. I do think it's a bit early to understand some of the changes that will occur over the summer and the impact. However, obviously, we focus on what we think we can control. Look at the power of our network, with 140,000 agents worldwide means something. The number of brokers we have in local communities means something. They have their finger on the pulse. They are able to serve the needs, helping with questions, communication, education—not only in the materials we provide in RE/MAX University but also at that local level. That's the importance of the broker and the relationship, living and working in the community with agents and helping them understand the value that not only that brokerage provides but also, obviously, the RE/MAX brand tools and community provide. So I think we're well positioned to compete. But I do agree that we will have to continue to compete. Competition will intensify. Will part-time agents leave? I think that is the case—I totally agree with that consensus. To what level, I don’t know. What I do know is that we're well positioned because we are full-time, productive, and we've got the support of a great community. We're in a better position than not. That said, we still have work to do, and we're going to have to keep our eye on the competition and work hard every day to help brokers and agents be successful in their market.

Well, I think I’d add to that, too, Soham, that everything we do here for decades has truly been designed to help an agent be more professional, more productive, and ultimately lead them to a path and an opportunity to sell more houses. So we're not playing catch-up there, but I also echo Erik's sentiments about the fact that we can continue to evolve and make sure we stay in the most competitive position possible.

Your next question comes from Ryan McKeveny with Zelman & Associates.

I'm sorry. Hopefully, you can hear me now. I was on mute. Sorry about that. On the capital allocation side of things, longer term, obviously, near term, it's kind of a rebuild of cash mentality. Maybe for Karri, is there a level at which you want to see the cash balance get to before rethinking about things like share repurchases or dividends? Just any framework on if there's any certain level you're targeting getting back to before reintroducing that or just general thoughts on that?

Sure. Ryan, great question. As you said, right now, there is just a fair amount of uncertainty from a macro perspective, and we're obviously laser-focused on getting the settlement behind us. In terms of the things we are focused on, we're really focused on leveraging, over the long term, the strong economic and cash flow characteristics of the business. We've got our eyes focused on a couple of different leverage levels stipulated in our credit agreement. The good news is that the franchise model and the strong economics, earnings to free cash flow characteristics—excluding the settlement, we're still looking at 45% to 50% conversion of our earnings to free cash flow for 2024. So really focused on that: getting the leverage levels lower and back in accordance with the levels stipulated in our credit facility. After that, we’ll definitely focus on those initiatives to drive the company’s growth in the future because we believe there are many opportunities across the network.

And one more for you. Just kind of a modeling one. On the broker fee revenue, I think, year-over-year down just slightly and kind of the best year-over-year performance in quite a bit. It was ahead of our estimate. I guess I'm just curious, is that just macro kind of EHS-related trends during the quarter, especially in February with the pickup we all saw? Or have there been any kind of structural adjustments at all within the way broker fee revenues are being structured?

Yes. I think that's a great question, Ryan. I think it really is macro related. But I do think some of that comes back to the overall strength of the network with the most productive agents—in a challenging macro environment, we stand to perform well. From both a top-line perspective and a margin perspective this quarter, we're just really happy with the results, and I think it highlights some of the differentiation in the financial model.

Your next question comes from Ronald Kamdem with Morgan Stanley.

I have a quick question. The agent count in the U.S. continues to decline, and I'm wondering if you have identified any notable trends among the agents who are leaving. Are they mostly part-time agents or the least profitable ones? I'm asking to understand how much more of this decline we might see before reaching a turning point.

Ronald, foundationally, the industry has contracted, which we've seen historically in the past. We are not immune to that, but I think that what we expect moving forward is that professionalism and the ability to navigate industry changes will become even more important. We feel like we're in a great position to capture agents who truly need support during this time and need to elevate their skill set because we're ready with everything they need to succeed. Our ability to compete should be very, very high here.

On, please proceed, Karri.

Yes. The only thing I was going to add from a numbers perspective is that especially as we look at kind of experience and tenure. The cohort of agents that we're seeing across our network continues to be fairly consistent with what we've seen historically. From an experience perspective, close to 20% of agents across the industry have 0 to 2 years of experience, whereas on the RE/MAX side, it's closer to 10%. We continue to differentiate ourselves there, both from an experience perspective and our agents being more tenured than the industry. That trend has continued and even strengthened over recent quarters.

And Ron, this is Erik. Your question is a good one. There are insights and actions that we can take. We're not necessarily satisfied with agent decline, either from a net or a disconnect perspective. I think it will be obvious if you think about it—agents do leave brokerages rather than kind of the brand. The industry, based on the volume last year on home sales and the volume this year, it’s harder to be an agent. We are probably better protected and mitigated because of the full-time nature of our agents. However, we need to increase agent satisfaction and broker satisfaction by providing additional tools, support, and resources to help agents be more successful, whether in a tough market or an easy market. We continue to try to turn over every rock here to understand what we can do to better support agents and brokers and we hope and think that we'll be able to bend the trend.

Great. And my second question is just on the implication of the NAR ruling. It sounds like you guys have been front-footed on education, staying ahead of agents and brokers. My question is, when you think about the 20 states that already have those policies in place versus the ones that haven't, is there anything structurally or process-wise that needs to change on the broker and agent level as you move forward?

So real quick, Ron. I will pass it over to Amy for some commentary because she's obviously closer to being an agent, a team leader, and running a brokerage than I am, and she's probably forgotten more than I'll ever know. I think that we need to still see some of the rules, right? Some specifics aren't necessarily outlined to the extent where you can make some changes. You’re starting to see some make proposals to come out with different buyer agreements, etc. First and foremost, we wanted to let our community know that we're there to support them. Education is first and foremost and getting back to the basics of the value you provide, your negotiation skills, and how you communicate about compensation for that value. We’ll be in a good situation to make changes to agreements, processes, and things of that nature. I'll turn it over to Amy for her perspective since she's had her feet on the street more recently.

Sure. In a little bit of history, buyer agency came into play in the mid-1990s. There was a big shift because buyers historically were not represented. They did a big study leading up to it, where nearly three-quarters of buyers out there thought that when an agent showed them a home, they were actually being represented. This change is not so colossal among agents as they are familiar with what it means to be represented or to be a buyer's agent. Although these other states have not had mandatory buyer agency agreements, those agreements exist and have been widely used for a long time. Now, though, they become mandatory. Some fields are going to change that elaborate regarding compensation and specifying an amount, etc. We will anticipate those changes in the forms to come at the local level, and it will be disseminated. Our brokers, boots on the ground, will be able to navigate that with speed and efficiency.

Your next question comes from Tommy McJoynt with KBW.

Along a similar line of questioning, with all the data you see on your agents and perhaps even anecdotal observations based on your face time with your agent up at annual convention. Is there any evidence of RE/MAX agents, or frankly, their local competitors, experimenting with compensation arrangements that are different than the typical, let's call it, 2.5% rate? I understand it depends on the local market—perhaps something like $6 compensation amounts or slimmed-down offerings? Anything like that you’re hearing or seeing in the data?

Well, Tom, first of all, I think it's important to say that rates have never been set. They've always been negotiable, and varying models have existed for a long time, whether it be flat-fee based, percentage-based, etc. Right now, however, we are not seeing a large uptick in any variation there. I just haven’t really heard much chatter from the network regarding that.

Yes, Tommy. From R4, there isn't an old model that’s now a new model that, all of a sudden, serves as a quick fix. Brokers and agents, especially at R4, were just talking about the value they provide on either the selling or buying side. This will be different, obviously, with a potential agreement before they go to a showing, etc. However, the fact that they are full-time professionals helps them because they’ve got tenure and they've got productivity. They have more opportunities to succeed in turbulent times, thus helping them get through challenges.

That makes sense. Switching gears over to the international agent side, I know this gets asked every couple of quarters, but I want to get the latest update. If I take the global fee revenues and divide it by the number of non-U.S. and Canada agents, that number seems to be running around $200. I think of it as a monetization opportunity. Would you see prospects for that to be increasing or decreasing? What initiatives do you have to potentially move that number?

Tom, I'll start there. It’s definitely something that’s on the roadmap. You're right; the fees have been running around $200. We have a great network in approximately 110 countries. There are many agents out there, and definitely, monetization opportunities exist. However, I don’t see any downside here; I only see upside.

Your next question comes from John Campbell with Stephens.

On the exiting April agent count, you guys provided in the press release, if you were to keep that static and kind of hold the line for the rest of the year, getting down, I think total agents down maybe 120 basis points year-over-year exiting this year. The low end of the total agent guidance you guys provided was down 50 basis points. So obviously, you'll need some sequential growth from here. I wanted to check on your level of confidence with the guidance. Secondly, how impactful is seasonality typically? Do you feel like the past cadence of kind of seasonal growth will hold this year?

Yes. I think that’s a great question. A couple of things to note with respect to the first quarter and even through April from that guide perspective. International agent count has been a little lumpy. We've had some puts and takes. Erik just mentioned the 110 countries and territories. However, we have still, on a year-over-year basis, grown international agent count by 3,500 agents and have had some pockets of strength, especially in Central and South America. Some of the reductions we've seen there, we expect to more than rebuild ourselves and get back to close to mid-single-digit organic year-over-year growth on the international basis. And that’s the biggest deviation. As we look at the U.S. and Canada, we're hoping to see some trends, but obviously, the macro conditions are a little bit tougher.

Okay. So it sounds like you're expecting continuation of U.S. Canadian headcount reduction and then a little bit better international, is that fair?

No. I just want to clarify there. From an international perspective, we're getting back to a year-over-year basis to that mid-single-digit level of growth. When we look at the U.S. and Canada, obviously, what we've seen currently in terms of the year-over-year performance is kind of more flat in Canada on a sequential basis. We have tremendous market share in Canada, so we look at that from the Canadian perspective. In terms of the year-over-year perspective in the U.S., the macro conditions are a little tighter, but we're expecting a bit of sequential improvement compared to what we've seen in the first quarter.

That's good color. I appreciate that. And then with Motto, if I go back and tally the franchise signings over the last couple of years, I'm showing you guys maybe have about two-thirds or so that are live now. I know there's probably an element of attrition in play there. Could you talk about how many franchises you have going through implementation or getting set up now? Once you get them live and paying full fees, what that level of revenue might represent?

Yes. The to-be-open status right now, we have close to 20 that are to be opened. We've already opened up eight this year, so we’ve done well in that area. We obviously need to sell a few more, so that continues to be a spot that we are working on. There are definitely some green shoots as it comes to sales. It's been a tough market to sell into, but we are still growing. Last year, we sold close to 30 franchises, and we believe we can go higher this year. That’s the plan. We still think there is an opportunity. It does take anywhere from 60 to 180 days to get someone open; after that, they start paying us in the seventh month. So it takes a little bit of time to ramp up. However, that equates to approximately $5,000 a month between the ad fund and the royalty fee. The opportunity for Motto to still be an organic growth engine is there, and we continue to sell high-quality sales; they are fewer now. Yesterday, I spoke to an independent who has 80 agents and who are eager to get into mortgage, so we’re still seeing people in the real estate sector looking for opportunities to branch into ancillary, and mortgage continues to be the best for them.

Seeing no further questions at this time, this will conclude our question-and-answer session. I will now turn the call back to Andy Schulz for any closing remarks.

Thank you, operator, and thanks to everyone for joining our call today. Have a great weekend.

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