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Presentation

Operator: Good morning and welcome to the Anywhere Real Estate Year End 2022 Earnings Conference Call via webcast. Today’s call is being recorded and a written transcript will be made available in the Investor Information section of the company’s website tomorrow. A webcast replay will also be made available on the company’s website. At this time, I would like to turn the conference over to Anywhere Senior Vice President, Alicia Swift. Please go ahead, Alicia.

Alicia Swift: Thank you, Dennis. Good morning and welcome to the year-end 2022 earnings conference call for Anywhere real estate. On the call with me today are Anywhere, CEO and President. Ryan Schneider; and Chief Financial Officer, Charlotte Simonelli. As shown on Slide 3 of the presentation, the company will be making statements about its future results and other forward-looking statements during this call. These statements are based on the current expectations and the current economic environment. Forward-looking statements and projections are inherently subject to significant economic competitive litigation, regulatory, other uncertainties, and contingencies, many of which are beyond the control of management, including among others industry and macroeconomic developments.

The impact of such developments on consumer demand and the incurrence of liabilities that are in excess of amounts accrued in connection with the pending litigation. Actual results may differ materially from those expressed or implied in the forward-looking statements. Important assumptions and factors that could cause actual results to differ materially from those in the forward-looking statements are specified in our earnings release issued today, as well as in our annual and quarterly SEC filings. In October 2022, the company initiated a plan to integrate Owned Brokerage Group and Title Group however, based on industry and business developments during the fourth quarter of 2022, the company has determined that its reportable segments will remain consistent at December 31, 2022 with prior period For those who listen to the rebroadcast of this presentation, we remind you that the remarks made herein are as of today, February 23 and have not been updated subsequent to the initial earnings call Now I will turn the call over to our CEO and President.

Ryan Schneider

Ryan Schneider: Thank you, Alicia. Good morning, everyone. Over the past few years, Anywhere has made powerful progress on our transformation. We entered 2022 with real momentum and even as the housing market worsened in the year, we leveraged our unique advantages, stayed focused on our priorities and took quick actions that enabled us to deliver $6.9 billion of revenue and $449 million operating EBITDA We accelerated our cost reductions from a target of $70 million to realize over $150 million of cost savings in the year. We rigorously prioritized our growth investments in CapEx and we capitalized on the improving competitive environment. We remained committed to growing our advantaged positions in our existing businesses, especially franchise, luxury and transaction services along with simplifying the transaction for agents and consumers.

Now looking back on 2022, it was a rapidly changing year for housing with substantial declines in the market that got worse every single quarter. Effectively all the market decline was from a drop in unit transactions culminating with Q4 market volume down more than 30% Higher mortgage rates continued to put pressure on affordability and these higher mortgage rates are hurting this new supply of inventory as many homeowners are locked into their current home with low mortgage rates. I am incredibly proud how our great agents and franchisees are taken care of customers, even in the midst of this tough housing market as they continued to demonstrate their value in the marketplace.2023 looks like a volatile year where the housing market will be meaningfully lower than 2022 driven by a substantial drop in unit transactions.

Industry 2023 forecast for transactions are typically in the 4 million to 4.5 million unit range down 10% to 20% from 2022 and remember, unit transaction declines have a disproportionate impact on our business as unit declines also impact our mortgage and title opportunities and we’ll see what happens on the price side of the volume and we expect Q1 2023 market volume to be down around 30% versus 2022 where we expect those year-over-year quarterly in comparisons to improve throughout the year. And I still believe the outlook for housing over the decade is strong and most importantly and potentially excitingly right now, we may be at or near a bottom already. We have all seen a number of the housing indicators in the macro economy exhibit more stability.

In outlook, from December 2021 to November 2022, our year-over-year volume comparisons all showed open volume lower than our closed volume, effectively showing housing results decelerate, that flipped in December 2022. Both in December 2022 and January 2023, our open volume comparisons were higher than our closed volumes. So even with the tough and likely volatile 2023 market ahead, I’m increasingly optimistic about our position and the opportunities in front of us. So first, we are laser focused on change in how we operate our company to deliver greater efficiency and enhance our value proposition. We realized $150 million in cost savings in 2022 and later in this call, Charlotte will share the equally powerful efficiencies we are expected to drive in 2023.

Our excitement in this area is not just about lower costs, it’s about re-architecting our business for greater success in the future. We are reimagining our real estate brokerage offices to be more efficient, flexible, and integrated with transaction services like title and mortgage, which means we can provide fewer but more impactful agent and consumer support costs. Building on our past investments to digitize our operations, we are automating processes across brokerage and title, removing work in friction for agents and consumers and while we’ve lowered our marketing spend for 2023 given market conditions, we are excited, how we’re using a more digital marketing mix to deliver greater value for agents and franchisees. Second, we are rigorously prioritizing our growth investments, which include continuing to expand our powerful franchise business leaning into our luxury leadership position, and driving innovation in our nationally scaled title and mortgage businesses.

Most importantly, we like the better competitive environment that we have seen evolve in 2022 and the competitive differentiation we are achieving. We believe our results demonstrate a flight to quality and that there will be growth benefits for us when the market rebounds. We experienced record franchise sales of 2022 bringing in substantial new companies and helping our existing companies grow via M&A. We continue to have strong growth in our Anywhere Advisors agent base up 4% year-over-year organically and most excitingly in this better competitive environment, we were able to recruit at better economics than in the past few years. And as we’ve been sharing with you throughout the year, we continued to have record high agent retention in our Owned Brokerage business.

Finally, we recently brought to market a new innovative multi-franchisee title joint venture opportunity as part of our franchise value proposition and are in the process of launching the first three in Florida and California. Even in a challenging market, we like the flight to quality that we’re seeing in the better competitive environment and our growth vectors which together, we believe will pay substantial dividends for us when the market recovers. Now I will turn it over to Charlotte to discuss our results in more detail.

Charlotte Simonelli: Good morning, everyone. 2022 was a challenging year for the housing market, but we are excited about the progress we’ve made and the position we are into further our leadership in this industry. We continue to deliver meaningful operating EBITDA and have taken the necessary steps to improve Anywhere’s financial and operational performance with our accelerated cost reductions and prioritization of our investments to drive growth. Now, I will highlight our full-year 2022 and Q4 financial results. Full year revenue was $6.9 billion and operating EBITDA was $449 million. Q4 revenue was $1.3 billion, down 33% in line with our transaction volume decline. Q4 operating EBITDA was $12 million down versus prior year due to lower transaction volume, higher agent commission costs and various other items like the sale of our underwriter business offset in part by additional cost savings.

Our business delivered well above that number in the quarter but operating EBITDA was reduced by several specific items booked in Q4, including write-offs in our franchise business and at our GRA JV, as well as additional legal accruals. Cash on hand at the end of 2022 was $214 million and full year free cash flow was negative $159 million due to a large negative working capital use in Q1 2022. This was driven by our 2021 outsized performance, which drove sizable accruals by year end ’21 which were paid in Q1 2022. We ended the year with the senior secured leverage ratio of 0.77 times and a net debt leverage ratio of 5.1 times. We are pleased with the progress we have made on our balance sheet, we have a long-dated maturity stack and have lowered our cost of capital.

We redeemed the 2023 notes in November and now have limited debt maturities until 2026. Now let me go into more detail on our business segment performance. Our Anywhere Brands business, which includes leads and relocation generated $670 million in 2022 operating EBITDA. Operating EBITDA decreased $81 million year-over-year primarily due to lower revenue related to transaction volume declines, partially offset by decreases in operating and marketing costs. Our relocation business substantially outperformed 2021 and even exceeded its pre-COVID 2019 full year performance driven both by cost efficiencies and new client signings. Our Anywhere Advisors operating EBITDA was negative $86 million, down $195 million versus 2021 However, this business generated $287 million in operating EBITDA before intercompany royalties and marketing fees paid to our franchise business.

Our agent base was up 4% year-over-year, like-for-like and commission splits were up 203 basis points year-over-year. And for 2023 even as overall market volumes are anticipated to decline, we expect continued split pressure driven mostly by continued agent mix as the higher producing agents who earned the highest splits will continue to drive more of our volume. We will also have pressure from previous recruiting amortization. That said, 2023 split pressure is expected to look more like what we experienced in Q4 2022 where splits were about 130 basis points higher year-over-year. Anywhere Integrated Services delivered $9 million in operating EBITDA in 2022. Operating EBITDA declined $191 million year-over-year due to lower mortgage JV earnings lower purchase and refinance volumes and lower earnings due to the sale of our title underwriter business.

As you have already seen in our 8-K, December open transaction volume was down 35%. Our January open volume was down 31%. And we expect our Q1 closed volumes to be down about 30% year-over-year, which will drive our Q1 operating EBITDA unusually negative. Consistent with industry forecasts, we expect the quarterly volume numbers to improve throughout the year but estimate that our annual transaction volumes will decline about 15% to 20%. With this range of volume declines, our 2023 operating EBITDA will be below 2022. But despite to weak housing market, we expect our operating free cash flow to be modestly positive driven by favorable working capital, robust savings programs, focused investments and judicious cash management. As Ryan has mentioned, we have a relentless focus on driving efficiency in this challenging housing market.

In 2022, we once again demonstrated our ability to rapidly change with market conditions delivering efficiencies and executing a $150 million in cost savings. These are comprised of the original $70 million in savings we targeted at the beginning of the year and another $80 million we proactively drove in the back half as market conditions eroded. For 2023, we expect to deliver about 200 million in additional cost reductions, including carryover of approximately $50 million of actions taken in 2022. Let me give you more detail on how we are thinking about these cost savings programs. The largest part of our cost structure today is tied to our operational real estate footprints, this includes the physical brick and mortar of both our brokerage and title operations but also the other support components like staffing, tools and resources and other non-agent activities.

As Ryan said, we are transforming our physical space locations both in quantity and in the way we deliver services to agents and customers. We are also advancing our technology and product solutions, which not only drive cost efficiencies for us, but also improve the agent value proposition. Second, we continued to reduce our operating cost to better match the housing market demand and changing how we work. We have lowered our headcount down 11% from June 2022, as we right-size for this market. Other examples of our savings programs include our ongoing efforts in procurement ensuring our marketing spend is positioned to deliver the highest ROI, identifying software synergies and prudently managing other corporate expenses. As much as possible, these actions should not impact our agent and franchise partners, nor our plans to transform the consumer experience, however, these savings will be offset in part by inflation in our people costs, software costs and litigation costs driven by two class action jury trials, which are scheduled this year to name a few.

And while the housing market remains a challenge, we continued to prioritize investing for growth while driving efficiencies for today and tomorrow. We have made progress against the goals we shared with you at our Investor Day, both on our savings targets and in creating an improved agent experience and look forward to sharing further progress against these goals in future calls. Now let me turn the call back to Ryan for some closing remarks.

Ryan Schneider: Thank you, Charlotte. Anywhere responded to the challenging 2022 for housing with agility. We reimagined how we operate and strengthened our financial profile while continuing to make strategic progress and invest for growth. In 2023, we remain committed to growing our advantaged positions especially in franchise, luxury and transaction services and simplifying the transaction for agents and consumers. Standing here today, in February, we really like what looks to be a better competitive environment for us, and potentially most excitingly based off the data in our book from December and January, we may have reached the bottom of the housing downturn. We really like our positioning to win, especially as the market rebounds. With that, we will take your questions.

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Operator: Your first question is from the line of John Campbell with Stephens. Please go ahead.

John Campbell: Hi, I want to check back on the rule of thumb you guys have provided in the past around the 1% volume swing kind of equating to $15 million of EBITDA sensitivity. Is that still a good measure to consider? And then also on the $200 million, how should we be thinking about the net impact for the year?

Charlotte Simonelli: Yes. It’s a great question, John. I think, the $15 million is still pretty close, I think what I would say is when the volume declines are more heavily based in size, that can impact our business little bit more, because there is a knock-on impact to title and mortgage. So you can — it’s there. It’s definitely still a good analog to use. As far as the $200 million, I don’t think that’s the flow-through is going to be different than what we’ve seen in other years. As you know, most of it flows through, however, we do have those offsets that I mentioned in the script like enhanced people costs and some inflation around software and litigation. So I can’t give you an exact percentage, but the flow-through is pretty consistent with what we’ve seen in previous years.

John Campbell: Okay. That’s very helpful. I’m sorry, Ryan,

Ryan Schneider: John, if I can build on that a little bit, I wanted to just double down on a couple of things there. One is Charlotte’s point and I said it in my script, when the decline is all units, it is a disproportionate hit on us because it hurts the mortgage and title opportunities, right, and we clearly see that in our 2022 results, when units were down pretty dramatically, both in the market and for us, right? So that’s a big thing. The other thing on the cost thing is, it does give just the question how volatile 2023 is going to be, right, in terms of what happens on the cost side, because obviously 2022 is a pretty wild housing market right? We had all those unit declines. We have the rate environment change, political stuff, high inflation, et cetera, and I chose the word volatile in my script for a reason.

The biggest uncertainty is the housing market itself, right, and lower unit transaction forecast and we’ll see what happens on price and depending on what happens with that, we will probably drive some of our cost base also, right? We’re rooting for a stronger year but that would probably mean we’d bring some cost back, if it’s a more challenging year, then obviously we keep looking there but there is also the uncertainty on the competitive side. I said we like the competitive environment that we’ve got, that’s evolved and I think there’ll be some real questions about which companies are going to prosper and which ones are going to struggle in a kind of type of year and so we like our relative position, what we’re seeing on the growth side, we’ll see if there’s any opportunities there that might create for us that would change our spending potentially and then another area of volatility for 2023 is litigation, right, Charlotte mentioned that, that’ll be a cost headwind for us.

we’ve got these two class action jury trials and then we got a couple of other multiple defending kind of industry class actions out there. And these are just the things we know about, the wild stuff in 2022 like Ukraine and the inflation stuff, what the Fed did on rates, we didn’t know a lot of those stuff. So end of the day, what happens with units will make a big difference in our — in all of our businesses effectively, including those title and mortgage results you saw in 2022 and what happens with the macro and some of these other things will make a difference on the cost side, but I think Charlotte given you the right way that we’re thinking about it right now and just like Charlotte gave you our January results, we’ll do our best throughout the year to keep you updated, just like we gave you our Q4 results six weeks ago, just you hadn’t, then you kind of — see what we’re using as we plan kind of going forward.

Charlotte Simonelli: The other thing – sorry, John, the other thing I would say is, because of where the housing market has been in the back half of last year, like the majority of that $200 million is identified. So, I felt very good about where we’re starting off the year from an identified perspective. The other thing I would tell you is, it does not include the more draconian things that we did during COVID. So hopefully that helps round out your thinking on the savings programs.

John Campbell: Yeah. That’s very helpful and it’s a very good point on the unit impact, I hadn’t thought about that too much. One more here just relative to your guidance for the full year, you guys said modestly positive free cash flow from operations. Charlotte, if we could dig into that for just a second, I know Cartus tends to have a pretty big influence on the working caps, if you could talk to expectations there and then also just moving down the total free cash flow, what else should we be considering relative to the CapEx and maybe your capital allocation program?

Charlotte Simonelli: Sure. So as far as Cartus goes, it actually was a drain for us in the fourth quarter, normally on a full year basis, we end up about zero on the securitization facility, give or take in a small single digits one way or the other. We actually had a pretty big drain of almost $50 million, so that unwinds in the first quarter. Now, I can’t tell you how we’re going to finish the year, but like I said, the majority of year that will neutralize over the year and we’ll end up on a zero basis, so it will benefit us in the first quarter and hopefully on a full year basis because of where we ended last year. So that’s how I would think about the securitization. Some other working capital components to think about as like all of our free cash flow working capital declines from last year really happened in the first quarter and for the reasons I called out in the script.

So we don’t anticipate having that impact us in the same way in the first quarter of this year. So working capital instead of being a hit like it was last year should actually be slightly positive for us. So other than that from a CapEx perspective as I called out, we’re being very judicious and we still have a healthy CapEx forecast. It’s on the lower end of what we’ve spent over the past sort of four or five years, but it’s still very healthy and that is obviously focused around two things, first driving our strategic goals, which is improving sort of the customer experience and part of that happens in technology and part of that happens on the facility side. So it’s still a healthy but focus budget, but on the lower end of what you’ve seen us spend over the past four or five years.

Operator: Your next question is from the line of Ryan McKeveny with Zelman and Associates. Please go ahead.

Ryan McKeveny: Hi, good morning. Thank you. Charlotte, so on the cost savings, so realized $150 million this year, $200 million expected next year, so that $350 million in total. I think that compares to an expectation or a target of $300 million that you laid out at the Analyst Day between 2022 and 2026. So can you talk about how much of the 2022, 2023 dynamic is kind of structural cost actions that you were planning to take maybe just at a later point in time that are being pulled forward? Or how much of the cost actions are more variable with the pullback in volumes, such as marketing spend?

Charlotte Simonelli: Yes. That’s a great question. So to your point, we had a goal of about $300 million and you can see that we’ve already delivered or we’ll expect to deliver about $350 million in these two years alone. How I think about it, is it’s kind of like two-thirds, one-third, so a lot of this is structural stuff that we are — you can call it pulling forward. I think we weren’t really specific about which year these savings were going to happen when we did Investor Day, anyway, I think this is, this is the right cadence for how we would want to go attack some of those permanent structural savings. So, I feel good about the progress against our goal but to that point, a third of it probably is more variable tied to the housing market and to Ryan’s point earlier, if the housing market comes back faster, some of that costs might come back faster too.

So I kind of think of it as like 60, 40 or two-thirds, one-third of sort of more structural savings versus tied to the housing market and variable or temporary.

Ryan McKeveny: Got it. Okay, that’s very helpful. Thank you. And then one higher level one, so, if we go back in time to the reality days, even Cendant Days in the GFC, obviously very tough from a volume and profitability perspective, but there were some operational offsets in the numbers at the time. So commission splits to the agent went down, commission rates to the consumer went up, franchise royalty rates went up, so it is kind of partial offsets against the volume environment at that time. I guess I’m curious as you look at the business today and going forward in this tough environment, is it possible that some of those partial offsets flow into things? Or is there any reason that it’s different this time than previous volume declines?

And I know your commentary on the split suggest continued upward pressure at least modestly in 2023 but just curious if there are kind of levers beneath the surface in tough volume environment, that may trend in a slightly better direction. Thank you.

Charlotte Simonelli: That’s a great question. Why don’t I start off and then let Ryan fill in with other thoughts that he might have. So the fact of the matter is, like if you think of the royalty rates and if you think of average broker commission rates and things that are structural to this business, they’re not really moving in a favorable direction because of either size consolidation in franchisees or the mix of homes that are being sold tend to be at higher price points these days, which tend to garner slightly lower average broker commission rates. So I don’t anticipate those things changing unless the mix of homes that are being sold with inventory coming back on, and that may help us in the future, but I don’t really see that helping us in 2023 per se.

From a commission split perspective, the good news is the competitive side of that is significantly more rational and like I called out the biggest impact that we’re going to have in us is pure agent mix. So to the extent that again we get more home sale transactions. There is a hopeful benefit in the future that the agent mix kind of normalizes itself out. And we have agents across the spectrum, delivering the home sale transactions. If that was the case today if we didn’t have this agent mix hit, we probably see a significantly better profile on commission splits, but until that changes, we kind of are where we are. So probably not the answer you wanted to hear, but that’s kind of how I’m looking at it in the short term.

Ryan Schneider: Yes, I don’t have a lot more to add on that. Ryan, I mean, if you just talk on the franchise side with a little more detail, our top 250 franchisees are about 70% of our business right now. And our rebate tables are public, so you can see how the more business that people do the lower royalty rate that they earn and that’s up from whatever 65% five years ago, which is up from 57% 10 years ago, which is up from whatever it was back in the Cendant days that you’re talking about. So I think that this concentration, both on the franchise side, and then the agent — the best agents doing a higher percentage of deals have both created a little bit of a different kind of ecosystem in the margin that probably makes it less likely that you get some of those effects that happened in the downturn 15 years ago.

Operator: Your next question is from the line of Tommy McJoynt with KBW. Please go ahead.

Tommy McJoynt: Hi, good morning guys. Thanks for taking my questions. Could you talk a little bit about what’s embedded in your guidance for the mortgage JV for next year either directionally or absolute EBITDA terms if you want to be that clear?

Charlotte Simonelli: Sure. As you know, it was a drain obviously on the year for us in 2022, the good news is, I do expect it to not be a drain in 2023 and then that has the benefit of a year-over-year impact as well. So I don’t imagine that we’re going to be like making money like we did two or three years ago, but the good news is that it shouldn’t be a drain on us. It should be positive and there is obviously a positive year-over-year benefit from that as well.

Ryan Schneider: The mortgages – where the competitive environment Tommy is also likely to help us. We’ve seen a couple people in mortgage make some pretty big strategic shifts that means we’re doing some things on the recruiting and kind of building the depth of our kind of joint venture in a way that’s pretty helpful. As you’ve seen some people pull back and so we’re hoping to reap some of the competitive environment benefits on that next year, even if it’s obviously kind of bit a tough business.

Tommy McJoynt: Thanks. And then just my second question. Can you remind us of some of the leverage covenants that you guys have on your revolver and some of your debt? And are there any concerns on — with the lower EBITDA next year you guys running into breaching any of those covenants? Or do you guys feel like there’s a pretty safe cushion?

Charlotte Simonelli: That was a bit of a softball, but thank you for that one. No. At the end of the day, our most restrictive covenant is our senior secured leverage ratio at 4.75 times and as you saw, we’re at 0.77 times, so we don’t have any concerns about breaching the senior secured leverage covenants. We do have a covenants that’s total debt leverage of four times that we are unable to do share buybacks. So we’re clearly beyond that, right now at 5.1 times but I don’t really consider that overly restrictive and basically, at the end of the day, everything that we’ve done over the past two or three years to handle this refinancing in a strong and positive market at the best terms possible, the significant transformation of the balance sheet, I guess the lesson there for everyone is take care of that when times are good, and then you’ll be well prepared when times — when the housing market takes these cyclical dips like it tends to do.

So, we feel really, really proud of what we’ve done over the past few years on the balance sheet and it puts us in a good position to continue investing behind our strategic priorities and obviously we start to focus on the cost, that’s just the right thing to do for the business, but I am not worried about those covenants.

Ryan Schneider: Yes. Tommy, that’s one thing that I want to just double down on a bit here, which is when you look at our balance sheet today and I give Charlotte and our finance and legal and other teams all the credit for this, I mean we’ve seized the moment a couple of times to basically, but a couple of billion of unsecured debt out to maturities like ’29 and ’30. We have done other moves beyond that, we paid off our 2023 notes and we moved from a world where we used to have a lot of secured debt to the point where our secured debt, as you know, incredibly low, right and hence you — even in a tough year for housing whether it’s ’22 or ’23, you can see that our senior secured leverage ratio is quite far away from our kind of most restricted covenants and it wasn’t an accident, there’s — when I talk about our transformation and the balance sheet part is as important as anything in this and so it is — if we hadn’t made those moves, we’d be having a pretty different conversation right now staring at a tough 2023 for our industry.

But whether it’s the lengthening maturities, whether it’s the massive shift to unsecured, whether it was frankly a pretty low rates that Charlotte and the team got in our lower interest expense and we used to pay like we’re in a lot better position there and that does give us the room to even in what is looking like a pretty volatile and kind of wild year 2023, keep making some of these investments, keep simplifying the company, keep changing how we do title and mortgage, keep investing to have franchise sales growth, things like that. So I love the question, still an important topic for us to stay focused on. We’re never going to relax on the balance sheet side, but it’s being prepared for these kind of challenges in the housing market and cyclical businesses.

It’s why we want to get ahead of these things and hopefully our owners feel like we’ve got the company in a very different position on the balance sheet side.

Operator: We have come to the end of the Q&A session. And with that, this concludes the Anywhere Real Estate year end 2022 conference call and webcast. We thank you for your participation, you may now disconnect.