Greetings and welcome to the frontdoor Third Quarter Earnings Conference Call and Webcast. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] It is now my pleasure to introduce your host Matt Davis, Vice President of Investor Relations and Treasurer. Thank you. You may begin.

Thank you, operator. Good afternoon, everyone, and thank you for joining frontdoor’s third quarter 2019 earnings conference call. Joining me on today's call are frontdoor's Chief Executive Officer, Rex Tibbens; and frontdoor's Chief Financial Officer, Brian Turcotte. Before the market open today, frontdoor issued a press release reporting our third quarter 2019 financial results. The purpose of today's call is to provide investors with further details regarding frontdoor's financial results as well as an overall business updates. The press release and slide presentation that will be used during today's call can be found on the Investor Relations section of frontdoor's website, which is located at www.frontdoorhome.com. I would also encourage all of our listeners to visit our website to find out more about our company. As stated on Slide 2 of the presentation, I'd like to remind you that this call and webcast will contain forward-looking statements. Investors should be aware that any forward-looking statements are subject to various risks and uncertainties which could cause actual results to differ materially from those discussed here today. These risk factors are explained in detail in the company's filings with the Securities and Exchange Commission. Please refer to the Risk Factors section of our filings for a more detailed discussion of our forward-looking statements and the risks and uncertainties related to such statements. All forward-looking statements are made as of today, November 5, and except as required by law, the company undertakes no obligation to publicly update or revise any forward-looking statements whether as a result of new information, future events or otherwise. We will reference certain non-GAAP financial measures throughout today's call, and we have included definitions of these terms in our press release as well as the presentation available on our website. We've also included reconciliations of these non-GAAP financial measures to the most comparable GAAP financial measures in our press release and the appendix to the presentation in order to better assist you in understanding our financial performance. Our financial statements include all revenues, costs, assets and liabilities directly attributable to us. Additionally, our financial statements for periods prior to the spinoff, which occurred on October 1, 2018, include allocations of certain costs from ServiceMaster incurred on our behalf. For those following along with the presentation available on our website, I'll walk through the agenda items shown on Slide 3. Rex will lead off by summarizing our third quarter performance. He will then provide a business update and discuss our strategic objectives for 2019. Brian will follow and will speak to our third quarter 2019 financial results, provide more details in regard to our financial statements and then update our full year 2019 outlook. We will then open up the line for questions. I'll now turn the call over to Rex for opening comments. Rex?

Thanks, Matt, and good morning everyone. Let's start with our quarterly summary shown on Slide 4. Overall, I'm very pleased with our financial performance this quarter, which Brian will cover in more detail later. Let me now highlight a few items on this page. We celebrated our one year anniversary as a public company on October 1. I could not be more proud of what the team has accomplished over the last year. Two of the biggest highlights in the third quarter were the efforts that went into our on-demand offering, which will be launched by the end of this year, and the recent introduction of dynamic pricing. I'll speak more on both of these points when I review our 2019 strategic objectives. Let’s now move to Slide 5, where I'll provide an update on our business and speak to each of our three customer acquisition channels. Before I touch on those, let me first review some of our accomplishments over the last year. As I mentioned, we've been an independent public company since October of 2018. Last year, we laid out a plan to improve several aspects of our business and we have delivered on those promises. Some of this year's highlights include re-stetting the company vision and to focus on disrupting the larger $400 billion home services market and taking the hassle out of the home; build technology that will allow us to be more nimble and flexible and better serve customers; let the evolution of dynamic pricing for the industry; created and we’ll soon launch our on-demand offering in less than a year and developed a high performing team as embraced a new culture of ownership, customer obsession and doing great things every day. We have achieved these initiatives while also improving our gross margins, profitability and…

Thanks, Rex. Good morning. Please turn to Slide 7 and I'll briefly review the key financial results from the quarter. Revenue increased 8% to $407 million driven primarily by a higher average price per plan and an increase in the number of home service plans. The revenue growth components consists of over four points of higher price and three points of increased volume this quarter versus the prior year period. As mentioned on previous earnings calls, we expected this shift of year-over-year revenue growth composition from volume to price due to the higher-than-normal price increases we implemented in late 2018 and early 2019. Looking at our three customer acquisition channels, revenue derived from customer renewals was up 11% over the prior year period due primarily to growth in number of home service plans and improved price realization. First-year direct-to-consumer revenue is up 6% due to the growth in new home service plans mostly driven by increased investments in marketing. And first-year real estate revenue was down 2% versus the prior year period as improved price realization was more than offset by a decline in new sales. Gross profit dollars increased 70% to $206 million in the third quarter. Gross profit margin increased 415 basis points versus the prior year period to 51%. The increase was driven by our execution of business process improvements and seasonally mild weather that had a favorable impact on claims incidents in the quarter. Net income for the quarter was $61 million or 23% higher than the same period last year. This increase was driven by a $21 million favorable impact from higher revenue conversion, $11 million in lower claims costs and $8 million of lower spin-off charges. This favorability more than offset a $14 million increase in selling and administrative expenses, an $8 million increase…

Thanks Brian. As a reminder during the question-and-answer session, we encourage you to ask any questions that you may have, but please note the guidance is limited to the outlook we provided in our press release and webcast presentation. We are working on our 2020 operating plan and will not be providing any comments on any financial metrics until our call early next year. Operator, let's open the line for questions.

Thank you. The floor is now open for questions. [Operator Instructions] Our first question is coming from Justin Patterson of Raymond James, please go ahead.

Great, thank you very much. On demand, could you update us around how much investment is included in the fourth quarter guidance? And I know you just said you wouldn't talk about 2020, but are there any puts and takes we should be thinking about? Both in terms of scaling beyond demand product and, how we should be thinking about weather within that guidance. Since – at least on the weather side this year was a very unique tailwind, last year was a very unique headwind. So what are the puts and takes we should be thinking about on the weather going forward? Thanks.

Yes. Justin is Brian your first question regarding how much we spend on demand target in the fourth quarter. Is that what your question was?

Correct.

It’s about – as far as the CapEx, it's roughly 25% of what we had told you. And OpEx is probably a little more than that but not dramatically different. As we had said originally $10 million, right, of $5 million OpEx, $5 million CapEx full year. So it's fairly linear, more heavily weighted towards Q4 perhaps.

Got it. And with respect to just how you normally treat weather within guidance, can you remind us on that?

Well, we had $2 million of favorability in Q3, and we're looking – when we look at Q4 we're forecasting normal weather. So a normal incident rate.

Okay. Thank you.

Thank you. Our next question is coming from Michael Ng of Goldman Sachs. Please go ahead.

Hey, good morning. Thanks for the question. I just have two on, on-demand, it's launching just a little bit earlier than we expected. Could you just talk about what you saw during the pilot program that led to your confidence in having a somewhat expedited rollout? And then second, just on the pressure on the retention rates, which led to the real estate revenue coming in a little bit short and the renewals slowing down a little bit, could you just talk a little bit, could you just talk a little bit about what pressured the retention rate and when we can expect revenue growth to reaccelerate, appreciating that some of the investments you guys have made in DTC should more benefit 2020? Thank you.

Yes, it's Rex. In terms of on-demand, the signals we got in the market, we're pretty excited to launch around single incidence appliance repairs and replacements, so really gives us an opportunity to, kind of, to lean in around narrowing the service offering in the geography and provide new levels of transparency and insight. So I mean, we have the opportunity to leverage our cost data to give customers transparency around price. So we're starting in the appliance world, and more likely, we'll launch in one city. We're still trying to determine that. We haven't landed on our 2020 budget yet but look forward to more commentary in the coming weeks as we launch. In terms of your question around the – around retention, we're very focused on a couple of different things. As we mentioned, moving is our biggest use case, so we have retention teams in place now around moving to ensure that the customer is moving, that we don't lose the opportunity to either keep the home service plan on the existing but also help them with the home service plan to the new home that they've just purchased. We've improved some of the process gaps around our call centers, obviously, cycle time, something we always focused on. And then we had some process gaps around how we collect payments as well, that we think all those things will help improve retention over time. One thing that I would also point out is that because we recognize revenue one-twelfth [ph] at a time. Even though we think that the back half of – or this quarter, real estate might be improving, obviously, we're not going to see that until 2020. So that's why we're very focused on the heavier investment for, well, for direct consumer.

Great. Thank you, Rex.

Thank you. Our next question is coming from Youssef Squali of SunTrust Robinson Humphrey. Please go ahead.

Hi, thank you for taking the questions. I have couple, so just going back to the on-demand platform, can you just flesh that out a little more for us. I think you talked about a market, have you shared with the community what that market will be? Just, what's the go-to-market strategy? In other words, just trying to understand how aggressive are you going to be in pursuing that opportunity short-term over the next couple of quarters as we think through the potential impact on the P&L? And secondly, Rex, your background is all about growth. You have over $400 million in the bank. Your net debt-leverage, as Brian said is now down to about 2.5 times, which is very comfortable. Just trying to understand your appetite your appetite for either doubling down on investments in 2020 or potentially some M&A to, kind of, reaccelerate the growth that you guys have been on. Thank you.

[Indiscernible] I mean, we're very focused on growth, and that's why we’re trying not to manage the business quarter-to-quarter but rather from a long-term perspective. We’re always looking for inorganic opportunities, either from helping accelerate our core business or technology that may help propel the on-demand business as well. In terms of your question around on-demand to – the specifics I can get, we have a lot of people who are on the phone who aren’t analysts, so I’m not going to go with a lot of detail, but you can expect a single-incidence or home service plan covers a variety of things in your home. These are point solutions, if you will, around repair and replacement for appliances. I’m not ready to talk about the city just yet. And we’re launching, as we always said, we’re launching at the end of this year, we’re scaling it in 2020, and then we continue to expand and optimize in 2021. So we don’t have 2020 approved by the Board yet so I can’t comment on, kind of, what does it take to – in 2020 to scale it. But I think it’s clear, the market that the market appreciates companies who grow responsibly, and we plan on doing that. So that’s – stay tuned in the next couple of weeks, we can give you more detail on on-demand.

Awesome, great. Thanks, Rex.

Thank you. Our next question is coming from Ian Zaffino of Oppenheimer. Please go ahead.

Hey, guys. Good morning. This is Mark on for Ian. Thanks for taking our question. So just – sorry, Rex, just so another quick one on on-demand. Now that you guys have a better sense of the initiative, and not going into too much details, but can you just give a sense of maybe what the market opportunity is? What the, sort of, addressable market is? I know like you’ve mentioned single instances, but what’s the maybe ultimate game plan and what the timeline could look on that?

We feel our value is really in the skilled trades. So we’ll continue to focus on appliances, HVAC, plumbing and electric. The broader market opportunity is $400 billion. Again, I haven’t got the – our plan for 2020 approved by the Board yet, so I can’t give you, kind of, what 2020 looks like yet. But certainly, if you take the $400 billion market, half of that is in repair and replacement. And then if you take another subset of that around just the core trades, it’s still a very large TAM. And so that’s where we’ll start. But our ultimate goal is to take the hassle out of your home. So ultimately, we want to expand where our customers see value.

Okay. Terrific. Thank you, guys.

Thank you.

Thank you. Our next question is coming from Ralph Schackart of William Blair. Please go ahead.

Good morning. Two questions if I could. Rex, on the call, you talked about improving retention as top priority for you and you identified some drivers. Just in the real estate channel in general, how much of that do you think with some of the new drivers that you’re looking at are initiatives, do you have under your control or within your control versus some of the macro factors out there that maybe, sort of, closing headwind or will continue to? And then second, on the call, you talked about contemplating increasing spend in marketing next year as the base business, obviously, is on strong footing. How much of that is contemplated, just, kind of, broadly for the new on-demand initiative versus just, kind of, more broadly for the existing products? Thanks.

Yes, sure. So from, kind of, what’s in our control. I think there’s a lot of things in our control. When you look at real estate, certainly, as we talked about last quarter, we signed up HSOA [ph]. We’re still ramping that. So we expect that, that will bear fruits, both in Q4 and in 2020. We’ve done a lot of work around providing more tools to two of our account executives. There’s been a lot of churn within the industry so making sure that we’re aligning ourselves with the top agents who understand the value of home service plans. And then from a retention perspective, clearly, I think, just as we – this time last year really leaned into the cost improvement. That’s exactly what we’re doing around retention. So although retention is rounded down like we anticipate it to, we’re doing a lot of work around improving our sales processes from a moving perspective. We’ve instituted new call center training for some of the process gaps that we’ve identified. We’re continuing to look for ways from a value proposition perspective so that customers see the value of our home service plan. And then just, kind of, general house cleaning on any process gaps, we’re finding a lot of things just as we did in the cost-improvement side that we can fix through technology. So I’m bullish that retention is something that just as it took a couple of quarters for it to round down, it will take a couple of quarters for it to round up. So – but I’m very bullish on what we’re doing to address retention.

And then on the marketing spend, that question may or may not relate to the on-demand offering for next year.

Yes, apologies. Yes. So we – for this quarter, since we had a beat in Q3, we’ve made a decision to really invest more in Q4 to drive 2020 growth. The – we're shifting some of our process improvements, and we're managing the business for the long term, not quarter-to-quarter. So this quarter, we are investing more for growth from a marketing perspective. This is also a quarter where we've made investments in service from a retention perspective as well as technology. So because we had to beat, we feel like this is good use of our resources to drive growth. In terms of 2020, as it relates to on-demand, again, we haven't got our Board approval yet from our 2020 plan. But we spent roughly $10 million this year in on-demand. Certainly, it's going to take a little more than that. It really depends on our marketing spend. But we plan to be prudent, and I think we can grow this business over time. But we have $1.3 billion-plus core business that we will continue to invest in as well.

Great. Thanks, Rex.

Thank you. Our next question is Chris Gamaitoni of Compass Point. Please go ahead.

Good morning, Rex. Thanks for taking my call. I wanted to follow-up on the real estate channel. Could you point us to kind of what drove the negative year-over-year comp, lower unit volume in that business? I get the process improvements to improve it, but was it related to competition not just in prices like you are? Or was there something else unique? I'm just trying to figure out, kind of, what the problem was that you're attaching – you're seeking to fix in the future.

Well, we're in all Top 10 of the larger brokerage firms. We've had a couple of our larger partners; we've had challenging years from iBuyers. We certainly – we saw the shift coming, and we are – have been working with iBuyers as well. So that's – some of those pressures have definitely affected our business. So I don't view it as competition for home service plans, I view it more as a competition and consolidation within the industry.

All right. So should I take that to mean you're going to increase your focus on new partners of, call it, the digital new entrants that are starting to win share?

Yes. We've already been doing that, and we'll continue to work with our partners as well as new entrants into the market. So our goal is growth. And so we're attaching ourselves to those players who can help drive that growth. This year, we just had, I think, we had some of our larger partners who just weren't performing as well. And so we're rapidly trying to change our mix, that's why we've signed at HSOA, and we have the ability to better manage the mix of volume.

All right. And just as you focus on growth, and obviously, the investment comes first and then you realize revenue, I think you said 1/12 at a time. On an annualized basis, should we think that your previously laid out, kind of, EBITDA targets are still in the range of what we should expect longer term or is there going to be a growth penalty as you accelerate top line?

Well, we've said our goal is to get back to 50% gross margins in 2020 from an EBITDA perspective. Certainly, for 2020, we could flex that, kind of, accordingly. We haven't made those decisions because they've improved the 2020 budget, but I'm not looking to take margins to 10% or anything like that. We're focused on growth, but we think we have a plan for responsible growth, if you will.

All right. Thank you so much.

Thank you. Our next question is coming from Kevin McVeigh of Credit Suisse. Please go ahead.

Great, thanks. Rex, in terms of the on-demand offering in Q4, is there any way to think about what percent of contractors should be, kind of, preferred versus non-preferred or is it case-by-case specific?

In terms of the on-demand offering itself, I mean, those folks will be preferred?

Yes. For what you're modeling, I guess.

Yes. I mean, certainly, for starting out, I think the majority will be preferred our best contractors. So why not lead with our best source of supply. So – but we'll – as we grow the business, the great thing about Frontdoor is that we're sitting on a pretty good supply position in the skilled trade. So I think we'll continue to leverage both preferred and our network contractors to help deliver on-demand as well.

Got it. And then just, can you remind us of the sensitivity of the retention, like what 100 basis points mean from a revenue perspective? And where you think you can get that back to? And then just, I guess, if you could bring free how much of that 74%, how much is moves – or I guess, the 26% rather?

Yes. 1 basis point of retention improvement is about $14 million.

And then of the – I guess, Brian, the same, just how many are disconnects for moves?

I’m sorry, I didn’t catch that.

How many – you said that one of the bigger drivers of the retention was people moving, right? What percentage of it is that? What percentage of it is that?

It's our biggest driver. We haven't broken out a pareto on all the different causes, but if we fix moving, I think we'll see the gains that we expect.

Okay. Thank you.

Thank you.

Thank you. Our next question is coming from Brian Fitzgerald of Wells Fargo. Please go ahead.

Thanks guys. Two quick ones for us, kind of, touch upon a bit. Process improvements were offset by tariffs in the quarter versus a bit of net benefit last quarter. Just wondering how we might expect that to play out in Q4 and into 2020. And then should we look to done pricing as a primary driver of gross margin improvement through 2020? Or do you think there are – there's more you can do there with respect to process improvement? Thanks.

Yes. So for Q4, it's all, kind of, baked into the guidance. I think where Q4 is a quarter, we're starting to lap some of the improvements from last year. But we – although we're focused on growth, we haven't given up, so to speak, on cost improvement. So in 2020, the two biggest levers we still have left that are, frankly, a little more long-term in terms of both structural and technology fixes would be our procurement leverage and as we move to self service, taking us down from just below 8% revenue from a customer-service perspective to something much lower. So those are longer-term initiatives but also big, big pools of spend. So pretty confident we can put together some programs in 2020 that will continue to drive those process improvements.

Got it. Thank you, Rex.

Thank you.

Thank you. Our next question is coming from Cory Carpenter of JPMorgan. Please go ahead.

Thanks for taking the questions. Rex, you touched on this some in the prepared remarks but as you lap your one year anniversary, maybe what are one to two accomplishments you're most proud of? And then on the flip side, what has been more challenging than expected? And then second, as you enter year two, why is now the right time to shift focus from cost efficiencies to top line growth? And what do you view as some of the biggest execution risk? Thanks.

Well, certainly, if you think about this call last year at this time, it was a very different call. We're resetting guidance, and from that time, we, at least from an OpEx perspective, we've beaten. So we are very, very much focused on the inputs of the company and ensuring that we can drive sustained process improvements, which led to great, great cross – cost savings. But I think the things I'm most proud of, as you think about a year later, this is a very high-functioning team. We have an incredible – the women and men of Frontdoor have done phenomenal things in one year, and I can't be more proud of them. In terms of why is the time now to focus on growth? I think we've put the foundational elements in place so that we can grow. We're not going to take our eye off of process improvements and making – taking the half out of the home. We're now just going to continue to double down on retention and growth so that we continue to drive shareholder value. So in terms of – I think your question around what's the biggest executional risk, it's – just as last year, we have – we're a year old. And so by no means is the company suddenly transformed overnight. We still have hard work ahead of us, and we're always prioritizing the work that we need to do and the value that we derive from that work. So focus will always be our Achilles heel as we look at growth in our core business and growth in on demand. We're up for the challenge of being very focused to deliver on both of those promises.

Okay, thank you.

Thank you. At this time, I would like to turn the floor back over to Rex Tibbens for closing comments.

Thank you, operator, and thank you to all of our analysts who participated on our call today. To wrap up, we had a great third quarter. We launched dynamic pricing, and we'll soon launch our on-demand offering. While these are significant milestones in the evolution of our company, we still have much more to do on advancing the overall customer service experience and driving our growth initiatives. This is why we believe now is the time to be investing in our business and to pursue new growth initiatives. These actions will position us to continue to grow our core business and expand into new services in 2020 and beyond. Thank you again for your interest in Frontdoor, and we look forward to speaking with you on our 2019 earnings call next February when we'll lay out our objectives and financial guidance for next year. Thanks, everyone.

Ladies and gentlemen, thank you for your participation. This concludes today's teleconference. You may disconnect your lines or log off the webcast at this time, and have a wonderful day.