Ladies and gentlemen, welcome to Frontdoor's Fourth Quarter and Full Year 2020 Earnings Call. Today's call is being recorded and broadcast on the Internet. Beginning today's call is Matt Davis, Vice President of Investor Relations and Treasurer, and he will introduce the other speakers on the call. At this time, we will begin today's call. Please go ahead, Mr. Davis.

Thank you, operator. Good afternoon, everyone, and thank you for joining Frontdoor's Fourth Quarter and Full Year 2020 Earnings Conference Call. Joining me today are Frontdoor's Chief Executive Officer, Rex Tibbens and Frontdoor's Chief Financial Officer, Brian Turcotte. 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@investors.frontdoorhome.com. As stated on Slide 2 of the presentation, I'd like to remind you that this call and webcast may contain forward-looking statements. These 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 SEC. Please refer to the Risk Factors section in 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, February 18, and except as required by law, the company undertakes no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise. We will also reference certain non-GAAP financial measures throughout today's call. We have included definitions of these terms and reconciliations of these non-GAAP financial measures to their 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. I'll now turn the call over to Rex for opening comments. Rex?

Thanks Matt and good afternoon, everyone. Turning to Slide 4, I want to start by saying I could not be prouder of our associates navigate an extremely challenging external environment in 2020. It is a fantastic job tackling some of the most difficult issues this business has faced in our 50-year history. I truly believe we are stronger, more nimble and more efficient organization as a result of how we responded to the COVID-19 pandemic. While COVID-19 continues to plague the world, we remain focused on meeting the needs of our customers, contractors, associates and shareholders while achieving our goal of sustaining double digit revenue growth. The broader team continues to further the company's vision of taking the hassle out of owning a home and in turn made significant strides in improving key areas of our business. For example, we were able to grow revenue by 8% in 2020 versus the prior year. This was an extraordinary accomplishment considering the difficulties we had to manage through. In comparison we only grew annual revenue an average of 3% during the global financial crisis. We also increased revenue in 2020 by accelerating opportunistic marketing investments in our direct-to-consumer or D2C channel, improving our customer retention rate and benefiting from a stronger than expected recovery in the real estate market in the second half of the year. We drove D2C revenue growth by aggressively leaning into much lower broadcast media rates in the spring, when others were pulling back due to COVID-19. This was a very efficient spin for us as we were able to grow our D2C customer base by 12% in 2020, with only a modest increase in our customer acquisition costs. We also launched a new advertising campaign and deepened the talent bench within our marketing team. Expanding our in-house…

Thanks Rex and good afternoon, everyone. Let's now turn to Slide 7 and I'll review our fourth quarter 2020 financial results. Revenue increased 8% versus the prior year period to $323 million driven by approximately five points of higher price and three points of increased volume. If we look at our home service plan channels, revenue derived from customer knows was up 8% versus the prior year period due to improved price realization and growth in the number of renewed home service plans. First-year real estate revenue was up 1% versus the prior year period, reflecting approved price realization partly offset by a decline in the number of first-year real estate home service plans. First-year real estate revenue was impacted by a 19% decline in existing US home sales during the second quarter as a result of COVID-19, which impacted revenue growth for the remainder of the year. First-year direct-to-consumer revenue was up 13% versus the prior year period, primarily reflecting growth in the number of first-year direct to consumer home service plans, mostly driven by the increased investments in marketing. Gross profit decreased 1% in the fourth quarter versus the prior year period to $137 million. And our gross profit margin was 43% consistent with our historical performance for this quarter. Net income was $2 million, while adjusted net income was $70 million. Adjusted EBITDA was $32 million in the fourth quarter at the top end of the guidance range provided in early November. We estimate that COVID-19 negatively impacted results by approximately $18 million during the quarter, including $13 million of higher claims costs and an incremental $5 million investment in our service organization in response to the higher call volume and retention improvement efforts. Moving to the table on Slide 8, we had $17 million in stable…

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 that guidance is limited to the outlook we provided. Operator, let's open the line for questions.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] And the first question will come from Cory Carpenter with JP Morgan. Please go ahead.

Great, thanks for the questions. I had two, maybe just first and you touched on this a bit in your prepared remarks, but just hoping you could talk more about your marketing plans this year, the level you think is needed to support the double-digit revenue growth and just how you're thinking about marketing behind newer products such as Shield Platinum and Proconnect? And then secondly, just on Proconnect I know it's still early, but we'll be helpful to hear about the traction you've seen since rebranding and expansion to 35 cities less quarter? Thank you.

Hey Cory its Rex. Good to hear from you. In terms of terms of marketing, I think about a couple different ways. Certainly the tail wind that we received from lower broadcast rates has kind of gone back to normal rates and so we're very focused on conversion this year. And we're expecting to grow first-year direct-to-consumer by double digits with a flat customer acquisition cost. So it'll all be about conversion and the focus of using technology to achieve that goal. As it relates to the Proconnect still early days, but we're right on plan, maybe slightly better than plan. But I would also say that as the year goes on the playing gets harder as we add more services to the 35 cities. So all systems go for Proconnect and we're pretty excited about really scaling it this year.

Thank you.

The next question will come from Justin Patterson with Keybanc. Please go ahead.

Great, thanks, hope you're all healthy and safe and that everything that's going on. Two if I can, first, to follow up with Cory on Proconnect, could you talk about just some of the metrics you're looking at to dictate the pace of investment and really warrant further market expansion going beyond just cross selling to the existing customer base? That's question number one. And then question number two, it sounds like you're making a lot of progress with the retention initiative. So curious to hear what you think the biggest levers are around that going forward and then how we should think about the benefits of Streem playing into that over time? Thanks so much.

Sure, so as relates to the Proconnect, we're very focused on number of jobs, obviously, but more so ensuring that we're expanding from just appliances or we are in 35 cities to adding trade services, such as plumbing electric. We're - first and foremost, we're investing in both the search and digital around ahs.com/Proconnect. So we're really focused on the digital aspects of that. So we're measuring our CAC ratios. Second, as we've talked about before, I think there's a great opportunity to cross sell with our existing customers and offer them maintenance services, as well as repair services. And then as we talked about last quarter, we think there's a great opportunity, and part of why we switch to the rebranding is that we have 30 million annual visitors to our AHS website, or American Home Shield website who don't purchase the home service plan. So we think it is a great opportunity to market to those folks as well. So we're looking at all those factors as we grow each marketplace or each market rather. And then we have specific metrics around each of those. And that's kind of how we're focused on that. In terms of retention, this is a - as you know we've been focused on retention for - since we spun the company. A lot of work this year kind of went into moving and sold. We continue to invest in training in our dedicated retention team. I think dynamic pricing certainly will play a factor in improving retention as we get even better about how we price. And then we're automating a lot of processes to improve data capture for real estate customers, obviously, we don't have the proper contact information, it's really tough to try to get the customer to renew. We're focused on communications. And then to your point about Streem that's really the longer-term vision that we have for integrating Streem within our core business is that I think there's a real opportunity here to not just pick up the phone and say, hey, we'll send someone out to take a look at it, but really have a two-way conversation digitally with the customer be able to capture the make model and serial number be able to really hopefully even provide a DIY solution for the customer. For example, for things like refrigerator freezers that are frozen over it's just that suddenly they're having to come out, you can help the customer walk them through that problem and get them back on their way. So we really see Streem as an incredible opportunity for us to reduce truck rolls in the future, which obviously has a great ESG benefit, but it has a cost savings in the future as well.

Got it, thank you, Rex.

Sure.

The next question will come from Matt Gaudioso with Compass Point. Please go ahead.

Hey, good afternoon, guys. Just a quick question on the real estate channel, just wondering, for the real estate channel, just given the dynamics in the market with it being a strong sellers' market and you mentioned trying to focus on buyers more. Can you give a little bit more color there on what you guys are doing? And then just with that being - like, what the dynamics amidst a really strong house and backdrop, how are you thinking about overall marketing spend in that channel?

Well, we're confident that we can still grow double digits in real estate this year. The team's done a lot of work around kind of shifting to that - the buyer versus the seller. Obviously, we're looking at geographic mix, and our realtor partner performance. So we have a lot more data and a lot more analytics around what's working and what's not compared to a couple years ago. By focusing on the buyer we're partnering with our real estate partners, we're using technology to alert us when the buyer data becomes available and then the men reaching out. And then leveraging technology to really deepen and frankly, integrate with our top real estate brokers. And then as we mentioned on the call, additional channels such as Mr. Cooper will also help us start to think about beyond just the real estate transaction, but also get into refinancing, as well.

Got it, that's helpful. And then just actually a quick follow up on that. Are you still having real estate agents use Streem for virtual touring? Does that seem like it's a longer-term trend that's sticking?

We're still offering it. I think, from an adoption perspective it's more on our contractor side, because they really think in terms of touring, there's a lot of different tools that they can use. But from a contractor perspective we're seeing a nice uptick in really working with the more tech forward contractors who see the value of being able to do more truck rolls per day because they're having the ability to have a conversation with a customer order parts, understand what's going on that type of thing. So we're seeing higher adoption from our contractors and realtors, but the realtor piece was always just an ability to help our real estate partners and kind of being the forefront, if you will, as they work through the pandemic.

That's helpful. Thanks.

Thank you.

The next question will come from Ian Zaffino with Oppenheimer. Please go ahead.

Good afternoon, guys. This is Mark on for Ian. Just a bit on dynamic pricing for us, on the five points of price this quarter concerning with - to parse out how much came from dynamic pricing. And then going forward, can you give us a sense of the progress of dynamic pricing within each business segment and how much came through so far within each - just sort of each day? Thanks.

Sorry, I missed the first part of the question, Brian, if you caught it feel free, but I didn't get to the first part of the question.

Yeah, I think Mark, you were asking about as far as the five points of price that contributed to Q4. Is that what you're asking about? And how much of that was from dynamic pricing?

Yeah, that's correct Brian.

And I think you asked what channel and Rex, I think it was really the renewals channel, it would have driven most of that dynamic pricing benefit, right.

That's right. 9% of our revenues is from the renewals channel. So that's where we focused our efforts first. From a dynamic pricing perspective we were able to look at it both from a risk to sell perspective as well as a usage perspective, and price accordingly. So that's kind of what we're looking at each kind of the cell if you will, for both renewables and direct-to-consumer.

Okay, got it. Thank you, guys. And then just a quick follow up on the CapEx spend for 2021, you guys mentioned this mostly on technology. Is this more on Proconnect? Were there any other ventures for sales and marketing that's also within that number? Thanks.

Brian, you'll take that.

Yeah, happy to. Yeah, and that range - probably it's like 85% of that CapEx spend would be technology focus and it covers the entire company Mark, to be honest with you. We've got Proconnect in there, we've got Streem, we've got the HSP business. So it's really covering the entire company, but yes it does have Proconnect in there.

Great, thank you guys very much.

The next question will come from Michael Ng with Goldman Sachs. Please go ahead.

Hi, thank you very much for the question. I was just wondering if I could ask about parts availability, you mentioned that as something that could be a risk to retention rates in 2021. Where do we stand today as it relates to parts availability, and talk about your progress in terms of establishing direct relationships with OEMs to secure parts? And then I just have a quick follow up on Proconnect.

Well, I'll let Brian cover that since his team has done all the great work around it.

Sure. Thanks, Rex. And Hi, Mike, how you doing? Yeah, that's been a big part of this whole COVID-19 pandemic issue we've been facing is parts availability. And our team, our sourcing team has done a I think a great job working with our operations team on finding alternate sources of supply, wherever we can to find the parts, because we certainly don't want to replace an appliance if we can repair it. So a lot of work has been done there. And it'll only get better as we go forward. But still, the manufacturers are focused on building units right now, not parts. So that will change as we go further into the first half of this year and hopefully get back to normal after midyear. And we'll have parts available like we used to pre-pandemic. Does that help?

Yeah, that does. Thank you, Brian. And just as a clarification on the Proconnect guidance, the $30 million of investments in Proconnect and Streem is that net of the $20 million of revenue? Or said differently, like do you do expect a $10 million loss from Proconnect after investments? Thanks.

Yeah, the 30 million is the OpEx for our emerging businesses. And we did put out the mile marker for $20 million in revenue for Proconnect this year. And we did mention that combined the emerging businesses would be EBITDA negative for the year. We haven't broken that out into the pieces, but they will be EBITDA negative for the year.

Great, thank you for the clarification. I appreciate it guys.

The next question will come from Youssef Squali with Truist Securities. Please go ahead.

Hi, this is Nick Cronin on for Youssef. Thanks for taking the questions. Two if I can, has the pandemic changed in any way your view on gross margins of 50% or better over time? And then secondly, is the introduction of dynamic pricing within the real estate segment still slated for February? And if so, how is that going to be rolled out? Thanks.

Yeah, so from a gross margin perspective, I don't think it changes the benefit changes our long-term view. Certainly, the great thing about dynamic pricing is allowed us to make moves quickly. But as Brian has just talked about, I think we're still square in the middle of the pandemic, and we'll still carry the cost of the appliance burden for at least the first half of the year. So through dynamic pricing and a lot of the other work that we've been talking about, we think we helped mitigate that, but certainly not solved at all. And so as the pandemic subsides, I think we have the tail winds of having made the pricing change that will certainly improve gross margins, which we can either leave as it is or we can always change pricing again and focus on growth. So it really has several levers there. In terms of dynamic pricing for real estate, real estate as you know is a little more or a little less automated as we work through our different top 10 brokerage firms. And so we leverage the models for the pricing, but we're not planning on implementing it from an automated perspective because our realty partners aren't going to have that capability yet. So we do leverage the underlying models to determine the price. But it's not it's not automated yet. But it is for renewals, which are getting the most 70% of our total revenue in first year direct-to-consumer. So between those two things, that's all fully automated, but it'll still be a while I think before our real estate partners are able to handle automated pricing.

Great, thank you so much.

Thank you.

The next question will come from Brian Fitzgerald with Wells Fargo. Please go ahead.

Thanks, guys. A couple of questions on the - few on the new product segmentation, have you been testing that new segmentation? Could you give us a sense of the pricing tiers maybe versus the current offering and maybe a sense of how you expect customers to segment themselves or any thoughts on where the weighted average pricing might be going as you roll out those segmentations? And then a quick follow up on - maybe housekeeping, what percentage of the other line was cancellation revenue versus Proconnect? How does that breakout compare versus prior year?

I'll tackle the first one and then I'll hand it over to Brian for the second one. In terms of - we're just rolling out the kind of good, better, best or, Gold - Platinum, Gold or Silver. I think that in the markets where we have tested it definitely played well for Platinum, because it's, I think one of the most comprehensive home services plans you can get, which includes, higher coverage limits, a seasonal HVAC tune-up comes with that as well. And so we're expecting our mix to change somewhat to more Platinum, but we - again, we're not fully rolled out yet. So it'd be tough to give you a number in terms of what the average price is going to be. And then Brian you want to take the second one.

Sure. So Brian are you asking about the other bucket of our revenue by channel?

Yeah.

In million for full year?

Yeah.

Yeah, less than half of that would have been our emerging businesses in 2020 and for '21, as I said in my prepared remarks it's more like 1% to 2% of the rev growth. So you do the math. And you can see it's a much bigger part, of them like half a percent, that it would have been a bad bucket for '20. So it's a much bigger part going forward as we grow those nascent businesses.

Got it. Perfect. Thanks, Brian. Thanks, Rex.

Absolutely.

The next question will come from Kevin McVeigh with Credit Suisse. Please go ahead.

Great, thanks so much. Congratulations. Brian, I think you talked about $54 million headwind in COVID, kind of delayed impact in 2020. And you still did a real nice job coming in at the 100 million range. Were there some offsets and was it made me just come to delivery footprint, just any offsets that helped offset some of those headwinds that led you to still deliver a really, really nice outcome on the EBITDA line?

Yeah, I think I called out a few if I can number. I think, we had 7 million of favorable weather in '20, again, a mild year not that we're starting this year mild, but a mild year in '20. We had a number of operational improvements, getting our incentive preferred for our contractor mix to 82% is a great win, as we keep driving that number further up. So yeah, there are a number of offsets just through all the initiatives within the company. I'm probably missing some Rex, so please feel free to jump in.

I think that was the big ones, the other thing that we're bullish about is we developed an appliance portal for customers to make replacements easier. Our supply chain team and Brian's team has really, I think it does a nice job in terms of vendor diversification and scale so that we can focus on parts rather than replacements. And then, I think the team overall, as Brian mentioned, the higher changes in our algorithms to get even higher percentage of preferred on our contractors definitely was helpful to us in '20.

And then is there any way to quantify like - maybe another said, I don't - just what 100 basis points of that shift to kind of percentage of preferred would mean from a negative perspective.

Yeah, happy to take that one Rex. Yeah, I think in terms, this round math, Kevin, of - it's got to be close to $5 million greater.

Thank you all very much.

Thank you.

The next question will come from Aaron Kessler with Raymond James. Please go ahead.

Great, thank you, guys. First, on the customer support side, can you maybe talk us through kind of which innings you're in for some of the changes you're making? And kind of what's maybe a completion date - never a completion date, but just kind of where the progress is? And then maybe from the inflation in parts cost, are you seeing anything more than kind of normal inflation level that you would call out or just pretty average you've seen over the last couple of years? Thank you.

Yeah, in terms of customer service, sorry, what? My phone was a little garbled, what -

Just kind of what innings are you in and kind of - and some of the changes that you're planning to make there that you've been investing in?

Well, certainly, our NorthStar for customer service is a - to be as self-services as possible, meant to be a web or mobile based self-service, so that you don't have to pick up the phone to call anyone. You can solve your problems at your fingertips, so to speak and it really depends on what part of the business we're talking about in terms of what anyone might be in, certainly the appliance portal I talked about before definitely gets us a lot closer, to being fully reliant on self-service. Our ability, our ecommerce platform, which we've done a fair amount of work on this year is most part touch less, but then we had the real estate channel, which still, is requires a lot of touch. For customers, I think they're going to see in the coming year and we really improve our authorizations process. So we built a new contractor portal. So contractors can resolve what they need digitally as well. So they don't pick up the phone to call for authorization, we can do all that digitally or majority of that digitally. And then integrating a lot of our supply chain, and multivendor strategy through API's and things like that, obviously, will help us be more digital as well. So it really depends on the area in terms of innings. But this is something that's going to be a multiyear journey, but we continue to be very focused on.

Got it and on the inflation of parts cost, anything out of normal you would call out or just kind of in line with previous years.

Brian, do you want to take them?

Sure, inflation as far as parts cost or just overall Aaron?

Yeah, normally just both overall and parts cost specifically.

Yeah, we negotiate pretty well on parts cost. The one thing we're keeping our eyes on is steel prices. And if you follow steel at all that those prices are going up pretty quickly due to auto demand, believe it or not, so supply versus demand prices are going up. And we use a lot of steel in the products we buy, so we're watching that pretty closely. So that's probably first and foremost right now. It's always watching whatever has a lot of steel in it like water heaters and other components.

Right, that's helpful. Thank you.

This concludes our question-and-answer session. I would like to turn the conference back over to Rex Tibbens for any closing remarks. Please go ahead, sir.

Thank you, operator and thank you to all of our employees, investors and analysts who are on today's call. In summary, I'm extremely proud of how our team met the unprecedented challenges from COVID-19 while delivering solid financial results. We've been making the right investments to accelerate growth and those investments are working. In 2021 we expect to generate sustained double digit revenue growth, also automating processes, expanding customer retention, and advancing our emerging businesses. Thank you again for your continued interest in Frontdoor and I look forward to speaking with you all again soon.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.