Ladies and gentlemen, welcome to Frontdoor's Second Quarter 2021 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 second quarter 2021 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 at 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, August 4 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 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. I'll now turn the call over to Rex for opening comments. Rex?

Thanks Matt and good afternoon everyone. This month marks the 50th anniversary of our largest brand, American Home Shield. I want to take a moment to say thank you to all the team members who built the business over the last 50 years and for the platform they provided us. Today, our team looks forward to transform the company and the industry over the next year 50 years. Since COVID-19 emerged early last year, we have navigated through unique and challenging market conditions and proven that we have a solid and resilient business model that offers Homeowners Protection, peace of mind and convenience. Over this time, we have executed a number of strategic initiatives to drive growth and improve the customer and contractor experience. These initiatives coupled with a lower than expected level of service requests, drove solid second quarter financial results. Now, turning to Slide 4 in our 2021 objectives. Despite some market driven challenges in our real estate channel, we are on pace to deliver the highest level of total company annual revenue growth we have seen as a standalone company. This momentum should continue into next year as we target double-digit revenue growth in 2022 as a result of investments in our direct to consumer channel, executing customer retention initiatives and the continued scaling of our emerging businesses. We are still aiming for double-digit growth for this year though will be somewhat dependent on the real estate inventory and our ability to grow other channels. In our direct to consumer or DTC channel, our new product line-up remains a big hit with customers as evidenced by higher than originally forecasted sales of our Platinum product. As a reminder, our new products were launched in the second quarter of this year to provide better coverage options to our…

Thanks, Rex and good afternoon, everyone. Let's now turn to Slide 6 and I'll review our second quarter 2021 financial results. Revenue increased 11% versus the prior-year period to $462 million driven by approximately 6 percentage points of volume growth and 4 points of higher pricing. Similar to last quarter, I would point out the volume component include strong year-over-year growth in both ProConnect and Streem of in the small base. Looking at our home service plan channels, revenue derived from customer renewals of 9% 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 4% versus the prior year period primarily due to improved price realization. I'll speak more about our real estate channel in the outlook. First year direct to consumer or DTC revenue was up 12% versus the prior-year period, primarily due to an increase in marketing investments that drove growth in the number of home service plans. Revenue reporting our other channel increased $10 million over the prior year period, primarily due to continued growth at ProConnect and Streem. Gross profit increased 11% in the second quarter versus the prior-year period to $242 million and our gross profit margin was 52% slightly higher than the prior year period. Net income was $40 million, which includes a $30 million debt extinguishment charge related to our recent refinancing. Adjusted net income increased $9 million from the prior year period to $65 million. The primary difference between net income and adjusted net income is the tax effective add-back of the debt extinguishment charge. Adjusted EBITDA was $114 million in the second quarter of 2021 versus $100 million in the prior year period. This was above the top end of our guidance range…

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. Operator, let's open the line for questions.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Youssef Squali from Truist. Please go ahead.

Hi, this is Nick Cronin on for Youssef. Thanks for taking my questions. Two, if I can. I know it's still early, but can you speak to the contribution margin differential between ProConnect in your traditional warranty business and whether one should be higher than the other at scale. And then secondly, what needs to happen to get the real estate segment to grow at double digits and the second half of '21. I know you called out that you still expect this segment to grow 9% to 10% in the year. Thanks.

Yes, hi Nick. It's Rex. So for in terms of contribution margin still I think early, early days, we continue to invest in the business. I also think it depends on the trading growth. So I think that overall over time, the contribution margin should get closer to our home service plan margins, but I think it's really dependent on the trade. So things like carpet cleaning, for example, may not be used as profitable as other areas. We also view it as an opportunity to increase our engagement with customers. So while we may do a job for slightly lower margins, when we look at it from a long-term value perspective, it's actually more advantageous for us to do those jobs from an engagement perspective. In terms of your second question, we certainly can't control the real estate market. But as I outlined in my prepared remarks, you were doing a couple of things to really continue to drive revenue in those areas. So certainly as we invested more in direct to consumer, that will help. Secondly, we are actually targeting real estate buyers, as I said before in the remarks, a lot of other customers, our home buyers are buying homes without inspections or contingencies. So I think that's a great, a great population to market towards. And then we continue to focus on partnerships. I mean the real estate space or adjacent to the real estate space such as Mr. Cooper. All that said, we're not totally dependent on our real estate for our growth going forward. So we still have are our largest annual revenue growth for the year, even despite a pretty tight inventory from a real estate perspective.

Understood, thanks.

The next question comes from Cory Carpenter from JP Morgan. Please go ahead.

It's Brian on for Cory, just wondering if you could expand a bit on some of the drivers of the lower service request volume this quarter and then also, are you back to more normalized pre-COVID levels of service requests and how does your guidance by service request volume in the back half of this year. Thanks.

Brian, you take that or do you want me to.

I'd happy to, Rex. Hey, Brian, how are you. As I mentioned in my prepared remarks, track on the second quarter was lower than we expected, despite the cooling degree days and also the pandemic related trades of appliance and plumbing are mitigating faster than we thought. So that's all good news for us. And that's a big part of why our instances in our service requests were lower in the second quarter. And looking forward, yes, we're assuming that's continuing as far as the pandemic trades that it's going to continue to abate as we go to the back half of the year and we still have some weeks left for the peak season as far as the HVAC and we'll see how that plays out. But so far, it's been working out pretty well for us.

Perfect, thanks.

The next question comes from Ian Zaffino from Oppenheimer. Please go ahead.

Hi, a couple of questions. As far as how you think about pricing and recovery, are you assuming ongoing inflation and increases in inflation, not just on your cost but also how you kind of go-to-market taking price, are you coming in a position right now given all the inflation to maybe pre-emptively take price? That will be the first question. And then on the acquisition front and that you mentioned that, how are you thinking of acquisitions versus buybacks, what size acquisition would be in sweet spot, and maybe where would you want to go with leverage. Thanks.

Sure. I'll take -- this is Rex. I'll take the first one and I'll hand over to Brian. In terms of pricing, I think that pricing is one of the key assets of the company. And when you think about, we have the ability to continually look at testing price from a geography perspective, from a risk perspective and we've been doing that really since last year. So I think we, we've pricing for inflation, if we see things change, we have the ability to move on pricing pretty, pretty quickly. And pricing also confirms that really customers are primarily in Elastic as it relates to price, and so we had the ability to really I think use gross margin as the lever for growth and for profitability. So between those two things, it looks like we're pretty well positioned; thanks to non-dynamic pricing. Brian, you want talk about leverage or sorry leverage, but our overall capital allocation strategy?

Sure. Thanks, Rex. Ian, how are you? As I mentioned, we're still acquisitive. We're going to invest in our business responsibly first and foremost to grow it even faster than we are now, hopefully. And, but we are acquisitive in the areas of home services in the digital space as I mentioned, but things assets of price each day. So we're looking long and hard and Rex and I are both in final agreement that we don't want to overpay for anything as stewards of investor capital. So we're going to be very careful when we look at things and so we're still looking. The good news is, although we lowered our cash by $213 million quarter-to-quarter through our debt repayment, we still have $150 million cash and we build that pretty quickly this year with our conversion from EBITDA to free cash flow. So, and -- if we look at something of scale; we can obviously lever up as needed as well. So that's sort of our stack ranking right now, how we're going to use our cash if that's helpful.

Thank you.

The next question comes from Matthew Gaudioso from Compass Point. Please go ahead.

Thank you. Good afternoon, guys. Just a question on customer service. I know the investments there take a little bit of times of flow through in the form of the retention rate. I'm just wondering how you can, wondering, I mean if you could share any color on how those investments are going, whether you feel like they're having an impact. And then can you remind me of the sensitivity of what each percentage point of retention rate means for the top line? Thanks.

Sure. So, hi, it's Rex. In terms of, we've been on a really digital journey for a number of years now, really trying to leverage both data and technology to really not just change the customer experience, but it's all it overall. And that's one of the reasons we acquired Streem. So we think that as we continue to make investments that allow us to touch customers sooner, allow us to change the overall cycle time as it relates to fixing their issue and those investments will pay off from a retention perspective over time. Right now, as the supply chain gets better than we expect that to be, certainly better for us from a retention perspective. So, it definitely takes time and I still say we're, this is a journey that will be on for a while as customers' expectations continue to change. Brian, you will talk about the what point of retention is worth.

Sure. Thanks, Rex. Yes, it's 1 percentage points worth about $15 to $20 million of incremental revenue on an annualized basis, and that will always depend on in year impact on the timing of when we actually get that benefit, but it's about 15 to 20 million.

Great, thanks.

The next question comes from Michael Ng from Goldman Sachs. Please go ahead.

Great, thanks for the question. I just have 2. First, I was wondering if you could just give us a more detailed update around ProConnect, has higher pacing in terms of the number and type of jobs you're offering on that and the market expansion there. Thanks.

Sure, Michael. So, as you know, we launched in 35 cities primarily in appliances as we, as we move out towards the end of the year. We're adding both plumbing and electrical and then really found a bright spot in maintenance services as well. So our growth strategy is not only to target other customers, but also target the other 2.2 million customers we have today. So we're on track for our leading our recognition of $20 million and both from the expansion of trade in stock markets as well as adding incremental maintenance services, we think there is a real opportunity as we move into 2022 as well.

All right, thank you. And I just wanted to follow up on some of the earlier questions around the strong gross margins in the quarter and the payroll service request levels, would you say that was more of a function of weather, normalization of service requests as reopening continues. I'm just trying to get a better sense of the sustainability of that. And also are you seeing increased levels of customer satisfaction, as the volume normalizes and do you expect any benefits from that as it relates to retention? Thank you.

Now, I'll take that the back half and then pass it over to Brian. So from a customer service and retention perspective. Yes. Outside of any supply chain issues, we've worked very hard, the team to focus on both retention as well as cycle time and it really kind of focusing on kind of speed, if you will for and on behalf of customers. Certainly as the supply chain improves and we're able to get the parts and replacements that we need to help customers that will continue to have a retention benefit for us. As it relates to kind of weather versus process improvements that type of thing. Brian, you want to take that one.

Sure. I wouldn't say weather was a benefit, but I don't think it was punitive like it could have been in Q2 with the HVAC service requests. But I think the exciting thing was just the mitigation of some of the pandemic related service trades Michael again like plumbing and appliance that they're trailing off, the incident rates are going lower. We're not back to 2019 levels. I think I stated that in my prepared remarks, but they're getting better. So I don't see why that would change going forward. I think people despite the delta variant, I think people are still exiting the home, maybe they're wearing masks, but I don't see as much pressure on our home systems going forward, just my opinion. Does that help?

So one of the things I would add is that we focus a lot on preferred contractors and I'm pretty proud of the team that we continue to have a pretty high rate of dispatches with our preferred contractors as well, which always help us from a cost perspective.

Thanks very much for the thoughts, Rex and Brian. Much appreciated.

The next question comes from Robert Coolbrith from Wells Fargo Securities. Please go ahead.

Great. Good afternoon and thanks for taking our questions. A couple more on the real estate channel, we know you're focusing on customer and partner education, but wondering if you could maybe talk also to share opportunities, a lot of agents have the ability, if maybe steer their customer to one of multiple plan providers. So, any thoughts on how you can make sure your top of mind in the channel. And then the second one, final one on real estate, given the sort of market dynamic that you're seeing. We imagine a greater share of planned volumes, our buyer pays or agent pays versus selling pays. So just wondering if you maybe help us think through; how that could potentially impact retention rates beneficiary at some point in the near future? Any color on the mix of buyer versus agent and seller pays and differences in retention? I mean, how that plays out over the next few quarters and prior years? Thank you.

Sure. So we're still very much engaged with our brokerage partnerships. We're in all or 10 of the top 10 brokerage firms, we continue to market aggressively to our realtor partners so that we can make sure they have educated on kind of what our plans and the performance of those plans. We're also focusing as I mentioned in my prepared remarks, really a direct consumer marketing effort focused on home buyers. So again, the folks who may have waived inspections or other contingencies. We are, have the ability now to directly market to a lot of those new home buyers. So pretty excited that this may create certainly a new channel for us. But in terms of the real estate channel continue to target value proposition campaign for both brokers and home buyers, we're expanding partnerships as well. From a retention perspective, keep in mind that direct to consumer customers retain about 3:1 to real estate. So we think that there is a real opportunity as we continue to lean into direct consumer, this will also pay future dividends as it relates to retention.

Ladies and gentlemen, thank you for -- thank you, again, for joining Frontdoor second quarter 2021 earnings call. Today's call is now concluded.

Thank you, everyone.