Ladies and gentlemen, welcome to Frontdoor's Second Quarter 2024 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'll begin today's call. Please go ahead, Mr. Davis.

Thank you, operator. Good morning, everyone, and thank you for joining Frontdoor's Second Quarter 2024 Earnings Conference Call. Joining me today are Frontdoor's Chairman and Chief Executive Officer, Bill Cobb; and Frontdoor's Chief Financial Officer, Jessica Ross. 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. There is also additional detail about Frontdoor, about our brand at frontdoor.com and on our new mobile App that you can download in the App Store and at Google Play. As stated on Slide 3 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 1st, 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 will now turn the call over to Bill Cobb for opening comments. Bill?

Thanks, Matt Davis and good morning, everyone. Frontdoor Inc. continues to operate consistently well and this was a record quarter for financial performance. As you can see on Slide 4, in the second quarter, revenue grew 4% to $542 million. Our gross margin expanded 470 basis points to a record 56%. Adjusted EBITDA grew 31% to $158 million. Free cash flow more than doubled to $91 million and we have used $83 million of cash to repurchase 2.5 million shares year-to-date through July. Now moving to Slide 5 in our strategic objectives. To be clear, our number one strategic priority remains growing our customer base through more sales of home warranties. While we strongly believe in the long-term growth opportunity of the home warranty category, which I will return to in a few slides, we must face the near-term reality that macroeconomic headwinds are impacting home warranty sales. As a result, we are taking the prudent step of slightly lowering our outlook for member count, which Jessica will cover in her section. Our number two strategic objective is to continue growing our on-demand business. This has become a very important line of our business that is already proven it's work and we're just getting started. And finally our third strategic objective is to close the acquisition of 2-10 Home Buyers Warranty. So let's move to Slide 6 and a quick refresh on 2-10 and where the acquisition stands. As you heard me say in June, this is a great business and as a leading provider of new home structural warranties, it's a perfect strategic fit for us. We will gain more customers. We will diversify our product portfolio into an adjacent category and we expect to generate significant synergies, all of which will generate long-term benefits. On the acquisition itself,…

Thanks, Bill and good morning everyone. Let's turn to Slide 18, where you will see that Frontdoor delivered another quarter of strong financial performance. Revenue increased 4% versus the prior year period to $542 million. Net income increased 32% to $92 million and adjusted EBITDA increased 31% to $158 million. On Slide 19, you will see gross profit increased 13% versus the prior year period to $306 million and gross profit margin improved 470 basis points to a record 56%. Let's now move to the bridge on Slide 20 where I’ll provide more context for the year-over-year improvement in second quarter adjusted EBITDA. Starting at the top, we had $17 million of favorable revenue conversion, driven by a 7% increase in price over the prior year period. This was partially offset by a 3% decline in volume. As a reminder, this includes the impact of a lower home warranty volume, which was partially offset by an $11 million increase in new HVAC sales. Now turning to Contract Claims cost, which decreased $17 million, driven by a transition to higher trade service fees and continued process improvement initiatives. As a reminder, we increased our trade service fees in 2022 in response to inflationary cost pressures including higher contractor related expenses and greater parts and equipment costs. The transition to higher trade service fees has two impacts on our business. First, higher trade service fees results in a lower net cost per service request as these fees are a contra cost to claims expense on our income statement. When combined with a normalized inflationary environment Frontdoor’s second quarter inflation rate on a net cost per service request basis was slightly favurable as the increase in trade service fee dollars more than offset external inflation. Second, higher service fees result in a temporary…

Thanks, Jessica. I want to re-emphasize what I said earlier about near-term realism and long-term optimism. While we face the realism of near-term challenges of the real estate in BTC funds, our long-term optimism about home warranties is strong. And over the past two years, we have done what we said we would do. We've taken several decisive actions to position the company for the long haul. We've explored strategic M&A to accelerate our growth and the acquisition of 2-10 is proceeding. We're seeing positive momentum with the relaunch of our American Home Shield brand. We’ve positioned ourselves team for the eventual turnaround in the real estate channel. We continue to drive higher customer retention rates. Our HVAC on-demand business is doing exceptionally well and our partnership with Moen is showing tremendous potential. Over the past 18 months, we have stabilized our margins and we remain confident in our long-term margin profile. Finally, we continue to return excess cash to shareholders through share buybacks. As demonstrated by our new $650 million share repurchase authorization, which is a 63% increase over our previous authorization. As you can see, we have a lot of great news and that's why I continue to be so optimistic about the future of our business. But our valuation doesn't reflect these facts and that leads into my final point. We showed this slide in February. The data on the slide has been updated through the end of July. However, taking into account the guidance we just provided, our multiple has actually declined to eight times as of today. The message here is simple. Our stock remains significantly undervalued. With that, Jessica and I are now ready to take your questions. Operator?

[Operator Instructions] Our first questioned today comes from Jeff Schmitt with William Blair. Please go ahead. Your line is open.

Hi, thank you. Could you give us an update on your pricing strategy over the next year? I know you said you are going to focus more on discounting then kind of broad price cuts. You had mentioned that in the past, but maybe if you could refresh us on why you are taking that route and kind of how does the competitive environment look? Are they discounting, as well?

Yeah, hi, Jeff. So let me let me flip this into DTC 1 and then renewal pricing. So with the renewal pricing, we're going to be consistent. We will have an increase but not to the level that we've done in the past couple of years. So but there will be a pricing action o our renewals. On new BTC1, we will be at a competitive price and as we said use targeted discounts on a time bounded basis as the tools not only grow new members, but we're very pleased by the work we've done in terms of being able to renew people even when they are faced with an aggressive discount. So, I think it's going to be more of what we're doing right now with the added piece. I think we've talked about this as we're going to have a more almost historic way of looking at our pricing for renewals. And I think that's a reflects the new user is more elastic and the renewal users and more inelastic to our customer.

Okay. Yeah, that makes sense. And then, you lowered your full year outlook for direct growth to a decline of 15% could you maybe discuss what drove that? Is just too tough of an environment I guess for that, for the pricing strategy to move the needle a ton there or just tough broad industry trend?

Yeah, I think they'll hit it in a script domain at the end of the day consumers are stressed, but they're spending less. We ended this year expecting interest cuts in the real estate market to rebound and it just simply hasn't. So, we are just saying to reflect the current macro.

. : So we it’s a tough as Jessica said macro, but the specific home warranty category continues to be slow. And I think the overhang of real estate is really affecting that.

Great. Thank you. Very helpful.

Thanks, Jeff.

Thanks, Jeff.

Our next question comes from Sergio Segura with KeyBanc. Please go ahead.

Great. Thanks for taking the question. Something you could dive into the Moen partnership a little bit more? Just how big of an opportunity is this for the business? And I guess you know taking a step back and taking a bigger picture view, do you envision partnerships like this be more of a strategic priority in the future? Any thoughts on that would be helpful. Thank you.

Yeah, we're not ready to share the numbers on Moen. We are off to a very fast start and logically, it's a terrific opportunity for us. Even if it fits just with Farmers Insurance as they look to expand into other states. Moen is also proven to be a terrific partner and our plumbing contractors are thrilled to be doing this at this point in California, but looking to expand that. But I think it is an indication of the type of approaches we want to take where I think our on-demand business or non-warranty business really is starting to do two things. We've got this user base of American Home Shield members, 1.9 million, 2 million strong that we can grow share of wallet with as their - a lot of their systems reach end of life. And then, we have this ability to go directly to the consumer and I think that with the leveraging, the contractor network we have, which is really one of the core capabilities of this company. We have a lot of opportunity in a lot of different ways and that's why we're so excited about the on-demand side.

Got it. And maybe. A second question. Thanks for the demographic breakdown in the presentation. I thought that was really helpful and interesting to see. I'm curious since you relaunched the American Home Shield brand, have you seen any differences in the types of customers coming into the sales funnel compared to your existing customer base? Anything that call out there would be very helpful. Thank you.

Yeah, I don't want to go into the specifics, but as we indicated in the demographic data, we are resonating more that's what I wanted to say, this is not just an old person's brand or a lower income brand. We are seeing a broad base group of folks coming through. And I think. The stuff we did with the relaunch the new tagline, the new logo, the new look, the advertising and the website which we’re really pleased with the increase in visits to the website. So it's been a broad based group there. But we're pleased with how the relaunch has started and relaunches they take time. They're a long-term play and what you're looking to do is make sure you're consumer indicators are going in the right direction and they certainly are in this case.

Okay. Thanks, Bill. Thanks for your thoughts.

Thank you, Sergio. Anyone else have a question?

Absolutely. Our next question comes from Maxwell Fritscher with Truist. Please go ahead

Hey, good morning. I am on for Mark Hughes. I was wondering what the contribution to the margin was from the HVAC on-demand or more broadly the other channel this quarter?

So, we said that was about $11 million increase over prior year coming from HVAC. So, again, this continues to be a bright spot for us and really outperforming as we continue to expand the program.

Yeah, I think, to your question. The margin contribution we're not going to go into specifically. We have indicated that it's a lower margin than certainly the home warranty piece. But we're not going to indicate exactly how much, And to us right now, it's all a matter of how it all comes together as the total P&L.

Got it. Understood and then you had mentioned that the HVAC service requests were down in the quarter due to geography of your customers. Is that a similar trend that you are seeing thus far in 3Q as it seems to the warmer weather has continued?

Well, I think there's like a couple of reasons. So I think lower incidents as I said there was an impact just that the change to trade service fees that drive just a change in customer behavior in the near term, where they are maybe a little bit more thoughtful about filing for a service request. I think the other one thing that we're really diving into is the impact of the new HVAC program is also having. I think that it's transitioning a service requests into a new HVAC sale, which this is a new program for us. We're still digging into that. But I think the combination of the incidents, as well as the impact that new HVAC is having had really probably the largest drivers as we think about the impact on overall incidents for the quarter. It definitely was a little bit head scratching right? Because I looked at the overall increase in cooling degree days year-over-year, but yet our HVAC incidents were down. So, some good benefits for us in the quarter, but definitely something we continue to dig into.

Yeah, we're not going to go into Q3 specifically, but it's - suffice to say it's all in the guidance that we gave for the full year.

Got it. Very helpful. Thank you.

Our next question Daniel Pfeiffer with JP Morgan. Please go ahead.

Hey, thanks for the question. For the first, obviously, HVAC upgrade has been a huge success. But I am wondering if you could give us any color on expectations for which category you might want to be into more within on-demand outside of the other partnerships? And then, I have a follow-up.

Yeah, obviously, our secondary is the Moen partnership. We're not ready to talk through other alternatives, but suffice to say that our corporate partnerships team is hard at work. And I think with the HVAC success and then the thing with Moen, we are getting a lot of interest from here. So, really what we want to do is not only work with the partner, but work with our contractor networks to decide, can we can we deploy our contractors? Can we execute it? And that's been part of the early success for Moen because the our plumbing group has really jumped on this and is executing beautifully.

Gotcha. And then, for the second, maybe talk about your expectations for marketing spend for the remainder the year? And maybe whether it makes sense to pull back a little given the macro headwinds and continued weakness? Thanks.

Yeah, I actually want to go the other way. I want to spend into it because I think we have our brand straights. We just relaunched the brand. I mean we indicated in the – and Jessica’s talk, we're looking at an incremental $10 million to try to drive demand and retention initiatives. We're figuring out what the best way to deploy that is. But we - yeah, we want to - we're thinking more the opposite direction which is we still think there are great opportunities. We think we have momentum here. And so, we're going to try to drive into it. It's not all the money in the world. We're taking, I think we're going to make, well, I'll use the prudent word again, prudent investments. But we're looking to continue to grow. We want to we want to keep the hammer down.

Thanks.

And our next question is from Isaac Sellhausen with Oppenheimer. Please go ahead. Take more and that's a con for you and thanks for taking the question congrats on the Sean quarter.

Hey, good morning. It’s Isaac on for Ian. Thanks for taking the question Congrats on the strong quarter. My first is on the gross profit margin target. Now that your sort of exceeding the pre-covered margins. Is there anything structural that it’s changed the business that would make these margins sustainable over the longer term. I know you mentioned margins will moderate in the second half of the year for a few reasons. But as you monetize new initiatives like the Frontdoor App could, margins go higher over the long term?

No I think I want to continue as we just talk about kind of our long term focus which we’ve guided to the upper 40%. As Bill alluded to, we are not ready to talk about really on-demand margins specifically but they are lower than the traditional home warranty business. So I think that as we think about what the long-term margin profile is again it's that upper 40s, which really incorporates the balance we anticipate as we continue to grow on-demand.

Okay. Understood. And then just a quick one on the 2-10 acquisition. How large is the traditional home warranties business within that? And maybe how does it compare to others in the space and HS?

Yeah, stay tuned on that Isaac. We are - we gave the broad numbers for 2-10 in terms of the number of customers they have year-to-date around 300,000. Their revenue is around $200 million. Their EBITDA was around $40 million. We have not yet disclosed the way we're going to combine the companies. That's why one of the reasons why we pushed back Investor Day. We want to come to you with a full look at it. Right now, we have to operate as independent companies while we're meeting with 2-10 on organization and structure and things like that we really can't get into business plans or anything like that. So, more to come, but obviously in the model that we put together that made us decide to go after and to make this investment, we saw enough indicators there that said I think is going to be a great value added acquisition for our shareholders

Okay, great. Thank you very much.

Thanks Isaac.

Thanks Isaac.

Thank you. We have no further questions. So this concludes today's call. Thank you for joining. You may now disconnect your lines.

Thank you all.

Thank you.