Good morning, and welcome to our second quarter 2022 earnings conference call and our first as Anywhere Real Estate. .

Before we begin, Ryan Schneider will share perspective on our recent rebranding. .

So I'm so excited about this, a powerful existing business, a new focus on the consumer, meeting homebuyers and sellers anywhere in their real estate journey from just starting to search to that incredible keys and hand moments and driving cultural change to deliver that future.

So I'm all in on it, right? And I'm actually -- I'm so committed to this that I want to signal this broader change to the world as our current brand and identity have not kept up with our company's transformation. .

So now is the time to move our brand to what's next, and I'm excited to announce Realogy will become Anywhere Real Estate. .

Good morning, and welcome to the Anywhere Real Estate Second Quarter 2022 Earnings Conference Call via webcast. Today's call is being recorded, and a written transcript will be made available in the Investor Information section of the company's website tomorrow. A webcast replay will also be made available on the company's website.

At this time, I would like to turn the conference over to newer Senior Director, Danielle Kloeblen. Please go ahead, Danielle. .

Thank you, Abby. Good morning, and welcome to the Second Quarter 2022 Earnings Conference Call for Anywhere Real Estate Inc. On the call with me today are Anywhere CEO and President, Ryan Schneider; and Chief Financial Officer, Charlotte Simonelli..

As shown on Slide 3 of the presentation, the company will be making statements about its future results and other forward-looking statements during this call. These statements are based on current expectations and the current economic environment.

Forward-looking statements and projections are inherently subject to significant economic, competitive litigation, regulatory and other uncertainties and contingencies, many of which are beyond the control of management, including among others, rising inflation and mortgage rates, constrained inventory, declining affordability and other macroeconomic concerns as well as the impact of the foregoing on consumer demand.

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Actual results may differ materially from those expressed or implied in the forward-looking statements. For those who listen to the re-broadcast of this presentation, we remind you that the remarks made herein are as of today, July 28, and have not been updated subsequent to the initial earnings call.

Important assumptions and factors that could cause actual results to differ materially from those in the forward-looking statements are specified in our earnings release issued today as well as in our annual and quarterly SEC filings..

Anywhere Brands, formerly known as Realogy Franchise Group; Anywhere Advisors, formerly known as Realogy Brokerage Group; and Anywhere Integrated Services, formerly known as Realogy Title Group..

Now I will turn the call over to our CEO and President, Ryan Schneider. .

Thank you, Danielle. Welcome to our first earnings call as Anywhere Real Estate and our first earnings call following our May 12th Investor Day. We were excited for that Investor Day because it gave us a chance to share the powerful results of the first chapter of our company's transformation and to articulate our next chapter and strategic future.

As we said during our Investor Day, having improved our operating performance and fortified our balance sheet, we like our mix of businesses across the real estate transaction, especially our luxury leadership position. .

And beyond continuing to leverage our existing strengths, we're committed for the future to simplify and reimagining the consumer experience buying and selling a home.

And while delivering the future we laid out for you continues to be our priority, the biggest change since we last spoke has been the shift in the housing market, record increases in mortgage rates to nearly double the levels they were a few months ago, combined with rising inflation and broader macroeconomic concerns has substantially changed buyer affordability, buyer demand and seller expectations.

And we saw that mostly later in the quarter, especially in June..

Now remember, historically, we have said that a 50 to 100 basis points increase in mortgage rates is a big headwind for housing and in the past few months, the industry has seen more like a 250 to 300 basis points increase in mortgage rates, which has clearly changed the market.

While we're now in a much more rapidly changing housing market, we believe our strategic progress and our financial strength have anywhere well positioned, especially relative to many of our competitors to execute.

So first, we generate profitability and free cash flow even in tougher housing markets like you'll see in our Q2 results and we believe that investors are increasingly valuing delivery of those critical metrics. .

Second, our balance sheet progress, our liquidity and our current low leverage ratios have us well positioned for all parts of the housing cycle and finally, we're always very focused on cost.

We delivered consistent cost reduction programs even during the very strong housing markets for the past 2 years and this year, we've meaningfully increased our cost reduction plans as we see the housing market changing..

Now consistent with this performance strength in both good and challenging housing markets, let me share our Q2 results. We delivered $2.1 billion in revenue and $202 million of operating EBITDA in Q2.

While this is down from 2021's record $2.3 billion in revenue and $310 million in operating EBITDA is still a powerful financial result on both an absolute basis and relative to our competition. Our franchise segment again demonstrated its attractiveness and resilience.

It's $204 million operating EBITDA was down only $20 million from 2021 while the market headwinds and greater direct effect on our frontline businesses like title mortgage and owned brokerage and our transaction volume reflected the weakening housing market that we've all observed..

Our volume was down 6% year-over-year in the quarter, with units down about 15%. Our own brokerage business, which we now call Anywhere Advisers, transaction volume was flat to prior year. Our franchise business, which we now call Anywhere Brands, transaction volume was down 9%.

The difference was driven in part by geography by the greater luxury mix for advisers and by one meaningful acquisition. We used our $70 million of free cash flow in the quarter and cash on hand to repurchase $45 million of shares to opportunistically purchase $60 million of our 2023 bonds at a discount and to continue to invest in the business..

Our commitment to expanding and delivering more consumer products is unchanged. Since we last spoke, we've expanded access to our homeplace app for consumers to 2/3 of our Coldwell Banker Realty footprint, and we like the direct-to-consumer engagement, it is driving.

Our commitment to helping consumers and agents better sell their homes with great products continues. For example, the Listing Concierge product we showcased at Investor Day crossed an amazing threshold with over 50% adoption among our Coldwell Banker Realty listings. And those of you at Investor Day heard how much we love our franchise business.

While we're always expanding our network with new franchisees, we had a special result in Q2..

In June, we were proud to help one of our great franchisees bring a leading luxury brokerage in Oregon into the Sotheby's International Realty Franchise Network. This new addition to our franchise network brings with it $2.5 billion in sales volume and over $60 million in gross commission income.

This is the largest gross commission income addition ever to the Sotheby's International Realty Franchise Network and the second largest addition ever to any of the Anywhere Brands franchise networks..

Let me shift now to what we're seeing in the housing market. First, while most headlines are about price cuts relative to list price. The most important thing to always look at is home prices versus a year ago. We have had 2 years of double-digit price increases and even plus 11% price growth in Q2. That trend has now changed.

Overall price for open contracts in June and July is up, but only in low-single digits. And our July open contract data, we see price still up in most markets, though a substantial moderation from the previous trend, EG price up about 5% in places like New York City, Texas and California, prices flat in places like Florida and New Jersey..

Second, we entered 2022 estimated units would be down from 2021. That trend has accelerated, especially late in Q2. The new contracts we see opened in June and July are down about 20% versus the previous year. And this is substantially worse than what we saw in the market in both April and early May.

And the most consistent feedback I'm hearing when talking with agents and franchisees and looking at our data is the speed at which changes happening, whether you're talking about buyer demand and expectations, seller expectations or increase creativity getting deals done. .

Now looking ahead, the housing market volatility, the pace of change and potential additional fed actions together make it pretty tough to forecast the rest of the year. But like we've been doing all year, our goal is to provide you with transparency about what we're seeing in the market and what we are estimating in our business outlook.

So Charlotte will be sharing our operating EBITDA, volume, commission and cost estimates later in this call. So as we close out Q2, we delivered good profitability and free cash flow. We invested to grow our business in the future and return capital to shareholders..

We remain even more focused on cost in this rapidly changing housing market and we remain confident in our ability to deliver financials, especially relative to many of our competitors. I want to come back and make a few comments on the longer term. But first, let me turn it over to Charlotte to discuss more details about Q2 and our updated estimates.

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Good morning, everyone. Before we get into the results for the quarter, I want to level set on the current macro-backdrop and how our business remains forward-looking in an ever-changing environment.

As Ryan said, we have a strong foundation, and we are well equipped to navigate today's environment, responding with agility to volatility and uncertainty while remaining focused on our long-term objectives and values which have made us so successful.

We are not immune to the challenges in the market, but we have shown we will flex our cost structure and strong balance sheet and liquidity in ways that are clearly an advantage for us. We believe we can be a net beneficiary as the current market landscape will naturally force winners and losers. .

The combination of our strong business model, the strategic investments we have made, the capabilities we have built and our culture positions us well.

The key is making decisions that deliver today while also staying committed to our strategy, which is designed to drive long-term value and which we believe positions us for success regardless of the macro-environment. An example of this is our continued focus on improving our cost structure..

We have proven we are relentless on our cost structure regardless of market conditions. In 2021, we delivered about $85 million in cost savings. For 2022, we originally budgeted about $70 million of cost savings.

But given the current backdrop, we have targeted an additional $70 million plus of both permanent and temporary cost savings for total full year savings north of $140 million. These additional savings are in 3 buckets.

First, we have moved rapidly to respond to shifts in the housing market to right-size our costs, including purely variable as well as semi-variable costs that are tied to volume, especially across our brokerage and title businesses..

Second, we continue to reimagine and reduce our retail office footprint, and we have reduced our administrative office footprint, which is down almost 80% since Q1 2020.

Finally, we continue to streamline our administrative support cost structure through RPA and other automation as well as enhanced use of business analytics and technology tools, including Power BI, Hyperion and advanced analytics. .

Another example of our success is our strong balance sheet and liquidity position with over $800 million lower gross debt than Q2 2019, a long-dated maturity stack, lower cost of capital and an untapped revolver, we have a lot of financial flexibility, and we believe our balance sheet is a competitive advantage.

We generate attractive profitability and free cash flow even in more challenging housing markets, and we recently moved to positive outlook for Moody's despite the market backdrop.

We remain committed to our plans to address the 2023 notes on or before maturity and have started to tackle this already in Q2 by purchasing $60 million of these bonds in the open market at a discount..

And in July, we successfully executed an amendment and extension of our revolving credit facility. We were able to upsize the extended portion of the revolver to $1.1 billion and to extend the maturity to July 2027. During Q2, we also repurchased $45 million in common stock with about $255 million of repurchase authorization remaining.

Looking forward, we will continue to balance these priorities with the impacts of the broader economy and our need to invest in the business as we look to advance our goal to make the transaction process simpler for consumers. With that context, I will now briefly highlight our Q2 financial results..

Q2 revenue was $2.1 billion, down $134 million or 6% year-over-year versus the unseasonably strong Q2 last year and down about $100 million due to the partial sale of the underwriter business. Franchise brokerage and title agency revenue drove the remainder of the decline, offset in part by growth in our relocation business.

Q2 operating EBITDA was $202 million, down $108 million due to softer franchise and brokerage transaction volume, higher agent commission costs and a decline in title earnings. .

Title, now Anywhere Integrated Services, included a hit of about $20 million year-over-year due to the sale of the title underwriter. These impacts were offset in part by favorable relocation earnings that were driven by strong volume growth. Cash on hand at the end of Q2 was $251 million, excluding restricted cash and free cash flow was $70 million.

We ended Q2 with a senior secured leverage ratio of 0.05x and a net debt leverage ratio of 3.4x, and we will continue to target a 3x net leverage ratio through cycle moving forward..

As a reminder, we are now a full cash taxpayer and paid $42 million in cash taxes in the quarter, which impacted our free cash flow.

We also had a big swing in our working capital, which contributed positive free cash flow last year but was a drain this year due to growth in our relocation business and due to timing and lower accruals in the rest of our business.

Our Anywhere Brands business, which includes leads and relocation, generated $339 million in revenue and $204 million in operating EBITDA in the quarter. Our core franchise business is national in scope and skews to more average home sale prices, which makes it more directly impacted by the rise in mortgage rates and lower inventory.

Despite near-term volume headwinds, our core franchise business has very attractive fundamentals, including a steady royalty stream and 70% plus profit margin in the quarter..

Our relocation business generated favorable operating EBITDA in the quarter, led by strong client initiation volume, which was up almost 40% year-over-year, including a resurgence of international volume.

Our Anywhere Advisors business, which skews high end with an average price point above $700,000 with our Coldwell Banker, Corcoran and Sotheby's International Realty brands generated $1.8 billion in revenue and $11 million in operating EBITDA in the quarter.

Advisers generated operating EBITDA of $127 million before the transfer of intercompany royalties and marketing fees paid to our franchise business. .

We continue to invest in this business with Q2, our eighth consecutive quarter of agent growth, up 6% year-over-year like-for-like. Ongoing agent recruiting success, combined with agent mix, drove most of the 236 basis points increase in commission splits versus prior year. Our retention rates also remained at historical highs in the quarter.

Between our recruiting success and our retention numbers, you can see we are leaning in here to position us for future growth.

And while this high-end recruiting success and record retention does bring with it some upward pressure on agent commission costs, albeit moderating slightly sequentially, we remain laser-focused on driving profitable growth..

Anywhere Integrated Services delivered $144 million in revenue and $21 million in operating EBITDA in Q2. Q2 revenue reflects the absence of the title underwriter with the balance of the decline primarily due to lower refinance volumes.

Operating EBITDA declined $34 million year-over-year, primarily due to the title underwriter sale, with the remainder also due mostly to lower refinance volumes and $10 million lower mortgage JV earnings driven by the abrupt uptick in mortgage rates.

Based on what we see today, our current view on transaction volume for the second half of 2022 is down about 10% to 20% year-over-year, which implies full year volume down 6% to 11% year-over-year.

Having earned $271 million year-to-date, this volume outlook, combined with our additional cost actions, 175 plus basis points in commission split headwinds and a few other moving pieces in our business has us today with our current estimate for full year operating EBITDA between $600 million and $700 million..

We like our free cash flow delivery, but keep in mind, our full year conversion percentage will be lower, given we are now a full cash taxpayer and have negative impacts due to working capital. We are laser-focused on the $300 million cost savings target we announced at our Investor Day.

This target spans 2022 through 2026, not including the incremental 2022 temporary saves just announced and will be delivered through reinvention of several parts of our business. We will drive further integration among our title and owned brokerage businesses and automation on a much broader basis..

Stepping back, we have been and continue to be relentless on costs and proactive on our balance sheet. We will move with speed and agility to not only deliver results today, but also invest selectively to continue to advance our strategy with our luxury focus, our reimagined cost footprint and key technology advances and consumer focus. .

I will now turn the call over to Ryan for some closing remarks. .

Look, it's clearly a dynamic time in the housing market and Anywhere Real Estate is well positioned given our profitability and free cash flow delivery, our balance sheet and liquidity strength and our increasingly impactful consumer focus.

And we believe we demonstrated those strengths with our Q2 results even given the market headwinds and the current market volatility likely creates opportunities for Anywhere to use our strengths to enhance our market position relative to our competitors..

Now looking to the future, the fundamentals for U.S. Housing actually remained quite strong, especially the demographic trends and the higher demand. And what will be most important is the future is changing the customer experience.

We believe people will buy and sell houses in a spectrum of ways in the future, all anchored in an improved customer experience and so we continue to invest to grow our future.

That includes driving growth from our existing businesses, especially our franchise business and our luxury focus, increasing market share by utilizing our market-leading scale, incumbency strength and exciting investments in products, technology and talent, delivering great consumer experiences, buying and selling a home.

There are attractive economics, share gains and competitive advantages to leading into this future and we must recognize that our true competitive set going forward is going to be different from the past. It is companies focused on the consumer experience that are likely to innovate, disrupt, change and win in this industry going forward..

So we're ready as Anywhere Real Estate to navigate and deliver during this challenging part of the housing cycle, while remaining focused on the innovation required to win in the future. With that, we will take your questions. .

[Operator Instructions] And we will take our first question from Justin Ages with Berenberg Capital Markets. .

Ryan, first one for you in a little bit in general, I think. I was hoping you could help us understand how you plan to balance the kind of short-term operating environment that we're seeing right now with the vision that you laid out for us at the Investor Day, just the puts and takes to kind of achieving those long-term targets that you gave us. .

Yes, it's a great question. We're clearly going through a changing housing market as we speak. Look, as we try to talk about on the call, we're moving pretty quickly to adjust to what's happening in the market change.

I think the emphasis on even more cost focus, not just that we've had in the good markets, but in a more challenging market, I think was pretty clear and something that we were excited about. And we're going to stay focused on that. But we're not going to stop investing for the future.

And we generate the free cash flow and profitability that allows us to do that.

And so while we're adjusting kind of in real time to the change in the housing market, especially on the expense side, we have not pulled investments in things in the future because we still think this is where the industry is going to go and needs to go, and we need to be a leader in that journey. .

All right. That's helpful. And the next one, somewhat related, maybe for Charlotte. Just hoping to dig a bit deeper on the EBITDA guide.

Given the commentary that gave about home prices moderate a bit, the transaction volume that's included in the EBITDA guide, that's going to be more on the unit side or is that how we should be thinking about it then?.

No. The numbers that I provided were actually total volume based. And like Ryan showed, we are seeing some price appreciation. So I think it's a balance. You also have to remember, like we are lapping our highest growth in absolute months in Q2 and July of Q3. And our comparisons start to become a little bit easier. We had like 85% volume growth in Q2.

And I can't remember exactly what it was in Q3, but it was certainly a lot higher than it was in Q4 and especially in July. So I think you have to kind of take a little bit of the real time data and balance it with kind of what we're lapping from the prior year. But those 10% to 20% is volume, and the costs, we're going to continue to flex them. .

So based on what we see today, we've taken actions that are commensurate with that. If things change, we will continue to take action. I think we've shown that especially during COVID too that we will move quickly. So you have to balance our ability to continue to flex our cost base with whatever volatility we continue to see in volume. .

Justin, one thing on the total volume. There's really 3 things to think about.

One is what's going to happen with prices, what's going to happen with units, but also what's going to happen with our relative performance, right? So you put those 3 things together, make whatever assumptions you want and those 3 things kind of go into the range that we gave. .

And we will take our next question from John Campbell with Stephens. .

This is A.J. Hayes stepping in for John Campbell. Ryan, kind of continuing on this conversation here.

Can you speak to some of the market trends or leading indicators you're seeing so far in July and how this market backdrop may be confidence for this revised guidance here?.

Well, yes. I mean, look, as I said, it's a rapidly changing market, A.J. So we're just trying to give you what we see at the latest, it is kind of hard to predict. Look, you can find an anecdote for anything.

But if you look at the data, I shared what we were seeing happening in price and in units in our portfolio, a couple of other things you might find interesting. What we're seeing, if you go back into Q2 also is we're actually taking more listings at $500,000 and up than we did the year before.

Conversely, there are less listings out there below $500,000. And I think that gets a little bit to some of the inventory issues and some of the seller and buyer expectations change I talked about. So I find that to be interesting. And then in our portfolio at least, about half of our listings are going under contract in 2 weeks or less.

That's down from about 60% of listings going under contract in 2 weeks or less last year, but that's still meaningfully above 2019 where it was like 35%. And all these things are moving fast out there. .

So we're seeing more strength in markets like New York City and Texas and the Carolinas. Like I talked about on the call, Florida and New Jersey are much more kind of flat kind of areas and California has got a few headwinds. But we gave you the overall numbers, and that's just a little more color. It's moving pretty fast.

We're watching it pretty closely. And that volume range Charlotte gave is a little wider, right, in part because of kind of that uncertainty on our side. But you really have kind of the latest data that we have, including some of these additional kind of examples I just gave here. .

Great. Very helpful. And then maybe a quick one on RealSure here. I was curious, are you seeing any read-throughs from RealSure. And then additionally, is there any further traction from this business given the market backdrop? And have you seen an incremental uptick in the number of sellers electing to accept the competitive bid from RealSure. .

That's a great question. So we like RealSure. We're continuing to invest in. I think the biggest story on RealSure, like many of the other power buyers, I would say, is a 2-part thing.

One is, from what we see both in our data in the market, I add some comments other people have made that the kind of, this power buying concept, I think, is here to stay, right? And we like the fact that we've got it and we can do it at scale. And so I think it is here to stay.

But you've seen, I think, most of the people who are in this part of the ecosystem pull back a little bit because of the market pullback. .

And we haven't pulled back out of any cities or anything like that, but we'll probably invest a little bit less in RealSure just because there's a little less market for it right now when the whole market is down the way it is. But we really like it. We're continuing to invest in it.

And most of what we've seen is our numbers and anecdotes that make us believe it's here for the long term as a concept and is part of us, but also in the near term, it has to flex just like many of its competitors of flex and like we're flexing into a bit of a different housing market. .

We will take our next question from Anthony Paolone with JPMorgan. .

So my first question is, I was hoping to get some help with maybe bridging some of the comments you've made in the past about pushing for market share gains and you also showed that your agent count, I think, was up, you said 6%. So those are positive.

But when I look at your unit numbers in the quarter, they seem to underperform NAR down about 15% versus 10% and price wasn't up as much as some of the NAR data suggests.

So can you talk about just what's happening on the market share side and how bridge that a bit?.

Yes. So if we look back over time, I think our unit share has gone up over time, but we think we've gotten a good amount of share gain also on price, which kind of leads into the luxury stuff that we do. I would say right at the moment, Tony, the truth is I'm not 100% sure what's going on with our market share in Q2 of 2022.

We don't have a clean comparison to give you, given the 8-K that we put out and some of the revisions and disclaimers that the third parties have done with their data that we often compare to. .

So we're looking at our market share comparisons like MLS data that covers about 80% of our business and some other stuff. And all these measures have challenged it. But we like our agent growth in the quarter. We like the kind of very, very high retention that we've had.

We like the ability to bring in kind of a larger than usual franchisee, and we're going to continue to stay focused on that.

And like the earlier question, kind of asked, we're not coming off what we said at our Investor Day, which is growing our market share is going to be an important part of delivering the kind of financials we want to deliver for this group. .

But as we sit here right in the second quarter, the data for the quarter is a little tough to judge, again, given some of the disclaimers people have done about the data we sometimes compare to. So we don't really have a clean comparison to give you, but we like the pieces that we saw and things do bounce around quarter-to-quarter.

But I think if you look over time, we've been up on units and kind of like the price luxury thing we've been doing. So that's probably all I've got for you. It's a strange answer, and it's kind of late breaking. So hopefully, we'll have better comparisons for you in the future. .

Okay. Fair enough. But then on that competitive landscape, you talked about splits being up at least 175 basis points, I think, which is fairly consistent with what you've talked about before.

I mean what are you seeing on that side? Has anything shifted for the better or worse given what's happening in the environment for housing?.

Yes. So a couple of thoughts on that. The quarter's agent commission splits were up 236 basis points. The majority of that was driven by agent mix still and the recruiting and retention. So most of that is driven by things we do control the recruiting and retention as well as the mix, which we kind of don't control.

And with lower inventories and lower listings, the higher-cost agents are definitely getting a higher share and continue to get a higher share of the transaction. Now for the full year, I said 175 plus basis points on the year, so what that implies is that the rate of increase is going to go down.

Part of what drives that is some of the heavy recruiting we did last year on the high-end agents, we start to lap that. So you're not increasing on top of an increase that you already had. .

So part of that just diminishes because of the timing of the actions that we've taken and part of that is driven by volume. Now normally, you won't see the volume impact until there the actual agent tables reset. So there's still more benefits from that to come. If volumes continue to go down, we're not rooting for that, obviously.

So the single biggest driver of why things should abate is mostly due to lapping heavy recruiting we did last year in the fourth quarter. .

And Tony, I want to take a bunch of ownership here in the sense of we are here for profitable growth. And hopefully, you've seen that in times when we were willing to let the market share go if it was going to be negatively profitable.

But part of the reason that we've got some of this upward pressure is we are excited about a bunch of the recruiting and retention success that we've had.

And I would say in the last, I don't know, 6 to 9 months, we've also kind of shifted and been doing more of our recruiting at the higher end or in some of the higher end markets in a way that's also driven some of the upward pressure here. .

And so I think Charlotte's sharing kind of a higher guidance number on this topic than we had last quarter is the right thing to do. And I'm still intrigued by -- in a tough market, what it might do to the competitive environment because, again, even in a tougher market, we're throwing off some free cash flow. We make a good amount of EBITDA.

It's probably too early to see how that translates into the agent recruiting and retention market, but I have a hypothesis or at least I hope that it will be a benefit to us.

And an early indicator I've got of that actually is when we look at the industry numbers, Tony, we see about 19,000 agents moved in Q2, that's actually down from previous Q2s of like 25,000 or 30,000 agents moving. .

So there's something going on, I think, happening and I think as the market is tougher and companies under more pressure, there may be some benefit to us here because we have the octane to keep pushing for more of this profitable growth, but it does have a few of these ancillary hits like into the commission line sometimes.

So we'll see how it plays out, but this environment may create some opportunities for a company like us that's got some strength and has the desire for growth that has the ability to do it still profitably, albeit occasionally at less margin maybe than the average. .

Got it. That's helpful. And then just if I can, last one maybe for Charlotte. Can you maybe help a bit on the free cash flow side. You talked about, I think, some working capital needs over the year, but you've also been buying back some stock and debt. I'm just trying to tie that together in the back half of the year. .

Yes, sure. So as I said, we ended the year with $250 million plus of free cash flow, that's after we bought back the stock and retired $60 million of debt. In the quarter, it was a pretty material impact on net working capital because if you think about last year, our volume was up about 85%. You're building accruals at that time.

sizable accruals tied to this gargantuan growth we had. Our volume is down 6%. So there's a complete reversal there. And then the securitization working capital had a material impact because as we start 40% up in client initiations and relo and then we start tapping into our securitization working capital.

So most of the negative hits from working capital have actually already hit year-to-date. .

But on a full year basis, like if you look back over time over the past 5 years, net working capital most years is sort of like neutral-ish, but there are certain years like every 3 or 4 years just because of timing, like last year, we basically accrued a bunch of expenses that got paid out in March. So it hits you this year.

And like I said, it actually already hit us. So it can be the most material swing on our free cash flow conversion, and we expect it to be so this year. Taxes were nothing. They were like a no impact to free cash flow conversion. And now it's sort of in the low double-digit numbers just because we're a full cash taxpayer. So hopefully, that helps. .

Tony, it's Ryan.

I'd love to make a comment here a little bit out of my lane, but also just so you and our owners can know how I think about it, which is if you look back at our company, we're kind of a 40% to, whatever, 70% free cash flow conversion company, right? And in strong earnings years and not a lot of working capital violence, we're on the high side of that.

In years where our earnings are less/there's the working capital stuff I talked about, we're more like on the 40% side, right? To me, I look at those cash taxes and you can do the math on it, and it's basically 15% to 20% now that we're a full cash taxpayer. .

So in my head, I've kind of reset my expectations for our free cash flow conversion range from 40% to 75% to more like 25% to 55% because of the cash tax thing. And then again, kind of the EBITDA and working capital kind of swings for the year kind of push us to one end or the other of that.

And I found that to be a helpful framework as I just think about both what we are delivering and what we're trying to deliver. .

And we will take our next question from Tommy McJoynt with KBW. .

So we've seen some pretty meaningful divergence in the year-over-year trends in brands versus the high-end advisors.

How much of that would you attribute to this type of comps last year versus general kind of outperformance in the luxury segment or maybe any other factors? And when do you think those factors should subside and bring those 2 segments' growth rates back closer to parity?.

It's a great question, and thank you for asking it. And I think Charlotte referred a little bit. Last year in Q2, we had whatever it was 80-plus percent kind of year-over-year growth.

The brand side, especially the luxury brands drove a huge piece of that, right? So they're lapping something that's much tougher than kind of a lot of the rest of the portfolio. That is a piece of it. But I tried to lay out the biggest 3 reasons.

One was just geography, right? Given how we're architected, New York City, for example, New York City was up 8 points of volume in Q2 when our portfolio was down negative 6%, right? New York City, I think is our second biggest market as a company.

But New York City is only on the adviser side, right? We don't really have a franchise presence of any size in New York City. .

So what Corcoran and Sotheby's International Realty and Coldwell Banker did in New York City, really was a swing. And that's just one example of the geography, but it's like the most striking.

Second, those 3 brands on our own side, Corcoran, SIR and Coldwell Banker do skew more luxury, as you heard in my listings commentary and stuff like that, we really like what's going on with us in luxury at least on a relative basis, if nothing else. .

And then third, we did in April bring a franchise into our owned area up in Seattle. It's a luxury market. We didn't have a presence in. It was a way to keep the franchisee who is exiting the business in our network. And you'll see in our press release that actually, without that, that was like 3 points of the difference basically on the adviser side.

So those 3 things are really what drove the difference. I don't know if the geographic thing is going to kind of normalize and flatten out. I think the luxury outperformance will continue. And then obviously, the acquisition will continue to carry into the numbers when you do year-over-year comparisons. So that's how I'd answer it. .

And then switching over a little bit to the mortgage JV. We saw a sequential improvement and a kind of a tough market for kind of mortgage broadly.

Do you kind of have an outlook for that kind of segment in particular in the back half of the year and into next year?.

Yes. We haven't shared a specific outlook. I would tell you that we think we're faring as good or better as other mortgage companies, you do highlight the sort of sequential improvement. So we are obviously taking actions to continue to balance the cost structure.

But we remain focused on growing our loan officer base, and like it applies across the broader business too. So we will continue to make selective investments for long-term growth because while it is painful in the short term, we like this business for the long term.

So I don't expect it to be a material contributor to our EBITDA for the rest of the year, just like most mortgage companies and again, probably faring better than some of them.

But ongoing, we still have a lot of love for this business and think once we can get past the acute macro issues that we're experiencing right now that this is going to be a great business for us. .

We will take our next question from Matthew Bouley with Barclays. .

I wanted to follow up on the commission split outlook. It sounded like the assumptions around the second half of the year are more a reflection of sort of a continuation of prior trends. And I think I've heard you right, it's not yet reflecting the changes to agent split tables.

I'm just curious, I guess, if transaction volumes play out the way you've guided, is there sort of a tangible benefit to commission splits as we think about 2023 or is this sort of constant upward pressure related to recruiting end up kind of outweighing that?.

Sure. At some point, if volumes were to continue to be down, the tables do reset. I mean, again, we're not rooting for continued volume decreases. So I think the one thing I would point you to is this mix piece because it is material.

And I think it ties into why we continue to heavily recruit at the high end because until the inventory situation improves, a lot of the higher-end agents are just getting a higher percentage of the transaction. So it's important that we have a strong base on the higher-producing agents, which tend to cost more.

So we're going to continue to do that where it is profit positive for us. .

Like Ryan said, you may have a bit of a margin hit. But the agent mix thing is the thing that we would hope in the longer term does settle itself out, but it is correlated to inventories. So I hope on the flip side of that, though, you have seen us be super proactive on our cost actions.

And so while we do want to invest in the higher-end agents and in our agent growth, and I also did mention we have continued historical high retention as well. So it's the value proposition that we're investing in, which helps us to balance splits for the longer term.

But the cost saves are what we're focused on in the short term too, to make sure that we have the right balance between investing for growth in splits versus profitability. .

Got it. Okay. And then second one, just following up on the transaction volume guide, that discussion. I mean it sounds like it's hard to make a call on share here, as you mentioned, given the 8-K kind of inability to compare versus the market with that change in data.

But I think NAR yesterday spoke to something more like a low single-digit decline in transaction volume dollars for the year just based on their assumptions around units and median price. .

My question is, given your assumption, is this sort of ripping the band-aid off and just kind of level setting the market for a range of just weakening outcomes that could potentially happen? Or is this you really looking into the past 8 weeks of the business trends and saying that this assumption for the second half of the year is basically what's been happening for the past 8 weeks.

So kind of is the assumption worsening or basically just kind of equivalent to what we've seen over the past 8 weeks. .

So again, I think it's given some of the disclaimers that people have made about third-party data out there, it's tough to do price comparisons these days.

Look, what we're trying to do here is just be as clear as possible both about what we're seeing and kind of what we think the range would be kind of based off what we're seeing, not just in the moment, but even some of the trend stuff that we're seeing.

I think putting prices aside, kind of what we're seeing and what we're talking about on the unit side is, I think, kind of in the ZIP code of what some other people have been forecasting. But again, ours is literally what we're seeing and then we're coming up with our kind of range out of that. .

On the price side, again, we gave you exactly what we're seeing. So we've got that info for you. And then how we do on a relative basis, we'll see, right? But we do have the leading indicators we have, whether it's on the agent growth front or the franchise expansion front.

So as I kind of said, for the last 4 years, we never gave you any guidance on this kind of stuff, right? And there's a constituent of people listening to this call who told me that was a bad idea to not do that. This year has been a pretty challenging year.

And our estimates have never tried to be estimates that we guarantee are going to come to fruition because I think it's a very hard thing to predict the housing market and the macro, I think this year kind of showed that.

because, again, our volume was running consistent with our start of the year guidance for a big part of year 2022, but the world has changed on us. So what we're really trying to do here is just give you as much recent debt as we can and kind of what we're literally estimating in our business from our perspective. .

And we're not that interested in kind of trying to like be forecasters versus others and who's right and who's wrong. But we've literally shared with you our data through late July of what we're seeing. And then what we're assuming for the rest of the year based off that data and the trending that we're seeing.

And giving you hopefully a framework that if you have a different view, you can plug that in and then you can adjust the other parts of our estimates for that.

But as we talked about, I talked about earlier, it's a little wider range than probably we'd like to provide you of our estimates, in part because of the uncertainty of the prediction here for the second half of the year that's implied in your question.

So we hope the transparency and the view of our estimates is helpful, but they're also not tablets coming off a mountain written in stone that are guaranteed to last for thousands of years. .

But the spirit of the range is sent to try to put a very broad framework around what we think sort of the best case scenario could be in like sort of more your rip the band-aid off scenario kind of thing. Like Ryan said, we haven't provided these ranges in the past. So there is some spirit there behind trying to do that for you guys. .

And we will take our next question from Kwaku Abrokwah with Goldman Sachs. .

Most of my questions were answered, but I just wanted to follow up on the free cash flow discussion here and sort of the relocation receivables. Just can you give us a sense of sort of, first, given that the receivables are going up, it seems like the relocation business is picking up again.

Can you give us a little bit of an update on that business? And then second, where could that working capital uses to go over the next year or so?.

Yes. So we're really pleased with our relocation business. The progress has been amazing. It's actually, initiations are even up over 2019. So, not only is it rebounded, it's even better than it was before COVID hit.

So we continue to make investments in that business throughout COVID, especially after it because of all the success in the rest of our business. And we think that business is well positioned. So yes, so what happens with the securitization is as you start to build growth, you tap into it, but then that it basically unwinds itself.

And usually, the securitization ends up being like a neutral factor on the year, it's just acute in the quarter. So that should unwind as it sort of settles itself out. If we continue to grow more than 40%, it will continue to build. So 40% was just a material number, and that's why it's so acute in the quarter. .

As far as the next year for working capital, like I tried to say, the reason we have negative net working capital aside from the securitization is just timing of accruals and because of the strength of our business over the past 2 years, there's accruals that sit in the business at year-end where the cash flow comes out in the first quarter to pay those accruals, and it was very material and you can see it in our Q1 actuals.

So most of that between Q1 and Q2 is actually already hit. There can be some small variation. But going forward, once you've lapped that, it should not continue to be a drain for us over the next 12 months. .

Perfect. And just to continue on some of the trends in the macro, like I think when we were having, when you guys were hosting the Investor Day, it seemed like the high end or the luxury end was really much more resilient than the other price points. And then something seems to have happened in June.

Can you give us a little bit of puts and takes as to how that transition sort of transpired so to speak, and what you were seeing in the transition from May into June and potentially into early July?.

Well, yes, I think the -- I mean the June and July kind of drop off is clearly a cross market, but I think on a relative basis, in our portfolio at least, this may not be true for everybody in our portfolio at least, the luxury stuff is still more resilient, right? And some of that is luxury has got a little more cash buyers, so you don't have as much of the mortgage hit.

But I talked earlier about the kind of the luxury kind of part of our own brokerage business kind of is part of the reason that business is outperforming the broader kind of more national franchise business, our 500,000 up listings are actually growing, right, not shrinking versus a year ago, whereas the mass market listings are dropping versus a year ago.

.

So I think the whole market has moved, but I think the relative performance within the market may not be that much different, at least in our portfolio from what it was in May. And I think it's the same reasons, less impact on mortgage, kind of the fact that the higher end people are still doing well.

And I think both sellers and buyers have kind of reset expectations, and that adjustment might be happening a little faster on the luxury side. .

And part of it, there was also the lap like Ryan called out. So that business performed above our 85% volume growth last year. Volume was a very high contributor to that. So I think in part the year-over-year lap is impacting things, too. .

We will take our next question from Ryan McKeveny with Zelman & Associates. .

Charlotte, I know we're all very focused on the recent and near-term dynamics. And certainly, the incremental $70 million of cost savings this year makes sense. But can you help us think about kind of cost saving opportunities or incremental levers that could be pulled next year if transaction volume in 2023 is actually worse than 2022.

And I'm are so curious on actual kind of operating expense cost savings as opposed to some of the flex points around things like splits or commission rates or franchise royalties. So again, just kind of curious if on the OpEx cost savings as you look into next year, is there still opportunity to take cost out of the business.

And I know you've been on a path of cost savings for quite a few years.

So just not sure if the low-hanging fruit is already out of the business or if there's incremental opportunity going forward?.

Thanks for the question. Yes. So we committed to a $300 million-ish target for over the horizon of 2022 through 2026. So hopefully, that does indicate, I do believe there's a lot more cost that can be taken out of this business.

And that's why I tried to articulate this temporary cost stuff that we're doing is not part of that because it can just be short-term things where we dramatically reduce expenses and discretionary spending one way or the other, but that's not how we would run our business going forward.

So I don't want that to be committed to trying to deliver the $300 million. .

A lot of what actually we do is flex our sort of our workforce model based on volume because if you can think about it, a pretty sizable portion of our employee base actually supports these transactions. And if there's 20% less transactions to have to do, it's a constant thing that we're doing and markets can be different.

So we're constantly flexing our workforce model relative to the amount of transactions that we need to handle both up and down. You can't really say that that's permanent cost savings because it's really just a flex based on volume. So that's part of what we're doing this year. .

The stuff that's part of our long-term plan that we shared at Investor Day is literally reimagining the transaction, which will be much more automated. And so I feel very good about the $300 million target. I feel like there's definitely more room to go.

Part of what we're dealing with right now is just flexing things based on some acute changes in the market, which we would normally do, whether it's 5%, 20%, any percent, whether it's up or down. .

That's very helpful. Charlotte. And Ryan, one for you. I wanted to dig in a bit on the M&A and investment environment. So one of the things we're picking up on is it does seem that there's independents looking to acquire. There's other independents looking to sell.

I'm not sure if those dynamics have changed as the market has shifted over the last month or 2. But we've also seen over the last year, private equity interest in investing in well-run franchisees or in some cases independents. .

So I guess I'm just curious, are you seeing a shift in the market around just industry consolidation or attractive acquisition opportunities potentially for your business? And kind of the second piece of that is just into a more challenging macro backdrop, any thoughts on how you think about M&A or consolidation opportunities within the brokerage segment or maybe more so in the franchise side with potentially lining up deals or helping some of the franchisees potentially acquire, consolidate amongst themselves?.

Yes. So I'll try to keep it brief here because I know we're at the period of time. Look, so we're trying to be pretty selective on M&A kind of stuff that we do, kind of either luxury focused or the pricing has to be really attractive.

And we're always out there trying to help either our franchisees make marriages or as I talked at Investor Day, we've kind of helped some third-party capital kind of come into the industry among our franchise network. And so we'll keep doing those things. .

I think the market is changing so fast that I don't really have a new read on it. I would expect in a more challenging housing market for there to be more consolidation opportunities. I think consolidation is inevitable no matter what.

And I would expect the prices to adjust in a tougher market, which again could be another place where our strength could let us take advantage of something relative to the competition. But it's a little too early to have a different set of data on that for you. So I'll probably just leave it there. .

And ladies and gentlemen, this concludes today's conference call. We thank you for your participation. You may now disconnect..