Good morning, and welcome to the RE/MAX Holdings Preliminary Third Quarter, Fourth Quarter and Full Year 2017 Earnings Conference Call and Webcast. My name is Kim and I will be facilitating the audio portion of today's call..

At this time, I would like to turn the call over to Andy Schulz, Vice President of Investor Relations. Mr. Schulz, please go ahead, sir. .

Thank you, operator. Good morning, everyone. And welcome to RE/MAX Holdings Preliminary Third Quarter, Fourth Quarter and Full Year 2017 Earnings Conference Call. We are working to file our third quarter Form 10-Q and 2017 Form 10-K with the SEC as promptly as possible.

Both documents will be available on our Investor Relations page at remax.com once filed. Please visit the Investor Relations page of remax.com for all earnings related materials and to access the live webcast and the replay of the call today.

If you are participating through the webcast, please note that you will need to advance the slides as we move through the presentation. Moving to Slide 2, please remember our prepared remarks and answers to your questions on today's call may contain forward-looking statements.

Forward-looking statements address matters that are subject to risks and uncertainties that may cause actual results to differ materially from those discussed today..

Examples of forward-looking statements include those related to agent count, franchise sales, revenue, operating expenses, financial guidance, housing market conditions, dividends, non-GAAP financial measures, as well as other statements regarding our strategic and operational plans and business models..

And information concerning the outcome or implications of the special committee investigation and its impact on the company were on the company's historical financial statements and the effect of any remedial measures taken in response to the investigation. As a reminder, forward-looking statements represent management's current estimates.

RE/MAX assumes no obligation to update any forward-looking statements in the future..

We encourage listeners to review our third and fourth quarter preliminary financial results press release which includes more detailed discussions about these forward-looking statements including factors that could cause results to differ materially from the forward-looking statements and the definitions and reconciliations of non-GAAP measures contained in the third and fourth quarter preliminary financial results press release which is available on our website..

Our Q3 2017 earnings announcement was delayed pending the conclusion of an investigation by the special committee of the board. We announced the conclusion of special committee's investigation yesterday as well as certain related matters in our press release in Form 8-K..

Beyond these disclosures, we do not have additional information to provide on this topic on today's call. We will keep our comments and Q&A focused on our business and financial performance..

Please note that the financial results and other information discussed on this call related to our third and fourth quarters and full year 2017 are unaudited, preliminary numbers..

We have not completed our quarter-end and year-end closing and review process and the auto process for full year financial statements with our independent registered public accounting firm..

Our financial results and financial information for the third and fourth quarters and full year 2017 may vary materially from the preliminary financial information discussed on this call..

Joining me today on our call is our Chief Executive Officer, Adam Contos, as well as our Chief Financial Officer, Karri Callahan. Ward Morrison, President of Motto Mortgage, will join us for Q&A. With that, I would like to turn the call over to RE/MAX CEO, Adam Contos.

Adam?.

Thank you, Andy, and thanks to everyone for joining our call today. RE/MAX was created 45 years ago last month based on a simple premise, create an environment where productive agents could come together, motivate each other and see their results soar. Some in the industry claim we started a revolution.

The concept seems so logical, a truly entrepreneurial agent-centric model. But it was groundbreaking at the time. Almost half a century later, that original business model is still going strong. All around the globe, over 119,000 RE/MAX agents in more than 100 countries and territories are delivering great outcomes to buyers and sellers..

Now the rest of the real estate industry seems to be trying to catch up. Many competitors are now also focused on being agent-centric. And although, 2018 has been described as the year of the agent, our commitment to the best agents in real estate has been our focus since day one. This is what has made us so successful. We are #1 in the world.

Nobody in the world sells more real estate than RE/MAX based on residential transaction size. Our network, our business model and our foundation have never been stronger, and I'm excited about the prospects for continuing our momentum..

Next week, I'm headed to our R4 annual conference where agents and brokers gather to exchanged their ideas and discuss the latest developments in real estate. We will have robust attendance this year. Yet another sign that RE/MAX brand continues to strengthen every day. I could not be more excited to go to R4 this year..

We have a brand people know. A growing global presence, a collection of unique competitive advantages and, most importantly, the most dynamic agents and brokers in the business..

The path we are forging today grows from the transformative insights that Dave and Gail Liniger brought to the marketplace and the hard work of all those who have contributed to making RE/MAX the most successful and respected brand in the business..

Turning to Slide 4. During the past year, we continued to see the strengths of our business model, as we executed on our strategy and grew our business, delivering strong results in the process.

We achieved success in 2017 by advancing the 3 core pillars that create shareholder value; organic growth, acquisition and investment catalysts and return of capital to shareholders..

In order to drive organic growth last year, we focused on helping our RE/MAX franchisees recruit and retain quality agents and continued to emphasize franchise sales..

Expanding the Motto brand and helping those new franchisees get up and running also contributed to our organic growth..

For the full year 2017, we added over 7,000 agents worldwide, a 6.4% increase year-over-year as we surpassed 119,000 agents globally. RE/MAX global franchise sales had its best year in more than a decade with over 1,000 units sold..

Motto Mortgage franchise sales finished the year strong. In just 16 months since we launched, we've now sold over 70 franchisees and currently have more than 30 Motto Mortgage franchises opened and operating. Our focus on organic growth fueled our stable recurring revenue streams.

This, coupled with our disciplined approach to expense management, produced healthy margins and generated $61 million in free cash flow..

Our investment catalysts drove further growth in 2017 and will continue to help generate attractive shareholder returns going forward. We continue to be committed to reinvesting in the top priorities of our business. Innovation, training and technology..

We created a new business and product strategy team focused on innovation, corporate strategy and product development, led by Executive Vice President Pete Crowe. Today's highly competitive real estate landscape makes it essential to find new ways to help brokers and agents serve buyers and sellers..

Pete's team will help us continue to evolve and stay one step ahead of the competition..

As a franchisor one of our key success factors is the world class training we provide to our network..

Our focus on assisting our entrepreneurial franchisees to recruit and retain high quality agents has always been foundational to our value proposition. Our commitment to our network was evident by the 44-city Profit/Ability tour throughout North America earlier this year.

In each location RE/MAX executives met with local franchisees to discuss critical strategies to help them grow their operations and build thriving businesses. The Profit/Ability tour was free for RE/MAX franchisees.

We have leveraged face-to-face trainings like the Profit/Ability tour throughout our history as we are passionate about our ability to deliver value and maintain positive business relationships with the best broker/owners in the industry. Helping our offices lead for profitability is important.

Greater office revenue drives enhanced services and benefits for our agents..

In turn, those agents are able to deliver even better service to home buyers and sellers. It's a virtuous cycle that benefits everyone..

On the technology front, we continued to make substantial investments in the past year, including launching new social media and digital marketing solutions for agents. RE/MAX, the #1 name in real estate, once again has the most visited real estate franchise website according to recent Hitwise data for 2017.

The remax.com website drew over 90 million visits in 2017 according to internal data..

RE/MAX has a substantial digital footprint, and we continue to gain momentum and expand our reach..

Attracting more visits means more visibility for RE/MAX listings and more opportunities for RE/MAX agents to help buyers and sellers. We are committed to making the most productive network even more productive..

Another growth catalyst for our business is acquiring independent regions, which is a strategic priority for us. In November, we purchased the master franchise rights to the Northern Illinois region. Karri will have more on this acquisition later in the call..

In the last 2 years, we have acquired a 7 independent regions, representing more than 10,000 agents in almost 600 offices..

Our third pillar is return of capital. Our management team and our board are committed to returning capital to shareholders in a prudent and consistent manner..

We have paid a quarterly dividend since we went public over 4 years ago..

As a part of our commitment to return capital, we recommended, and the Board approved, an 11% increase to our quarterly dividend earlier this week..

Moving to Slide 5..

One of the keys to being a successful franchisor is to have the #1 brand and market share..

RE/MAX has both. The #1 brand in real estate, and nobody in the world sells more real estate than RE/MAX as measured by residential transaction size..

The world's leading brands remain at the top because they share a common trait --.

they evolve to stay ahead in changing markets and build upon hard-earned consumer loyalty..

World-renowned brands subtly refine their looks over time to fit consumer preferences and reinforce their culture, personality and competitive position..

Staying current lifts the value proposition at every level of an enterprise..

To provide our brokers and agents with even bigger marketing advantages with today's consumers, RE/MAX branding has been updated with a fresh modern design. This brand refresh looks great on yard signs and works well across social, digital, mobile and print platforms, further extending our brand strength, reach and strength.

Consumer data and opinion drove this initiative. Over the past 2 years, more than 20,000 consumers in the U.S. and Canada provided feedback on RE/MAX branding..

Our refresh brand is a deliberate move to continue to position RE/MAX agents as industry leaders for the home buyers and sellers of today and tomorrow..

Moving to Slide 6. Motto Mortgage franchise sales accelerated through the fourth quarter, and we have now sold over 70 franchises in 29 states since inception..

The vision and dedication of the Motto team has helped more than 20 franchisees open their doors and effectively compete in their local market places..

Interest in owning a Motto franchises remains high. We are encouraged by the spreading interest in owning a franchise across different customer types, and we feel good about our pipeline..

We expect to sell tens of franchises in the forthcoming year. We are pleased with Motto's progress and the pace at which the brand continues to expand..

Turning to Slide 7. According to the February edition of the RE/MAX National Housing Report, which is based on MLS data from 53 Metro areas, the record speed of January home sales may signal that buyers aren't waiting for the typical Spring selling season to begin..

Despite the number of home sales being down 2.8% year-over-year, the February RE/MAX National Housing Report shows homes sold in only 60 days on average last month, making the fewest days on market of any January in the 9-year history of the report..

The combination of robust demand and tight inventory resulted in higher sales prices. The median sales price of $224,000 also set a January record, up 6.7% year-over-year. Out of 53 markets, 51 posted gains, marking January as the 22nd consecutive month of year-over-year price increases dating back to April 2016..

Inventory remains constrained as the number of homes for sale in January 2018 was down 14.8% year-over-year. Based on the rate of home sales in January, the supply of inventory was 3.4 months compared to 3.8 months in January 2017..

A 6-month supply generally indicates a market balanced equally between buyers and sellers..

Moving to Slide 8. We ended 2017 with over 119,000 agents in our global network. That's an increase of 6.4% compared to year-end 2016. Agent count growth in the U.S. and Canada combined was 2.3% with growth in almost every region..

Agent count outside of the U.S. and Canada increased by over 5,000 agents or almost 18% over 2016..

Strong gains in South America and parts of Europe have continued this year with significant contributions from Brazil, Portugal, Italy and Turkey..

It is terrific to see the accelerated growth of our international operations..

Outside the U.S. and Canada, we are in over 100 countries and territories. A number of the master franchise rights to these countries were sold in the last 15 years.

Generally speaking, it takes these owners 5 to 10 years to build infrastructure and market share in their respective markets and we are seeing the healthy franchise sales and agent count growth numbers we expected. International growth is an opportunity for us in the longer term.

We are first movers in many countries and are establishing our brand across the globe..

What's important for us now is establishing our footprint, expanding our brand name and helping those international owners successfully build their businesses. Slide 9 shows the breakdown of RE/MAX agents in the U.S. and Canada. The information on the left highlights U.S.

agent growth of 2.3%, driven by gains in many states, including Florida, California and the Carolinas..

As expected, following a transition period after the acquisition in Q1 2016, New York is now growing again, adding over 10% to its agent count in 2017..

We believe New York represents an above average multiyear growth opportunity and one which we are very excited about..

As shown on the right, our Canadian agent count grew over 400 agents or 2.1%. Agent count growth in Canada was highlighted by strength in Québec, which grew more than 8% during 2017..

With that, I'd like to turn the call over to Karri. .

Thanks, Adam. Good morning, everyone. We issued our preliminary third quarter, fourth quarter and full year 2017 results yesterday afternoon. So hopefully, everyone has had a chance to review. Instead of discussing our financials line by line, I'd like to draw your attention to a few key topics.

All of our standard quarterly results slides are included in the earnings presentation available on our website. I'm also happy to answer any additional earnings questions you might have during our Q&A session.

During Q3, we continued to execute on our core business drivers, increasing our global agent network, expanding Motto Mortgage and growing previously acquired independent regions, despite the financial headwinds resulting from the hurricanes last year.

Turning to Slide 10, the third quarter 2017 hurricanes were extraordinary storms, which directly impacted thousands of our associates. We are inspired by how the entire RE/MAX network rallied to help those in need and their communities and we continue to support our impacted associates..

Given the magnitude of destruction from these historic storms, we waived certain fees for those who were directly affected. The fee waivers were for a limited time based on individual facts and circumstances.

Total fees waived reduced Q3 revenue and adjusted EBITDA by approximately $1.7 million and reduced Q3 adjusted EPS by an estimated $0.03 per diluted share..

We continued these limited time fee waivers for a much smaller subset of impacted associates during the fourth quarter, resulting in a reduction of Q4 revenue and adjusted EBITDA of approximately $300,000..

Turning to Slide 11. We announced in November, we acquired the master franchise rights for the Northern Illinois region, which includes Chicago, for $35.7 million. We funded the acquisition using cash on hand..

With this acquisition, we added almost 2,300 agents in more than 100 offices into the company-owned region..

It's important to note, we receive between 15% and 30% of fee revenue from independent regions. By acquiring a region, we capture the additional 70% to 85% of revenue generated by the region..

That is why these acquisitions are so attractive and so accretive to our business. Moreover, our team has done an excellent job transitioning regions, delivering the high quality service our network expects. The most recent acquisitions are performing at or above expectation..

Looking ahead, we expect the Northern Illinois acquisition to add approximately $5 million of revenue and $3.5 million to $4 million of adjusted EBITDA to FY 2018 results. Moving to Slide 12, we finished the year strong, delivering double-digit increases in both revenue and adjusted EPS in Q4.

Revenue increased 11.4% to $49.5 million in the fourth quarter..

The acquisitions of independent regions increased revenue 7.5%, organic growth added 3.4% and favorable FX movements contributed just over 0.5% of growth..

The impact of hurricane related fee waivers and the timing of a large Canadian agent conference reduced organic growth by 1.5%. Q4 organic growth would have otherwise been closer to 5%..

One other comment on revenue. New revenue recognition rules under U.S. GAAP became effective beginning in 2018. Generally, this new accounting standard impacts the timing of recognition of our franchise sales and franchise renewal revenue and is expected to modestly impact our financial results..

For example, we believe our 2017 revenue would have been lower by less than $2 million had the new accounting standard been in effect last year. In 2018, we estimate that our revenue will be negatively impacted by closer to $3 million upon adoption of the new accounting rules..

Looking at Slide 13, selling, operating and administrative expenses were $28 million for the fourth quarter of 2017, up $2.8 million or 11% over the prior year quarter.

The increase in SO&A was primarily due to $2.6 million in special investigation expenses, investment in Motto as well as an increase in other litigation cost, partially offset by expenses incurred in the fourth quarter of 2016 related to the refinancing of the company's debt agreements..

Turning to Slide 14, the United States government enacted historic tax reform in late 2017, notably reducing the corporate tax rate..

The net impact to our Q4 and full year results was a net expense of $8.2 million or a reduction to GAAP earnings of $0.46 per diluted share..

I'd like to take a minute to review, generally, how the new tax law might impact RE/MAX holding..

From a business standpoint, it is difficult to predict the net impact of the tax reform on home buying and selling behavior..

Although, new restrictions on mortgage interest and property taxes deductions could limit activity for a subset of home buyers and sellers, we continue to be positive about housing in both the near- and long-term..

The U.S. market remains fairly healthy, with a strong underlying economy and still low interest rates..

Furthermore, long-term demographic trends appear to be favorable as millennials continue to grow into their prime home-buying years..

One of our most notable competitive advantages is our diverse geographic footprint of over 3700 RE/MAX offices spread out across the U.S. Although, we are not immune to individual market dynamics, we are somewhat insulated due to our distributed franchise model.

Bottom line, our agents are among the most productive agents in the industry, out-selling, competing agents at large brokerages more than 2 to 1..

With our unique agent centric model, #1 global market share and the #1 name in real estate, we believe our agents will continue to help home buyers and sellers achieve their dreams..

As far as our effective tax rate is concerned, we expect it to drop in proportion to the overall corporate rate reduction. Previously, our GAAP effective tax rate was about 23% to 25%, lower than many companies due to our corporate and ownership structure. We now expect it to be approximately 14% to 17% beginning in FY 2018..

Furthermore, the reduced tax rate should enhance our ability to generate more free cash flow, perhaps our most attractive financial characteristic. In our scaled business model, a good portion of each incremental dollar of revenue translates into profit and cash flow..

Increased cash flow means more capital available for those initiatives, which are likely to deliver the best returns. Our capital allocation priorities remain unchanged..

We plan to continue to allocate capital to all 3 pillars of shareholder value creation. Reinvestment to drive future organic growth, acquiring independent regions and exploring other strategic acquisitions and returning capital to shareholders..

On Slide 15, I would like to share our outlook for the first quarter and the full year 2018. Before I do, a couple of items to bring to your attention..

First, recall that our margins are seasonal like our industry with Q1 and Q4 being lower than Q2 and Q3. Q1 margins are also impacted by expenses related to our annual agent conference being held in Las Vegas next week..

Severance costs are also expected to negatively impact Q1 this year by $1.9 million. Secondly, we continue to invest meaningfully in our business, providing our brokers and agents with the best training, tools and technology available. As a result, you should expect our margins to be modestly lower in 2018 than they were in the prior year..

The company's first quarter and full year 2018 outlook includes the expected impact from adopting the new revenue recognition accounting rule and assumes no further currency movements, acquisitions or divestitures..

For the first quarter of 2018, we expect agent count to increase 5.5% to 6.5% over first quarter 2017, revenue in the range of $49.5 million to $51 million and adjusted EBITDA margin in the range of 38% to 39% of first quarter of 2018 revenue..

For the full year 2018, we expect agent count to increase 5% to 6% over full year 2017, revenue in a range of $205.5 million to $209 million and adjusted EBITDA margin in the range of 50.5% to 52.5% of 2018 revenue..

Also, we have included a supplementary slide in the appendix to our earnings presentation, which provides some further details on expected 2018 amortization expense as a result of the Northern Illinois acquisition. Now, I'll turn it back to Adam. .

Thanks, Karri. Turning to Slide 16. In conclusion the fundamentals of our business remain solid, and I believe, our foundation has never been stronger. Our competitive advantages are multiple and significant. We have an outstanding business model and management team, supporting the world's best agents and brokers.

We remain confident in our strategy and long-term business plan. And we are excited about driving our business forward..

With that, operator, let's open it up for questions. .

[Operator Instructions] Your first question comes from the line of Ryan McKeveny from Zelman & Associates. .

Just a couple of quick ones. So on the domestic agent count growth, I just wanted to focus on that for a minute. We've seen deceleration there in the last few years, and it seems to have kind of picked up in terms of the decel in rate of growth in the back half of '17.

So curious if you can just talk about the dynamics around the domestic agent comp growth, the recruiting environment, whether there is kind of macro factors at play or just the competitive dynamics of the brokerage industry.

And then, ultimately within that guidance for 2018 of 5% to 6% total agent count growth, if you can give any thoughts around the magnitude of how the domestic agent count growth might fit into that guidance?.

Good morning, Ryan and thanks for the kind words. Great to talk to you today. Yes, we -- obviously, that's one of the fundamentals of our business is agent growth. So we keep a close eye on it.

And as you probably hear throughout the industry, competition for the agents is as fierce as ever, however, we continue to stay on top of and ramp up our value proposition that we are delivering to the field. You look at NAR agent growth, it was 5.5% year-over-year while we did 2.3% in U.S., which is typical of our system.

We typically lag NAR when it comes to agent growth because we are very selective in the position in the market that we pursue in the agents. We want high productive, professional, experienced agents and that's what we continue to go after.

With the turnover rate in the industry right now and the fierce competition that you're talking about, I think what you're going to see is, you're going to see consistent numbers from what we've been seeing recently.

So we just finished a 44-city speaking tour, the Profit/Ability tour where we met with a great deal of our broker owners throughout North America and the sentiment for gaining agents is strong. There was a lot of excitement amongst the brokers and a lot of dynamics in the market that they have to be excited about..

So I think we're confident that what we are -- what we've seen is what we're going to continue to see, and we continue to iterate on our business model to provide the highest quality product and service to our agents. .

Thank you, that's helpful. And then one on the 2018 EBITDA guidance. So the margin guidance of 50.5% to 52.5%, that's, as you mentioned, likely to be down from the 53% in 2017, down from '16.

So I know you mentioned, just the ongoing investments and such, but I was wondering if you can give a bit more color because generally speaking, we view RE/MAX as having somewhat fixed cost structure for the most part so I think generally people expect some leverage in that model.

So can you maybe call out the moving pieces there impacting that margin to potentially be lower in '18 versus '17?.

Good morning, Ryan, it's Karri. No, it's a great question. One thing to keep in mind is that about 50% of our cost structure is in personnel. And as Adam mentioned in the scripted remarks, there are some initiatives that will drive personnel higher this year.

We are really focused on innovation, technology and making sure that we enhance the overall value proposition and the new strategy function that's been established under Pete Crowe's leadership is going to result in some additional investment in personnel.

And then we are also continuing to focus on technology and tools that we're offering to the network, really focused on automation and leveraging digital and social capabilities for our network, which will result in some additional investment as well as just some overall foundational technology investment.

So we're really looking to leverage the other financial characteristics of the business -- free cash flow -- to put that back into the business..

But do expect to see a little bit of reinvestment to pull the margins down, just a little bit. But again, focused on long-term growth. .

And your next question comes from the line of Vikram Malhotra with Morgan Stanley. .

Just wanted to clarify now that sort of the roles are separate. I know you can't give -- I'm not asking for more information on the specifics of the investigation. Just going forward, will Dave be involved in sort of -- say, negotiations for buying back regions or the day-to-day operations.

Maybe give us a bit color what his role will be?.

Good morning, Vikram, and thank you. Likewise, I look forward to seeing you in person one of these days. Dave has stepped back from day-to-day operations. The executive team that we have in place has been heavily involved in day-to-day operations for quite some time, as it is.

And with respect to the continued future-looking discussions of acquisitions, things like that, the executive team has been a primary driver in those to begin with. Dave built those relationships over the years, however, we've continue those relationships quite well and have very good relationships with the different independent regional owners..

So the dynamics of that process, I don't believe will change. Dave will be handling some major events, some speaking engagements, things like that. But we're running the show here, myself and the executive team, and we're quite confident in the direction of the organization, as a result. .

Okay. And then just on Motto. Seems like you've have had pretty good success.

Can you maybe just -- are all the 70 franchises, are they all with existing RE/MAX agents or owners? And then, can you maybe just talk about how you see this sort of trending over the next 12 months or so?.

I'm going to toss this over to the brand President of Motto, Ward Morrison.

So Ward, do you want to take that?.

Yes, Vikram, great question. The majority are still within the RE/MAX family but we have opened it up, as we talked about, and are getting interest from a few other different customer types that we're excited about. So although that number still remains small compared to the RE/MAX's, we're excited to open up our customer base to varying types. .

So just in that 70 there are a very modest number that are owned by non-RE/MAX?.

Yes, that is correct. .

Got it. And just to clarify, lastly, it's still a fixed fee per office, right? That's the case for both RE/MAX run Motto and non-RE/MAX's. .

Yes, Vikram,, that is correct. It's a time-based fixed-fee model so as they move along our franchise agreement life cycle, increase over time and the reach the maximum amount and then stay at that level. .

And your next question comes from the line of John Campbell with Stephens Inc. .

Congrats on the conclusion of the investigation. I know it's something you guys worked hard on. You guys have -- the $2 million or so of franchisee waivers obviously, you'll get that uplift this year. And then, you've got the $5 million from the Northern Illinois buyout. And Karri, I think you said $3 million drag from the accounting changes.

But if you guys do sell kind of the same level of Motto franchises that you expect to this year that probably offsets the $3 million. But if I back all of that out of guidance, I'm getting to kind of core business organic growth of about 2%.

Does that -- so first, does that sound about right, is that math right? And then secondly, if you guys maybe can talk about to the assumptions of home sales trends this year, and what's that -- what's in guidance?.

Sure. So John, just thinking through that a little bit. On an organic basis, we've said historically that we expect to be kind of in the mid-single-digits from an organic growth perspective. We think that the revenue recognition changes are going to adversely impact that by about 100 basis points.

So we're going to be a little bit low than that -- lower than that but not as low as what your model is suggesting..

And then with respect to just overall kind of housing trends and how we see that? I mean we're still very -- we are still confident in terms of just overall housing trends. As Adam mentioned in his scripted remarks, we're still seeing strong demand with some constraints of buy.

But overall, our distributed franchise model looking at 3,700 offices spread out across the U.S. we think mitigates some of that risk. And all of that has been really baked into what we have come out with from a top line guidance perspective. .

Okay, I guess just kind to kind of segue way off of that. So January was down a little bit, it looked like, year-over-year as far as units.

Are you expecting unit growth within guidance for the full year?.

Yes. So we are -- if you looked at 2017 versus 2016 and just terms of transactions, we trended pretty consistent with our U.S. agent count growth in the U.S. And so that's -- we're expecting somewhat similar trends as we go into 2018. .

Okay, and then on the New York region. Can you just provide any kind of updates there.

How many new franchises have you sold since you took over? And then maybe how much faster you're growing agents and kind of where we are as far as penetration? I know you guys kind of target that 5% or so of state agents?.

Yes, good morning, it's Adam. We're, we're excited about New York. It seems to be going quite well. We've seen about 10% agent growth in 10 franchise sales there. The region has gained traction. And the expectation is about 10 per -- franchises per year in growth in that region.

Keep in mind, it's a very good opportunity for us, but it's not a huge region, if you will. But we're seeing, what we think to be, quite a successful operation occurring there and that's what we expect to continue. .

Yes, just building on top of what Adam was talking about. I think the other thing that's important to note with New York as well as even other independent regions that we acquired in '16 is that they are really performing really consistent to our expectation.

And so we're really excited about kind of that above average organic growth that New York, we think, will bring over the long term. And everything is performing very much in line with what we thought. .

And your next question comes from the line of Jason Deleeuw with Piper Jaffray. .

On the guidance with the agent growth, it's implied to slow as the year goes on. Just any thoughts or details around that, just kind of in the recruitment strategy that you have. Just looking for a little bit more detail on that. .

First of all, good morning, Jason, and thank you. I don't necessarily know that we're going to see slowing agent growth throughout the year. We are throughout the U.S. and as Karri said, in so many different markets that different markets have seasonalities and changes and things like that.

But consistently across U.S., we don't anticipate slowing agent growth throughout the year. The key focus of our organization is expanding our franchise network and growing agents. And of course, reinvesting in the business to continue to provide value to those franchisees and agents.

So we're going to continue to iterate on our value proposition, especially with the new strategy and product position that we've created with Executive Vice President, Pete Crowe. As well as, we -- since the last call, we rolled our brand refresh.

So there is a great deal of excitement in the marketplace, brokers and agents have a lot to get excited about. And people want something fresh and new and that's what we're providing to them, even with our 45-year old iconic position in the marketplace.

But we operate from a position of strength in this and we still feel, absolutely, that we are the best place for the producing agents to be. .

Got it. And then just -- a question we get a lot is, how important is the technology to agent recruitment? I mean, generally agents are focused on the economics, but technology is becoming a bigger part of the process.

So how important is that in recruitment from -- and is there any like a distinction between the CRM technology and lead generation solutions?.

It's something we talk about and strategize on every day. We are highly invested in the productivity of our agents as well as the tools that help boost that productivity, and it's something we're very excited about. We look at auto -- look at technology as providing a few things.

One is, it provides exposure to the agents and the brand and their brand in the marketplace. And another thing it does is, it automates a lot of that process now.

So we've been involved quite heavily with a couple of different initiatives, one with BombBomb, with a product called, Social Prompt, that we rolled out exclusively to our network this past fall, which allows automated production and distribution throughout the social channels of different product for those agents that they can modify on the fly and get out the door from their phones..

We also have heavy involvement with AdWorks in increasing our agents' exposure, gathering that attention online digitally. So we know that those things help build our agent's business and provide greater exposure to the customer base. So we are super excited about that.

We also constantly look at other initiatives and are excited about continuing to explore and rollout those initiatives throughout this year..

Keep in mind also, we do still have the #1 real estate website when it comes to franchisors. The franchise brands, we had over 90 million people go to our website this past year and we are super excited about that. So technology is a big piece. But fundamentally, the business is still the business.

It's a people business, it's a complicated process to buy and sell a house. And that demands the attention of a highly skilled operator to help the home buyer or seller to accomplish that effectively. We still see multiple offers across-the-board in the markets throughout the -- really around the world -- but predominantly in the U.S. and Canada.

And that really means that you have to have a good person behind you in that process. So fundamentals of the business haven't drastically changed but the technology helps them execute on those nets, that's the balance that we keep. .

And your next question comes from the line of David Ridley-Lane with Bank of America Merrill Lynch. .

Wanted to ask on Canada, so that market had new mortgage regulations, which went into effect -- started this year -- poised to be a further headwind in the market. I did note that your Canadian agent counts were down slightly on a sequential basis in the fourth quarter.

Have you risk-adjusted your 2018 guidance for the potential of an accelerated downturn in Canada?.

Good morning, David, this is Karri. If you look at Canada, it continues to be a very strong point for the RE/MAX network. We do have about 70% of the equivalent of the National Association of Realtors up in Canada. And we've always consistently said that we think that agent count growth is going to be around flat to slightly up.

And that's really what is baked into our guidance for next year. We continue to see actually pretty strong volume there. And we're watching that market closely. But continue to believe that because of the overall strength of the brand in Canada that the assumptions are reasonable. .

And then on Motto franchises, can you give us the revenue contribution for 2017 if you have that.

And then on Motto's profitability, should Motto get to breakeven in 2018 and maybe have a little profit as well?.

Yes, thanks, good morning. So in terms of Motto from a financial perspective. It really operated in 2017, like we thought. So low single digits of millions of dollars on the revenue line and in that investment. We do expect that 2018 will also be a net investment for Motto.

That's partially driven by some headwinds from the revenue recognition guidelines. But regardless, we continue to be really excited about Motto. Ward and his team have done a fantastic job getting to 70-plus sales now and continue to expect comparable sales growth in 2018. .

And then just quick numbers question. The pro forma tax rate you're using for adjusted net income, that was 38%.

What's -- what is the new adjusted tax rate?.

Yes, it should be closer to about 25%. .

And your next question comes from the line of Bradley Berning with Craig-Hallum Capital. .

On the EBITDA margin, one follow-up question on that. It's look like in 1Q, there is a greater year-over-year comparison challenge there than the overall year number.

So can you talk through what are the moving parts in 1Q that kind of differ for the year? Are there any additional hiring timing that happens to be in 1Q or are there any comp or professional fees regarding the investigation issues that get into 1Q.

Can you just kind of walk through the moving parts of that first?.

Sure, absolutely. So the biggest driver, actually, is a severance charge that we expect to record of about $1.9 million. So if you strip that out, you should get back to relatively consistent margins in terms of what we've seen on a historical basis in Q1. .

Yes, that makes more sense, understood.

And then, on the M&A side of the equation for the other regions, can you talk about appetite? Can you just help us understand kind of that the pipeline of activity over time, what is the interest level?.

Good morning, Brad, it's Adam. That's something, obviously, that we're always interested in, the reacquisition of the independent regions. Currently there are 9 regions, about 28,000 agents that would be available in the marketplace. It is a very opportunistic or lumpy approach, I guess, if you will, that we look at, in that.

We maintain our relationships with those regional owners quite regularly. We are, obviously, quite interested in their regional growth, because it is part of our system to begin with. In all reality, it's up to the timing on the whole thing.

Are they ready? Is the time right for them to come to the table with us? But we're always available and talking to them. Do we have timing on any of that? No, we don't. It happens as it happens. We've had great success over the past several years with seeing them come to the table and being able to execute on those.

So we'll continue to look for future involvement with them at the table when it comes to the M&A discussions and we are always available to talk. .

One quick follow-up on that is, do you see that those parties are more interested in generational transitions or do you think that they are more interested in the sales route over the longer term not necessarily asking for near-term perspective.

So just kind of curious as to how do you think most of those regions feel about those kind of 2 dynamics?.

I think it's a combination. It just depends on the personality and the infrastructure that they've built around those things. It's some yes, some, no type response. Whether or not that affects their desire to come to the table to discuss with us is not to be seen at this point. Again, it's opportunistic.

It's on their part as well as relational on our part. Not something you can really forecast. .

Yes, understood. And then real quickly on Motto. Just -- help us think through the dynamics of the timing of the revenue ramp on these, without adding new growth, per se, what is the revenue ramp from '17 to '18 to '19, just on the existing stuff that you've already sold.

Just to help us all think about the magnitude of the contribution, how that changes as these -- not asking you for a sales forecast on new sales, just thinking about how the revenue works on the existing franchises you've already sold?.

Yes, so this is Karri. I think if you think about 2017, we had low single-digit in terms of millions of revenue. As you look forward, 2018, kind of low-to mid-single-digit. And then in outlier years getting more into the mid-single digits in terms of the revenue contribution. .

[Operator Instructions] And your next question comes from the line of Bose George with KBW. .

This is Tommy on for Bose. Just wanted to get you guys take on how you guys were able to implement sort of the regular agent fee increases that you guys do on a regular basis, just given that housing markets are pretty tight now, even though you might expect sales to be up next year.

Just if you're getting sort of any pushback from getting those through to agents?.

Good morning, Tommy, it's Adam. It's something that we really take a hard look at before we implement. Obviously, we give quite a bit of a lead time when it comes to doing that. And frankly, any agent fee increases that we introduce to the marketplace are very nominal to begin with, we talked about $2.50 a month or something like that per agent.

And that is just a portion of -- a very small portion -- of what an agent's monthly expenses boiled down to be in operating their business. When you look at everything that goes out the door, $2.50 is less than a cup of coffee on a monthly basis.

So in all reality, it's -- if you provide and continue to increase the customer experience which is the experience that we provide to the agents and brokers -- and increase the value -- I think that people are okay with nominal adjustments. If they can reinsert that into their business and see growth in their business as a result.

And that's our goal, is anytime we do something like that, we want to make sure that we've provided far more value to our customer base in doing so..

Generally, we do -- some people say, okay, why are you doing this? In all reality, once we discuss it or if anybody even does question it, you know they realize, okay, you are providing me higher value and this is a very teeny, tiny function of my business expenses. So we're okay with it.

We feel it helps us to run our business better and provide more value to them and that it drastically outweighs that nominal increase. .

Got it. And separately, it looks like a lot of the year-over-year growth that you guys have in agent count is coming from the international, outside of the U.S. and Canada.

Could you just remind us if there is any sort of difference in the fee structure there or the kind of expected revenue that you guys get from those agents?.

Yes, no, it's a great question. So In terms of agent count outside of the U.S. and Canada, on a per agent basis, in terms of revenue, they really contribute about $200 per agent. That compares to in our own region in the U.S. and Canada about $2,500 per agent. So there is a difference in terms of revenue.

But as Adam talked about earlier, the power of the brand and the global presence of the brand is really important and we believe with kind of just overall trends in globalization, expanding that global footprint is a key competitive advantage for the company and for the brand around the world. .

Got you. If kind of the trend continues where that almost mid-teen percentage year-over-year, then it could become a bigger part of the pie eventually. .

Eventually. Yes, it's absolutely a long-term, strategic opportunity for us. And it's something that we look at on a regular basis. .

And there are no further questions at this time. I'll turn the call back over to the presenters for closing remarks. .

Thank you, Kim, and thanks to all for joining us on the call today. That concludes our prepared remarks. Have a great day. .

Ladies and gentlemen, this concludes today's conference call and you may now disconnect..