Frontdoor Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
August 1, 2024

There are 9 speakers on the call.

Operator

Ladies and gentlemen, welcome to Frontdoor's 2nd Quarter 2024 Earnings Call. Today's call is being recorded and broadcast on the Internet. Beginning today's call is Matt Davis, Vice President of Investor Relations and Treasurer, and he'll introduce the other speakers on the call. At this time, we'll begin today's call. Please go ahead, Mr.

Operator

Davis.

Speaker 1

Thank you, operator. Good morning, everyone, and thank you for joining Frontdoor's Q2 2024 Earnings Conference Call. Joining me today are Frontdoor's Chairman and Chief Executive Officer, Bill Cobb and Frontdoor's Chief Financial Officer, Jessica Ross. The press release and slide presentation that will be used during today's call can be found on the Investor Relations section of Frontdoor's website, which is located at investors. Frontdoorhome.com.

Speaker 1

There is also additional detail about our brand atfrontdoor.com and in our new mobile app that you can download in the App Store and at Google Play. As stated on Slide 3 of the presentation, I'd like to remind you that this call and webcast may contain forward looking statements. These statements are subject to various risks and uncertainties, which could cause actual results to differ materially from those discussed here today. These risk factors are explained in detail in the company's filings with the SEC. Please refer to the Risk Factors section in our filings for a more detailed discussion of our forward looking statements and the risks and uncertainties related to such statements.

Speaker 1

All forward looking statements are made as of today, August 1, and except as required by law, the company undertakes no obligation to update any forward looking statements, whether as a result of new information, future events or otherwise. We will also reference certain non GAAP financial measures throughout today's call. We have included definitions of these terms and reconciliations of these non GAAP financial measures to their most comparable GAAP financial measures in our press release and the appendix to the presentation in order to better assist you in understanding our financial performance. I will now turn the call over to Bill Cobb for opening comments. Bill?

Speaker 2

Thanks, Matt Davis, and good morning, everyone. Frontdoor Inc. Continues to operate consistently well and this was a record quarter for financial performance. As you can see on Slide 4, in the Q2 revenue grew 4% to $542,000,000 Our gross margin expanded 4 70 basis points to a record 56%. Adjusted EBITDA grew 31 percent to 100 and $58,000,000 free cash flow more than doubled to $91,000,000 and we have used $83,000,000 of cash to repurchase 2,500,000 shares year to date through July.

Speaker 2

Now moving to Slide 5 and our strategic objectives. To be clear, our number one strategic priority remains growing our customer base through more sales of home warranties. While we strongly believe in the long term growth opportunity of the home warranty category, which I will return to in a few slides, we must face the near term reality that macroeconomic headwinds are impacting home warranty sales. As a result, we are taking the prudent step of slightly lowering our outlook for member count, which Jessica will cover in her section. Our number 2 strategic objective is to continue growing our on demand business.

Speaker 2

This has become a very important line of our business that has already proven its worth. We're just getting started. And finally, our 3rd strategic objective is to close the acquisition of 210 Home Buyers Warranty. So let's move to Slide 6 and a quick refresh on 210 and where the acquisition stands. As you heard me say in June, this is a great business and as a leading provider of new home structural warranties, it's a perfect strategic fit for us.

Speaker 2

We will gain more customers. We will diversify our product portfolio into an adjacent category and we expect to generate significant synergies, all of which will generate long term benefits. On the acquisition itself, our integration team continues to work with 210 to prepare for a smooth transition of ownership. In fact, our team has been in Denver this week. The main update for today and this is really great news is that the applicable federal Hart Scott Rodino waiting period to close the transaction has expired.

Speaker 2

Now we continue to wait for regulatory approval from a handful of states. Bottom line, the acquisition remains on track to close in the 4th quarter. Moving to Slide 7, let's now look at operational areas that are doing exceptionally well starting with our on demand business. This has proven to be a real success and we think it presents a great opportunity with plenty of runway. We are realizing our vision of providing a consolidated ecosystem for all things home.

Speaker 2

We are reaching more homeowners through our virtual experts and network of independent contractors, effectively growing our share of wallet across our member base and leveraging these great partnerships to meet the repair, replacement and maintenance needs of every homeowner. For example, our new HVAC program has taken off. For all of 2023, this program delivered $50,000,000 of revenue and we are on track to far surpass that number this year. We are also continuing to build out our technology capabilities to grow alternative revenue streams. Our new partnership with Moen is a great example of this.

Speaker 2

Frontdoor through our independent plumbing contractors is the exclusive provider for installing Moen water shutoff valves in California homes insured by Farmers Insurance. This is a growing opportunity as farmers and other insurers are requiring these valves to prevent water damage. And it's not just in California. In fact, Moen and Farmers have asked us to expand into a number of other states before the end of the year. We'll have more to say about this during our Q3 earnings call in November.

Speaker 2

Now moving to Slide 8, customer retention continues to be another terrific story for us. Our 2nd quarter retention rates grew to an all time high of 76.6%. While this includes a lower mix of real estate customers, our team has also done a great job of engaging members throughout the customer journey, improving customer service, expanding use of preferred contractors and moving more members to autopay, which finished last year at 86%. Now let's move to Slide 9 and look at some of the cyclical issues that remain a challenge for our business. I believe this is a story of near term realism and long term optimism.

Speaker 2

As we've seen in recent earnings announcements from several leading companies, consumers are stressed, spending less and this is impacting our category and many other sectors of the U. S. Economy. The good news for us is that American Home Shield already the leading player in the category has actually outperformed our top competitors nationally. This is based on our analysis of data from the California Department of Insurance, which maintains nationwide data on home warranty providers based in California.

Speaker 2

Additionally, real estate continues to be a major near term headwind for the category. It's been a significant drag in our business for 3 years now and it's likely to remain so for the balance of 2024. To that point on Slide 10, let's take a closer look at the real estate market today. In short, things are not improving. Last December, existing home sales were projected to be $4,700,000 in 2024.

Speaker 2

However, that is not going to happen. According to the most recent report from the National Association of Realtors, the annual run rate of home sales has decreased to 3,900,000 homes. That's a 5% decline year over year and as this graph shows, this is amongst the lowest real estate activity in 30 years. NAR also said home prices grew 4% year over year to a record median price of $427,000 Mortgage rates also remain elevated and inventory remains low. While the current situation is bad, it will change.

Speaker 2

The real estate market has been through down cycles before and it will come out of this one eventually. We will continue to make refinements that will have us better positioned when the market does turn. Turning to Slide 13, to better understand the challenges facing home warranties, we completed a deep dive on the American Home Shield customer base in May. This analysis showed that AHS has wide appeal across key demographics, all ages, income and ethnic segments. Let me be clear, the customer base for AHS is not aging out.

Speaker 2

About 60% of our customer base are boomers and Gen X and about 40% skew younger between millennials, Gen Y and Gen Z. In fact, AHS over indexes with the primary home buying segment of 35 to 54 year olds. Now let's look at income on Slide 14. AHS resonates with various levels of household income and contrary to some perceptions, AHS is not an offering that's used to our lower income households. In fact, our analysis shows that about half of our members have annual household incomes over $100,000 with the other half making less.

Speaker 2

In aggregate, the data on the AHS customer base also reveals that we have long term opportunities to drive more targeted acquisition. On Slide 15, we can see the race and ethnicity makeup of our member base. As we said, millennials are the sweet spot of future homebuyers and the data indicates they are favorably disposed to home warranties. Within that millennial profile, while AHS currently over indexes on black homeowners, we believe there is even more opportunity with this segment as well as with Latinos. We'll have more to say about these opportunities during our Investor Day presentation.

Speaker 2

Now let's move to Slide 16 and the comprehensive actions we are taking now to improve home warranty sales. In April, we launched the new marketing campaign for AHS yielding strong results. Brand awareness is now at 50%, double our nearest competitor. Google searches for AHS are up 6%. Ahs.com website sessions have increased over 30%.

Speaker 2

In essence, the brand relaunch is doing exactly what we hoped it would do, drive demand and brand engagement. We are also deploying programs in the short term to grow members such as our focused discounting strategy. In March of 2023, we ran a 50% off promotions. What we learned is that members renewed 12 months later at a retention rate and stepped up price similar to those who were not initially discounted. With this learning, we ran another 50% off promotion throughout the month of July 2024 that yielded very positive results.

Speaker 2

With this success, we are confident in using time bound discounts to acquire and retain new members going forward. Now looking further out, we are moving to the next phase of the AHS brand relaunch, drilling down and educating consumers about the value of a home warranty and improving our targeting of homeowners at a point when they are most likely to convert such as following the recent purchase of an expensive appliance. Moving to Slide 17, here are the primary reasons we remain bullish about the long term opportunity for home warranties. First, the market for home warranties is huge, 85,000,000 homeowners. Through our research, we believe there are approximately 5,000,000 homeowners with warranties today.

Speaker 2

Yet we believe there is an opportunity to capture at least 10,000,000 more. 2nd, this situation presents a massive opportunity to educate homeowners about the benefits of a home warranty. For millions of consumers being pinched by the cost of living, home warranties remain an excellent way to guard against unplanned expenses. Furthermore, our research shows that peace of mind is the number one reason our members own a home warranty. 3rd, U.

Speaker 2

S. Demographics are conducive to future member expansion. Millennials are coming to the forefront as the primary group of homeowners and we know we have significant opportunities with certain subgroups of this population. Finally, as the industry leader, we have a proven track record of innovation. The rapid rise of our on demand offerings is a clear demonstration of how we are using technology to meet the needs of homeowners in the ways they want to be served.

Speaker 2

Together, all of these factors give us optimism about the long term demand for home warranties. And on that high note, I'll now turn it over to Jessica for the financials of the quarter.

Speaker 3

Thanks, Bill, and good morning, everyone. Let's turn to Slide 18, where you will see that Frontdoor delivered another quarter of strong financial performance. Revenue increased 4% versus the prior year period to $542,000,000 Net income increased 32 percent to $92,000,000 and adjusted EBITDA increased 31% to $158,000,000 On Slide 19, you will see gross profit increased 13% versus the prior year period to $306,000,000 and gross profit margin improved 4 70 basis points to a record 56%. Let's now move to the bridge on Slide 20, where I'll provide more context for the year over year improvement in 2nd quarter adjusted EBITDA. Starting at the top, we had $17,000,000 of favorable revenue conversion, driven by a 7% increase in price over the prior year period.

Speaker 3

This was partially offset by a 3% decline in volume. As a reminder, this includes the impact of lower home warranty volume, which was partially offset by an $11,000,000 increase in new HVAC sales. Now turning to contract claims cost, which decreased $17,000,000 driven by a transition to higher trade service fees and continued process improvement initiative. As a reminder, we increased our trade service fees in 2022 in response to inflationary cost pressures, including higher contractor related expenses and greater parts and equipment costs. The transition to higher trade service fees has two impacts on our business.

Speaker 3

1st, higher trade service fees result in a lower net cost per service request as these fees are a contra cost to claims expense on our income statement. When combined with a normalized inflationary environment, Frontdoor's 2nd quarter inflation rate on a net cost per service request basis was slightly favorable. As the increase in trade service fee dollars more than offset external inflation. 2nd, higher service fees resolved in a temporary decline in the number of service requests per customer as we typically see a short term change in customer behavior until they become accustomed to the new amounts. Additionally, our team continues to be laser focused on cost management and we continue to benefit from the process improvement initiatives implemented over the past few years.

Speaker 3

These include our high cost claims review program, leveraging our bulk purchasing power with our suppliers and moving more of our service requests to preferred contractors, which reached a record high 85% in the 2nd quarter. This is an outstanding result, especially given that this is the beginning of our peak season and directly attributable to the great work our contractor relations team is doing to strengthen relationships across our contractor network. Contract claims costs were also negatively impacted by weather by approximately $4,000,000 Now moving to sales and marketing costs, which decreased $3,000,000 over the prior year period, primarily due to sales optimization efforts. And finally, general and administrative costs increased $2,000,000 primarily due to increased personnel costs, partially offset by a decrease in professional fees. In summary, adjusted EBITDA increased to $158,000,000 which exceeded the midpoint of our outlook by $23,000,000 I want to take a moment to provide some context here.

Speaker 3

Approximately $10,000,000 of the beat was due to a lower number of service requests compared to our expectations, primarily in the HVAC trade. We anticipated a higher number of service requests in HVAC given the large favorability we saw in the Q2 of 2023 driven by mild weather and that is what happened as cooling degree days increased 20%. However, we only saw a moderate increase in the HVAC incidence rate, which was driven by other factors such as the change in trade service fees and geographic concentration of our customer base. Our earnings beat also reflects an $8,000,000 benefit from process improvement initiatives, such as preferred contractor utilization increasing to 85%. Finally, we had $5,000,000 from favorable claims cost adjustments related to prior periods.

Speaker 3

Let's now turn to Slide 21 for a review of our statement of cash flows. Net cash provided from operating activities was $187,000,000 for the 6 months ended June 30 as a result of our exceptionally strong earnings and was comprised of $158,000,000 in earnings adjusted for non cash charges and $28,000,000 in cash provided from working capital that was primarily driven by seasonality. Net cash used for investing activities was $22,000,000 and was primarily comprised of capital expenditures related to investments in technology. Net cash used for financing activities was $71,000,000 and was comprised of $58,000,000 of share repurchases as well as $8,000,000 of scheduled debt payments. We ended the quarter with $419,000,000 in cash.

Speaker 3

This was comprised of $167,000,000 of restricted cash and $252,000,000 of unrestricted cash. I would like to point out that we ended the 2nd quarter with a high amount of unrestricted cash. This is due to timing and seasonality of our claims costs and is expected to reverse in the Q3. We are also extremely pleased to highlight Frontdoor's strong free cash flow conversion of $164,000,000 or 72% of EBITDA for the 6 months ended June 30. Now turning to Slide 22, where I'll provide an update on our capital structure.

Speaker 3

We are in the strongest financial position this company has ever been in. And with this strength, we are able to deliver on each aspect of our capital allocation strategy. Let me give you an update on each of our priorities. Our number one priority is growth, and we continue to target closing the 210 acquisition in the Q4, which will add more customers, more revenue and more earnings. Our second objective is to ensure we have a solid financial profile.

Speaker 3

Our net leverage ratio was less than 1x at the end of the second quarter. This is well below our targeted range of 2 to 2.5 times, which we anticipate getting back to after the 210 acquisition closes. And finally, our 3rd objective is to return cash to shareholders. Year to date through the end of July, we used $83,000,000 to repurchase 2,500,000 shares. This brings our total to $364,000,000 since we initiated our $400,000,000 share repurchase program in 2021.

Speaker 3

Additionally, as Bill said earlier, our Board just approved a new 3 year $650,000,000 share repurchase authorization that starts on September 4, 2024. This amount is 63% higher than our current 3 year authorization. In summary, we are fortunate to be in a position where we can dramatically increase our ability to repurchase shares at the same time we are completing the largest acquisition in the company's history. And I believe both of these actions will deliver substantial shareholder value over time. Now turning to Slide 23, where I will walk through our Q3 and full year 2024 outlook.

Speaker 3

We expect our Q3 revenue to be between $530,000,000 $545,000,000 which reflects a mid single digit increase in our renewals channel, a decline in both our real estate and B2C channels of slightly over 10% and an approximately $10,000,000 increase in other revenue. 3rd quarter adjusted EBITDA is expected to range between $130,000,000 $140,000,000 up about $7,000,000 over the prior year period at the midpoint. Now turning to our full year 2024 outlook, starting with revenue, where we are maintaining our range at 1 point $1,000,000,000 to $1,840,000,000 which includes a mid single digit increase in realized price, partially offset by a mid single digit decline in realized volume. This assumes a mid single digit increase in the renewals channel and a roughly 15% decline in both the real estate and B2C channels. It also assumes other revenue will now increase approximately 40% to approximately $110,000,000 This is almost entirely driven by higher new HVAC sales.

Speaker 3

We are now expecting the number of home warranties to decline 3% to 5% in 2024. Now turning to our gross profit margin outlook. I want to call out that our first half gross margin was 54%. However, gross profit margin is expected to be lower in the second half of the year for the following reasons: lower contributions from realized price and trade service fees an increase in the number of service requests per customer for the balance of the year and finally, we expect to see normal low single digit inflation for the duration of 2024. The net effect is that we are raising our full year gross profit margin outlook to be slightly above 51%.

Speaker 3

We are increasing our full year SG and A range to be between $605,000,000 $615,000,000 to account for an additional $10,000,000 investment to drive organic growth and customer retention initiatives. This also includes an estimated $15,000,000 of transaction costs related to closing the 210 acquisition, which is excluded from adjusted EBITDA. Based on these updated inputs, we are increasing our full year adjusted EBITDA range to be between $385,000,000 $395,000,000 Our full year outlook also includes $16,000,000 of interest income and reflects stock compensation expense of approximately $28,000,000 And finally, we expect our full year capital expenditures to range between $35,000,000 $45,000,000 and the annual effective tax rate to be approximately 25%. In conclusion, we continue to deliver exceptionally strong financial results and our business is operating consistently well. Before I turn the call over to Bill, I would like to tell you about a change in our Investor Day date, which we are moving to February 27, 2025.

Speaker 3

After we announced the acquisition of Q10, we felt it was more important to focus the team on delivering on integration and synergy planning for the balance of 2024. And we can then come back to you at Investor Day to share more details on the combined business. With that, I will now turn the call back over to Bill.

Speaker 2

Thanks, Jessica. I want to reemphasize what I said earlier about near term realism and long term optimism. While we face the realism of near term challenges on the real estate and DTC fronts, Our long term optimism about home warranties is strong. And over the past 2 years, we have done what we said we would do. We've taken several decisive actions to position the company for the long haul.

Speaker 2

We've explored strategic M and A to accelerate our growth and the acquisition of 210 is proceeding. We're seeing positive momentum with the relaunch of our American Home Shield brand. We've positioned our sales team for the eventual turnaround in the real estate channel. We continue to drive higher customer retention rates. Our HVAC on demand business is doing exceptionally well and our partnership with Moen is showing tremendous potential.

Speaker 2

Over the past 18 months, we have stabilized our margins and we remain confident in our long term margin profile. Finally, we continue to return excess cash to shareholders through share buybacks as demonstrated by our new 650 $1,000,000 share repurchase authorization, which is a 63% increase over our previous authorization. As you can see, we have a lot of great news and that's why I continue to be so optimistic about the future of our business. But our valuation doesn't reflect these facts and that leads into my final point. We showed this slide in February.

Speaker 2

The data on the slide has been updated through the end of July. However, taking into account the guidance we just provided, our multiple has actually declined to 8x as of today. The message here is simple. Our stock remains significantly undervalued. With that, Jessica and I are now ready to take your questions.

Speaker 2

Operator?

Operator

Thank Our first question today comes from Jeff Schmitt with William Blair. Please go ahead. Your line is open.

Speaker 4

Hi. Thank you. Could you give us an update on your pricing strategy over the next year? I know you said you're going to focus more on discounting than kind of broad price cuts. You'd mentioned that in the past, but maybe if you could refresh us on why you're taking that route and kind of how does the competitive environment look?

Speaker 4

Are they discounting as well?

Speaker 2

Yes. Hi, Jeff. So let me split this into DTC1 and then renewal pricing. With the renewal pricing, we're going to be consistent. We will have an increase, but not to the level that we've done in the past couple of years.

Speaker 2

So but there will be a pricing action on renewals. On new DTC1, we will be at a competitive price. And as we said, use targeted discounts on a time bounded basis as a tool to not only grow new members, but we're very pleased by the work we've done in terms of being able to renew people even when they are faced with an aggressive discount. So I think it's going to be more of what we're doing right now with the added piece. I think we've talked about this that we're going to have a more almost historic way of looking at our pricing for renewals.

Speaker 2

And I think that reflects the new user is more elastic and the renewal user is more inelastic customer.

Speaker 4

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

Speaker 4

Yes.

Speaker 3

I think Bill hit it in his script. I mean, at the end of the day, consumers are stressed. They're spending less. We entered this year expecting interest cuts and the real estate market to rebound and it just simply hasn't. So we are adjusting to reflect the current macro.

Speaker 2

Yes. I think, Jeff, we grinded over this one a lot. I think we I said near term realism. The category is down. We showed you the data where we talked about the data from the California Department of Insurance, which looks at all national providers who are based in California.

Speaker 2

And while we're performing better than they are, there's nothing to brag about because we've all declined. So it's a tough, as Jessica said, macro, but the specific home warranty category continues to be slow and I think the overhang of real estate is really affecting there.

Speaker 4

Great. Thank you. Very helpful.

Speaker 3

Thanks, Jeff. Thanks, Jeff.

Operator

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

Speaker 5

Great. Thanks for taking the questions. I was hoping you could dive into the Moen partnership a little bit more. Just how big of an opportunity is this for the business? And I guess taking a step back and taking a bigger picture view, do you envision partnerships like this being more of a strategic priority in the future?

Speaker 5

Any thoughts on that would be helpful. Thank you.

Speaker 2

Yes. We're not ready to share the numbers on Moen. We are off to a very fast start and logically it's a terrific opportunity for us, even if it's just with Farmers Insurance as they look to expand into other states. Moen has also proven to be a terrific partner and our plumbing contractors are thrilled to be doing this at this point in California, but looking to expand that. But I think it is an indication of the type of approaches we want to take where I think our on demand business or non warranty business really is trying to do 2 things.

Speaker 2

We've got this user base of American Home Shield members, 1,900,000, 2,000,000 strong that we can grow share of wallet with as they're a lot of their systems reach end of life. And then we have this ability to go directly to the consumer. And I think that with the leveraging the contractor network we have, which is really one of the core capabilities of this company, we have a lot of opportunity in a lot of different ways and that's why we're so excited about the on demand side.

Speaker 5

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

Speaker 5

Anything that call out there would be very helpful. Thank you.

Speaker 2

Yes. I don't want to go into the specifics, but as we indicated in the demographic data, we are resonating more. That's what I wanted to say. This is not just an old person's brand or a lower income brand. We are seeing a broad based group of folks come through.

Speaker 2

And I think the stuff we did with the relaunch, the new tagline, the new logo, the new look, the advertising and the website, which we're really pleased with the increase in visits to the website. So it's been a broad based group there. But we're pleased with how the relaunch has started and relaunches take time. They're a long term play and what you're looking to do is make sure your consumer indicators are going in the right direction and they certainly are in this case.

Speaker 5

Okay. Thanks, Bill. Thanks for your thoughts.

Speaker 2

Thank you, Sergio. Anyone else have a question?

Operator

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

Speaker 6

ahead. Hi, good morning. I'm on for Mark Hughes. I was wondering what the contribution to the margin was from the HVAC on demand or more broadly the other channel this quarter?

Speaker 3

So we said there was about $11,000,000 increase over prior year coming from HVAC. So again, it just continues to be a bright spot for us and really outperforming as we continue to expand the program.

Speaker 2

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

Speaker 6

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

Speaker 3

Well, I think there's a couple of reasons. So I think lower incidence, as I said, there was an impact just with the change to trade service fees that drives just a change in customer behavior in the near term, whereas they may be a little bit more thoughtful about, filing for a service request. I think the other thing that we're really diving into is the impact of the new HVAC program is also having. I think that it's transitioning a service request into a new HVAC sale, which this is a new program for us. We're still digging into that.

Speaker 3

But I think the combination of the incidents, as well as the impact that new HVAC is having had really probably the largest drivers as we think about the impact on overall incidents for the quarter. It definitely was a little bit head scratching, right, because as you looked at the overall increase in cooling degree days year over year, but yet our HVAC incidents were down. So, some good benefits for us in the quarter, but definitely something we continue to dig into.

Speaker 2

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

Speaker 6

Got it. Very helpful. Thank you.

Operator

Our next question comes from Daniel Fifer with JPMorgan. Please go ahead.

Speaker 7

Hey, thanks for the questions. For the first, obviously, HVAC upgrades have been a huge success. But I'm wondering if you could give any color on expectations for which category you might want to lead into more within on demand outside of partnerships? And then I have a follow-up.

Speaker 2

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

Speaker 7

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

Speaker 2

Yes, I actually want to go the other way. I want to spend into it because I think we have our brand strength. We just relaunched the brand. Mean, we indicated in Jessica's talk, we're looking at an incremental $10,000,000 to try to drive demand and retention initiatives. We're figuring out what the best way to deploy that is.

Speaker 2

But we yes, we want to we're thinking more drive into it. It's not all the money in the world. We're taking, I think, a drive into it. It's not all the money in the world. We're taking, I think, we're going to make I'll use the prudent word again, prudent investments.

Speaker 2

But we're looking to continue to grow. We want to keep the hammer down.

Speaker 5

Thanks.

Operator

And our next question is from Isaac Selhuysen with Oppenheimer. Please go

Speaker 8

ahead. Hey, good morning. Isaac on for Ian. Thanks for taking the question. Congrats on the strong quarter.

Speaker 8

My first is on the gross profit margin target. Now that you're sort of exceeding the pre COVID margins, is there anything structural that has changed the business that would make these margins sustainable over the longer term? I know you mentioned margins will moderate in the second half of the year for a few reasons, but as you monetize new initiatives like the Front Door app, could margins go higher over the long term?

Speaker 3

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

Speaker 8

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

Speaker 2

Yes. Stay tuned on that, Isaac. We are we gave the broad numbers for 2 10 in terms of the number of customers they have year to date around 300,000. Dollars Their revenue is around $200,000,000 Their EBITDA is around $40,000,000 We have not yet disclosed the way we're going to combine the companies. That's why one of the reasons why we pushed back Investor Day, we want to come to you with a full look at it.

Speaker 2

Right now, we have to operate as independent companies while we're meeting with 210 on organization and structure and things like that. We really can't get into business plans or anything like that. So more to come. But obviously, in the model that we put together that made us decide to go after and to make this investment, We saw enough indicators there that said I think this is going to be a great value added acquisition for our shareholders.

Speaker 8

Okay, great. Thank you very

Speaker 3

much. Thanks, Isaac. Thanks, Isaac.

Operator

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

Speaker 2

Thank you all.

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Earnings Conference Call
Frontdoor Q2 2024
00:00 / 00:00