Frontdoor [FTDR] Conference call transcript for 2022 q1
2022-05-08 22:35:11
Fiscal: 2022 q1
Operator: Ladies and gentlemen, welcome to Frontdoor’s First Quarter 2022 Earnings Call. Today’s call is being recorded and broadcast on the Internet. Beginning today’s call is Matt Davis, Vice President of Investor Relations and Treasurer and he will introduce the other speakers on the call. At this time, we will begin today’s call. Please go ahead, Mr. Davis.
Matt Davis: Thank you, operator. Good afternoon, everyone and thank you for joining Frontdoor’s first quarter 2022 earnings conference call. Joining me today are Frontdoor’s Chief Executive Officer, Rex Tibbens; and Frontdoor’s Chief Financial Officer, Brian Turcotte. The press release and slide presentation that will be used during today’s call can be found on the Investor Relations section of Frontdoor’s website, which is located at investors.frontdoorhome.com. As stated on Slide 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 and which could cause actual results to differ materially from those discussed here today. These risk factors are explained in detail in the company’s filings with the SEC. Please refer to the Risk Factors section in our filings for a more detailed discussion of our forward-looking statements and the risks and uncertainties related to such statements. All forward-looking statements are made as of today, May 5 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 Rex for opening comments. Rex?
Rex Tibbens: Thanks, Matt and good afternoon everyone. Frontdoor delivered another strong quarter of revenue growth despite continuing macroeconomic headwinds. Today, we plan to focus our discussion on two near-term external challenges, cost inflation in the real estate market and our long-term opportunity. Beyond these challenges, the rest of our business is generally on target with what we laid out last quarter. Turning to Slide 4, where we will provide an overall business update and how we are addressing the challenging macroeconomic environment. First, we are moving with urgency to address accelerating inflation. Brian will address this topic in more detail, but in short, U.S. inflation rates are rising at the highest level since 1981. Inflation in the home services space is rising faster than the overall economy. As a result, we are seeing service costs accelerate faster than we anticipated and higher than we priced for. In response, we are redoubling our efforts to address rising inflation and support our customers and contractors during this extraordinary time. Contractors across the country are experiencing record cost as they help us resolve the hassle of owning a home. We are intentionally working with our contractor network to find innovative ways to reduce cost and improve customer service in these unprecedented times, but this comes with a near-term cost. Separately, our real estate channel continues to be impacted by historically strong sellers market as a result of extremely low home inventory levels. This is driving a decline in our first year real estate sales and I will address this topic shortly. Much of the near-term pressure from inflation in real estate is macro in nature and is not intrinsic to our normal business operations. We remain focused on improving the key drivers of our business and focusing on controlling the controllable. While we continue to work on mitigating the external factors, many of them remain beyond our control in the near term. Despite these challenges, it is in this environment that our Brazilian business model and scale demonstrates the ability to grow revenue and generate strong cash flow. While others are cutting back, we are able to continue investing in our customer experience and develop our contractor community in order to drive long-term performance. We believe we have a tremendous growth opportunity ahead of us and continue to propel our strategic initiatives while building a strong foundation for future success. Now turning to the real estate channel on Slide 5. In short, the real estate channel has been underperforming our expectations. When we provide our previous full year outlook in February, we expected to sell approximately the same number of home service plans in our real estate channel as we did in 2021. However, it remains increasingly difficult to sell a home service plan when inventory levels remain extremely low and the seller has significant leverage in a transaction. There are three market statistics from the National Association of Realtors or NAR that we believe highlight this trend, including days on market declined to 17 days in March according to NAR, this was down from 18 days in the prior year period and less than half of the levels seen before the pandemic. The second metric is inventory of unsold homes, which NAR reported was approximately 950,000 at the end of March or only 2 months of supply. This is well below a normal market of around 4 to 5 months of inventory. The third metric is the percentage of cash sales, which NAR reported was approximately 30% in March. This is up from 23% in the prior year period. This dramatic increase reflecting the significant percentage of homes being purchased by investors, has been a contributing factor impacting our ability to sell home service plans since these investor buyers are not naturally inclined to buy our product themselves and they shrink the inventory levels available to individual purchasers that are more likely to purchase a service plan. As a result of external market pressure, we are now expecting our real estate channel revenues to significantly decline in 2022. In response to this environment, we continue to be focused on the following actions: first, investing more in our direct-to-consumer or DTC channel and our renewal channel to help offset some of the impact from lower real estate channel sales. We are also expanding our partnership strategy to help diversify our revenue over time. Within the real estate channel, we are aggressively looking to expand our channel share with our largest real estate partners. We are completing a strategic realignment of our real estate sales organization to focus on key geographic markets, and we’ve recently launched the new Good, Better, Best home service plans in our real estate channel comparable products we launched last year in our D2C channel, they are the most comprehensive products we have ever offered, and we believe will help us better position our products in the market. To be clear, none these actions will fix our real estate channel overnight. However, we believe that this channel is core to our home service plan business and we will continue to rebuild our demand footprint over time as the macro market factors become more favorable and our improvements take hold. Now turning to Slide 6 and a review of our top objectives for 2022, I will start by reminding you that our objectives have not changed since our last call. Let’s now dive deeper into some of these priorities and how we are progressing through the early part of 2022. Starting with our D2C channel, where the team continues to perform well after making improvements in late 2021. We remain on target of providing double-digit revenue growth as we did this quarter. Our comments from last quarter still hold true. The marketing team stabilized our platform late last year, and we expect that to continue through 2022. Our spending, media footprint and conversion funnel are all operating as expected and we continue to make minor changes to optimize the platform. For example, our e-commerce platform is working well, and we are catching a broader net with our media coverage by this time last year. In the renewal channel, our team continues to improve the renewal process. We’ve increased the number of customer outreach touch points, improved call center staffing and training and leverage technology to make it easier to renew your home service plan. In fact, we are just launching a new feature where you can upgrade your plan through our online platform. While it’s still early, we believe there is a lot of potential around upgrading more of our customer base to the more inclusive Platinum offering which provides both coverage and maintenance services. We are still looking to improve overall customer retention in 2022. However, the decline in real estate sales and higher pricing will have an impact on our total customer count. In response, we continue to progress these initiatives I’ve spoken about previously. We are working to improve the service experience by leveraging technology and our digital-first focus, such as Streem to make it easier for customers to interact with us and for us to walk in their shoes. For example, we just began offering a new click-to-call feature that allows customers to more easily launch a Streem call to drive better customer adoption. We’re also committed to further our progress on the service delivery experience by allowing for more digital self-service options, utilizing more preferred contractors and by continuing to optimize dynamic pricing. Over the last few years, we have improved our self-service capabilities and are now processing more than half of our initial customer interactions through my account or automated phone system. As we roll out our customer app later this year, we think we can make our self-service capabilities even better. While Frontdoor is facing some near-term external challenges around accelerating inflation rates in the macro real estate environment that are beyond our control, we remain focused on improving the key drivers of our business and focusing on controlling the controllable. We strongly believe that our long-term vision of transforming the home services space and taking the hassle out of home services. I will leave you with three reasons to believe in Frontdoor: first, we continue to profitably grow this business despite the pandemic and current macroeconomic conditions. As I stated in our last call, we expect the majority of our public company life in uncertain times, and yet we continue to deliver profitable growth. Second, we are uniquely positioned to transform an antiquated and inefficient industry on the banks through disruption. We strongly believe we have the knowledge and scale to transform into a digital-first model that allows you to solve your home hassles in a much more delightful way. Last, we continue to build products that bundle traditional home service plans and new maintenance services to provide a more holistic and complete set of offerings for not only our current customers but for those who may not need a home service plan, thus reaching a much larger audience. This industry is ripe for digital transformation and has a massive opportunity to grow into on-demand services, and that’s exactly what we plan to do. I will now turn the call over to Brian to review our financial results. Brian?
Brian Turcotte: Thanks, Rex and good afternoon everyone. Please turn to Slide 7 and I will review our first quarter 2022 financial results. First quarter 2022 revenue increased 7% versus the prior year period to $351 million as a result of higher pricing and a mix shift to higher priced products in our home service plan business. Looking at our home service plan channels, First quarter revenue derived from customer renewals was up 10% versus the prior year due to improved price realization and growth in a number of renewed home service plans. First year real estate revenue was down 20% versus the prior year, reflecting the continued decline in the number of home service plans in this channel, offset in part by improved price realization. The decline in the number of home service plans in this channel was higher than we had projected due to the continuation of the challenging sellers market driven in part by extremely low home inventory levels across the U.S. First year direct-to-consumer or D2C channel revenue was up 14% versus the prior year due to improved price realization and a mix shift to higher-priced products. First quarter revenue reported in our other channel increased $5 million over the prior year, primarily due to continued solid growth at ProConnect and Streem. First quarter revenue for ProConnect and Streem was $7 million and $2 million respectively and should continue to ramp up over the balance of the year. Gross profit declined 3% in the first quarter versus the prior year period to $144 million, and our gross profit margin was 41%. Net income declined $3 million in the first quarter of 2022 as lower gross profit and increased investments in sales, marketing and technology, as well as higher personnel costs more than offset lower interest expense. Adjusted net income decreased $5 million over the prior year period to $3 million. Adjusted EBITDA was $25 million in the first quarter or $11 million lower than the prior year period. Let’s move to the table on Slide 8 and I’ll provide context for the year-over-year decline in adjusted EBITDA. Starting at the top, we had $21 million of favorable revenue conversion in the first quarter of 2022 versus the prior year period. Contract claims costs increased $24 million in the first quarter versus the prior year period. The increase was primarily in the appliance, plumbing and HVAC trades due to accelerating inflationary trends including rising contracted labor and fuel costs as well as continued industry-wide parts and equipment availability challenges. This was partly offset by a lower number of service requests and process improvement benefits. Additionally, contract claims costs for the first quarter of 2022 include a $9 million unfavorable adjustment related to the adverse development of prior period claims primarily from the fourth quarter of 2021. Sales and marketing costs increased $4 million in the first quarter versus the prior year period, primarily related to increased investments in the DTC channel and ProConnect. And finally, general and administrative costs increased $3 million in the first quarter due to increased professional fees, investments in technology and higher personnel costs. Turning to Slide 9, I am now going to more detail on the significant claims cost inflation we’re experiencing, the effects on the business and our ongoing cost mitigation strategies. Based on the claims cost trends we experienced exiting last year, we assume that a high single-digit year-over-year increase was appropriate based on higher contracted labor, parts and equipment costs. However, our actual first quarter year-over-year cost inflation rate was in the mid-teens. There have been several changes since our last earnings call that have resulted in a greater acceleration of inflationary cost pressure than we originally anticipated. First, the war in Ukraine has resulted in global cost inflation especially fuel prices and supply chain uncertainty; second, the COVID-related shutdowns in China have impacted the global supply chain by creating production issues and logistics challenges that could impact overseas parts and equipment availability for the foreseeable future. And third, we have seen an increase in overall inflation that has impacted the macroeconomic environment. These factors have all contributed to U.S. inflation rising at the highest rate since 1981 with the consumer price index increasing 8.5% in March. However, it’s important to point out that cost inflation in the home services space is rising well ahead of this rate. For example, we are seeing our service request costs now rising at double-digit inflation rate as contractors pass along the higher labor rates as well as higher fuel, parts and equipment costs. While we have great visibility and an ability to influence our own direct purchases of parts and equipment, we don’t have that same level of visibility into our contractor costs, especially when they supply their own parts and equipment. As a result of the current environment, we are aggressively addressing rising inflation and global supply chain challenges through a number of actions. First, we are implementing another round of price increases and now targeting an upper single-digit overall price increase in 2022 and that will be delivered through dynamic pricing to minimize the sales unit impact. Our price testing continues to show that our customers are mostly inelastic priced, and we expect to be able to increase our price over time to cover the inflationary pressure. Second, we are implementing a host of process improvements with our contractors, such as increasing the percent of jobs assigned to our preferred contractors, redoubling our recruiting efforts and driving broader adoption of technology and automating processes. Third, we are continuing to expand our supply chain efforts by broadening Frontdoor-sourced parts and equipment for contractors. And fourth, we’re taking SG&A cost reduction actions across the business. Please now turn to Slide 10 for a review of our cash flow and cash position for the first quarter 2022 compared to the prior year. Net cash provided from operating activities was $47 million for the 3 months ended March 31, 2022, and was comprised of $14 million in earnings adjusted for non-cash charges and $33 million of cash provided from working capital. The cash provided from working capital was primarily driven by seasonality. Net cash used for investing activities was $8 million and was primarily comprised of technology-related capital expenditures. Net cash used for financing activities was $47 million, primarily driven by $40 million used for share repurchases. Free cash flow, calculated as net cash provided from operating activities minus property additions, was $39 million for the 3 months ended March 31, 2022, compared to $45 million for the prior year. We ended the first quarter 2022 with $255 million in cash. Restricted net assets totaled $163 million and unrestricted cash totaled $92 million. Our unrestricted cash, combined with $248 million of available capacity under our revolving credit facility, provides us with a solid available liquidity position of $340 million. It remains our intention to return the majority of our excess cash to shareholders over the next few years through our share repurchase program, but we certainly could pause the program for a strategic acquisition or other considerations as detailed in our public filings. I’ll now conclude my prepared remarks with our current thoughts regarding the financial outlook for the second quarter and updated full year 2022 provided on Slide 11. We expect our second quarter 2022 revenue to be within a range of $475 million to $485 million, which reflects an increase in direct-to-consumer and renewal channel revenue versus the prior year period, partly offset by a nearly 30% decline in real estate channel revenue. Second quarter adjusted EBITDA is expected to range from $75 million and $90 million, which is significantly below the prior year period as a result of the accelerating inflationary cost trends. Turning to our updated full year 2022 outlook, revenue is projected to be within a range of $1.66 billion to $1.69 billion. The full year revenue growth assumptions include double-digit revenue growth in the DTC channel comprised of higher price and the continued shift in product mix to higher-priced products, upper single-digit revenue growth in the real estate channel, driven primarily by price realization, and higher renewal customer accounts and a mid-20% decrease in real estate channel revenue due to a decline in our expectations for this channel related to the historically challenging sellers market an extremely low level of home inventory. On a consolidated basis, our core home service plan business revenue growth is now expected to be in the low to mid-single digits. Additionally, customer count is now expected to decline slightly in 2022, primarily driven by the weakness in first year real estate sales. In regard to our emerging businesses, ProConnect revenue is still expected to reach about $40 million and Streem revenue is targeted to be between $10 million and $15 million as originally projected. Our full year 2022 gross profit margin is expected to be between 44% and 45%, driven primarily by the acceleration of inflationary cost pressures, partly offset by higher pricing and process improvement efforts and are projected to have a greater impact in the second half of the year. For 2022, we anticipate that the inflationary pressure will drive cost per service request to increase in a low-teens percentage while the actual number of service requests is expected to be flat to slightly down versus prior year. The rate of cost inflation is expected to remain elevated in the first half of the year and then improve in the second half of the year as we lap some of the increases from late 2021. I should note that while our long-term gross margin target for our core home service plan business remains the same, which is approximately 50%. Our goal is to provide you with the best real-time data we can as we navigate – there it’s a volatile macroeconomic environment and take every action to mitigate the inflationary impact. We are now targeting full year 2022 SG&A to range between $540 million and $565 million. The $10 million decrease from our previous guidance primarily relates to the SG&A expense reduction actions I mentioned earlier. Based on these updated inputs, full year 2022 adjusted EBITDA is expected to range between $215 million and $245 million. In conclusion, we are doing our best to manage through this very challenging set of macroeconomic conditions by controlling the controllable and executing our internal business initiatives. While our near-term performance continues to be impacted by geopolitical and pandemic-driven inflationary cost pressures and a historically challenging real estate market, we’re focused on delivering on an aggressive set of actions that will help us navigate through this challenging period. Despite these near-term pressures, we remain confident on our long-term business outlook, and we continue to invest in building a strong foundation for the future. With that, I’ll turn the call back over to Matt to open the question-and-answer session. Matt?
Matt Davis: Thanks, Brian. As a reminder, during the question-and-answer session, we encourage you to ask any questions that you may have so please note that our guidance is limited to the outlook we provided. Operator, let’s open the line for questions.
Operator: Thank you, Matt. Our first question is from the line of Jeff Schmitt from William Blair. Jeff, your line will be open now, if you would like to proceed with your question.
Jeff Schmitt: Hi, good afternoon, everyone. Did you say that claims cost inflation was sort of in the lower mid-teens but then you’re targeting kind of high single-digit price increases? And I’m curious just because, I guess, why not just push for 10% to 15% price increases to combat this? Or is the market environment too competitive? I would think your competitors are going through the same type of pain. So I guess, why not get more aggressive on the pricing front?
Rex Tibbens: Yes, this is Rex. A couple of things. One, in our last call, we talked about kind of a mid-single-digit price increase because we thought that’s kind of where inflation was going to be. And so as Brian mentioned, now we’re targeting kind of another round of price increases. So I think between those two things, as Brian mentioned, over time, I do believe that, that begins to mitigate the impact of inflation. Brian, I think you’d add to that?
Brian Turcotte: Yes. And just to be clear, the inflation rate will be mid-teens through the first half of the year. And then end the year on a full year basis in low teens. So it trails off a bit in the second half as we lap some of the pressure from last year.
Jeff Schmitt: Okay. And a question on the new Platinum plans. The – which I think you said included some kind of maintenance options. What’s the progress of that? What type of growth are you seeing there? And is there any cannibalization of, I guess, the ProConnect maintenance business at all?
Rex Tibbens: No. So for Platinum, we’re actually seeing something that customers like the blend of both home service plan coverage as well as maintenance services. And so we’re actually seeing a higher mix of Platinum than we originally had forecasted for, which is always a great sign. We don’t think it cannibalizes ProConnect at all. And we actually think that maintenance services, is a great retention tool for our customers longer-term.
Jeff Schmitt: Okay, thank you for the answers.
Operator: Thanks, Jeff. Our next question is from Ian Zaffino of Oppenheimer. Ian, your line is now open. Please proceed.
Ian Zaffino: Hi. Great. Thank you very much. On the pricing side, is there anything you can do to get pricing more immediately – have you thought about surcharges or some other form of price increases that you could take to maybe offset some of the inflation better than you’re able to do right now? Thanks.
Rex Tibbens: Hi, it’s Rex. Certainly, it’s something we’ve explored. I think since we sell an annual contract, there is not an opportunity to have an immediate surcharge, if you will. But A lot of the things that we’ve worked through with our pricing increases is we’ve taken kind of a data science approach to our models for dynamic pricing, just to remind the group I think pricing, we look at both usage as well as kind of cost within the zip code. So between those things and the risk deciles we looked at, we’ve been pretty, I think, surgical in terms of how we’re raising prices. Keep in mind that our service contracts are annual, therefore, we recognize the revenue twelfth at a time. So that’s why we think that this plays out over time, but it’s not going to be the immediate improvement.
Ian Zaffino: Okay. And then just a follow-up, on the ProConnect side, are you in taking similar price increases to cover inflation there? Is there an opportunity to take more? And I’m just trying to think of how that kind of fits with your $40 million of guidance. If that’s the case, it might be higher than that. Maybe help us understand that? Thanks.
Rex Tibbens: Sure. So certainly, I think the – for some areas, there is a potential opportunity, but it’s also the areas that we’re currently building within ProConnect. So just as a reminder, we started with appliances and maintenance services. Certainly, I think there is maybe a small opportunity in appliances. But as we roll into both plumbing and electrical there is an opportunity to take more price, but it’s also somewhat nascent, that’s the part that you’re building up. So I think it will help. I’m not sure it’s going to take us beyond our revenue target of $40 million.
Ian Zaffino: Okay, thanks very much.
Operator: Our next question is from the line of Youssef Squali of Truist Securities. Youssef, your lien is now open. Please proceed.
Youssef Squali: Great. Thank you. So two quick questions for me. One, still on pricing. So versus inflation assumption hitting you in the call it, low to mid-teens for the year versus the price increase in the high single digits. Arguably, as you institute the price increase, it’s going to take time for a tool over – how much are you assuming that you’re going to be able to recapture from that, call it, low teens price inflation? And second, can you maybe talk about the marketing efficiency you’re seeing in your DTC channel some time back, I think you pulled back a little bit on marketing because marketing efficiency through that channel was not as good as you have hoped maybe your assumption about sustained double-digit growth in DTC. Does that come at the expense of maybe ROAs or is that still within your acceptable ROAs? Thank you.
Rex Tibbens: Yes, sure. I’ll take the direct-to-consumer question, Brian, I’d ask you to comment on how our pricing will kind of lap into this year and next. So for direct consumer, you’re right, late last year, the team faced a couple of the challenges but as we’ve reported last quarter, that’s behind us. We’re still seeing a great – certainly, things are more expensive. I think the team has worked on both conversion and efficiency. We optimized our e-commerce platform and our digital marketing. We’ve spread over other areas. And so those things continue to perform well, and that’s why we’re still bullish on direct-to-consumer and still think that we will have double-digit growth for the remainder of the year. But we’re seeing it somewhat in price and mix first, but we expect units towards the back of the year. But these actions we’ve taken last year are definitely providing some green shoots as we look forward to the second half of this year.
Brian Turcotte: And Youssef, to your question about the pricing and reclaiming some gross profit or gross margin, as Rex said, it just takes time, right? It takes a few months to roll these price increases out. And then you recognize revenue monthly and so you’ve got the cost upfront and then you get the margin recovery over time. So it’s not going to happen this year, as you saw from our forecast of 44% to 45% gross margin. But as we get into next year, we were able to get more of that pricing benefit. And as we think about long-term, dynamic pricing will certainly be a great lever for us to get back to 50% gross margins for the home service plan business, but it will be dependent on how quickly future real estate rebound, etcetera. So anyway, it’s going to take some time to long story short to get back to the gross margins we need to get to.
Youssef Squali: Okay. Thanks for your clarification.
Operator: Thank you. And our next question is from Aaron Kessler of Raymond James. Aaron, your line is now open. Please proceed.
Aaron Kessler: Great. Thank you. Just a couple of questions. Maybe first, if you can talk about kind of customer acquisition costs you’re seeing and maybe specific to the D2C channel. And then I think you just – maybe just to clarify, I think you talked about inflation kind of in the mid-teens. What’s kind of the rough mix between – in your estimates between kind of labor costs as well as parts as well? Thank you.
Rex Tibbens: Sure. So I’ll take direct-to-consumer and ask Brian to comment on inflationary costs. So for direct-to-consumer certainly, we’re seeing slightly higher CACs, but also keep in mind that with prices increases and mix changes to more of our product, that actually helps give us more headroom if you will from an LTV perspective. So, we are certainly seeing some inflationary pressures there, but nothing out of ordinary. Since we have transitioned to our e-commerce platform and changed our mix profile, I think that the team is executing very well. We – last year brought in some programs in-house that continues to provide green shoots for us. So, as we spread our marketing across digital, direct mail and broadcast, we are still pretty confident in our plan.
Brian Turcotte: Hi Aaron, it’s Brian. What was your inflation question again, I am sorry?
Aaron Kessler: Yes. Thank you. You kind of mentioned mid-teens overall inflation. Just curious, I think you may have mentioned labor cost is about 10%, is having kind of parts were up, kind of the remainder, or how should we think about the mix between labor costs and parts, if you have a good sense?
Brian Turcotte: Yes. The data that we have seen shows that it looks like labor costs that are probably hitting our contractors are the mid to high-single digits that they are facing with their technicians. And when they look at their – what they are paying for parts and equipment, the inflation is probably at a rate of 15% to 25% inflation, which is very high. We are facing more like 10% with what we buy due to our purchasing leverage. So, that’s pretty high. And think about fuel, they are paying 50% more today than a year ago for fuel for their trucks. So, there is a lot of inflation that’s facing our contractors today. But from what we purchase, it’s more like 10%. Is that helpful?
Aaron Kessler: Got it. Okay. Thank you.
Operator: Thank you. Our next question is from the line of Justin Patterson with KeyBanc. Justin, your line is now open. Please proceed.
Justin Patterson: Great. Thank you and good afternoon. I wanted to go back to some of the comments you let off, that Rex, about just investing more around improving customer service, improving the self-service capabilities. Can you talk about the timeline for that to phase into the business? And then as these investments start to bear fruit and macro conditions normalize, how should we think about the potential benefit that could have to both retention rates, margins and pricing power over time? Thank you.
Rex Tibbens: Hi Justin, I think that this has kind of been an ongoing work. I don’t think I know this has been ongoing work since we started. And we are really starting to see traction from a self-service perspective, get a team a lot of kudos in terms of our – My Account feature has definitely improved. Our automated phone systems have improved. So, I think I said early on, the last time I wanted to talk to someone was never, and we still believe that and that you should be able to resolve any issue you have through digital means. And so we think that as we roll out our app later in the year, that continues to strengthen what customers can do from a self-service perspective. We think that starting with a digital-first approach for resolving problems through Streem, simply now starting to click to call a feature where you can bring the agent online, that is kind of walk in your shoes and understand your issue digitally. Those are all things that make the customer experience better. And the byproduct of that is, is they are also lower cost. And so – the combination of those things should help us over time bring down our service costs. And then from a retention perspective, we think that a lot of these things are a more delightful experience and should drive retention because it could be a very different approach to solving the problem than we have seen in the industry. And so we think those combination of factors will help not only, improve our support costs going forward, but also provide a more delightful customer experience, which should then dovetail into better retention.
Justin Patterson: Thank you.
Rex Tibbens: You bet.
Operator: And our next question is coming from the line of Brian Fitzgerald from Wells Fargo. Brian, your line is now open.
Brian Fitzgerald: Thanks guys. A couple of questions. You had nice performance in D2C in the quarter. Wondering if you could tease out volume versus pricing trends there, many of the drivers and the strength that you saw in the channel in the quarter? And then Rex, you talked about upgrading customers to premium includes coverage and maintenance. Can you give us the kind of any trajectory there? What does the tangent like, what are – what’s the conversion rates there, what’s the penetration rates there? I’m trying to assess what kind of the opportunity and the momentum is there.
Rex Tibbens: Sure. So, from a direct-to-consumer perspective, you should expect at least in the first half of the year, you have driven primarily by price and mix and then you will see units come on towards the latter part of the year. As it relates to our Platinum products, we kind of test our way into Platinum and realize that customers kind of enjoy having not just a break fix kind of moment with us, but also rely on us for maintenance services as well. And the primary maintenance service for Platinum is an HVAC tune up, but we will be rolling out additional things in the coming months as well. So, in terms of penetration, I don’t think we have outlined our mix. But certainly, Platinum is performing better than we thought. But Brian, I don’t know if you could comment on what we said publicly from a mix perspective, but at least in my knowledge, I don’t think we have given mixed numbers.
Brian Turcotte: Not at this time, Rex.
Brian Fitzgerald: Okay. Thank you, guys. I appreciate it.
Operator: Thank you. And our next question is from the line of Cory Carpenter from JPMorgan. Cory, your line is now open. Please go ahead.
Cory Carpenter: Hi. Thank you. It sounds like the change in the revenue guide is completely due to the real estate channel. But Rex and Brian, I just wanted to confirm that with you. And then, Rex, hoping you could talk more broadly just around what you are seeing in the competitive environment for a bit. Do you think you are gaining or losing any share in the real estate or direct-to-consumer market more broadly? Thank you.
Rex Tibbens: Yes, absolutely. For real estate, I think your summation is correct. Certainly, it’s been challenging as we think about both inventory continues to go down. And then the more troubling thing for us was the higher percentage of investor buyers, which takes away even more inventory from traditional home buyer who we would be marketing to. So, as it relates to direct-to-consumer, I think that we are focused on controlling the controllables and both direct-to-consumer and renewables are two areas where I think we can really make headway. And so certainly, direct-to-consumer, we have diversified our spend conversions looking pretty well. And then from a renewal perspective, we have optimized dynamic pricing. We continue to change our products from our Good, Better, Best strategy. And that’s actually one of the – we are hopeful from a real estate perspective as we have launched that will help us. But in terms of share, I can’t comment on kind of what other folks are doing. But historically, we look at share, we are not losing share, so to speak, in real estate for sure. But certainly, with a much lower inventory the pie has gotten a lot smaller, but our portion of that pie, at least in our analysis suggest that we are not losing share there. And then overall, I think we continue to perform, and we don’t see any signs of weakness from a competitive perspective, certainly just weakness from a macroeconomic and inflationary perspective. So, we are still focusing on the things we can control. And I think we will continue to deliver profitable growth on those areas.
Brian Turcotte: Your assumption was correct. Our outlook for B2C and renewals is really the same from the February call. We only changed was the real estate going from decline of just over 10% to mid-20% rev decline. So, you were correct.
Cory Carpenter: Okay. Thanks Brian.
Brian Turcotte: Sure.
Operator: And our final question today comes from Eric Sheridan of Goldman Sachs. Eric, your line is now open. Please proceed.
Eric Sheridan: Thanks for squeezing me in. I want to come back to Slide 9 and maybe just ask a few follow-ups to things that were talked about already. In framing aggressively mitigating the headwinds you are seeing, can you talk first about your confidence interval and the ability to raise price without causing any impact from a churn standpoint and how you sort of ensure that you get balance right, looking out over the next couple of quarters. On the second point of improving contractor processes, can you give us a little bit more color on what goes into that and the duration by which we could see that improvement as we go over the next couple of quarters. And then on expanding the supply chain, can you give us again a little bit more detail on how the duration of that plays out and how we can monitor that from the outside in as your results progress in the quarters ahead? Thanks so much.
Rex Tibbens: Sure. So, from a dynamic pricing perspective, this is something that we watch very closely. Again, we have on a basis, we look at our customers and we segment them by deciles. And so whether it’s by usage or by risk, we have a pretty, I think, pretty robust models around each one of those deciles. And as we raise prices, what is the level of elasticity for each one of those deciles. And we haven’t seen any changes in that even with the level of pricing increases that we have given. We do think there is an opportunity in our higher deciles where our customers are using us more than the norm to charge them an even higher premium and we have seen that those customers are willing to pay because they like that coverage. So, we haven’t seen any changes to our models. We haven’t seen any backlash, if you will, from what we expect from a retention perspective for each one of those deciles. So, it seems to continue to be working very well for us. And then I am sorry, on the other questions, Brian, if you want to take the inflation one, and I will –actually both of them, I think you can handle.
Brian Turcotte: Yes. I think the second one was about the improving process improvements and cost improves with contractors. Is that right, Eric?
Eric Sheridan: Yes. Just on improving contractor processes and expanding supply chain, how should we be thinking about the duration of the impacts playing out in the quarters ahead, so we start to see benefits from that – whatever you are putting in place from a mitigation standpoint, just so we can understand that? Thanks.
Brian Turcotte: Right. Yes, and Rex, please jump in. Regarding the process improvements of contractors, improving the percent of preferred mix from the historic, I guess low-80% is pretty sudden. I mean that’s a quick impact, the more we can push our service request to our percent referred, the lower our costs are going to be. So, that’s pretty quick. It’s just – it’s the amount of time that they take to raise that level. And I think the control team is doing a great job of that today. So, we should be able to see more of that as we go forward. And regarding supply chain, as I mentioned, we are paying 8% to 12% more today for parts and equipment than we did a year ago. But our contractors are paying 15% to 25%, round numbers. So, anything we can shift to our sourcing from theirs is going to save us money and help gross profit and gross margin. So, again, that could be fairly quick as well. We just have to get them to allow us to purchase for them. Rex, anything else you would like to add?
Rex Tibbens: I will add two things. One is on our preferred contractors. They seem to have a much better handle on being able to help us manage cost, because the volume they handle. And so that’s why it’s so important that we increase the percent of preferred, because the kind of network contract, if you will, are certainly a lot more expensive than our preferred. And then the second is, I think there has been some work or will continue to do some work on optimizing our selection algorithms for contractors so that we can help increase that percent of preferred. So, this is definitely a big unlock or a cost mitigator for us as well as what Brian spoke about in terms of where we source parts versus our contractors.
Operator: Great. And that is it for all our questions today. So, I would like to hand back to Rex Tibbens for any closing remarks.
Rex Tibbens: Thank you. In closing, while Frontdoor is facing some near-term external challenges around accelerating inflation rates in the macro real estate environment that are beyond our control, we absolutely remain focused on improving the key drivers of our business and really focusing on controlling the controllable. So, thank you again for your time this afternoon, and we look forward to talking to you in our next earnings call.
Operator: Ladies and gentlemen thank you again for joining Frontdoor’s first quarter 2022 earnings call. Today’s call is now concluded.
