Image source: The Motley Fool.
Realogy Holdings Corp (HOUS -2.17%)
Q2Â 2019 Earnings Call
Aug 8, 2019, 8:30 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Good morning, and welcome to the Realogy Holdings Corp. Second Quarter 2019 Earnings Conference Call via webcast. Today's call is being recorded and a written transcript will be made available in the Investor Information section of the company's website later today. A webcast replay will also be made available on the company's website.
At this time, I would like to turn conference over to Realogy's Senior Vice President, Alicia Swift. Please go ahead, Alicia.
Ryan M. Schneider -- Chief Executive Officer, President and Director
Thank you, Dennis. Good morning, and welcome to Realogy's Second Quarter 2019 Earnings Conference Call. On the call with me today are Realogy's CEO and President, Ryan Schneider; and Chief Financial Officer, Charlotte Simonelli. As shown on slide three of the presentation, the company will be making statements about its future results and other forward-looking statements during this call. These statements are based on the current expectations and the current economic environment. Forward-looking statements and projections are inherently subject to significant economic, competitive and other uncertainties and contingencies, many of which are beyond the control of management. Actual results may differ materially from those expressed or implied in the forward-looking statements.
For those who listen to the rebroadcast of this presentation, we remind you that the remarks made herein are as of today August 8 and have not been updated subsequent to the initial earnings call. Important assumptions and other important factors that could cause actual results to differ materially from those in the forward-looking statements are specified in our earnings release issued today as well as our annual and quarterly SEC filings. Also, certain non-GAAP financial measures will be discussed on this call and per SEC rules, important information regarding these non-GAAP financial measures is included in our earnings press release.
Now I will turn the call over to CEO and President, Ryan Schneider.
Now we'll turn the call over to CEO and President, Ryan Schneider.Thank you, Alicia. Good morning, everyone. I'm excited to share with you today our financial results, our outlook and a number of proof points on strategic initiatives that make us optimistic about the future. Even in this competitive environment, we continue to generate sustained profitability with substantial operating EBITDA and free cash flow. We are by far the best combination of scale, partnerships, market position, agents, brands, products and profitability, and you will hear today why we are, and you should be, optimistic about Realogy's future. We earned $245 million in operating EBITDA in Q2 and generated $147 million in free cash flow, driven by improving volume sequentially, moderating agent commission cost pressure and strong cost management. We now expect to earn $590 million to $610 million in operating EBITDA in 2019 based on what we know today and subject to macro uncertainty.
Our transaction volume trajectory is improving. Our Q2 transaction volume declined 3% year-over-year. This is a substantial improvement compared to the 9% year-over-year decline in Q1. At the business unit level, our franchise business was down 2% in the quarter year-over-year, improving from an 8% decline in Q1. Our owned brokerage business was down 5%, an improvement from its 11% decline in Q1. We faced similar pressures in Q2 as we shared in Q1, specifically the competitive environment and our geographic concentration in California. We are forecasting positive transaction volume in Q3 with sequential improvement in Q4. Our $70 million of 2019 cost efforts are on track. We have executed approximately 30% of the actions so far required to generate these savings and have captured $22 million in the income statement year-to-date. And on our next call, Charlotte will share with you additional information on further cost efforts that will impact 2019 and beyond. Finally, this quarter we began to demonstrate results in areas that have been headwinds to top- and bottom-line growth. First, on agent commission cost, in the past year, we've rolled out new commission plans across most of the U.S.
Remember, the new local plans leverage our unique data scale, use our machine learning capabilities and include select fees. The goal is to create attractive commission plans to grow our agent base, while better managing/controlling commission costs. We are seeing continued moderation in our agent commission cost pressure, an increase of only 21 basis points year-over-year. This is by far our best result in 12 quarters. We now have 2 quarters in a row of much better results on this metric, and we expect the upward pressure on commission splits to be less than we told you about earlier in the year. We now expect it in the range of 50 to 70 basis points for the full year of 2019. Second, we're delivering new products, partnerships and technology and data offerings to improve our value proposition. While much of the discussion we have had is around how improving our value proposition will help us better recruit and retain agents, I want to emphasize today how it also helps drive growth and in some cases, improves margins in the business. In Q2, we have a number of new proof points to share.
First, our Listing Concierge product, which provides a great integrated marketing package for agent listings is now live in about 60% of our markets. Today, agents using Listing Concierge get a good higher commission rate on average. We are very excited to help agents win more listings and drive growth of this product, while demonstrating that we can actually add margin back into the business. The marketing product we launched in partnership with Facebook and Instagram in Q1 named Social Ad Engine continues to get traction with thousands of marketing campaigns launched that already delivered over 85,000 leads for our agents. This product is only available through Realogy and is another innovative product example designed to drive greater volumes. We recently launched TurnKey, a collaboration with Amazon to create fantastic home-buying and move-in experience for the consumer. The program has the potential to generate high-quality leads and drive growth for Realogy owned brokerage agents and franchisees. TurnKey transactions are expected to drive greater margins, and it is just beginning. We launched in July and are only in 20% of the U.S. market today. Our capital-light iBuying partnership continues in 3 cities.
We've expanded our early efforts to now include select franchisees, and we like our early learnings and look forward to moving to additional cities soon. Finally, we have grown our owned brokerage agent base for the first time in a while. This growth has occurred and accelerated in the past four months because of the combination of our new commission plans and our value proposition changes. Our NRT agent base is up about 2% from Q1, and we like our recruiting momentum. So pulling way up, we anticipate earning $590 million to $610 million of operating EBITDA for fiscal year -- full year 2019. We anticipate moving to positive transaction volume growth in Q3, and we continue to expect sequential transaction volume improvement in Q4. And looking ahead, our agent commission pressure is moderating. We're creating products and partnerships designed to drive growth and to add margin back into the business. We are growing our owned brokerage agent base and NAR is now forecasting 8% transaction volume in 2020. Putting all those things together, you can see why we more -- we are more optimistic about our top- and bottom-line trajectory.
I will now turn the call over to Charlotte for a deep dive into the financial performance.
Charlotte Simonelli -- Executive Vice President and Chief Financial Officer
Thank you, Ryan. Good morning, everyone. Before we get into the details, let me start with a few comments about our financial results for the quarter. We delivered a solid quarter of financial performance, exhibiting sequential improvement across several key financial metrics. We continue to execute upon our strategy, which includes new products and partnerships that leverage our leading market share to grow our business profitably, while improving the transaction process for the industry overall. We remain diligent and focused on expense management, both actioning and identifying incremental operational efficiencies across the business. At the same time, we are implementing even more best practices and process automation, which we look to further scale across the enterprise. The strong focus on cost management is starting to gain momentum and favorably impact the income statement year-to-date.
We reported slightly lower operating cost and already actioned approximately 60% of the $70 million cost savings program for full year 2019. We also returned to positive free cash flow in the quarter and are committed to reducing our leverage until we achieve 4x and below. Now let's jump into Q2 2019 consolidated financial results on slide five. Total net revenue in the second quarter was $1.7 billion, a decline of $85 million versus prior year, primarily due to lower NRT revenue. Operating EBITDA was $245 million, a decline of $31 million from Q2 2018. Expenses decreased by approximately $50 million due to lower commissions and operating costs. Operating costs improved slightly in the quarter, primarily due to office footprint optimization. Q2 2019 net income was $69 million compared to net income of $123 million in Q2 2018, due predominantly to an increase in interest expense of $35 million and the decline in transaction volume.
The interest expense increase was driven by a $24 million mark-to-market loss on our interest rate swaps versus no change to mark-to-market in Q2 2018. Adjusted earnings per share was $0.83 compared to an adjusted earnings per share of $1 in Q2 2018. Now let's turn to cash flow and the balance sheet. Free cash flow was $147 million in the quarter, as the business moves into the peak cash-generating season driven by higher cash from operations, and we reduced net debt by $113 million in Q2. We ended Q2 2019 with total liquidity of $1.4 billion. We continue to pay down the revolver borrowings, which were $265 million as of August 6. We remain committed to using our free cash flow to reduce leverage until we achieve net debt leverage below 4x, while making prudent investments in the business with no near-term debt maturities.
Now let's move into a Q2 2019 year-over-year review of segment operating performance on slides six and 7. RFG revenue of $234 million decreased slightly due primarily to lower intercompany royalties from NRT. Excluding intercompany royalties from NRT, RFG revenue was up slightly. RFG operating EBITDA was $163 million, a decline of $10 million. NRT revenue of $1.3 billion was down $77 million from Q2 2018, due predominantly to lower transaction volume, especially in California, where NRT is geographically concentrated and faces intense competition. Operating EBITDA was $47 million, a decrease of $14 million due to lower revenues, partially offset by lower agent commissions and lower intercompany royalties to RFG. Q2 2019 agent commission splits were up 21 basis points year-over-year, the lowest year-over-year increase in 12 quarters.
On a like-for-like basis, splits were up 40 basis points. Cartus revenue of $97 million, decreased $8 million, primarily due to decreases in international revenue and lower referral revenue, including lapping a large group move from Q2 2018. Operating EBITDA was $27 million, a decline of $7 million as the revenue decline was only partially offset by favorable operating expenses. TRG revenue of $160 million was down $2 million, primarily due to lower resell revenue. Operating EBITDA was $32 million, an increase of $1 million as the decline in resell revenue was more than offset by an increase of $5 million in GRA mortgage JV earnings. We now expect GRA to generate approximately $10 million in operating EBITDA for TRG in full year 2019.
Before I discuss our efficiency effort, let me stop for a minute, as I believe everyone would benefit from more clarity on the net royalty per side driver in our franchise financials. As you know, we moved to net royalty per side as the key driver for our franchise business in 2017. This metric has the benefit of showing the impact of all incentives, including those designed to help our franchisees grow. In Q2 2019, net royalty per side was $331 compared to $336 in Q2 2018. The $5 year-over-year decline in net royalty per side was primarily driven by 3 factors: First, in 2018, we introduced a royalty fee cap in one of our brands to drive more franchise growth. This different pricing structure allows us to compete more broadly across the market. Second, we continue to use incentives to help franchisees grow, through acquisitions, mergers, recruiting and also to extend franchise agreements and convert new franchisees to our brands.
And third, our top 250 franchisees continue to grow at a faster pace and earn larger rebates. Our top 250 represent approximately 70% of RFG GCI in Q2, which is up from Q2 2018. Turning to slide eight. We continue to make progress on our $70 million cost savings initiatives previously identified for the year. To date, these savings have largely come from workforce and office optimization. Through Q2 2019, 60% of our actions have been completed and $22 million has already been realized through the income statements. We are on track to deliver our full year target. Making Realogy much more efficient is and will remain a very strong priority for me. Since my arrival in late March, I have launched new efforts that will drive additional savings, both in 2019 and 2020 and I intend to share more details with you on our next call.
During the quarter, we incurred $9 million of restructuring costs associated with these cost-savings initiatives, and we now expect $54 million of restructuring cost through 2019. Wrapping up, I am pleased with our second quarter performance, which I believe highlights that we are on track with our plan and are executing the necessary steps to improve our financial performance. We are approaching our business decisions with even greater financial rigor and speed that will allow us to drive improved performance across the business. In the near term, we will remain balanced with our use of free cash flow to both drive better business performance and lower our overall leverage.
With that, I'll turn the call back to Ryan for some closing remarks.
Ryan M. Schneider -- Chief Executive Officer, President and Director
Thanks, Charlotte. In closing, let me step back and make a few competitive points. First, even in the current competitive environment and a pretty tough housing market, we generated $245 million in operating EBITDA and $147 million in free cash flow in the quarter. Those are massive absolute dollar amounts in an industry where there is a large amount of capital deployed without profitability. When I joined Realogy 20 months ago, there were 3 to 4 "disrupter" companies we got a huge number of questions about. Today, one of those companies have gone, proving how easy is to make a big splash as a disrupter and spend a lot of money and how hard it is to build a sustainable business. There are still multiple competitors in our industry who are investing a ton of capital to compete with us, which first and foremost, we think is strong evidence of the fundament attractiveness of our business.
We are by far the best combination of scale, partnerships, market position, agents, brands, products and profitability. We have significant financial resources from our substantial internally generated free cash flow, which allows us to invest in the business, to de-lever and to compete successfully. We are here to stay, we fully intend to strengthen our position in this attractive market. We believe our trajectory will improve and we like a number of our results this quarter as proof points. Looking head, our agent commission pressure is moderating. We're creating products and partnerships designed to drive growth and to add margin back into the business. We are growing our owned brokerage agent base and NAR is now forecasting 8% transaction volume growth in 2020. Putting all that together, you can see why we are more optimistic about our top- and bottom-line trajectory.
With that, Charlotte and I will take your questions.
Questions and Answers:
Operator
[Operator Instructions] And your first question is from the line of Stephen Kim with Evercore ISI. Okay, we'll move on to the next question from the line of Ryan McKeveny with Zelman & Associates. Please go ahead.
Ryan McKeveny -- Zelman & Associates -- Analyst
Hey good morning. And Nice job on the quarter. So I have a 2-parter related to TurnKey. So the Amazon part of that kind of the consumer touch point obviously got a lot of the focus and the headlines. I guess, can you give some color on the infrastructure that you've built at Realogy with TurnKey, maybe the kind of the technology that you're leveraging, what's going on back office wise? Also would love to hear about OJO Labs and how's that's being integrated on the AI side and just bigger picture integration with Cartus? So that's kind of the first big picture one on just the infrastructure that you guys actually have. And then the second part, just with kind of online lead generation in general, there is always this trade-off out there over quantity versus quality. So I guess, in the decision to embark on TurnKey, what do you think about as far as how the leads that you can generate could compare with other sources in terms of potentially better quality, better converting, do you think that's the case? And if so, why?
Ryan M. Schneider -- Chief Executive Officer, President and Director
So let me start with your second question. Look the world is awash in incredibly low-quality, low-conversion online leads, the lead tends to be nothing but an email address effectively, and so we're really excited by TurnKey because we think it'll be an incredibly high-quality lead because it's both a live customer ready to talk to an agent incubated by our OJO Labs' partnership, if they're not ready at the moment. But it's also a customer whose excited about the value proposition of Amazon Home Services, both on the smartphone and the move-in support and help kind of thing. And so in the spectrum of the quality of leads out there, we think this will be a really high-quality lead that will be incredibly valued and very differentiated from the low-quality leads that are just out there in -- kind of in mass. So we're really excited about that. From an infrastructure standpoint, this is kind of one of the examples where I think the scale and uniqueness of Realogy really helps, so Ryan, if you think about any national partnership, whether it's, in this case, what we're doing with Amazon or something else, right, we're the 1 player in the market who has national coverage across all geographies, between our owned and our franchise business. We've got multiple brands for consumers and partners to choose from, and we already have an infrastructure through our Cartus broker network of very high-quality, proven agents, a kind of subset of our overall agents, on a national basis that can support already the existing national kind of lead things that we do on the infinity and the relo side that our agents and franchisees really value.
So we and Amazon together built some technology for the consumer experience part through amazon.com/turnkey. We built some interaction with OJO as an incubator for people who aren't ready for the human conversation yet, but want to be in the program and for when the time is right. But the lion's share of what we built this on was already part of our company and was an example of leveraging both the technology scale and the geographic scale of our company, which we feel is almost uniquely possible to do with us, but with no one else in this industry given those things that we have the rest of the folks don't, which is why in my comments, I tried to remind everybody how much in this very attractive industry we have the best combination of market position, scale, agents, branch, etc., partnerships, that can get leveraged for national things like this. So that's how I'd answer both parts of your question, Ryan.
Ryan McKeveny -- Zelman & Associates -- Analyst
Thank you very much. That's very helpful.
Operator
Your next question is from the line of John Campbell with Stephens Inc. Please go ahead.
John Campbell -- Stephens Inc -- Analyst
Hey guys. Good morning. Congrats on a great quarter. I just want to go back to -- one more time to the Amazon partnership, that seems like a pretty interesting opportunity for you guys. Just at the highest of levels, how do you define success there? I mean, is there a certain level of transactions where you say, hey, this is working better than we originally expected?
Ryan M. Schneider -- Chief Executive Officer, President and Director
Look, we've got big dreams for the thing, and we want it to be as big as possible. We -- while we do a little bit of investment to get the thing going from a technology standpoint, as Ryan's question talked about, the economics of this basically are a function of closed transactions. So when we close a transaction through TurnKey, then we deliver the Amazon smarthome services and the Amazon Home Services as part of it. So the economics are very kind of marginal cost here, not fixed cost in a lot of ways, but we think it would be very large. Obviously, we've got a partner who does things very large on this, and we want it to be as big as possible. And so we're only just getting started, right, we're only in 20% of the U.S. right now. We're in our early days. And bluntly, we launched in July, which is kind of late in the year to launch. And so if you think about the momentum, I'm even more excited about what it could look like in 2020 as we have our learning, we haven't even really started marketing yet, but imagine going into the prime housing season next year with six months of marketing behind it, all the learnings you get from kind of you're shakedown crews and your growing pains of doing this stuff, and we want it to be as big as it can be.
John Campbell -- Stephens Inc -- Analyst
Yes, it makes sense. On the 2% growth in NRT agents, that was really good. I felt that you've seen some others in the space who, I think, have seen more of a challenging run of late. So if you could just maybe talk to, I guess, a; is that mostly U.S. agents? And whether that growth is driven by better retention or maybe faster gross adds? And then secondly, how does that 2% growth look versus the last few quarters? It sounds like that you slid a bit there, but maybe that's a good -- better, just kind of looking for the degree of improvement there?
Ryan M. Schneider -- Chief Executive Officer, President and Director
Yes. So first off, it's 100% U.S. based. For NRT, it's a U.S. thing. So it's 100% U.S. And look -- and we think it's kind of the combination of bringing some of those new commission plans and make it more attractive. I would say, most of the growth is the combination of kind of new agents joining at a higher rate and then kind of keeping about the same level of retention as we had in the quarter before. But with different things, like TurnKey or Listing Concierge, etc., we're now delivering better leads and more high-quality leads for agents. We're doing things that in turn are enhancing the value proposition. I think that helps a lot, and then it's funny, so the 2% is 2% compared to a year ago, it's 2% compared to the start of the year and it's 2% compared to the start of Q2. So we gave the 2%. And so we kind of have been going down for a while, then we were flat for a while, and now, we actually have a data point going in the direction that we're all rooting for.
John Campbell -- Stephens Inc -- Analyst
Thank you.
Operator
Your next question is from the line of Stephen Kim with Evercore ISI. Please go ahead.
Stephen Kim -- Evercore ISI -- Analyst
Yeah. Sorry, about that earlier. Technical issues. I had a couple of questions on splits, if I could. Obviously, encouraging what we've seen here, and I just wanted to clarify, you said that you're looking for splits to be up 50 to 70 basis points on a year-over-year basis. For the full year, Ryan or was that just in the back half of the year?
Ryan M. Schneider -- Chief Executive Officer, President and Director
No, that's for the full year. We had talked to you about kind of 90 to 110 earlier at the start of the year. Obviously, we've been doing better than that, and we're thinking 50 to 70 for the back half of the year. That's still a little higher in the back half than the first half, but because we're getting some momentum on recruiting and we see the sequential growth happening, we do think one of the things that will happen is our agents are going to be working their way more up their productivity tables and so there will be a little bit of higher splits from that in the back half of the year. So -- but we've had 2 quarters in a row of better than we -- than probably we thought, and we like that, we'd love to keep that trajectory, but we don't want to go too far with it yet, and so we thought we should tell you kind of where we've recalibrated in our heads on that, and we are excited to stay very focused on it. We've had 12 quarters of results that looked a heck of a lot worse than that massively, and so we're pretty excited to see those kind of numbers now for 2 quarters in a row, both because of our new commission plans influenced them and helped pay off it, but also just that we're seeing it actually -- we're seeing some of our actions kind of deliver a different number that, bluntly, has been the #1 question you and others have asked us. And now we have 2 quarters in a row of delivering something that looks very, very different than the past 12 quarters before that.
Stephen Kim -- Evercore ISI -- Analyst
Yes, absolutely. I mean, as you've pointed out, when you took charge, splits -- keeping splits low alone is not the goal, the goal was to improve the productivity and the revenue. So that's important. In that vein, we did notice that, once again, in both NRT and in RFG, both on the price and on the volume side, the numbers seemed to be a little lower than what NAR was indicating. And I know you gave a good -- NAR gave a good forecast for 2020, but relative to NAR, relative to what the industry is doing, do you see the potential to get that to your relative performance year-over-year to close the gap with the industry or maybe even to gain some share back? And just one other housekeeping item on the mark-to-market on the interest expense, can you remind me how much of your floating exposure you have hedged?
Charlotte Simonelli -- Executive Vice President and Chief Financial Officer
I can take the mark-to-market thing real quick, just to put that out, that is. We have a 70/30 ratio, so 70% is hedged.
Ryan M. Schneider -- Chief Executive Officer, President and Director
Yes. So on the shortfall to NAR, great question. Look -- and so 2 things, first off, we closed the gap this quarter, right? Last quarter, we had a 500 basis point gap to NAR. This quarter, we had a 300 basis point gap to NAR. And some of that is the fact how overweighted we are in California and even in Q2, California performed worse than the rest of the U.S. But also, we talked about some competition stuff last year. So the forces are kind of the same, but you can see we closed the gap from 500 to 300. Obviously, as we move to positive transaction volume in Q3 and Q4, we hope that we continue to close that gap. We'd love to get past the gap and be on the positive side of that, but -- and that's why we're -- we've focused so much of our efforts on things like TurnKey, things like our Social Ad Engine product, like the recruiting focus, etc.. And anything we can do to create products and partnerships to drive growth for agents, drive the recruiting, that's going to translate to both better top line and better bottom line and some of the proof points this quarter, Stephen, is why we're more optimistic. But we should be -- I want to be really clear, we did -- the gap did close this quarter and we view that as a very good thing even if some of the gap is still driven by just geographic difference between us and NAR, especially vis-a-vis California.
Stephen Kim -- Evercore ISI -- Analyst
Great. Thanks very much guys.
Operator
Your next question is from the line of Chris Gamaitoni with Compass Point. Please go ahead.
Chris Gamaitoni -- Compass Point -- Analyst
Hi good morning everyone. Hello Chris. Good morning. I wanted to ask first question on TurnKey. So the success of it will really be about consumer engagement, who controls the marketing approach to it and who pays for that?
Ryan M. Schneider -- Chief Executive Officer, President and Director
So we'll be funding the marketing primarily. And our -- the marketing -- there is both marketing we can do inside of Amazon channels, there is marketing we can do inside of Amazon channels. Obviously, anything we do inside Amazon channels needs to be something that we're both supportive of and excited of, but we're primarily funding the marketing for the thing. We have -- we'll access people out there in the world in general, we'll also access through Amazon kind of -- within Amazon kind of marketing channels.
Chris Gamaitoni -- Compass Point -- Analyst
Do you envision marketing being Internet-based approach, TV ads, just trying to understand how to get the message?
Ryan M. Schneider -- Chief Executive Officer, President and Director
I -- this is an industry where I think TV is not a winner. I mean, I come from a financial services company where I'd had a like $300 million ad, I had a massive TV spend in the last company that I worked at, and I feel like I understand that pretty well. I don't think this is an industry where TV is necessarily the way to go. I predict it will be much more Internet-based, obviously, our partner in this Amazon's whole model is Interest-based, and so the fact that we can market through their channels and on our own through Internet of Things is likely where we're going to invest our marketing dollars.
Chris Gamaitoni -- Compass Point -- Analyst
All right. And then on the new agents joining, you mentioned same level of retention and more new agents. Are these -- is the profile of agents coming from other brokerages or are they new agents entering the industry?
Ryan M. Schneider -- Chief Executive Officer, President and Director
We're large enough. We have every profile, like every single year, we have a ton of new agents who join us across the country both in our owned business and our franchise businesses. We have -- but -- and we have agents across the whole spectrum that join us every year. I would say, like the growth we're having is kind of across the whole spectrum and our sweet spot is probably the -- well, yes, the sweet spot is probably the -- in terms of recruiting into it, what we're trying to do is recruit people who we think have the those potential. So we're recruiting a lot of people in there three to five years as an agent kind of criteria. I've talked before on calls that the first machine learning model we built kind of scans all the public agent data and our private data and tries to figure out who we're going to target that we think has the most growth potential, independent almost of their current production, and so that's probably where we're targeting the most. But because of our size, we kind of get it across the whole spectrum and the growth we've had in the last quarter, there is no one group that stands out as disproportionate. It's a little bit of just broader success across the spectrum for us.
Chris Gamaitoni -- Compass Point -- Analyst
All right thank you so much.
Operator
Your next question is from the line of Jason Deleeuw with Piper Jaffray. Please go ahead.
Jason Deleeuw -- Piper Jaffray -- Analyst
Good morning. Thanks for taking the question. It's good to see some of the key fundamental drivers improving here. And I was wondering if we could get a little color on the agent competition trends, any change there? Have the competitors lightened up a bit or not? And then, also, just kind of the agent recruiting conversation, is that changing at all? Is it still just all splits or some of these lead generation opportunities or things that you can bring to the table, are those having a bigger influence?
Ryan M. Schneider -- Chief Executive Officer, President and Director
Yes. On the agent competition side, I would say, no change. It remains very, very intense, right. There are geographic variations. I've talked on our last call about how, especially in some of the California cities and Chicago, for example, the competition intensity is Spinal Tap 11 kind of thing. And I don't think there has really been a change between last quarter and this quarter on that. So that's the answer to your first question. On the conversation, I mean, I -- there are certain markets and certain agents for where it is nothing, but about the money and as I've told you guys before, at the end of the day, if it's a choice between losing money and letting someone go, we're not going to lose money just to retain people. But even with this competition, you saw our NRT agent growth here in Q2 and for the earlier question kind of first time in a long time and versus even a down trajectory in the past. But we have the conversation really on multiple dimensions, right? I mean, we are full-service traditional brokerage.
Our value proposition isn't just the money because if you want the highest split possible, you can go to RE/MAX and you're going to have a higher split than you're going to have at here or any other traditional brokerage. So we really -- we've got to be competitive on that, but we're also trying to emphasize the benefits that we bring with the kind of partnerships and products that I described in the call with the power of kind of some of our scale, referral, things like that. And again, it's a tough market out there, we're going to keep fighting on it. But world where we've been losing agents and then for the other question kind of flat for a year or so to actually get some meaningful growth, felt good and since we disclose those numbers every quarter, we obviously, wanted to talk about them here.
Jason Deleeuw -- Piper Jaffray -- Analyst
Great. And then just on the outlook, the positive transaction volume growth in the third quarter and better in the fourth quarter, is that for both RFG and NRT or is that just on a combined basis? And what's the visibility on that? I know you see the opens for the third quarter, for most of the third quarter here but just help us think about kind of the visibility you have on that outlook?
Ryan M. Schneider -- Chief Executive Officer, President and Director
Yes. We've got a -- we -- look, we think they're both going to keep improving and -- but the positives on a combined basis, we'll see how it plays out just based on some of the competition in market for us as you talked about. We feel good so far after July, we've seen our July numbers, we haven't seen the market numbers. And we feel good that we're on that trajectory. Keep in mind, last year July, it was a pretty good month, right? Last year in July, I think the market was up like 5% or 6%, and then August was like a flat month and September was down like 10% and then Q4 was down about 5%. So we are actually transitioning in this quarter from what had been kind of a normal type of growth here in terms of volume growth to the time period last year when kind of things fell off of a cliff, and so we feel good about our guidance and our trajectory, the details of the decimal point number is kind of by different parts of the business. There is still a little bit of volatility around those based off the market, but we like the overall trajectory and are optimistic about it.
Operator
Thank you. So our next question is from the line of Bose George with KBW. Please go ahead.
Bose George -- KBW -- Analyst
Hey good morning. Can you give us an update on trends you're seeing in the iBuyer market and competition in markets where iBuyers are very active?
Ryan M. Schneider -- Chief Executive Officer, President and Director
Sure. Yes. It's -- as a lot of capital' has been poured into iBuying, it's a big phenomenon, it's -- Phoenix is kind of the biggest area where, I think, the iBuying market share is something like 4% or 5% of the market, don't hold me too much for that, that's a month or 2 dated, but we look at that market pretty closely. And so -- and a lot of the iBuyers now are using agents, including some of the iBuyers are using our franchise agents, for example. We use agents in our pilots, so the model is shifting a little bit where there is the idea, the commission economics are disappearing is less violent than people had predicted.
The other thing that I will say is, it is changing in a few of those markets the consumer conversation, you find a lot of people shopping, will get an iBuyer offer at the same time that they're talking to an agent about selling their house and as some of the iBuying people have talked about, in the vast majority of cases, people turn those offers down because bluntly, part of that, I believe, is -- a lot of the offers are bid at a pretty good discount above and beyond the service fee. So it's a little bit of a change in the consumer conversation. I think agents, not just at our brands and others, are adjusting both, in a few cases, by being part of it, but more importantly, by continuing to win the vast majority of listings with the value proposition of, frankly, helping people get the best price, which is the real thing.
I mean, you can sell your house through an iBuyer but often if you look at the market data, you're taking a 15-plus percent hit on price. And so that's a little bit of what's out there. Look, we're testing it in 3 cities, we're going to expand soon to some other cities to keep doing some more testing on it. We've expanded to our franchisees to let their agents have access to it in some of those cities. We like the learnings. The path to profitability, I think, is very unclear, probably for everybody at this point. But we like our capital-light way of participating in that and learning a lot.
Bose George -- KBW -- Analyst
Okay, that's helpful. And then just switching to your -- the earnings, the TRG segment, the margin was up despite lower volumes. Is that just the cost-cutting side paying off?
Charlotte Simonelli -- Executive Vice President and Chief Financial Officer
It's a little bit of cost-cutting, but it's also the GRA. So as I called out a bit, we are now making money on our GRA joint venture, and we're feeling really good about the progress there.
Bose George -- KBW -- Analyst
Okay, good. That makes sense. And then actually one -- just last one on capital management. Any -- is there any thought there to cutting the dividend and using that to deleverage or is that just not meaningful relative to your free cash flow?
Ryan M. Schneider -- Chief Executive Officer, President and Director
So look, our focus is investing in the business and paying down debt. And obviously, we're pretty excited about the quarter, the $245 million operating EBITDA, $147 million free cash flow, we paid down debt by about $113 million, and you can hear it on Charlotte's remark, we paid down the revolver even further since the end of the quarter. And we like the cash-generating capacity of the company. Look, we keep evaluating the dividend in the context of our capital allocation, but our -- the biggest thing we've been focused on is making sure we're investing in the business and what we're doing on paying down debt, so we'll keep you posted on that.
Bose George -- KBW -- Analyst
Okay. Thank you.
Operator
And today's final question will come from the line of Jack Micenko with SIG. Please go ahead.
Jack Micenko -- SIG -- Analyst
Good morning. Ryan, following up on that prior question, looking at the free cash flow, you've got a better outlook for the year and you mentioned that obviously that's a big priority for you. How should we think about debt pay down through the balance of the year given the better outlook? I know you've got some severance charges coming through and that sort of thing and how do we think about the pecking order of the debt pay down?
Ryan M. Schneider -- Chief Executive Officer, President and Director
I'm sorry, Jack, could you repeat that and possibly either speak up a little better or get close to the mic. I had a challenging time hearing you or that might be my hearing going though.
Jack Micenko -- SIG -- Analyst
Is this better?
Ryan M. Schneider -- Chief Executive Officer, President and Director
It's a little better.
Jack Micenko -- SIG -- Analyst
Okay. Just talk through free cash flow through the balance of the year with the better outlook and how much debt you think you can pay down between now and the year-end as the guidance range kind of holds?
Charlotte Simonelli -- Executive Vice President and Chief Financial Officer
Yes. So we're not really giving guidance on where we're going to be from a leverage perspective at the balance of the year, a lot of it does depend on the housing market that can make it a lot better, and so we feel comfortable that the trend will be very consistent with what we had last year, we always de-lever as we go throughout the year because we generate free cash flow and that won't be any different this year.
Jack Micenko -- SIG -- Analyst
Okay. Okay. And then bigger picture on tech spends, it seems as if the pivot is maybe more to partnerships, especially it's brokerage around Amazon now, does that mean over time that maybe tech spends -- does the spend go down? And can you maybe send more of that to debt pay down or does the mix of tech spend internal versus partnerships just shift?
Ryan M. Schneider -- Chief Executive Officer, President and Director
I think it's probably a little more of the latter. Our tech spend, we don't expect it just to go up in any sort of material way. I still think even after 18 months working with the team, we still have opportunities to reallocate and spend our tech differently and better to be even more on the forefront of product development. But we are going to do some tech development, deliver our own products, we're going to do some integration with third parties whether it's partnerships or third party product providers because we're kind of more focused on trying to deliver an open architecture so that our agents and franchisees can access the best products out there. But I think, we're going to want to keep investing but probably more at the same rate than any sort of a different rate. On the tech side, and we like some of the products that we're both providing and others are providing because, again, we think they can drive growth and have some -- hopefully, add some margin back into the business.
And then, again, we're going to keep rotating our spend. We're getting out of the data center business and into the cloud business. And on a net basis, the cost probably will be little bit cheaper on that, Jack, but not in a -- not in some sort of a transformative way. But the benefits of being faster and quicker speed to market and more real-time data for our agents and franchisees, we, again, hope those benefits translate onto the top line. Most of the places where we're going to drive efficiency, as Charlotte talked about, are more in the office optimization and some of the redesign stuff we're doing there kind of offices of future type of work as well as in kind of the a few -- 3 or 4 different ways and she'll talk more on the next call about this, of just getting a little more efficient in some of the more classic places as we kind of take our kind of sprawling holding company and try to run more as a single company over time.
Charlotte Simonelli -- Executive Vice President and Chief Financial Officer
And just to build on that too, we've just gone through a process of like rationalizing the products we offer our agents and so we've rationalized almost 90% of the products that we offer to them to give them a better product, and that's another example of how we drive efficiency because there was a lot of ad hoc products that maybe only a few agents would use here or there and we're redirecting that spend to have more bang for the buck.
Jack Micenko -- SIG -- Analyst
Charlotte, to the point, just a quick follow-up. It looks like maybe call it 2/3 of what you've realized so far is dropping to the bottom line, I'm just thinking about like the $22 million of the $35 million or $40 million, is that the right way to think about the net savings on the rest of the $70 million as well as whatever is coming in the third quarter or does that -- can that go up or down?
Charlotte Simonelli -- Executive Vice President and Chief Financial Officer
Yes. so basically, the whole bit of the savings is dropping to the bottom line. It's just other investments that we're making in the business that are offsetting it. I mean, I think from a ratio perspective, we don't expect any wild swings in our investments versus how the savings are coming through. As you know, more of the savings will come through in the back half of the year just due to the fact that we wait for the big season to sort of wind down before we implement some of these changes. So it's really more of a timing thing, but they all drop to the bottom line, it's just what we choose to invest quarter-by-quarter that offsets that.
Jack Micenko -- SIG -- Analyst
Thank you.
Operator
And at this time, there are no further questions. Please continue with any closing remarks.
Charlotte Simonelli -- Executive Vice President and Chief Financial Officer
Great. We thank you for joining the call today, and we look forward to speaking with you over the coming quarter. Thank you.
Operator
[Operator Closing Remarks]
Duration: 50 minutes
Call participants:
Ryan M. Schneider -- Chief Executive Officer, President and Director
Charlotte Simonelli -- Executive Vice President and Chief Financial Officer
Ryan McKeveny -- Zelman & Associates -- Analyst
John Campbell -- Stephens Inc -- Analyst
Stephen Kim -- Evercore ISI -- Analyst
Chris Gamaitoni -- Compass Point -- Analyst
Jason Deleeuw -- Piper Jaffray -- Analyst
Bose George -- KBW -- Analyst
Jack Micenko -- SIG -- Analyst
