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First American Corp. (NYSE:FAF)

Q4 2008 Earnings Call

February 26, 2009 11:00 AM ET

Executives

Jo Etta Bandy - Senior Vice President, Corporate Communications

Parker S. Kennedy - Chairman and Chief Executive Officer

Anthony "Buddy" Piszel - Chief Financial Officer and Treasurer

Dennis J. Gilmore - Executive Vice President, Chief Executive Officer of First American's Financial Services Group

Frank V. McMahon - Executive Vice President, Chief Executive Officer of First American's Information Solutions Group

Analysts

Robert Napoli - Piper Jaffray

Nikolai Fisken - Stephens Inc.

Jordan Hymowitz - Philadelphia Financial

Michael Ting - PartnerRe Asset Management

Operator

Thank you for standing by. A copy of today's press release and the accompanying presentation will be available at the company's website at www.firstam.com/investor. Also note that the call is being recorded and will be available for replay from the company's investor website and for a short time by calling 203-369-0797.

We will now turn the call over to Jo Etta Bandy, Senior Vice President of Corporate Communications to make an introductory statement.

Jo Etta Bandy

Thank you and good morning, everyone. And we appreciate you joining us on this morning's call.

At this time, we would like to remind listeners that management's commentary and responses to your questions may contain forward-looking statements, such as those described on page two of the company's slides, and other statements that do not relate strictly to historical or current facts.

The forward-looking statements speak only as of the date they are made, and the company does not undertake to update forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements are made.

Risks and uncertainties exist that may cause results to differ materially from those set forth in these forward-looking statements. Factors that could cause the anticipated results to differ from those described in the forward-looking statements are described on slide two.

As indicated on slide three, management's commentary and responses to your questions also contain certain financial measures that are not presented in accordance with Generally Accepted Accounting Principles.

The company does not intend for these non-GAAP financial measures to be a substitute for any GAAP financial information. In the slide presentation, these non-GAAP financial measures have been presented with, and reconciled to, the most directly comparable GAAP financial measures.

Investors should use these non-GAAP financial measures only in conjunction with the comparable GAAP financial measures.

Joining us today on our call is our Chairman and Chief Executive Officer, Parker Kennedy; Buddy Piszel, First American's newly appointed Chief Financial Officer; Dennis Gilmore, Chief Executive Officer of First American's Financial Services Group; and Frank McMahon, Chief Executive Officer of our Information Solutions Group. During the call, we will be referring to a slide presentation, which is currently available on First American's website at firstam.com/investor.

At this time, it is my pleasure to turn the call over to Park Kennedy.

Parker S. Kennedy

Thank you, Jo. 2008 was a challenging year for our company and our industry. The dislocation in the credit markets and the deteriorating economic environment contributed to a 22% decline in our operating revenue relative to 2007.

We reacted aggressively and decisively reducing our expenses 24% during the same period. Many of our expense reductions were structural in nature and are not expected to return when market conditions improve.

For example, in 2008, we reduced our employees by over 5,700 or 20% of our workforce. Additionally, we closed 500 offices or 26% of our total footprint. But underneath these numbers we drove a fundamental, reorganization of the business by centralizing, streamlining and standardizing our processes. The result of the this reorganization is enhanced operating leverage as volumes recover.

Despite, the significant changes we made to the company, the relationships with our customers remain strong and our service level has not deteriorated. Our employees have performed extremely well during this difficult time.

In the fourth quarter of 2008, First American reported a loss per diluted share of $0.82.

Our results were adversely affected by three items. First, the Title Insurance segment strengthened loss reserves by $78 million. Dennis Gilmore will comment on the operational initiatives the company is taking to mitigate claim losses.

Second, the company recorded $29.6 million of intangible asset impairments primarily related to a business within First Advantage. Frank will comment on these impairments in his remarks.

Finally, the company recorded $19 million of employee separation and lease termination costs as we continue to reduce operating expenses. After excluding these items our adjusted pre-tax earnings were $40 million, about equal to the fourth quarter of 2007 with much lower revenue.

As we entered 2009 we should benefit from a few things. First; our cost base is aligned with current revenues as volumes grow and we would expect substantial margin growth in the future. The substantial changes we have made to the organization coupled with our industry leading technology, systems and offshore capabilities uniquely position us to capitalize on improving market conditions.

Second, transaction volumes have increased dramatically across all of our origination businesses. The increase began at the end of the fourth quarter and has accelerated into the first quarter. Our title settlement, appraisal, flood, tax and credit products are benefiting from higher refinance and resale volumes due to favorable mortgage rates and improved affordability.

Third, we are encouraged by many of the steps Washington has taken to stabilize the economy, including the homeowner affordability and stability plan. This plan creates opportunities for First American to sell our products to lenders and homeowners who would not otherwise qualify for refinancing. Our unique product mix positions us extremely well to capitalize on the needs of our clients as they respond to these government programs.

Finally, we will benefit in 2009 due to the hiring of Buddy Piszel, our new Chief Financial Officer and Treasurer. Buddy comes to First American following a year and half as Executive Vice President and Chief Financial Officer for Freddie Mac. His background also includes two years as CFO for Health Net and more than a decade in senior financial positions at Prudential Financial. I have asked Buddy to focus on a number of key priorities including capital management, assisting the businesses with continuing to improve operating performance and enhancing communication with the investor community.

Now, I will turn it over to Buddy, our CFO.

Anthony "Buddy" Piszel

Thanks, Park. Since this is only my fifth week at the company I will just make a couple of points. First, I am thrilled to be here and I am quickly coming up to curve on our financial and business prospects. As Park said I'll be intently focused on operating performance and capital management as any CFO would be in these difficult market conditions. I will also be taking a fresh look at how we communicate and engage with our shareholder base. I'll be on the road in March and I'm eager to hear you feedback on the company, how we present ourselves and what would be more helpful to you.

I look forward to meeting you all and with that I hand it over to Dennis Gilmore, who'll cover our Financial Services Company.

Dennis J. Gilmore

Thanks Buddy, welcome aboard. Now, we are proud of the dramatic progress we've made in improving the operating efficiencies of our businesses, despite a very challenging environment. 2008 our direct revenue, our Title Insurance Company declined 23%, while our salary and other operating expenses declined 22%, a notable achievement given the fixed cost nature of our businesses. Throughout last year we reduced our employee count by 4,250 for an annualized savings of 234 million. We've reduced our employee count by 25% during 2008 and 42% during our peak of June of 2006.

A portion of our employee reductions are stressful in nature, as we've reduced management with consolidated divisions and decreased staff positions. In 2008, we closed 435 offices with an expected annualized savings of 27 million. These office closures represent 26% of our total footprint.

A vast majority of these office closures are structural in nature and are not expected to return when market conditions improve. As part of our overall strategic plan, we have centralized our key administrative functions, including technology, human resource, treasury and accounting.

The centralization strategy will enhance our operating leverage and reduces our risk profile. This is a fundamental change from how we've managed the business in the past. The significant changes we've made in 2008 have positioned us well as we entered 2009.

I'd now like to comment on the fourth quarter results. During the fourth quarter, the Title Insurance segment posted a GAAP pre-tax loss of $94 million. The results include a reserve strengthening adjustment of $78 million. Severance cost of $9 million. Lease termination cost of $6 million and net realized investment loss of $1 million. Excluding these charges our pre-tax loss for the Title Insurance segment was $1 million.

The company opened 395,000 orders during the fourth quarter, including 5,400 orders opened per day in October. 5,600 orders opened per day in November and 7,800 orders opened per day in December.

In January, the trend continued as we opened an average of 10,000 orders per day, a 28% increase relative to December.

For the first three weeks in February we've opened an average of 8,800 orders per day. The sharp increase in open orders was due to increase in refinance activity which comprised 40% of our open orders in the fourth quarter and 58% of our open orders in January.

We expect that the refinance orders we're opening today will have closing ratios in line with the historical experience. For example, through January 31st, we have closed 51% of our refinance orders that was opened in December.

This is in line with our historical average for refinance orders that have been open for two months. However, throughout the first quarter, we do anticipate closings taking longer due to backlogs in the lending industry.

Our direct revenues declined 32% over the prior year, due to decreases in the number of title orders closed and the average revenue per order.

Our average revenue declined 19% relative to the prior year. This is driven primarily by a shift in the order mix as well as decline in home values.

The company is in the process of examining rate adequacy in certain states. In California, we've filed a rate increase which we expect to become effective April 1. We also expect to file similar increases in other states where appropriate.

Our agency revenue declined 39% over the prior year. The decline was a result of the same factors affecting our direct operations as well as determination of certain agency relationships.

In 2008, we've made significant progress towards optimizing our agency operations. During the last year we've established standards for minimum remittance and splits by state. We've created a universal underwriting agreement and continue to terminate underperforming agents.

One of our key objectives for 2009 will be to centralize our agency administration. This imitative will consist of centralizing our agency remittance processing, our policy distribution and our background screening of new agents.

Our salary and other personnel costs decreased 35% over the prior year. During the fourth quarter, the Title segment reduced its employee count by 1,210. Producing an annualized cost savings of 61 million. There were $8 million of severance costs associated with the fourth quarter employee reductions.

The Title segment finished the year with approximately 13,000 employees including 1,600 employees in our international division. Despite increased order count we expect to make modest employee reductions in the first quarter.

Our other operating expenses declined 34% over the prior year. The primary drivers of the decline in other operating expenses were decreases in occupancy costs, production costs and our other cost containment programs.

The company closed 70 offices during the quarter, yielding an annualized cost savings of 6 million. There were also 6 million of lease termination costs associated with the fourth quarter office closures.

The loss provision for claims was 17% of operating revenues for the fourth quarter of 2008. The current quarter reflects an ultimate loss ratio of policy year 2008 of 6.6%. This claim pattern is consistent with our expectations.

We took a $78 million charge for adverse policy development, primarily for policy years 2006 and 2007, and the ultimate loss ratio for policy years 2006 and 2007 is 7.5% and 7.7% respectively.

The company has taken significant steps to centralize our claims administration process. Which has historically been managed in a decentralized manner.

First, we've appointed a new Director of Claims. Second, we've implemented a strict review and approval practices for our claims handlers and we've established specific financial authority levels for all claim handling.

Third, we're in the process of consolidating our claims administration from over 100 field locations into five central hubs. We anticipate these continued steps will improve our controls, standardize our processes, reduce our claim handling expense and increase our claims recovery efforts.

We expect to complete this initiative by the third quarter of 2009. Our total revenues in our commercial segment declined 48% relative to the fourth quarter of 2007. And our revenues in our international divisions declined 45% during the same period. After several years of steady growth we expect the commercial and international markets to remain challenged in 2009.

Our total revenues for our Specialty Insurance segment 72 million, a 7% decrease over the prior year. The decrease was due to declines in business volumes impacting the property, casualty and home warranty divisions and the combined ratios are 98 and 110%.

To summarize, we're encouraged by the recent increase in orders and by the opportunities created by the homeowner's affordability and stability plan. And many of the structural changes we've made in 2008 and we'll continue to make in 2009 position us well for the future. We will continue to centralize key strategic functions including our claims administration and our agency administration and we will continue to have a keen focus on expense control.

I'd now like to introduce Frank McMahon, who will comment on the Information Solutions Company.

Frank V. McMahon

Thanks, Dennis. I will talk very briefly about our results in the fourth quarter and the full year but then discuss the trends thus far this year and our expectations for 2009.

2008 was a year of transformation and transition for the Information Solutions Group. Our division experienced a significant amount of change in 2008, new leadership, new operating styles and philosophies and new challenges. Many of our markets contracted, some of our clients disappeared and virtually all of our clients were impacted by the global recession and the uncertainty of government actions.

Although our GAAP financial results were clearly disappointing, we took many actions that position us very well for 2009. We took aggressive actions to number one, right size our workforce with gross head count reductions of over 1,000. Number two, we reduced our physical footprint closing 64 offices. Number three, we modified our compensation programs with our personnel costs as a percentage of revenue down over a 10% in the fourth quarter. Number four, we centralized many of our administration functions. And finally, we consolidated and integrated many of our product companies.

In addition, we dedicated significant resources to new product development, product enhancement and talent acquisition. The ISC is a leading provider of data, analytics and processing services for wide range of companies. Total revenues in 2008 were $2 billion with approximately 28% of these revenues, 28% of the revenues from activities tied to mortgage origination, 35% from activities tied to servicing default activities, and 37% for non-real estate-related activities.

Obviously, mortgage originations were off dramatically last year down 24%, so we are impacted by the weak origination market and our operating revenues declined by 8.4% year-over-year. However, we feel we have an attractive business mix for most environments and expect revenue growth to be positive in 2009.

In addition, we are looking at ways to migrate a few of our business lines from transaction based revenue models to subscription or licensing based models which should reduce the cyclicality of our revenue streams.

In the fourth quarter our operating revenues declined by 6.3% relative to the fourth quarter of '07 and by 3.5% on a sequential quarter basis, offsetting the revenue impact from the soft mortgage origination market where market share gains and revenue from new or enhanced products.

Our controllable expenses declined $87.9 million or 6.9% for the year and 13% in the fourth quarter compared to the fourth quarter of '07 as a higher percentage of our cost reductions were in place later in the year.

Our fourth quarter results were impacted by several non-recurring items including asset write-downs of 6.2 million, severance of 3.6, restructuring cost of 1.9 and goodwill impairment of 19.7.

Adjusting for these items our EBITDA was down 2.9% on a sequential quarter basis. However, there were a number of positive developments in the fourth quarter and many of the resulting trends have continued into 2009. From a revenue perspective we are seeing growth come from three areas. Number one; increases in refinance activity, number two market share gains and number three revenue from new products.

Overall, origination activity over the past several months has increased and many of our origination related price have demonstrated strong year-to-date growth relative to the fourth quarter of '08. Our credit orders were up 31%, flood certifications were up 40%, BPO activity has risen by 16%, and our electronic title plan information sales were up over 25%.

In addition, we had a strong quarter from a new sales perspective adding over 25 significant new clients in the fourth quarter. We've gained market share in tax, appraisal, BPO, fraud analytics and AVMs. We introduced many new products or enhancements in 2008 that are gaining traction in the marketplace.

A few examples would be our true LTV product which gives services and investors a complete view of lean positions and the current value of collateral, our VP4 Default product which is an AVM specifically designed for properties in default or foreclosure and enhancements to LoanSafe 2.0 which is the leading fraud analytic tool in the marketplace.

Additionally, we continue to see growth in the investor vertical where we serve over 200 clients and estimate that our revenues in this vertical will double to over $100 million in the next three years.

Finally on the default side, we have been mandated or in advanced discussions with seven of the top 10 services regarding our loan modification and loss mitigation solutions.

We feel we are uniquely qualified to offer a holistic solution to services for loss mitigation in loan markets. We offer best-in-class front-end analytics, the best-in-class valuation capabilities, income verification NPD testing capabilities, document preparation, call center and case management.

As the details regarding our national loan modification program become finalized we expect to see significant revenue growth in this area.

While we are encouraged by the improving market conditions, we remain focused on expense management and believe incremental revenue will be accretive to our margins. Cost savings initiatives completed in 2008 are anticipated to save an incremental $45 million in 2009.

To provide investors a sense of the earnings power of the Information Solutions Group, we have provided EBITDA and pre-tax number suggested to exclude the non-recurring items and realized gains and losses. For the full year 2008, adjusted EBITDA was 438.9 million, a decrease of 3.9% relative to 2007. Because of our cost cutting initiatives however, we're able to increase our EBITDA margin in 2008 from 20.9% in 2007 to 21.7% in 2008. Adjusted pre-tax earnings were 251.5 million, a 6.1% decline relative to '07.

Now, I'd like to talk about our outlook for 2009. As we mentioned earlier there was positive momentum in our businesses in the fourth quarter in 2008. Operating earnings increased each month in the quarter and the increase in refinance activity, market share gains and new product sales contributed to accelerating results during the quarter.

We also view the current environment as a great opportunity to attract talented individuals to our team, and we have added quite a few in the last few months and expect to add quite a few more in the coming months. Although we do not give guidance I would like to share with to you our internal long-term financial goals for the ISC with our revenue growth of 7%, EBITDA growth of 10% and EBITDA margin improvement of 5%.

Based on our assumptions of new mortgage originations of 1.9 trillion and loss, I am sorry, loan modifications of 4 million transactions, our expectations for 2009 are that our revenue growth will be positive but will fall short of that 7% long-term goal, that we'll meet or exceed our EBITDA margin improvement goal of 5%, and that our EBITDA growth will be positive as well. And we'll make considerable progress in getting to our 10% goal. All of these growth expectations are based off the adjusted 2008 results that we have provided.

So to summarize, we believe we made a lot of progress in 2008 transforming the business to respond to changing market conditions and expectations. We are disappointed in the GAAP financial results in 2008 but are optimistic we can deliver year-over-year revenue and EBITDA growth and expanding EBITDA margins in 2009.

I would now like to open it up for questions.

Question-and-Answer Session

Operator

Thank you. We will now begin the formal question-and-answer session. (Operator Instructions). Bob Napoli of Piper Jaffray, you may ask your question.

Robert Napoli - Piper Jaffray

Thank you. Good morning.

Parker Kennedy

Hi, Bob.

Robert Napoli - Piper Jaffray

And, welcome Buddy.

Anthony “Buddy” Piszel

Hey, how you're doing?

Robert Napoli - Piper Jaffray

Good. How are you?

Anthony “Buddy” Piszel

Good.

Robert Napoli - Piper Jaffray

Few questions just on... Frank and the last thing you said it just, get that out of the way first. You talked about 4 million loan mods in your Information Solutions Group outlook for 2009. What is the... which segment is that in and how are you... how do you get paid for, how are you generating revenue off of those loan mods?

Frank McMahon

Well, the loan modification market has developed slowly. A number of large lenders had adopted large programs, we've been in it in very advanced discussions with virtually all the large lenders. We have been mandated by a few, and we haven't lost any opportunities. We've been successful 100%.

And we offer a full range of services. We can provide front-end analytics to determine what the value is of the property. We had income verification information and importantly we also have the ability to do the processing work to prepare the documentation necessary for the loan modification to contact the borrower to do the case management. So there's a lack of capacity in the market to serve this growing need and we feel we're very fell positioned to pursue those opportunities.

Robert Napoli - Piper Jaffray

Okay. Your claims this quarter were jumping back to the Title were disappointing obviously for you guys as well. It sounds like you've made some changes and, first the Fidelity National, on their conference call went through some pretty good detail of how they're seeing sequential improvements in claims. And you're not seeing... you're seeing the opposite. You're not seeing the improvements that they are. I just wondered why... what do you think the difference is?

Dennis Gilmore

This is Dennis, Bob. I can't really comment to what's happening in their business, but I'll tell you in our business, we had an adverse development in the fourth quarter.

And we took the appropriate actions. And our adverse development was primarily containing the years '06 and '07 with the majority in '07. To me that's encouraging. The adverse development is continuing to contain down the certain amount of years.

And what we're doing about it is a real heavy focus in the organization to centralize and control the administration of claims processing. Claims processing has been typically a decentralized effort for us and while we're right in the process of doing it, we're going to roll it out and complete it by the third quarter, to centralize that activity.

And we're looking for real tight controls on authority limits, on pay limits and how we're doing recovery efforts and how we're using outside counsels. So I am encouraged by what we're doing as we move into 2009 and how we process our claims.

Robert Napoli - Piper Jaffray

Is it too early to say what you're seeing for... for your policy year 2008.?

Anthony “Buddy” Piszel

Yeah, Bob let me comment on 2008. As Dennis said, most of the development that we've seen was related to policy year 2007.

If you look at our reserves in total, the '07 and '06 years about 45% of it. And that had taken some negative development but the rest of the book was in pretty good shape. Actually a little bit of a release.

In '08, you can see we're accruing at a 6.6% ultimate expected loss rate and out of the block it's performing better than '07, it came in for its first calendar year a little bit better than expected. And if you think about Title underwriting that just took place in the real estate market, as well as the agency calling efforts that we've done, we would expect '08 to come in better than '07 and so far that it is.

Robert Napoli - Piper Jaffray

Okay. The North America having been acquired or had a bankruptcy by up and up and it really had 15% market share. And I think it's... what you guys, what does First American think how do you think you'll benefit, what... your market share was 30% prior to that do you expect the gain decent snug of that market share are you seeing it already?

Dennis Gilmore

A couple of comments Bob, this is Dennis. First, we gained market share in the third quarter, our fourth quarter results are not released yet from LTA. But, I'll tell you we'll be in very opportunistic for gaining revenue producers and people predict control business. And so we're not adding any admin folks, we're not adding any overhead, any management, or simply going after people that can deliver business to us or appropriate agency relationship. So I think over the next year it will be one of our key focuses to continue to grow appropriate profitable market share.

Robert Napoli - Piper Jaffray

Okay.

Frank McMahon

And Bob it's Frank. Also related to Latin America, obviously they were in the tax--

Robert Napoli - Piper Jaffray

Yeah.

Frank McMahon

Appraisal business and credit business in a very small way. And so, we're actually pursuing very aggressively and have been very successful thus far in converting Latin America clients over to some of our products.

Robert Napoli - Piper Jaffray

Great. And just one more quick question. The revenue per order down, I think you said 19% we calculated 23%, but what is your outlook for 2009? I would imagine we go to another step down or two?

Dennis Gilmore

Yeah. We really will ultimately depend on the mix and how the mix plays out. It was down primarily driven by reductions in commercial revenue and the mix switching to refinance primarily and lower property values across the country. As we enter 2009, clearly we're in a refinanced phase right now. But we've also seen an uptick in resales over the last month which is encouraging to us. So at the end of day it will just depend on ultimately what the mix is and we'll manage towards it.

Robert Napoli - Piper Jaffray

Can you just remind me the gap between a new purchase and a re-buy the revenue in margin?

Dennis Gilmore

It's just really at a high level. It will depend on the state and the dynamics involved. But you can typically look for a refinance to be at half the price of a resale.

Robert Napoli - Piper Jaffray

And the margin?

Dennis Gilmore

We don't comment and breakout the margin from that perspective, but we run a very efficient refinance operation.

Robert Napoli - Piper Jaffray

Thank you.

Dennis Gilmore

Welcome.

Operator

Nik Fisken of Stephens, Inc. You may ask the question.

Nikolai Fisken - Stephens Inc.

Good morning, everybody.

Parker Kennedy

Hi.

Dennis Gilmore

Good morning.

Nikolai Fisken - Stephens Inc.

Can you give us an update on the potential spin or split of the company?

Parker Kennedy

Yeah, Nik this is Park.

Nikolai Fisken - Stephens Inc.

Hi, Park.

Parker Kennedy

We are still committed to the separation of the businesses as much as ever. And I might point out that we operate the two businesses very independently. However, as we navigate the difficult environment that we are in, it's good to be together. But once the market stabilizes and has more clarity we will definitely be prepared to separate the businesses.

Nikolai Fisken - Stephens Inc.

And what's your definition of stabilizing?

Parker Kennedy

I am not so sure. It's hard to say, it's not quite there yet.

Nikolai Fisken - Stephens Inc.

I am just looking at the year stock price versus the beginning of December versus the other few Title guys and you guys are flatten there up, I'd thought it would emerge more to do this split in light of what orders have been doing since Thanksgiving?

Parker Kennedy

Our orders are good, I think we'll need to have some stability over several months or quarter to before we really get comfortable with splitting the companies. But we are very focused on it and we are ready to go and it's just a little bit of a waiting game.

Nikolai Fisken - Stephens Inc.

Okay. Fair enough. Dennis on the price increase in California can you... are you guys going to tell us what that number is?

Dennis Gilmore

It's approximately 10%. And on a price increase overall I'll just give you some color on that. We consistently look at our rate structure to make sure it's adequate, make sure it's not discriminatory. And as an ongoing effort we will continue to adjust our prices accordingly. When you look at the overall top 20 states that generate 80% of our revenue, and you take that the promulgated and the rate in your states. Now we look for price increases in for 11 of the 13 remaining states.

Nikolai Fisken - Stephens Inc.

And then can you talk to your efforts to recapture some agency commissions.

Dennis Gilmore

Well, its been, yeah sure it's definitely been one of our key focuses for '08 will be one of our key focuses for '09. We actually I think crossed all the companies in the space. We're probably the one that made an improvement in our overall agency commission split. We look for that to continue to improve in '09 and we really like the agency channel. But it needs to be a profitable channel for us with the righteous profile. So again, that'll be a key focus for us going through '09.

Nikolai Fisken - Stephens Inc.

And then you talked a little bit about saving more money on the Title side. But if I add up all, the '08 saving is roughly 250 million. Do you have a goal to take out in '09?

Dennis Gilmore

When you look at our overall savings for '08, when you pull out all of our reductions from structural, from employees, from facilities et cetera our cost containment programs they're well, well north of that number you quoted.

But moving into '09 what we really do is run this business on a really tight metric approach. And so the volumes are volatile right now and they'll stay volatile until this market settles down.

But irrespective of the volatility of the market, we stay very focused on our operating metrics and what we do look for and we achieved in '08 and we are going to have one of key objectives in '09 is to improve our orders per employee, one of our operating metrics every quarter on a sequential basis over the prior year.

Now, even in a highly declining market last year, we were pretty encouraged by the fact that we actually increased our productivity per quarter throughout '08 versus '07. And we'll look to try to do the same thing going in to '09.

Nikolai Fisken - Stephens Inc.

And I think I read or heard earlier, you guys have stopped firing or you haven't stop firing?

Dennis Gilmore

Again, I personally look that process as ongoing effort. We're never done. We're always going to be looking for increased efficiencies in our business and looking to improve on whether our operating performance was in one quarter to improve the next quarter. And so going into the first quarter to give you a little color while our orders are up significantly and that's obviously a very good development.

So we do not anticipate hiring staff in the first quarter. In fact, we anticipate a slight decline in our head counts going into the first quarter.

Nikolai Fisken - Stephens Inc.

Last one I've got is for Frank. Are you in light of the economy are you starting to or are you going to continue to take some costs of out info?

Frank McMahon

We have different businesses that have different growth factors. So last year in 2008, we were cutting in some businesses and we were adding in other businesses. And I would expect 2009 is going to be the same that we'll be cutting in some businesses and we'll be adding in other businesses and we'll be just allocating our resources appropriately.

As I said, we do have a goal of expanding our EBITDA margins by 5% and we feel that we'll be able to do that that. So that growth will be the result of revenue growth, but also continued focus on expense management and the things that we've already accomplished in 2008, will, because of the timing of when we took those actions, we'll provide an incremental $45 million of savings in '09.

As we'll sit here today I don't expect us to take as many actions from the head count reduction or from a lease termination perspective in '09 as '08. Just based on what we're seeing right now in terms of activity levels.

Nikolai Fisken - Stephens Inc.

Okay. Thanks and congrats on the progress.

Parker Kennedy

Thank you.

Frank McMahon

Thanks Nikolai.

Operator

(Operator Instructions). Jordan Hymowitz of Philadelphia Financial. You may ask your question.

Jordan Hymowitz - Philadelphia Financial

Hey guys. A quick question for you. it looks like your deferred revenues was down quarter-over-quarter from 48 to 41 million, what's causing that and is it because of the foreclosure modifications? And I have a follow-up after wards.

Frank McMahon

Yeah, a couple of things Jordon. This is Frank. Number one, its important to note that, that doesn't represent all of our default revenues. Our default title operations are within the Title company and those continue to experience very strong growth.

On the information side, we have a very balanced mix between foreclosure related activities and loss mitigation related activities. And I would characterize what happened in the fourth quarter, as because of the more volumes or foreclosure related activity slowed down a little bit, and people began to think about how they are going to expand their loss mitigation programs and setup the low modification program.

So as I mentioned earlier seven out of top 10 servicers we feel like we're going to be doing business with them. But they really haven't kicked off their programs yet. So we are looking for pretty strong revenue growth in '09 in that line item. But I think in the fourth quarter there was a little bit of pause going on as people were trying to understand what was coming out of Washington in terms of national programs and obviously the more programs that we've put in place.

Jordan Hymowitz - Philadelphia Financial

So to follow-up then with those questions. First of all you said something is in the title line item what is in title line item?

Dennis Gilmore

This is Dennis Gilmore. In the title line item will be our foreclosure title work which would either be a title search foreclosure title search for our TSG and Western states.

Jordan Hymowitz - Philadelphia Financial

Okay. But that's a small portion.

Dennis Gilmore

No, it's a significant portion of the revenue.

Jordan Hymowitz - Philadelphia Financial

And what was that number of Q3 to Q4 then?

Dennis Gilmore

We haven't broken it out on that level of detail but we had significant growth in our default foreclosure business in the title side.

Parker Kennedy

Jordan, some information that might give you some color. In '08 on a consolidated basis our default oriented revenue was about$550 million and in '07 it was 46% less than that. So it--

Jordan Hymowitz - Philadelphia Financial

Can you see what it was Q3 to Q4?

Parker Kennedy

I don't have that.

Jordan Hymowitz - Philadelphia Financial

You think you can get back to me with that, I can follow-up with that.

Parker Kennedy

Yeah, I think so.

Jordan Hymowitz - Philadelphia Financial

Okay. And second question is, is there any major difference between you guys and LPS in terms of the actual businesses you're doing, because theirs was still up for getting the meeting with different clients out. But I'm trying to understand why if the same industry you guys were the two biggest players why they would be up and you would be down. Do they account for things more upfront and you guys accrue it more do you have any knowledge of that?

Frank McMahon

No, it's really a business mix, again we're much more balanced than we do participate in the foreclosure activities. But we're much more focused on loss mitigation and loan modifications. And that was kind of a strategy that we adopted in 2008. And we have focused less on the default outsourcing model that LPS is focused on. So and we're very happy with our position right now. So we actually are very optimistic about the outlook for 2009.

Jordan Hymowitz - Philadelphia Financial

So would it be fair to say if we're moving towards a program where there is a lot less foreclosures and a lot more modifications, you would benefit much more than they would?

Frank McMahon

I am not going to respond to that I will let you make that decision. I would tell you that our revenue mix is more balanced I think between those two, but I am not going to comment on other company. So--

Jordan Hymowitz - Philadelphia Financial

And finally, would you say that the foreclosure business in Q1 has continued to slowdown from Q4?

Frank McMahon

Yeah, I would say, its I would say slow... continued to slowdown but I would say it's roughly on the same pace.

Jordan Hymowitz - Philadelphia Financial

Okay. Thank you.

Parker Kennedy

Thank you.

Operator

Michael Ting of PartnerRe Asset Management. You may ask your question.

Michael Ting - PartnerRe Asset Management

Hi, yes. I would like to follow-up on the adverse development. When you look at your claims across the geography do they roughly correlate to your market share in those markets or there is some markets that you are seeing higher level of development?

Parker Kennedy

No, there is nothing you need between geography approach and it's very tied to our market share approach.

Michael Ting - PartnerRe Asset Management

Okay. And then, so given what you know today what are your current cumulative loss estimates for the 2006, 2007 vintages?

Anthony “Buddy” Piszel

2006 and 2007 are running about 7.7%. And as I said earlier we accruing 2008 at 6.6 for all the reasons that the overall underwriting and our own actions have improved our expectations.

Michael Ting - PartnerRe Asset Management

Okay. But do you have an estimate of what the ultimate cumulative loss would be for those two vintages? For those two years?

Anthony “Buddy” Piszel

That is the ultimate cumulative loss.

Michael Ting - PartnerRe Asset Management

Okay. So, the 7.6 and 7.7 is your estimate for the cash flow?

Anthony “Buddy” Piszel

Yes.

Michael Ting - PartnerRe Asset Management

Okay, got you. And with regards to centralizing of the claims processing, is any of that currently done outside of the U.S.? And I think you mentioned outsourcing overseas, is that... is there a need to outsourced to third parties or is that... or and you've got done overseas in markets like India or Philippines?

Dennis Gilmore

No. it's all done in the U.S.

Michael Ting - PartnerRe Asset Management

Okay. Okay, great. Thank you.

Dennis Gilmore

You're welcome.

Parker Kennedy

Thank you.

Operator

(inaudible). You may ask your question.

Unidentified Analyst

Good morning, gentlemen and hope you enjoy having a better year here in 2009.

Parker Kennedy

We will.

Unidentified Analyst

A couple of questions on the loan modifications, you mentioned, you're expecting $4 million in 2009. Can you clarify what amount of money the government pays for this modification work?

Frank McMahon

Well, we contract with the servicers. So the government will--

Unidentified Analyst

So I'll just make it simpler. What do the servicers pay you?

Frank McMahon

We don't disclose what we get and part of that is it's still developing and part of it is that, for some people we may do the full spectrum, we may do the decisioning analytics that allow them to figure out what loans go in that 80 to 105 LTV bucket, which ones are above that, which ones are below that, some other people uses use for the document prep and case management and call center activities. So it really is dependent.

Unidentified Analyst

It depends. Fine. So, I'm just trying to understand the process. The $4 million you're expecting in 2009 will be how much of an increase from the amount of volume done in 2008?

Frank McMahon

Varying... I don't have that number but--

Unidentified Analyst

I mean, is it similar near your 4 million?

Frank McMahon

I don't have that number, it's at least that, at least that.

Unidentified Analyst

Because what I'm trying to clarify is, you're saying that your default oriented revenue in the business was $550 million in 2008 and if your loan modification business is going from two to four hypothetically, does that suggest that this default oriented revenue could approach $1billion this year?

Parker Kennedy

No. The $550 million, this is Park, Elliot (ph). The $550 million was spread over our entire company, not just information services.

Frank McMahon

Let me just give you a sense. I mean, again depending on the nature of the solution and whether it's a holistic solution or piecemeal, the revenue that a firm like ours would get from a property going through foreclosure is a lot more than going through a loan modification.

We're not talking about the same type of dollars to an outsource provider and that could probably be anywhere from 20% to 50% depending on the services provided.

Unidentified Analyst

Okay. But clearly when we are talking about the number of open orders you're having for resales and new mortgages. Those volumes are completely separate from the loan modification business which is in your information services businesses?

Frank McMahon

Yes.

Unidentified Analyst

Okay. And two last things--

Frank McMahon

4 million is our expectation for the market not for how many we're going to do. So we're clear.

Unidentified Analyst

Right.

Frank McMahon

As a market--

Unidentified Analyst

Market number, got it. It was my misunderstanding. And then two last things on with your reduced employee count today, your opening orders of 9,000 to 10,000 per day, what is your capacity given the reduced number of employees.

Dennis Gilmore

This is Dennis. Again it's a fact that just we look literally daily, weekly. And right now we are comfortable with our current employee counts and our current roll counts. And I think we have some benefits here we'll leverage in our technology very effectively, we'll leverage in our overall structure effectively, so we're handling the current volumes without capacity constraint right now.

Unidentified Analyst

What I am asking you if we went to 12,000 per day what is the number which you have to begin hiring additional people?

Dennis Gilmore

Again it will depend on the type of orders and it will depend on the geographic distribution of those orders. And so we'll play it out as we go forward in the future. But I will tell you, through all the activity that we have done over the last two years we will be very diligent about minimizing adding cost to this business. And so we're going to try to run it as efficiently as we possibly can moving forward.

Unidentified Analyst

And the last thing as you do... as you close these additional mortgages and you're trying to leverage your existing expenses what percentage of every dollar do you think will flow to pre-tax for the incremental business, is it 40% or some other number, because you're actually getting $500 of additional revenue on a close or 1,000 what percent actually is profit?

Dennis Gilmore

Again, we haven't really disclosed that's getting real close to our guidance structure for guidance statement we have not disclosed that. But your point is accurate and we watch your point very, very closely and that is for every incremental dollar we bring into this business we would track our incremental expenses very, very closely. And is one of our key management measurements.

Parker Kennedy

And also what you're getting at is what our operational leverage is and well, we can't really say exactly what our margin would be because it differs by product. There is no question, if there is a lot of upside leverage because our expenses are low enough now that we really don't need much improvement on the revenue side, we see really good margins.

Dennis Gilmore

And just let me follow-up, this is Dennis, again. Again well I didn't give you the exact numbers on our incremental margin. We definitely think you will see it in the revenues and profits of the company as we move to '09 and these closings start to occur.

Unidentified Analyst

Okay. Well, thank you again.

Parker Kennedy

Thank you.

Dennis Gilmore

You're welcome.

Operator

There is no other questions we have today. That concludes this morning's call. We would like to remind listeners that today's call will be available for reply on the company's website or by dialing 203-369-0797. Copies of press release announcing First American's year-end results and the company slide presentation are also available on First American's website at www.firstam.com/investor.

The company would like to thank you for your participation. This concludes today's conference call. You may now disconnect.

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