CoreLogic's Management Presents at Credit Suisse 15th Annual Global Services Conference (Transcript)

| About: CoreLogic, INC. (CLGX)

CoreLogic, INC. (NYSE:CLGX)

Credit Suisse 15th Annual Global Services Conference

March 12, 2013 2:30 pm ET


Frank D. Martell - Chief Financial Officer

Unknown Analyst

Okay, so I think we're about ready to begin. Our next presenting company is CoreLogic. And we're very pleased to have with us today CoreLogic's CFO, Frank Martell. And I also do want to point out that Dan Smith, who runs the IR effort at CoreLogic is also in the audience as well.

And with that, I will pass it over to Frank.

Frank D. Martell

Thanks, George [ph]. Good morning, everyone. As George [ph] mentioned, I'm the CFO of CoreLogic. And what I'm going to do today is just to give you just -- for those of you who are not familiar with the company, just a little bit of a primer on what we do, our unique value proposition, take you through how we did the recently concluded year, talk about the focus areas for 2013, and then I'll answer any questions at the end that anybody may have.

By way of a quick overview, CoreLogic at its essence is the leading property information, analytics and services company in the U.S. and Australia. We have approximately 99.9% of the U.S. residential properties in our database in the U.S. and about 98% of the Australian residential properties in our database. Most of our information is must-have, and I'll talk about that, why that is the case in both the origination and the servicing of home loans and mortgages. And we have significant revenue streams across the real estate, mortgage and capital markets and increasingly, in other verticals such as geospatial, insurance, oil and gas and telco.

As I mentioned, we have must-have data analytics and services. We believe we have the most comprehensive set of data in the industry. I think if you call most of the clients across the industry, the key originators and servicers, they would acknowledge that CoreLogic is the gold standard in property records and analytics. A lot of our analytics are patented. We have over 20 patents and counting on the analytics side. We have comprehensive servicing. When you originate a loan, the credit checks, the flood certifications and the escrow tax payment processing are all areas that CoreLogic has a significant market share, and then we have a significant scale of managing those businesses, and then we have a blue-chip client base.

CoreLogic has been on a journey of transformation the last couple of years, culminating in record financial results in 2012. We actually spun off our parent company, First American, in the middle of 2010. From 2010 to the end of last year, we restructured the company very aggressively, reshaped the portfolio into the segments, in which I'll talk about in a minute. In addition, we took out about $82 million of cost out of the infrastructure of the company, transformed the margin characteristics and the cash flow characteristics and delivered a lot of value for our shareholders.

These are our 3 key operating segments: Data Analytics, Mortgage Origination Services and what we call AMPS, which is Asset Management and Processing Solutions. This is formerly called the Default segment. You can see the revenue distribution in these segments, about 40% of our revenue comes from Data Analytics, 40% from Mortgage Origination Services and about 20% from AMPS.

A part of the transformation process that I alluded to is we are growing the Data and Analytics segment. About 3 years ago, it's about 1/3 of the company; last year, it was 40%. And we stated that one of our key goals in the next couple of years is to drive that percentage up over 50% of the company, and we believe we have the plans to do that.

If you look at each segment, in the Data and Analytics area, 2/3 of the revenue stream come from our core property records, licensing and related analytics and advisory services. The model there is long-term contracts, staggered terms across the client base, very, very sticky and consistent growing revenue. CoreLogic is in the residential property sector primarily, but this is an area that tends to be embedded in the key operating systems of our clients. So it's a very sticky revenue stream, very predictable revenue stream.

We have a geospatial business, which is related to taking property maps and overlaying different data sets on it, primarily for the property and casualty insurance industry where we model hazard risks, either flood, wildfire, earthquake, et cetera and score the properties based on the risk of natural hazards. We are a leading provider of realtor solutions. About 50% of the realtors in the U.S. use our workflow solution on their desktops. We call it kind of a Zillow on steroids, where you're able to go through and interrogate in, in depth the properties that are in the areas that the realtors service, do analytics, valuations on those properties, et cetera.

We are one of the largest tenant screening for multifamily properties, so we do background screening for prospective tenants for major clients in the multifamily space. And then we are also a credit bureau for the under-banked population, about 40 million folks across the U.S. that avail themselves of payday lending services. They don't have access to traditional retail banking opportunities. Last year, the Data and Analytics generated about 31% margin and grew 12% year-over-year.

Our second leading segment is Mortgage Origination. When you originate a loan, basically you have to have -- make sure that, that property is inside or not inside a flood zone. So we do that in about 50% of the loans that originate across the U.S. We provide that service. It's a highly electronic model, so over 90% of the orders received electronically are fulfilled electronically within seconds, so a very high-scale, high-margin business for us. From a credit perspective, we provide about -- again, about 50% of the time, we provide the tri-merged credit report for the borrower when you are originating a loan, again, electronic fulfillment model.

On the tax side, from an escrow tax payments, we are actually the largest provider of the processing of tax payments. Over $60 billion a year flow through CoreLogic to over 22,000 tax jurisdictions across the U.S. We have 27 million loans in our portfolio that we process tax payments on or we monitor to make sure that those tax payments are being made. And then, we also, in this segment, we operate several joint ventures with major market makers where we essentially operate their back offices from a settlement services perspective.

This segment is one that has seen a lot of automation and therefore, the margins have expanded in this segment. Last year, as an example, we grew our margins from 30% to 40% from an EBITDA perspective, and this is one that grew -- this segment grew over 30% year-over-year in 2012 versus 2011.

Our third segment, which is our smallest segment, is the AMPS segment. And that's where we provide primarily 3 services related primarily to delinquent -- delinquencies, so once the mortgage goes into a delinquency status. We have about 0.5 million homes in our portfolio that we actually provide surveillance, maintenance and upkeep services for. This segment primarily caters to our top 10 clients. We also provide valuation services for homes that are in delinquency or in foreclosure status to help our clients devalue those on an ongoing basis. And then we have a series of technology businesses that help process claims and other activities that relate to either the foreclosed properties or properties that are in a delinquent status.

That's a business that the overall volumes of delinquencies and foreclosures in the U.S. declined about 10% last year. Year-over-year, we actually grew the segment revenue about 2%, so we grew much faster than the market. But that reflects specific client-related relationships and the fact that our client base is really the key market makers in this area.

Now we have a series of other cross-company related functions. We manage our clients centrally, our data centrally, our technology centrally and our overhead centrally.

Some quick financial highlights. We had a record fourth quarter, but importantly for the full year, you can see there we grew the top line by 17%. We expanded our margins both from an operating income and an EBITDA perspective fairly dramatically. That's a function of the revenue growth, operating leverage within the business, as well as our Project 30, which I'll touch upon in a few minutes, which is a major $100 million cost reduction program that we're in the final year of in 2013, which has been a tremendous success.

You can also see the free cash flow number there of $278 million. That compares to $99 million the year before. So we converted about 62% of our adjusted EBITDA to free cash flow. We have a target to do a consistent greater than 50% year-over-year, and we exceeded that in 2012. And then you could see our earnings per share also was over 100% growth there, which is a function of the profitability increase, as well as we bought back about 10 million of our shares using some of the free cash flow last year. That 10 million shares is roughly 10% of our total share count.

Just some other -- we talked about the growth there. All of our segments actually grew EBITDA and expanded margins in 2012 versus 2011. Project 30, as I mentioned, that's a enterprise-wide cost reduction initiative that we commenced in the middle of 2011. We took out $20 million of cost in 2011. We targeted $60 million in 2012. We captured $62 million of the $60 million target, so that was a real success there. Most of those savings related to reductions in corporate overhead functions, as well as the technology infrastructure area.

We drove our cash flow and our EPS, as I mentioned there before. We also took down our debt. We used some of our free cash flow to reduce our leverage by about 1 turn from 3x leverage from an EBITDA-to-debt perspective down to 2x, and the share price reacted accordingly.

We also importantly for the future, one of the extensions of Project 30 program is what we call the Technology Transformation Initiative. We signed a 7-year deal with Dell Appro to take our infrastructure. We have 2 very large data centers, one in Southern California, one in Texas. And we're in the process of moving those to a private cloud in a Dell facility, and that will be completed at the end of 2014. Once we do that, we'll take our infrastructure spending from $120 million a year down to about $80 million a year. So a significant reduction in our infrastructure spend as we go forward leveraging the Dell partnership.

We put in a one CoreLogic front end of the business. So our sales and marketing used to be done by individual business units, now be done across the company led by a senior executive of the company. And we expect that this unified approach will allow us to access white space and to leverage our product offerings across in a much better way across the market and help us to grow organically.

And last but not least, we acquired CDS Mapping in December. That is -- it was a leading geospatial company, very complementary to our organic business to help us scale up that business going into 2013.

Our focus in 2013 will be to continue to grow our Data and Analytics by double digits. We are going to continue to outperform our market, which we did in 2012. We took a lot of share on mortgage origination and our asset management businesses in 2012. We expect that trend to continue. One of the big growth drivers for CoreLogic is the compliance infrastructure in the mortgage market. There's a lot of new regulation our clients are working to try to understand it and to be able to handle the new regulatory environment. Our data and our services help our clients to do that. So we're seeing a significant growth in 2012 and expect the same in 2013 around compliance and leveraging these service businesses.

Operational excellence, as it was in 2012, continue to be a focus. Our Project 30 remaining savings target of $20 million is supported by actions that really were taken toward the end of 2012, so expect to realize that $20 million of savings in 2013, and then use that -- a lot of that money to reinvest to get the Technology Transformation Initiative further along in its progression.

We expect to end the year with an exit rate of 30% EBITDA margins. That was the goal that we set 2 years ago when we originally launched Project 30, and we're tracking quite nicely along with that target. Our EBITDA margins in 2012 by comparison were a little under 29%. So we have about 130 basis points to go to get to the 30% margin.

Free cash flow, we did 62% of EBITDA in 2012. We have a target of 50% in 2013, and we expect to meet or exceed that target. And with that, we will continue to strengthen our financial flexibility. We have a publicly stated goal of buying back at least 3 million shares to continue to return capital aggressively to our shareholders. And we expect through that combination of that and the profit growth to drive our earnings per share at double-digit rates in 2013.

These are our guidance numbers. So you can see despite the fact that we expect there to be a slight decline in the mortgage origination market in 2013 compared to 2012. In 2012, the mortgage market from a dollar volume perspective was about $1.8 trillion. Our guidance is based at $1.5 trillion. So importantly, you can see that we do, despite that, we expect to grow our top line and our profitability in 2013 through a combination of all the efficiency numbers that I spoke of earlier, as well as things like the geospatial growth, the compliance growth, the mid-market growth and other growth initiatives that we're focused on. So pretty solid top line, bottom line and EPS growth projected in 2013.

Just to summarize on the model that CoreLogic is changing. A lot people ask me how exposed CoreLogic is to origination swings and transactional volumes. We're becoming much less so with every quarter, and that's why I think we're able to provide guidance in 2013 that does show positive growth despite the fact that originations will be down slightly or projected to be down slightly. And the reason -- the way we're doing that is through becoming progressively more of a data and analytics centered company. As I mentioned, we have a goal in the next 3 years to get the total mix up to 50% or greater.

We continue to drive the efficiency in our servicing businesses. What we've done is we've actually taken our Mortgage Origination business, which is about 40% of our revenue and make sure that, that business can make at least 25% EBITDA margins in a $1 trillion to $1.1 trillion market, which we believe to be a fairly severe trough market and hopefully, something that we won't test, but want to make sure that those businesses can generate hefty profits despite a trough market. And we're well along in that trajectory.

Project 30, we mentioned, fundamentally reshaping the cost structure. The Technology Transformation Initiative follows on from Project 30, not only yields the $35 million to $40 million of savings I talked about beginning 2015, but it also becomes a platform for growth. As part of that project, we are putting all of our data assets into one central data warehouse with an aggregation engine and a decision-support engine that sits on top of the data warehouse, and then that's delivered through a one CoreLogic portal. That will make our products and service more accessible to the mid-market and the mass market than they are today, and we think that's a significant growth opportunity for the company as we head out into the future.

And finally, with the predictable strong free cash flow that CoreLogic generates, we'll continue to improve our capital structure, as well as put the money to work in terms of returning capital to shareholders and reinvesting in the company.

Just briefly, I mentioned Data and Analytics, why do we want to be more than 50% of our revenue? As you can see here, in 2009, the mortgage market was $1.9 trillion. In 2011, it was $1.4 trillion. So that was a significant decline, and you can see that this segment grew despite that decline. It has long-term contracts, syndicatable revenue streams and highly, highly embedded data and analytics in our clients' workflows. So that's something that makes this segment highly predictable and very attractive for us and one that we'll continue to grow through organically, as well as inorganically.

Mortgage Origination Services, 40% of our revenue. The game is efficiency and scale, and you can see what we've achieved to date. We'll continue to drive a similar automation efficiency as we go forward, but you could see the margin expansion. If you dial back to the end of 2011, this was in the low 30s. We're around 40% for the year in 2012. And we expect to continue to automate, particularly our tax operation, where a couple of years ago, we had about 2,000 people; today, we have about 1,500. We expect that kind of trend to continue as we come -- we become more mechanized and more automated.

Project 30 has been a big success for the company. You can see the $100 million target. We got $20 million to go. We think we're going to get there with the actions that are currently in flight, and this is something that has taken out a lot of cost and has made the company fundamentally more efficient and a higher margin.

This just gives you a quarterly split for some of the revenue and the profitability trends for the company. And you could see there, they've all trended in the correct direction, and we expect these to continue into 2013.

So in summary, CoreLogic has been on a transformative journey. I think we achieved record results in 2012. We head into 2013 with a very focused set of businesses that are market leaders in their respective areas, generating strong cash flow, putting that to work to return money to our shareholders, as well as to reinvest for profitable revenue growth in the future.

So with that, I will turn it over for any questions.

Question-and-Answer Session

Unknown Analyst

Frank, over the past few years, you've realigned some of the businesses. You've expanded your presence in Data and Analytics. Do you think all of your current service offerings are core to the future of the company? And then maybe you could elaborate a little bit on expanding on the international front again.

Frank D. Martell

Okay, sure. So in terms of core operations, clearly the focus is on Data and Analytics, first and foremost, followed by Mortgage Origination. We think those are great businesses and ones that we really have clear market leadership. On the AMPS side, we are working primarily on margin expansion in that segment. It's a diminishing part of our total revenue. The default area and the problem loan area is one that the market itself is shrinking, and we expect that to continue as the shadow inventory dissipates. We're seeing a work-off of the shadow inventory as house prices stabilize, taking pressure off some of the distressed borrower. So that's an area that we want to play in a focused way. We have been exiting some small product lines and some small business units in that segment, probably we'll continue to do that. The game there is to get the margins consistently over 20%. It generates a reasonably good cash flow. It's a relatively low CapEx-type environment but very focused on specific clients and specific engagements there. So that would be in terms of the big focuses on Data and Analytics and Mortgage Origination. And in terms of international, CoreLogic has a lot of opportunity. Geospatial, for example, is a business that has a relatively infrastructure-light footprint but high, high value. We have a lot of interest in that service across the Asian markets, as an example, where flooding and storm surge is a big issue and other natural disasters are a big issue, so modeling that. We have just signed a joint venture in Japan related to MLS, our MLS business and the workflow solutions. That's a country that did not have an MLS structure. It's putting one into place. So we have a lot of opportunity in Asia. We bought RP Data in Australia a couple of years back as a platform to expand into Asia. It gives us scale. That's a business that's about a $70 million, $75 million business, highly profitable. It's a clear market leader in Australia and New Zealand that has, from a geographic proximity standpoint, good visibility into Asia. So we're looking at the Asian markets, China, Japan, Hong Kong, Singapore as the primary focus areas. I think the international piece, particular Asia and Latin America are high value. CoreLogic has operations in the U.K., Canada, Mexico, as well as Australia and New Zealand at the present time. So we do have an international footprint, but the focus from a revenue perspective is primarily North America.

Unknown Analyst

Any other questions?

Unknown Analyst

Talk about [indiscernible].

Frank D. Martell

Yes. So CoreLogic doesn't -- it doesn't make any difference from us from a revenue perspective, whether it's a refi or a purchase, a new purchase. So we are benefiting from the refi wave. In terms of the trajectory of the origination market, we can see pretty with very good clarity to the middle of this year. Our volumes have been running pretty strong, so we feel pretty good about the mortgage market from an originations perspective going into at least the middle of the year. We expect our guidance really calls for a gradual decline in the refi activity as we get out into the latter part of the year. I think that's consistent with most other forecasts. The real question at this point is the purchase market. We've seen some pickup in certainly the application side of the purchase market, and there's signs of hope that, that will continue. But the question is when that will -- that trend will pick up sufficient to offset the refi activity, which will probably be in the 2014-'15 time frame versus 2013. There are a lot of people that are more optimistic than we are about the mortgage market in 2013, but we're trying to make sure that we set the business goals around what we think is a relatively prudent origination market, so -- which is about $1.450 trillion.

Okay. Well, thanks for your time. We have 1 second left. So appreciate it, and have a great conference.

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