CoreLogic's (CLGX) CEO Anand Nallathambi on Q2 2014 Results - Earnings Call Transcript

| About: CoreLogic, INC. (CLGX)

CoreLogic (NYSE:CLGX)

Q2 2014 Earnings Call

July 24, 2014 11:00 am ET

Executives

Dan Smith -

Anand K. Nallathambi - Chief Executive Officer, President, Director and Member of Acquisition Committee

Frank D. Martell - Chief Operating and Financial Officer

Analysts

Darrin D. Peller - Barclays Capital, Research Division

Bose T. George - Keefe, Bruyette, & Woods, Inc., Research Division

Kevin D. McVeigh - Macquarie Research

Glenn Greene - Oppenheimer & Co. Inc., Research Division

Geoffrey M. Dunn - Dowling & Partners Securities, LLC

Alexander Veytsman - Monness, Crespi, Hardt & Co., Inc., Research Division

Alexander Veytsman - Barclays Capital, Research Division

Brett Horn - Morningstar Inc., Research Division

Operator

Good day, ladies and gentlemen, and welcome to the Second Quarter 2014 CoreLogic, Incorporated Earnings Conference Call. My name is Esteban, and I will be your operator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference over to your host for today, Dan Smith.

Dan Smith

Thank you, and good morning. Welcome to our investor presentation and conference call where we present our financial results for the second quarter of 2014. Speaking today will be CoreLogic's President and CEO, Anand Nallathambi; and CFO, Frank Martell.

Before we begin, let me make a few important points.

First, we have posted our slide presentation, which includes additional details on our financial results, on our website. Second, please note that during today's presentation, we may make forward-looking statements within the meaning of the federal securities laws, including statements concerning our expected business and operational plans, performance outlook and acquisition and growth strategies and our expectations regarding industry conditions. All of these statements are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. For further details concerning these risks and uncertainties, please refer to our SEC filings included in the most recent annual report on Form 10-K and subsequent 10-Qs. Our forward-looking statements are based on information currently available to us, and we do not intend, and undertake no duty, to update these statements for any reason.

Additionally, today's presentation contains financial measures that are non-GAAP financial measures. A reconciliation of these non-GAAP measures to their GAAP equivalents is included in the Appendix to today's presentation. Finally, unless specifically identified, comparisons of second quarter financial results to prior periods should be understood on a year-over-year basis, that is in reference to the second quarter of 2013.

Thanks. And now let me introduce our President and CEO, Anand Nallathambi.

Anand K. Nallathambi

Thank you, Dan. Good morning, everyone. I will lead off the call today with an overview of our second quarter operating results. I'll then touch on market conditions and the challenges and opportunities they present, and conclude with an update on our strategic imperatives. Frank will cover our financial results, and we'll end the call with Q&A.

CoreLogic delivered strong operating results in the second quarter, and we continue to execute on all our major elements of the strategic business transformation program. We grew overall revenues modestly despite a sharp decline in U.S. mortgage volumes.

During the quarter, our Data & Analytics group grew at a double-digit rate and contributed just shy of 50% of the company's total revenues. Our focus on expanding international and insurance vertical revenues was a major driver of the 14% year-over-year growth in this segment. We also continued to benefit from the durability of our core Property Information and workflow solutions, which are an integral part of our clients' daily operations.

Our Technology and Processing Solutions segment continued to significantly outperform its core markets as we gained market share and capitalized on the benefits of scale and operating leverage. The development of new offerings and expansion of revenues outside the mortgage vertical also helped to reduce the impact of lower U.S. mortgage activity.

Over the past 3 years, we have significantly improved our automation and service delivery in the TPS segment. This has enabled us to deliver adjusted EBITDA margins in TPS above our long-stated target of at least 25% in a $1 trillion originations market. As is well known, the U.S. mortgage market has been undergoing a major reset from the refinance to a purchase-driven cycle. This reset has been gathering steam since the middle of 2013. Purchase transactions accounted for approximately 60% of total originations over the past 6 months compared with the 30% in 2013, as refinancing volumes fell about 70%.

Over the first 6 months of this year, we estimate that mortgage volumes were down about 50%. In fact, many of our major clients are reporting significantly higher volume declines because of their concentration in the refi market. Many firms have also constrained their mortgage activity in response to regulatory risk and uncertainty and capital limits on MSRs introduced by the Basel standards.

In our earnings release issued last night, we indicated our belief that the U.S. mortgage volume should trough in 2014 around $1 trillion. This is 10% lower than our projections going into 2014. Looking forward, we expect the U.S. housing and mortgage markets to stabilize and begin to rebound in the next 12 to 18 months, driven by fundamental factors such as economic growth and job creation.

Despite the headwinds faced by the housing and mortgage markets, the global real estate economy represents an enormous opportunity for efficient, content-driven data providers. The need for property-level data insights has never been greater as market participants look to manage their risks and capitalize on the opportunities provided by the eventual recovery in the U.S. housing market and the overall global economy.

Over the past 3 years, we have transformed our business in anticipation of this historic reset in the mortgage market. We have scaled our core businesses and focused on expanding our unique insights: data, analytics and data-enabled workflow solutions to enable our clients to succeed and grow in this challenging mortgage market. We've also invested in our operations and technology platforms, reduced costs by over $100 million and repurchased over 20% of our outstanding common shares. As we look forward to the balance of 2014 and next year, we will continue to execute against our strategic plan.

I will now discuss some of the more significant initiatives we're working on. Revenue mix is an integral part of our long-term strategic plan. We're reshaping CoreLogic into a more diversified data-driven subscription-based model built around our ability to generate unique property-level insights. The recent acquisitions of MSB, EQECAT and DataQuick are major catalysts and will add new and complementary capabilities and data sets and expand our reach into insurance and other new business verticals.

Over the past few years, we have carefully scaled our international business. The company's international footprint is built around our Data & Analytics capabilities, much of which is leveraged from our U.S. operations. For the first time, we expect international revenues will exceed $100 million in 2014, propelled by growth in the real estate market in Australia and New Zealand.

one of our principal long-stated strategic imperatives is to generate more than 50% of our total revenues from D&A by 2015. We almost achieved this threshold in the second quarter by leveraging our expanded footprint in insurance, spatial solutions and international. These non-U.S. mortgage-related revenue streams totaled almost $60 million or roughly 17% of our total revenues in the second quarter.

We believe that the current troughing of the U.S. mortgage market presents a significant future growth opportunity for CoreLogic. Our past focus on driving scale and market leadership in our TPS units, especially payment processing, credit verification and flood services has positioned us to drive high-margin revenue gains from any rebound in mortgage volumes.

Similar to D&A, our TPS teams are focusing on growing our mid and mass market revenue. This has been a multiyear effort and is bolstering our relative performance versus the market, as these mid and mass market firms have gained share in a purchase-driven cycle.

In addition to growing and diversifying our revenue streams, we continue to strive for operational and technological excellence. In 2014, our focus is squarely on transitioning our data centers, integrating acquisitions and driving towards first-quartile benchmarks and back-office costs. In the first half of this year, we successfully transitioned about 50% of our technology platforms to Dell, in line with our TTI program, and launched our first product application on our next-gen technology platform. We also completed the integration of Bank of America's tax and flood operations and reduced operating and overhead costs by $17 million.

In closing, I believe CoreLogic has delivered strong results so far in 2014 and is well positioned to capitalize on a significant number of growth opportunities across our core business operations in the years ahead. We continue to transform our business model, based on a focused strategy that leverages the company's unique data assets, the market-leading position of our analytics and the scale of our data-enabled servicing businesses.

I'd like to thank our clients, employees and shareholders for their continued support. The entire CoreLogic team is excited by the opportunities presented by our ongoing business transformation and by the prospect of delivering outstanding results in 2014 and beyond.

With that, I'll turn the call over to Frank.

Frank D. Martell

Thanks, Anand, and good morning, everyone. Today, I'm going to discuss our second quarter financial results and update you on our progress with regard to a number of major operational areas. I'm also going to discuss our 2014 guidance and capital management priorities.

As Anand discussed, CoreLogic had a very solid second quarter from both an operational and a financial point of view despite a challenging set of conditions in the U.S. mortgage market. We believe that our ability to consistently outperform market trends, maintain and, in some cases, expand margins, and generate strong cash flow, despite the lowest mortgage market in 15 years, is a clear validation of the successful execution of our strategic transformation program.

During the second quarter, we continued to take aggressive actions needed to secure major value creation catalysts for this year and next. We believe the continued transformation of our business operations will position us to capitalize on the opportunities presented by the eventual rebound in the U.S. housing and mortgage markets.

In terms of second quarter results, notable highlights include: Positive revenue growth and market outperformance; the emergence of our insurance, spatial solutions and our international operations as significant contributors to our overall business mix; the delivery of 27% adjusted EBITDA margin; the completion of the integration of Bank of America's tax processing operations; and finally, the overachievement of our cost savings, free cash flow and debt paydown targets.

Second quarter revenues totaled $349.4 million, a modest increase from prior year levels as share gain, organic growth and acquisition-related revenues offset the impact of lower mortgage volumes. D&A revenues increased 14% to $174.1 million fueled primarily by growth in insurance, spatial solutions and international operations, which grew 85% and accounted for 35% of the total segment revenues in Q2. The recent addition of Marshall & Swift/Boeckh and DataQuick, market-leading firms that benefit from data-driven subscription-based models, should provide strong growth in D&A over the course of 2014. Our teams are already hard at work leveraging expanded client base, exploring new and innovative data, analytics and data-enabled services, and integrating operation back-office functions.

Our core Property Information, the real estate workflow solutions units, delivered solid results despite market headwinds. Revenues in our mortgage-related analytics and advisory businesses declined on lower loan application volumes and our exit of a non-core product line. Multi-family tenant screening and specialty credits revenues declined as lower renter turnover and ongoing regulatory pressures impacted their respective markets. TPS revenues decreased almost 11% to $177.3 million as the benefit of market share gains were more than offset by the contraction of mortgage volumes and lower project-related document processing or retrieval revenues.

Each of our major business units, tax services, flood zone determination and credit, outperformed their respective markets. Our property tax payment processing business, which represented 46% of total segment revenues in Q2, grew 5% year-over-year. In terms of profitability, in addition to revenue and mix management, our focus on operational excellence and productivity has been instrumental in helping CoreLogic drive margins and reduce the impact of the current dislocation in the U.S. mortgage market.

We announced late last year that we were targeting to reduce cost by at least $25 million in 2014. During the second quarter, we achieved $10 million in savings related to this program. As we move forward, we will continuously calibrate and adjust our cost-reduction target in light of mortgage market trends.

One of our single largest opportunities for reducing cost going forward lies in the completion of the TTI. Our main focus in 2014, as it was in 2013, is on consolidating processing platforms and transitioning our current legacy data centers and applications to a private cloud-based environment. As Anand mentioned early -- earlier, we are successfully commenced moving our systems to Dell's Quincy, Washington facility. The transformation of CoreLogic's IT infrastructure is an integral part of our long-term strategic technology plan and is expected to substantially lower our cost profile beginning in the second half of 2015. Importantly, the TTI will also provide a platform that enables future growth.

As we detailed in our earnings release, operating and net income from continuing operations and adjusted EBITDA for the second quarter included costs related to the implementation of our strategic transformation program. These included severance, acquisition-related costs, TTI investments and stranded AMPS costs.

Operating income from continuing operations totaled $42 million for the second quarter compared with $47.5 million in the second quarter of 2013 and $13.7 million in the first quarter of 2014. The 11% year-on-year decrease in operating income was principally the result of lower mortgage volume and strategic transformation program costs, which totaled $17 million in Q2.

Net income from continuing operations totaled $25.2 million compared with $32 million in the second quarter 2013 and a net loss of $3.9 million in the first quarter of this year. The decrease in net income compared with 2013 was mainly due to lower mortgage volume and the transformational charges I just discussed. Adjusted EPS totaled $0.36, which represent a 25% decrease from the same 2013 period, reflecting lower mortgage volumes and transformational expenses, which more than offset the benefit growth in D&A and share repurchases.

Adjusted EBITDA totaled $94.1 million in the second quarter compared with $111 million last year and $64 million in the first quarter of 2014. The decline from 2013 levels was attributable primarily to the impact of mortgage market headwinds and transformational program costs, which offset growth in insurance, spatial solutions, international, as well as cost productivity upsides.

D&A-adjusted EBITDA totaled $56.7 million, an 11% increase from the second quarter of 2013, as the impact of acquisitions, organic growth in insurance, spatial and international operations more than offset lower mortgage volume as well as declines in specialty credit and tenant screening. EPS-adjusted EBITDA decreased 37% to $47.2 million in the second quarter, driven primarily by lower U.S. origination volumes and BofA integration costs.

I will conclude my prepared remarks today with some color around capital allocation and our financial guidance. In terms of capital allocation, our priorities remain to fund disciplined reinvestment, return capital through repurchase of our common shares and to progressively reduce our debt levels in line with our long-term leverage targets.

During the second quarter, we generated $90.5 million of cash flow or approximately 96% of adjusted EBITDA. Second quarter cash flow benefited from improved operating results, collection efficiencies and the timing of certain tax refunds and collections. Our year-over-year cash flow conversion rate is 52% of adjusted EBITDA. On a trailing 12-month basis, as of June 30, 2014, our free cash flow was 60% of adjusted EBITDA.

For all of 2014, based on latest trends, we expect free cash flow conversion rates to range between 40% and 45%. Over the longer term, we are continuing to target conversion rates of at least 50% of EBITDA, based on normalization of mortgage volume, benefits from the high free cash flow contributions of MSB and DataQuick, and improved cost and tax efficiencies.

In line with our ongoing commitment to reward our shareholders and build financial flexibility, we repurchased about 850,000 of our common shares and paid down $51 million in debt in the second quarter. We expect to continue to pay down debt and complete our full 2014 share repurchase plan by year-end.

Regarding 2014 guidance. Based on current and projected market conditions, we have reduced our estimate of the U.S. mortgage volume by approximately 10% to $1 trillion. We are also forecasting lower discretionary spending by many clients based on first half trends.

As a result of these market headwinds, we have adjusted our 2014 guidance. For the full year, we expect to generate revenues of between $1.33 billion and $1.37 billion, adjusted EBITDA of between $335 million and $360 million and adjusted earnings per share of $1.25 to $1.40.

With regards to the third quarter of 2014, based on current volumes processed within our mortgage-related businesses and normal seasonality, we believe that adjusted EBITDA in the third quarter should range between second quarter 2014 and third quarter 2013 levels.

In closing, we are continuing to transform our business into a more subscription-based model, underpinned by unique property data assets, analytical capabilities and data-enabled services. We believe that CoreLogic has delivered a strong operating performance over the first half of 2014 and that we are well positioned to capitalize on the eventual rebound in U.S. housing and mortgage.

Thanks very much for your time today. I'll now turn the call over to the operator to kick off the Q&A session.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Darrin Peller with Barclays.

Darrin D. Peller - Barclays Capital, Research Division

I just want to start off with your guidance and trying to break it down a little more. When I -- when we look at the expectations going to the second half of the year, coming off a quarter that was relatively in line with your prior expectations, maybe just a little bit shy, you're talking about dropping it by the $25 million overall range, which obviously is I know correlated to originations. But I guess, number one, I mean when we look at the costs coming out of the model still, right, as we progress through the year, you should have materially less in terms of onetime items that were included in this quarter, for instance. And yet your guidance for us for third quarter seems like it's only calling for somewhere in the high -- just under $100 million of EBITDA. Wouldn't the cost coming out alone get you to a much higher number than that, especially when you add into that the seasonality in third quarter? So first of all, if you could start off a little bit more -- explain with a little bit better of an explanation as to why we wouldn't have much better than $100 million third quarter guide? And then maybe give us a little more color on why you really think that the second half of the year is worth -- is going to be $25 million -- worth $25 million less of EBITDA.

Frank D. Martell

Yes, I think -- Darrin, this is Frank. So first of all, I think implicit in the guidance is the $25 million to $50 million roughly increase in the run rate of EBITDA first half to second half. So there's an acceleration in EBITDA based on, I think the -- some of the factors you've mentioned. Of course, the $25 million in cost savings was embedded in the original guidance. So we expect to do a little better than that, but it won't be material enough to offset the 10% projection in mortgage volumes. In addition, I think that we've seen clearly that at these extraordinarily low levels of mortgage activity, our ability to cut cost to compensate for those volume declines, this late in the year, diminish. So I think you have to also factor that in. I think we are projecting a stronger finish to the year. I think we are expecting some of these costs to decline, like obviously, we're through the BofA integration. That was a significant cost, so that will come out. We are also -- implicit in our guidance is a return to seasonality trends that we haven't seen for the last couple of years due to the refi boom. So you have to also factor that when you shape the year in terms of how the EBITDA is going to play out. So I think the biggest reason for the guidance, the caution in the guidance, hopefully we're being very, very cautious and prudent on the guidance. But we expect that, that sets a prudent baseline to plan off of as we look at running the business going forward.

Darrin D. Peller - Barclays Capital, Research Division

Okay, I mean but even just breaking into that for a little more -- for just one more minute on the quarter itself. I mean, I understand, it sounds like what you're saying is as the year goes on, you have more costs that are coming out in terms of the -- what I mean by cost, I mean in terms of the onetime items, you're going to see reduced onetime items as the year progresses. Maybe that makes fourth quarter a little bit better versus third than normally, and also not as much seasonality as typical. However, again, still, I mean just looking purely at the costs or the onetime items being reduced when you look at whether it's the integration costs or the incremental severance or the reduced severance costs alone, wouldn't that get you just from second quarter to third quarter levels without even adding any seasonality in the quarter? So is it just that much conservatism around the underlying mortgage market sequentially not improving at all?

Frank D. Martell

Well I think you have to look at things like -- we talked about the discretionary pattern of some of the project costs as well in the project-related businesses. So I think there are swings and roundabouts. I mean, clearly, I think we want to make sure that we're -- we set the business based on a prudent view. And then we also have a number of factors like TTI that could have timing-related issues. So I think that the guidance tries to factor all of that in. We are in some kind of acceleration. One of the other things I think obviously that was, I think, impacted the second quarter, was we had -- as I think the broader industry, it felt like there was going to be surge in volumes coming out of the first quarter, which was really low. I think we saw a pickup, but that wasn't towards -- until the latter part of the quarter in terms of volumes really picking up. We're seeing that pickup continue in the early phase of the third quarter. But I think it just pays to be a little bit more cautious given the volatility of the market and the sensitivity of the market, as well as -- not to mention all the things that clients are wading through as it relates to the regulatory side, which is making people really fairly herky-jerky and cautious.

Darrin D. Peller - Barclays Capital, Research Division

Okay. And just quickly on the way up, in other words, as the mortgage market were to potentially improve, is there going to be a similar -- should we expect a similar pass-through with respect to incremental margins? Because obviously, it's been much higher than the traditional $25 million revenue, $50 million EBITDA. We're seeing it more like a $25 million EBITDA sensitivity. So let's say we go back to $1.2 trillion, is there any reason why it would not be $25 million per $100 billion of originations for the -- at least the initial couple of hundred billion up?

Frank D. Martell

Yes. I mean the great thing is I think we are positioned to deliver a high incremental margin back up on the upside for sure, which is good news. And then the one other thing I would say, Darrin, is that as we talked about in the past, we always talk, for simplicity purposes -- we always talk in terms of dollar volumes of originations. Clearly, there's been price escalation in housing over the last couple of years. So from an actual volume of transactions' perspective, we've absorbed a slightly higher percentage decline than the dollars would indicate. So I think all that considered, I feel really good about where the cost structure is and will be after we get through the data center migration, which is coming fairly quickly now. So we're poised to really capitalize significantly on every dollar of volume as the market returns to at least a more moderately depressed debt level than the trillion, which we expect to happen in the -- I mean...

Darrin D. Peller - Barclays Capital, Research Division

Can I just ask one quick follow-up on Data & Analytics, and then I'll turn it back to the queue. The growth rate, when we look at the organic growth it, backing out the acquired revenue from MSB along with some of the other businesses you've acquired, we get to a number that's down 6%. And even if you were to back out mortgage, it's still relatively flat. And so I guess I just want to understand what you think this business should really be in terms of the growth profile, right? I mean, even if you back out the mortgage sensitivity and assume that's, let's say, flat or up a little bit -- I mean, do believe this business still should be a mid- to high-single digit growth business over the course of the next few years, assuming a normalized mortgage market? Or can you give us a little color as to what the moving parts were that really is inhibiting that business from organically growing faster?

Frank D. Martell

Yes. I mean, I would say that obviously, the harshness of the decline in the mortgage activity and the fact that most of the bigger clients are hunkering down in terms of spending, as you'd expect them to do, because that's had a cascading effect across D&A, particularly in the core property area. I mean, we're doing -- let me explain this, we're doing a lot of things that will generate future benefit on the top line in terms of the integration and product development and actually fusing different data sets from across the organization for greater monetization. So I think we have enough irons in the fire that I'm pretty confident that the upper single-digit numbers that we've been talking about over the last year or 2, I think are valid. We talked about this year not expecting a lot of organic growth until we move through the balance of the year. So I would expect, with the mortgage market stabilizing, as Anand mentioned, and improving into '15, that we'll start to see positive organic growth picking up and then returning to those kinds of levels that we saw pretty consistently in the 2009 through '11, '12, '13 period, that has clearly tailed off the last couple of quarters. But I think the fact that we've held our own with organic growth kind of flat in a 50% down market, that is really impacting the industry, is not where we wanted to be, but certainly I think a very, very strong result.

Operator

Our next question comes from Brett Huff with Stephens Inc.

Unknown Analyst

Fred [ph] in for Brett. Just to follow up a little bit on the last question that was asked about D&A. What was the D&A organic x mortgage growth in 1Q? We think it's kind of in the 2% range. And then by our math, the second quarter was about flat x mortgage. Is that kind of right? And then what were the drivers of the sequential deceleration in D&A, if those numbers are sort of correct?

Frank D. Martell

Yes. I mean think when you're talking about the difference between 1% or 2%, it's a relatively small dollar amount. But we've had a few non-mortgage related items, and I'd say that your percentages are roughly correct. I think we had a small growth in the first quarter and kind of a flattish scenario. Part of the issue clearly that's non-mortgage related that's been impacting the company -- actually for some period of time, but the impact has been accelerating, is we have a small business in the payday lending area, which has been under siege from a regulatory perspective. So we're seeing a continued compression in the market volumes there that have shaved off a couple million dollars of growth over time. So that's one factor. I think the discretionary spending in some of the advisory areas. The other thing is we have -- we've exited a, we call it a non-core product line. It's an advisory business that we had in the D&A area that we've exited because of the profit characteristics and growth characteristics. But it did generate a significant amount of revenue last year that's not resident this year as well. So part of the organic growth is that, that exit in that product line, which -- where we actually didn't make any money. So that's the -- I think the right move for us to do, but it has clipped the organic growth profile. So those factors really are driving those minor changes. I think broadly speaking though, the flat type of organic growth that we're seeing in the first half of the year, we expect again to pick up as we move forward and get through some of these more modest tailwinds and the mortgage market starts to pick up and clients get their balance around regulatory situation and feel more confident in the trajectory of their businesses.

Unknown Analyst

Okay, that's helpful. And then on the TPS segment, you had mentioned that there might be some additional efficiencies in the tax business. Can you just give us some info on that kind of relative to the lower guidance that we see now? Is there any work there that might give us a lower cost base as we move into '15? And just kind of how should we think about that?

Frank D. Martell

Yes. I mean I think there is terrific opportunities, especially in the data collection area, where we have a number of initiatives around -- we're still consolidating data capture organizations across the company where we've traditionally done a fair amount of that work in silo. So as those come together, we expect it to see some fairly significant efficiencies, as well as the continued automation of some of the payment areas around some of the counties that we deal, where they have traditionally have been manual. So I think there are significant benefits there. As regards to this year, there's just not enough time to see a significant reduction from those types of -- currently in flight-type initiatives. We are working, as you can see implicit in the Project 30 numbers that we talked about, we're running a little bit ahead. Hopefully, that will continue to benefit us. I think that the fact that we're at 20 -- 26%-plus margins in that business, I think it's pretty darn good given the $260 billion, $270 billion of mortgage volume in the second quarter. So overall, we feel pretty good. There are definitely upside potential in the areas I discussed. I think all the other things that are currently in flight -- TTI, as I mentioned, will come onstream in the middle of next year. And that's a $30 million-plus the opportunity for -- on a full year basis to reduce the technology-related costs.

Operator

Our next question comes from Bose George with KBW.

Bose T. George - Keefe, Bruyette, & Woods, Inc., Research Division

As I look forward to bridge to 2015 EBITDA, can we strip out the $25 million of onetime? And also, just in terms of the $25 million from the TTI cost saves, how much of that is already benefiting your 2014 EBITDA number?

Frank D. Martell

Yes. So just to be clear, the $25 million of cost did not include the TTI investment. So there's a -- there's just a nuance there, Bose, but I think you know that part of it. We've seen, in terms of the call-outs, those items, we see clearly that we're now past the BofA integration costs, which were roughly equivalent year-over-year. We acquired that company in the middle of last year, so the integration of the 12 months is done. So that's a benefit over the second half of the year, a couple million dollar benefit for us as we go forward this year. And then clearly, we won't have that cost next year. So that's a strong benefit for us next year. Roughly, just roughly $10 million a year was spent on integrating, so that will come out fully next year. And then we have -- we do have some additional integration costs related to MSB and DataQuick, but they are relatively smaller, which are falling in primarily the second half of this year that won't be in next year. So between those 2, you're talking about $10 million to $12 million of costs coming out for next year. I think we'll have -- we have some ancillary other costs. I think the AMPS flowbacks, we expect to reduce a couple of million next year as well. So we'll get the benefit of those. The TTI spending will continue, I think, in line with the current rates through really the middle part of next year. And then they will abate -- and then we'll have some offsets there with the next-gen platform that we're -- that's underway. So I wouldn't expect a material year-over-year change in the cost structure as it relates to investment in TTI. But you will see the run rate savings that we talked about, really the $3 million a year, next year in terms of the operation of this data center. So that's a benefit next year as well. So I think you'll see this year, second half will be incrementally better. And then next year, you'll see kind of a $10 million, $12 million related to integration costs not being repeated. And you'll see a halving of the investment in TTI, which is about $7 million, $8 million. That halving though will be offset by -- somewhat by the next-gen platform investment.

Bose T. George - Keefe, Bruyette, & Woods, Inc., Research Division

Okay. Great. And then just switching to the AMPS sale. Any update on that? And do you still think that can get done this year?

Frank D. Martell

Yes. We're in an active process right now. So we -- we're very optimistic that something will get done this year around AMPS. And we're looking at every option in terms of that sale of that. It's the entire division, so there's several pieces within the division. So we're looking at that. It's taking a decent amount of time as we suspected, because we want to make sure that we have an appropriate buyer for those assets. But I would expect at some point in the second half, we'll have some news on that.

Bose T. George - Keefe, Bruyette, & Woods, Inc., Research Division

Okay. And then finally, just can you characterize your outlook for acquisitions? Just how you're looking at that? What kind of things you're potentially seeing?

Frank D. Martell

I think the screen really remains consistent with what we've talked about. We're most interested in data sets, analytical capabilities that we don't already possess. Spatial is an area we are -- we've been particularly interested in, more from a bolt-on capability/addition perspective. We also are looking at -- if there's opportunities to continue to scale in the -- some of the TPS businesses, particularly tax and flood, either both -- either through assuming client-related operations or acquiring small players, those would be the areas that we're most interested in the -- and continue to be most interested in. I think that obviously, as I talked about it in my prepared remarks, we're also focused on reducing our debt and building financial flexibility, so you can continue, as we've said for some quite some time now, that we want to keep our leverage ratios in line with our long-term kind of 2.5-turn type measurement. So we want to bring the debt down over some elongated period of time. But bring the debt down progressively, and we will continue to do that. So we have to balance that with the acquisition, the quality of assets we're seeing.

Operator

Our next question comes from Kevin McVeigh with Macquarie.

Kevin D. McVeigh - Macquarie Research

If you could just explain a little bit in -- one of the things you said in terms of the guidance reduction, was expected reductions in discretionary client spending. What type of projects are you working on there? And from a margin perspective, are they consistent with the rest of the business? And just -- as you think about the buckets that you laid out, how would that kind of stack in terms of contribution to the guidance reductions?

Frank D. Martell

Yes. So I'd say, the 10% reduction in mortgage volumes is obviously the bigger driver. Because as we talked about earlier, we're seeing the margin compression related to that revenue is significant. So that's the biggest. I'd say most of the areas around discretionary would be a good example in our document retrieval area where clients would outsource some of that work. Now they're trying to find work for people within their organizations. So there's not as much outsourcing or they're delaying or deferring some of that activity. And that's the areas where we're -- we're doing loan file reviews. We're doing augmentation of data. That would be a good example. That's a fairly significant revenue stream for us. The margin profile in the discretionary areas would be not too dissimilar. The document retrieval area is a little bit less than the 27%, 28% margin. But in terms of some of the other areas around electronic data retrieval, some of the custom fulfillment around the data areas that are discretionary, those would be higher margins. But I'd say aggregated, it would be a little bit below, but not too far below our aggregate margin level.

Kevin D. McVeigh - Macquarie Research

Got it. And then Frank, I know you talked about some stranded costs over AMPS. How are we trending in terms of reducing them? Is it still at the same run rate it was in Q1? And how does that look for the balance of the year?

Frank D. Martell

Yes. So right now, Kevin, and again this is a little bit fluid. It's not material in terms of dollars because of the divestiture of those assets. But roughly, it's the same amount every quarter this year. It's about $2 million to $2.5 million a quarter. And that's in line with last year. So year-over-year, it's the same. Once it's clear, the sale process is clear and the manner in which those assets are sold is clear, then we can start to reduce that. I would expect we can reduce that in 2015 -- probably 25%, 30% hopefully next year.

Kevin D. McVeigh - Macquarie Research

Okay. And then just my final question. As we think about -- and I know '15 is a little ways out. But it sounds like we're kind of calling for a re-acceleration of originations at some point in '15. How are you thinking about the split between refinance and purchase? And what indicators should we look for to kind of give us a sense, "Okay, at this point, we are at an inflection point and we should start to see the trough and then ultimately some re-acceleration?

Frank D. Martell

Yes. I mean I think we're -- from a refi split perspective, I think we are -- we're similar, I think, to MBA. We're looking at -- it's dropping from that 65%, 70% last year to kind of 40% this year and down into the 30s next year, maybe the low 30s to mid-30s. So I think that progression is pretty clear. That could be altered a little bit depending on rates, but I think rates look fairly benign, so I think from that perspective. I think the interesting part to me is on the purchase activity. Because I think clearly we're seeing that's where the bulk of the activity is going to be going forward. There's a lot of cash purchase. One of the things that's restrained the purchase market from a mortgage perspective is the very high level of cash purchase that we've been seeing the last year or 2. 40% is pretty much double the normal. That's going to come down at some point, hopefully to the benefit of the purchase market. So that's a little bit of a kicker there. We expect to see growth in the purchase market going forward. Certainly, the economic indicators are positive and support that. So I'd say, as we talked about earlier, I mean I think the great news for the company, and Anand talked about it, we think the growth driver is the return to a more normalized mortgage market in the $1.3 trillion to $1.5 trillion level. And I think that we're capitalized to convert a lot of that revenue to profit as we go forward, and really from a starting point where last year the mortgage market was over $500 billion and this year, it's $275 billion. So from that perspective, we're not far away. We're almost the same EBITDA level at half the market. So we think that's a pretty good starting point to catapult off of.

Kevin D. McVeigh - Macquarie Research

Got it. And then lastly, is it the same sensitivity, Frank, in terms of originations? On the way back up, I know it was kind of for every $100 billion or so, it was $50 million incremental EBITDA? Does that hold or is it, given the way the business is secured now, it may be more accretive than that?

Frank D. Martell

Yes, I think initially, we expect it to be more accretive as it's been -- on the way down, it's been more impactful than the normal benchmark would be. So I think we expect initially to be highly accretive and then it will return more -- as we get more to that $1.3 trillion, $1.5 trillion, it will return back to the normal sensitivity that we have seen over the past several years. I would also say, though, Kevin, that as you know, we're materially less sensitive to mortgage in totality because the revenue mix is changing significantly. If you look at international and the insurance and spatial revenue streams, they're almost 20% of the total company from virtually nothing a few years back. So that introduced a new element where we're more -- we have different diverse revenue streams to rely on.

Operator

Our next question comes from Glenn Greene with Oppenheimer.

Glenn Greene - Oppenheimer & Co. Inc., Research Division

A couple more questions on the guide. Maybe just first on the $1 trillion mortgage market assumption. Sort of I think you sort of talked about $270 billion, $275 billion for the second quarter, which probably implies something like $500 billion or so for the first half, which would imply pretty modest assumptions for both 3Q and 4Q. So it just that felt -- feels conservative. So maybe you could help us understand what's your expectations are, specifically for the 3Q mortgage market? And then I've got a follow-up on that as it relates to your EBITDA references.

Frank D. Martell

Yes. I guess I -- at the risk of repeating the same estimate I had the last -- on the last call, I think we thought the mortgage market in the second quarter is about $300 billion. We think it's about $270 million in the second quarter. We think it's going to be probably in the $280 billion to $300 billion level in the third quarter and then dropping back to kind of $230 billion, $240 billion in the fourth quarter.

Glenn Greene - Oppenheimer & Co. Inc., Research Division

Okay. And then just sort of looking at the EBITDA guide, and this has been alluded to a little bit, but it looks like your new range, the high end of the range is basically your low end of the range before, and that $1 trillion was within the low end of the range. I guess I'm just sort of trying to understand philosophically how you thought about the guide. It almost feels like it's implausible that you get to the low end of the EBITDA range. Or what could -- I guess a better way to phrase it would be, what would have to happen for you to be at the low end of that new EBITDA range?

Frank D. Martell

Yes, I think that, that -- that's again mostly driven by the mortgage estimates that we have. So as I mentioned, we drive our numbers off of actual loan applications and closed loans, Glenn, versus dollar volume. So that down date's a little bit more significant for us from an actual revenue generation perspective, but not -- but I think that the things that we're looking at -- we're obviously trying to cut as much of our expenses as possible and maintain a low expense profile. I think we'll be successful in that. We're also obviously -- the TTI is a variable in this. We're almost -- we're over 50% of our systems have transitioned. We're in the critical phase there, so we need to spend the money required to get that done so we can unlock the savings. So, that, I consider more of a timing issue. But we're moving out of our Westlake, Texas facility in a couple of months, so we need to again spend the money to get that done. So there's a few items like that, that could swing us a little bit more pressure. But obviously, that would be a -- not a great scenario and not -- hopefully, not likely. But I want to make sure we capture that possibility in the range.

Glenn Greene - Oppenheimer & Co. Inc., Research Division

Okay. And then just one more question and this is simple logic. But if I just look at the insurance and spatial line, Q-to-Q kind of improved, grew $15 million Q-to-Q, which I assume is largely MSB. First of all, is that a reasonable assumption? And then if it is, it seems like it's sort of somewhat under the run rate that I would have assumed. Am I missing something there?

Frank D. Martell

You're right that it's mostly MSB. And I'd say that, from my perspective, MSB is almost dead nuts on what we thought it would generate. So I think it's not below our expectation.

Operator

Up next, we have Geoffrey Dunn with Dowling & Partners.

Geoffrey M. Dunn - Dowling & Partners Securities, LLC

First on the insurance line, is there any sort of seasonality we should be expecting there, particularly with the MSB product?

Frank D. Martell

No. MSB is more level-loaded. And I think maybe, just a point of clarification and may go to what Glenn had just asked about. As we bring these companies onboard -- MSB has a deferred revenue adjustment that's relates to the accounting around the purchase accounting. And so that may be what you're seeing is a little bit of a depressive effect on their revenues early. That will come back in next year. So that may be what Glenn is seeing in that initial quarter. But from a normal business operation, the revenues are subscription-based and end up [ph] loaded.

Geoffrey M. Dunn - Dowling & Partners Securities, LLC

Okay. Within D&A, can you provide the organic growth rate for the overall segment and maybe do the breakdown like you did last quarter, looking at market pressure, currency, et cetera? And then also, can you provide the organic rate for the Property Information segment, particularly?

Frank D. Martell

Yes. I mean I think we can do the -- a granular review and provide that probably on the website. But I think in terms of -- I think it's -- the overall D&A growth rates are what we discussed earlier, first quarter, 1%, 2%, 3%, and then the second quarter kind of flat overall growth rate.

Geoffrey M. Dunn - Dowling & Partners Securities, LLC

Okay. So you're doing the x the market, that 1.5% you gave last quarter?

Frank D. Martell

Correct. Correct, yes.

Geoffrey M. Dunn - Dowling & Partners Securities, LLC

Okay. And within D&A Property Info, what are the segments that are working, that are growing today? And what are the primary headwinds just in terms of either product or vertical or aspect of the market you're addressing? Just if you could get a little more granularity on the moving parts there.

Frank D. Martell

So Property Information, just -- it's some of the bigger buckets. So our data licensing business is a long-term subscription model. So from that perspective, the CoreLogic data licensing businesses is pretty steady. The DataQuick acquired business, as you know, we are bringing that into the company. We are setting up as part of our agreement with the FTC, a licensee. So there are some requirements under the agreement as it relates to setting up that licensee and helping them to get set up, that is creating some pressure around some of the DataQuick revenues. But I wouldn't say that's necessarily a market-related type of an area. International, as Anand mentioned, most of the international businesses are Data & Analytics business. A lot of it is property related records, that's up sharply this year from an organic perspective, particularly in Australia. And then I would say that the work -- workflow solutions business, which is driven, powered by the data, has been modestly up as well. So I think from a Property Information perspective, that component of the businesses held up pretty well. I think where we've seen some variation is in the query business, where clients query our database on a per-click basis. We have some minimums there, but some of the overages have been coming down as people cut back into the mortgage activity. So that's an area with a little bit of pressure. On the advisory area, that's probably where we're seeing some greater pressure, more discretionary in nature. But using information to do -- derived analytics and derived analysis, et cetera, that, that's an area that we've seen some cutbacks in.

Geoffrey M. Dunn - Dowling & Partners Securities, LLC

Okay. And within advisory, can you give us an example of a type of project there?

Frank D. Martell

So a client would want to go in and look at a loan portfolio for different characteristics, as an example -- a specific portfolio or value a specific portfolio or look at underwriting some types of aspect of underwriting against loans.

Operator

Next, we have Alex Veytsman with Monness, Crespi.

Alexander Veytsman - Monness, Crespi, Hardt & Co., Inc., Research Division

Just a quick question on the EBITDA to free cash flow conversion. I believe it was 52% for the first half of '14. So my question is do you expect it at 50% kind of for the rest of the year as well? I kind of understand that 50% is your longer-term expectation. But I believe during your last earnings call, you mentioned that it's going to be 35% for this year. So I just wanted to get more color around the conversion rate.

Frank D. Martell

Yes, we've actually -- we did refine our view of cash flow this quarter versus the last quarter. I think we've gone from the 35% to kind of the 40% to 45%. So we see the cash flow rate this year coming close to the 50% normal rate. The second quarter, as the first quarter was, we had some timing issues. We also had a few collections that are not going to repeat. We had some dividends and a few other catch-up type items that did help us in the second quarter that won't repeat. But, yes, we think a 45% or thereabouts is a pretty good figure for this year. But I think that we're pretty confident. The 50% has held for the last 3 years, and we're pretty -- we feel pretty good about that going forward.

Alexander Veytsman - Barclays Capital, Research Division

Got it, got it. And just one final question. Can you quantify the market shares or like the kind of market share gains or at least kind of provide more color for the TPS segment? And also, what are your expectations for the second half?

Frank D. Martell

Yes. We normally don't provide -- because they are obviously internal estimates. We believe that most of our businesses, the major businesses, have a greater than 50% market share in their respective areas. I think the market share gains in the tax business are the ones that we have talked about. And those, we've gone from loans in our portfolio from around $27 million up to about $35 million. So that gives you some idea of the -- our proportion of the total loans available in the U.S.

Operator

Our last question comes from Brett Horn with Morningstar.

Brett Horn - Morningstar Inc., Research Division

Yes. I just want to -- you mentioned it in your comments, that obviously, you guys would be leveraged to an improvement in market volumes. But I just want to get your sense of -- sales activity remains fairly weak. What specifically is holding it back? And what would need to change to get to more normalized levels on the purchase side?

Frank D. Martell

I think where we feel really good about, in terms of sales activities, is the mid mass market. That's been a focus the last couple of years, to try to develop those areas. We've traditionally had a lot of our volumes in the variable arch, mortgage originators and servicers. So that's something that we are seeing increasing traction on. And so that's an area that we feel good about. Conversely, I think that the bigger pressure's on the bigger lenders, not surprisingly, who did a lot of refi volume, that's come down much greater than 50% in the first half of the year. That's where we continue to look at white space. That's where when the volumes do come back, we'll benefit from that. But in the near term, that's where most of the pressure lies. I think we're looking at leveraging across the insurance vertical, where we can add data sets there that complement the existing, for example, MSB platforms, where we can provide Property Information, so taking advantage of those synergies. But I'd say the biggest areas are the synergy area, as well as the mid mass market, with pressure coming in the bigger end of the market at least in the near term. I would reiterate, I think we are very, very well positioned to leverage any volume upsides in the market whenever they come.

Brett Horn - Morningstar Inc., Research Division

Okay. But I'd just like -- you said -- like what is it going to take to get that upside to show up?

Anand K. Nallathambi

Brett, this is Anand. I think in general, if you just look at the market, a general question on what has to happen is, there's a lot of uncertainty from a macroeconomic and social economic factor standpoint, GSE [ph] reform, impact on fiscal policy, and interest rates, and access and affordability. That was part of the reason for us to go with cautious prudence on our guidance. I think it's a question of time. It will get solved out, it will get resolved. Once we do that, we're going to be getting back to a normalized level that we talked about, the $1.3 trillion to $1.5 trillion in originations. That's going to happen, not immediately. I don't think that the rebound is going to be immediate or sudden. It's going to be a regular kind of bounce along the bottom and kind of get there slowly over the next 12 to 18-month-type time frame. In terms of our company and our -- we're bullish on the company and the prospects. And we talked about it on the mortgage side, it's just a rebound and we're positioned to capitalize on it with incremental margins. On the insurance side, we've got to remember, it's only 90 days in the mix. And that we are putting together, we are very excited about what we can do on the insurance industry. International is starting to fire on all cylinders, which we've been at work for the last probably 2 or 3 years. So it's a question of time to get all these policy issues settled in the marketplace and that would start to bring back some of the volumes.

Operator

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.

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