CoreLogic (CLGX) Anand K. Nallathambi on Q2 2016 Results - Earnings Call Transcript

| About: CoreLogic, INC. (CLGX)

CoreLogic, Inc. (NYSE:CLGX)

Q2 2016 Earnings Call

July 26, 2016 11:00 am ET

Executives

Dan L. Smith - Senior Vice President, Investor Relations

Anand K. Nallathambi - President and Chief Executive Officer

James L. Balas - Chief Financial Officer, CoreLogic, Inc.

Frank D. Martell - Chief Operating Officer

Analysts

William A. Warmington - Wells Fargo Securities LLC

Darrin Peller - Barclays Capital, Inc.

Jeff P. Meuler - Robert W. Baird & Co., Inc. (Broker)

John Campbell - Stephens, Inc.

Geoffrey Murray Dunn - Dowling & Partners Securities LLC

Chas Tyson - Keefe, Bruyette & Woods, Inc.

Chris Gamaitoni - Autonomous Research US LP

Kevin Kaczmarek - Zelman & Associates

Oscar Turner - SunTrust Robinson Humphrey, Inc.

Eric M. Robinson - Piper Jaffray & Co. (Broker)

Glenn Greene - Oppenheimer & Co., Inc. (Broker)

Operator

Good day, ladies and gentlemen, and welcome to the second quarter 2016 CoreLogic, Inc. earnings conference call. As a reminder, this call may be recorded.

I would now like to introduce your host for today's conference, Mr. Dan Smith, Investor Relations. Please go ahead, sir.

Dan L. Smith - Senior Vice President, Investor Relations

Thank you, and good morning. Welcome to our investor presentation and conference call, where we present our financial results for the second quarter of 2016. Speaking today will be CoreLogic's President and CEO, Anand Nallathambi; CFO, Jim Balas; and COO, Frank Martell.

Before we begin, let me make a few important points. First, we 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 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 looking details concerning these risks and uncertainties, please refer to our SEC filings, including 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 to undertake – and we 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. 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 2015.

Finally, please limit yourselves to one question with a brief follow-up. We'll take additional questions at the end of the call, as time permits.

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

Anand K. Nallathambi - President and Chief Executive Officer

Thank you, Dan, and good morning, everyone. Welcome to CoreLogic's second quarter earnings call. I will lead off today with an update on important market trends and areas of strategic focus. Jim will review financial results for the quarter, and Frank will cover operational highlights and provide color on our financial guidance and capital return.

CoreLogic is off to a great start in 2016 with strong growth in revenues, operating profits, cash flow and adjusted EPS. Revenues for the second quarter were up 30%, operating income was up 24%, adjusted EBITDA was up 15% and adjusted EPS was up 18%. For the first half, revenues were 27% above last year and operating income was up 21%. Adjusted EBITDA and adjusted EPS rose 11% and 12%, respectively.

In terms of strategic imperatives, a major focus area over the last nine months has been the scaling of our property Valuation Solutions Group. Since the launch of the VSG in September of 2015, we have acquired a significant set of data, technology, analytics and services-related assets focused on property appraisal. These assets build upon and complement a number of valuation-related data and analytics services offered by CoreLogic before the launch of the VSG.

Most recently, we completed the acquisition of FNC in late April. This is a foundational platform asset for VSG. In addition, during the second quarter, we assembled a core leadership team for VSG and completed a series of planning and feedback sessions with key constituents in the valuation space. These sessions will help us develop a comprehensive set of property valuation and collateral assessment solutions that connect market participants with supply chain service providers.

The market for residential property valuation in the U.S. is about $4 billion annually. Based on our discussions with lenders, regulators and service providers, we believe that the area would benefit from operational scale, enhanced technology and the application of data and analytics. The opportunity to transform the way real estate assets are valued and to bring greater transparency to the underwriting process makes this a significant medium and long-term growth opportunity for us.

During the second quarter, we delivered strong growth in our insurance, geospatial and international operations. Over the past five years, we have increased revenues contributed by these units almost threefold. We expect these businesses to contribute about 15% of our total revenue in 2016, up from 8% five years ago.

Expanding our footprint and building market leadership in valuation insurance, geospatial and international has been a major success and will continue to be a strategic focus area. These businesses are highly synergistic with our core Property Intelligence assets and are a significant growth opportunity for us.

Over the last six months, we continued to scale back certain non-core product lines, tightened discretionary and project-related spending. From a market perspective, much of this discretionary spending has been redirected by industry participants to cope with the challenging regulatory environment, including the need to invest in such areas as compliance management, information security and vendor oversight.

We are entering the balance of 2016 with a clear pathway to accelerating growth, actually deploying new and unique data-driven solutions that enable participants in the real estate ecosystem to more precisely underwrite and manage their risks and capitalize on opportunities.

As I have mentioned on past earnings calls, the U.S. mortgage market is continuing to transition to a purchase-driven cycle. We believe the transition will continue, fueled by expected increases in population, the first-time home buyers and plus fewer cash purchases.

We have recently experienced a rise in refinancing activity, spurred by the reaction to Brexit and historically low interest rates. However, based on current mortgage industry predictions, we do not expect this elevated level of activity to continue through the rest of 2016. Based on our research, we now believe the ongoing growth in home purchase activity and the return to normalized levels of refinancing support a new normal mortgage market of $1.5 trillion to $1.7 trillion going forward.

We have a long established track record of consistently outperforming market volume trends. This strong performance has resulted from our focus on scaling our core business units through market share gains, product development as well as smart acquisitions.

In closing, I want to thank our employees, clients and shareholders for their continued support. We delivered a strong first half in 2016. I believe our performance demonstrates the value creation opportunities inherent in our strategic plan. Our focus remains squarely on strong operational execution and positioning CoreLogic for superior long-term growth and stakeholder value creation.

With that, I will now turn the call over to Jim Balas for an update on our financial results. Jim has been a key contributor to CoreLogic since 2011, and we're very proud to have him serve as our Chief Financial Officer. Frank and I look forward to working with Jim to take CoreLogic to even greater heights. Jim?

James L. Balas - Chief Financial Officer, CoreLogic, Inc.

Thank you, Anand, and good morning, everyone. Today, I will recap our second quarter financial results and provide some additional color on our recent bond redemption and the upsizing of our credit facility.

As Anand mentioned, second quarter revenues, operating income, adjusted EBITDA, cash flow and adjusted EPS were up strongly from 2015. As we have over the past several years, we outpaced the U.S. mortgage market volumes, benefiting from the market leadership of our core Property Intelligence and underwriting in risk management solution areas.

Notable second quarter financial highlights included, first, we grew revenues 30%. This was boosted by the launch of the VSG and underlying growth of 3% from core product lines. Positive organic growth was achieved despite reduced levels of discretionary spending by clients in the mortgage industry.

Next, we increased operating income by 24% and adjusted EBITDA by 15% while continuing to make important investments in growth, productivity, compliance and technology. Third, aggressive execution against our cost productivity and efficiency targets help drive up profits and self-fund reinvestment. During the quarter, we focused on simplifying our organization structure, improving operational processes and reducing SG&A cost levels.

Fourth, on a trailing-12-month basis, we converted 65% of our adjusted EBITDA to free cash flow. Free cash flow conversion rates remain strong, as we enhance our business mix and manage working capital.

And finally, during July, we upsized our term loan facility and redeemed our outstanding senior notes due in 2021. This should provide lower cost funding and additional flexibility going forward.

Now, I will cover the financial results in more detail. Second quarter revenues totaled $500 million compared with $386 million in 2015. The 30% increase was driven primarily by the PI segment. PI segment revenues rose 72% to $277 million, driven principally by the VSG and growth in insurance and spatial solutions in international.

RMW segment revenues were in line with 2015 levels, as market share and pricing gains offset reduced project-related revenues and the wind-down of certain non-core product lines.

Operating income from continuing operations was up 24% to $76 million for the quarter. Benefits from revenue gains and productivity more than offset costs associated with the VSG launch, optimization of the capital structure, integration, severance and investments in cyber security and compliance. Operating margin was 15% after absorbing these costs and investments. Second quarter margins were mostly in line with 2015 levels.

Second quarter net income and diluted EPS from continuing operations totaled $40 million and $0.45, compared with $33 million and $0.36, respectively, in 2015. Growth in net income and diluted EPS reflects the operating upsides previously discussed and the positive impact of share repurchases, which more than offset higher taxes in the quarter.

Adjusted diluted EPS was up 18% to $0.65 for the quarter, reflecting the positive impacts of growth, cost reduction and share repurchases. Adjusted EBITDA was up 15% to $136 million in the second quarter, largely due to revenue growth and the benefits of cost productivity programs.

Finally, free cash flow continued to be very strong in the second quarter. On a trailing-12-month basis, as of June 30, 2016, free cash flow totaled $290 million, a 65% conversion rate of our adjusted EBITDA.

The balance of my prepared remarks today will focus on our capital structure optimization. As recently announced, on July 18 we paid $411 million to complete the redemption of all of our outstanding senior notes due in 2021. We funded this redemption through a $525 million expansion, an amendment of our existing credit facility. After upsizing our term loan and redeeming our senior notes, CoreLogic had total debt of $1.6 billion, consisting of $1.3 billion in outstanding term loans and $280 million drawn against the $550 million revolving credit facility.

Our updated capital structure provides CoreLogic with substantial additional financial flexibility and significantly lowers interest expense. As we have discussed in the past, CoreLogic's strong operating results, free cash flow and balanced capital management approach allow the company to invest in our strategic programs and also to return capital to shareholders as we maintain prudent debt levels.

We had a strong second quarter and first half, and I look forward to a successful second half of 2016. Thank you for your support, and I will now turn the call over to Frank.

Frank D. Martell - Chief Operating Officer

Thank you, Jim.

Today, I'm going to outline the progress we are making, capitalizing on our growth opportunities and expanding margins. I will also provide some thoughts on the increase in our 2016 financial guidance and capital return targets.

As Jim and Anand highlighted, we had a strong second quarter and first half. Importantly, we continue to execute against our strategic imperatives, which are focused on delivering unique property insights that allow participants in the real estate ecosystem to make better decisions in the areas of prospect identification, underwriting, and continuous risk management and monitoring. Our consistent focus on driving scale and operating leverage, cost productivity and cash flow allows us to reinvest in leading-edge product development, technology initiatives and risk management programs. This helps us to sustain our competitive advantage and broaden our capabilities.

CoreLogic's first half revenues were up 27%, driven by the scaling of our property Valuation Solutions Group. We think there is a unique opportunity to transform the property valuation experience in the U.S., and we believe we are well-positioned to do so, given our scale and data-driven insights.

Regarding the VSG, we expect to exit this year with a well-integrated appraisal operation that consistently delivers to the highest service levels. We also expect to see the initial benefits of data and operational synergies between the acquired VSG assets and other CoreLogic operations. Completing the integration of our capabilities and realizing the full potential of VSG will be a significant multi-year endeavor.

In addition to VSG-related growth drivers, we also launched a number of new products and enhancements over the past 12 to 18 months. A number of these should become industry-standard tools over time, and several are progressively gaining traction in the marketplace. In the case of our insurance unit, new products are helping to drive accelerated growth rates.

Our focus on pricing is also yielding benefits. And, finally, we are seeing upsides from cross-selling-related point solutions through more integrated offerings and packages. As we scale and drive top line growth, we're also relentlessly pursuing first-quartile levels of cost efficiency. We are committed to achieving 30%-plus adjusted EBITDA margins, based on a normalized U.S. mortgage market and after accounting for the build-out of our Valuation Solutions platform.

We believe we can achieve our margin goals through the combination of profitable growth, favorable shifts in revenue mix, as well as business model transformation and cost productivity. Regarding cost management, we expect to save at least $30 million this year by consolidating facilities, reducing SG&A costs, outsourcing certain business activities and other operational improvements.

These programs should also contribute an additional $15 million in savings in 2017. Actual second quarter adjusted EBITDA margin was 27%, a bit ahead of our expectations, driven by upside in the PI segment. The launch of the VSG had a roughly 500 basis point impact on total company adjusted second quarter EBITDA margins.

Our 2016 year-to-date financial results provide an indication of the effectiveness of our laser-like focus on delivering our business plan. We have a strong management team dedicated to delivering consistent stakeholder value. Over the past five years, our strategic growth and operational excellence programs have produced double-digit compound growth rates for revenue, adjusted EBITDA and adjusted EPS. At the same time, the price of our common shares has risen more than threefold.

I will close my prepared remarks today with a brief discussion around our increased 2016 financial guidance and share repurchase targets. We are increasing our 2016 revenue, adjusted EBITDA and adjusted EPS guidance ranges based on our strong first half performance and higher than initially expected 2016 U.S. mortgage unit volumes.

We now expect to generate revenue of $1.89 billion to $1.92 billion, adjusted EBITDA of $480 million to $500 million and adjusted EPS at $2.20 to $2.30 per share. The midpoints of these ranges generate annual growth rates of 25%, 16% and 19% for revenue, adjusted EBITDA and adjusted EPS, respectively.

Our increased guidance reflects the following: First, our latest view of 2016 U.S. mortgage origination volumes; second, the impact of the delayed closing of FNC; third, lower interest expenses; and, fourth, the positive impact of higher share repurchases.

In terms of the third quarter of 2016, based on seasonality and our current view of origination unit volume trends and timing of our investment to cost management programs, we believe that adjusted EBITDA should be in line with or modestly above second quarter 2016 levels.

Finally, we have increased our share buyback program to 3 million shares this year. This increase is consistent with our long-held practice of rewarding our shareholders through a significant level of annual capital return. This is made possible by strong revenue and profit growth and our high cash flow conversion. So far, this year, we've repurchased 800,000 shares. We have and will continue to repurchase shares using cash generated from operations.

We also plan to make voluntary debt repayments. Lower debt levels and growth and profitability should result in debt to adjusted EBITDA ratios approaching 3 times by year end. Although our market capitalization has increased significantly over the past several years, we believe that our current share place does not reflect the full intrinsic value of our business today and its future potential. Therefore, in our view, the ongoing repurchase of substantial numbers of our common shares remains a significant source of potential value creation for our shareholders.

In closing, CoreLogic continues to deliver strategically, operationally and financially. Over the long term, we remain committed to delivering consistently superior value creation through the realization of our vision of providing unique property level insights to the global real estate ecosystem.

Thank you, all, for your time today. I'll now turn the call back over to the operator for Q&A.

Question-and-Answer Session

Operator

Thank you. Our first question comes from the line of Bill Warmington of Wells Fargo. Your line is open.

William A. Warmington - Wells Fargo Securities LLC

Good morning, everyone.

Anand K. Nallathambi - President and Chief Executive Officer

Good morning.

James L. Balas - Chief Financial Officer, CoreLogic, Inc.

Good morning, Bill.

William A. Warmington - Wells Fargo Securities LLC

And congratulations to Jim on the promotion.

James L. Balas - Chief Financial Officer, CoreLogic, Inc.

Thanks, Bill.

William A. Warmington - Wells Fargo Securities LLC

So, first question, I just wanted to ask about your forecast for the $1.5 trillion to $1.7 trillion for 2017. The MBA is forecasting a $1.38 trillion market. Where does your forecast differ with the MBA forecast and what gives you confidence in it?

Frank D. Martell - Chief Operating Officer

Bill, this is Frank. Just to clarify, on the quotation, $1.5 trillion to $1.7 trillion is a new normal level. It doesn't refer specifically to 2017. We haven't provided a viewpoint on 2017 origination volumes.

William A. Warmington - Wells Fargo Securities LLC

Okay.

Frank D. Martell - Chief Operating Officer

As you may remember, based on the environmental factors in the mortgage market on, call it, kind of a $1.5 trillion market is a normal – kind of new normal post-recession. And I think, based on what's been happening, that's actually a little bit more favorable at the $1.5 trillion to $1.7 trillion.

William A. Warmington - Wells Fargo Securities LLC

Sure. I mean, right now, you're trending at about $1.7 trillion to $1.8 trillion for the year. So, I mean, that would seem – it would seem potentially like a reasonable expectation for next year. But anyway, what are you seeing in the – from your vantage point, that's giving you confidence in that level?

Anand K. Nallathambi - President and Chief Executive Officer

For the last couple of years of being in that area and I think, assuming 2016 is going to be flat as 2015, because that's what most of the industry predictions are, it's right about that number, Bill. So, unless something drastically changes, we think that that's a pretty good new normal with some yearly fluctuations based on market conditions.

William A. Warmington - Wells Fargo Securities LLC

Got it. And then, for my second question, on your unit volumes, it looked like flood was up about 4%, tax up about 11% and credit was particularly strong at 17%. Just wanted to ask about what was driving the different volumes there.

James L. Balas - Chief Financial Officer, CoreLogic, Inc.

Yeah. So, I think, obviously, they are slightly different markets and we have different shares. The credit number is a little bit higher due to – we've had actually some pretty good success in the big mass market on taking some volume and taking some market share, Bill, in the last couple of years. So, that's been – that accounts for the slight differential there. And then, we've had some different share gains and different client adds, so that accounts slightly. In any given quarter, the rates may vary a little bit.

William A. Warmington - Wells Fargo Securities LLC

Okay.

Anand K. Nallathambi - President and Chief Executive Officer

Bill, also, the normal seasonality is such that credit comes really first. And as they look to write apps, and flood and tax come a lot later, tax being the last one as they (25:06) so you could have normal seasonality.

William A. Warmington - Wells Fargo Securities LLC

Got it. Well, thank you very much.

Anand K. Nallathambi - President and Chief Executive Officer

Thank you.

Operator

Thank you. Our next question is from Darrin Peller of Barclays. Your line is open.

Darrin Peller - Barclays Capital, Inc.

Thanks, guys. I just want to start off, trying to get a bigger picture understanding of growth trends. From your perspective, when we look at the organic rate of the business being, I guess, around flat when you back out the deals or maybe 1% constant currency and then I guess we get to around 3% when we add back the non-core project-related revenue that I think you guys have tried to talk about before that you consider sort of discontinued. I guess just we're in a relatively flat market now, at least, from a number of loan standpoint. And so, can you help us bridge what would get us from what is around, let's call it, a 3%-ish organic growth rate to the mid- to high-single digit growth that you talked about longer term being able to do?

Frank D. Martell - Chief Operating Officer

Yeah. Bill, this is Frank. I think we've discussed a couple of things on the call. And I think there are – the good news is there are a number of levers that we think are going to help us there. One, I talked about pricing, so we've invested in some additional resources to help us accelerate the rate of price increases. Certainly coming through the recession and out of the recession, essentially, we weren't getting any price. So, we think we can get a couple of percentage points of growth as a base for accelerated organic growth rates.

Secondly, I think the product introductions that I mentioned over the last couple of years, we've really just fired up that engine of growth for us. And I think that we're starting to see some clear traction there. I think we had the best year, the best quarter, growth-wise in the insurance area in a great long period of time. And that's really driven to a fair degree by the product launches that we've made over the last 18 months.

So, I think that's a good validation that we can have success in the market with the new products. And we have a variety of those, both in the core mortgage area, but also in the insurance international areas as well in the geospatial areas, some new models, et cetera. So, I think the second area beyond pricing is our product introduction area.

The third area, I think as Anand kind of alluded to, the time period of the last certainly several quarters, and I think this is an area that I think everybody's kind of under estimated the impact of the burden of the regulatory environment. And the fact of the matter is that a lot of the lenders, in particular, the servicers and other participants in the market, are really struggling to keep up and to manage the regulatory burdens, which are expanding. And I think whereas we used to get a fair amount of discretionary spending, that's somewhat dried up.

And the final area is, I think, obviously, we talked about this on past calls. The fourth area that gives us good solid support for an accelerated growth rate is the fact that these non-core areas, we had five or six areas that were just – collectively, they were a meaningful number – amount of revenue. But individually, they're somewhat small. But they're little areas of non-core that we're just biting the bullet and getting through. So, this year, we're bearing the brunt of that now, and that will dissipate as we go forward, obviously, so there's four areas – there are others, but those are four principal areas that give us pretty good foundation for our expectation of an accelerated growth rate.

Darrin Peller - Barclays Capital, Inc.

And is VSG a part of that also, I mean, as sort of the new products? Just I imagine expanding the opportunity there as you've finally gotten through, really, the – you're going through the integration now and everything, the deals. I imagine – I mean, that's definitely predicating a lot of basis for investors.

Frank D. Martell - Chief Operating Officer

Yeah. I think, as Anand mentioned, one of the things that we feel about VSG is there's tremendous data content resident in those assets that we can leverage. So, we see a great deal of synergy beyond just – obviously, it's a huge market space that's really fragmented. So, I think that that's an area of tremendous organic growth and inorganic growth as well. It's a huge – at $4 billion, the U.S. – and that's just the U.S. That's not international. We have a very large footprint in valuation in Australia as well. So, to that extent, we're a global leader in valuation. We'd like to take that to other geographies.

Darrin Peller - Barclays Capital, Inc.

Thanks. Just for my follow-up, the guidance reason it was predicated on roughly flat number of loans year-over-year versus a prior expectation, I think, for a decline of around 15% or I guess it's an improvement now of around a couple of hundred billion dollars from your prior expectation volume. Historically, I know you suggested around $15 million of incremental EBITDA for every $100 billion or so. So, just touching on the raise in guidance of $15 million in EBITDA, I mean, is it – instead of what would be around $30 million, I mean, is it related to integration investments or just conservatism in the outlook or anything else we should think of? Thanks, guys.

Frank D. Martell - Chief Operating Officer

Yeah. So, I think, obviously, a part of that is looking at unit volumes versus dollars. So, there's...

Darrin Peller - Barclays Capital, Inc.

Yeah...

Frank D. Martell - Chief Operating Officer

A little bit of – yeah, there's definitely price inflation there. I think we're pretty well in line with our historical sensitivity levels. We did have a month' delay in FNC that cost us a little bit. So, there are some swings and roundabouts there. But I think, if you factor that in, factor our view of the strengthening dollar versus the – some of the foreign currencies, you know that story. So, there's a few of those swings and roundabouts that take away a little bit.

But I think the strong raise in guidance – obviously, I think, as we mentioned in the last call, we're still looking at – we have a fair amount of revenue coming through VSG that's concentrated in a couple of clients. So, reflecting the mortgage market changes, our sensitivity will be changing a little bit. We'll provide a little bit of an update on that toward the end of this year.

Darrin Peller - Barclays Capital, Inc.

And have you – just the last question. I'm getting these from two clients as we speak and I'll be turning back to the queue. Have you provided any – or can you provide any opportunity of discussion around the opportunity for VSG's growth rate? Or is that just still too early to say? In terms of what it can do over the next two to three years even?

Frank D. Martell - Chief Operating Officer

We're in a – because we see it's a massive market opportunity, so I think it can be very high. We haven't provided specific percentages. But certainly, it's likely to be of an aggressive growth rate.

Darrin Peller - Barclays Capital, Inc.

Okay. Great. All right. Guys, thanks very much.

Operator

Thank you. Our next question is from Jeff Meuler of Baird. Your line is open.

Jeff P. Meuler - Robert W. Baird & Co., Inc. (Broker)

Close enough, thanks. Can you give us a sense of the non-core products? I think you said there's five to six areas that are getting bucketed in here. Just roughly, what is the current-year revenue contribution from those? And then, are there other products that you're flagging that maybe will be considered noncore a year or two from now and are kind of undergoing devaluation? Just trying to understand how much exposure we still have to this headwind.

James L. Balas - Chief Financial Officer, CoreLogic, Inc.

Yeah. In terms of the non-core products, on a year-to-year basis, the impact to the quarter is probably about $10 million collectively.

Jeff P. Meuler - Robert W. Baird & Co., Inc. (Broker)

Right. But I guess what I'm wondering is do you still have $50 million of net exposure? Or just how far away are we working through those?

James L. Balas - Chief Financial Officer, CoreLogic, Inc.

Probably exiting this year and a little bit into next year, so I think it's going to be over the next 12 months. It is five to six. Some of the product lines have tails to them.

Frank D. Martell - Chief Operating Officer

But, Jeff, the vast majority is coming through the system now. So, as Jim mentioned, it will dissipate through the balance of this year. So, it's – going forward, it will be a materially lower factor. And it's mostly – this is mostly – we had a document retrieval business and some staff augmentation and a few other areas that were legacy from the default area – default services area, so these are kind of bits and oddball units.

Jeff P. Meuler - Robert W. Baird & Co., Inc. (Broker)

Okay.

James L. Balas - Chief Financial Officer, CoreLogic, Inc.

Yeah. The H1 impact is probably bigger than what we'll see in the back half of the year.

Jeff P. Meuler - Robert W. Baird & Co., Inc. (Broker)

Okay. And then, on the new product introduction, is there any way to roughly quantify the number of meaningful new products you're launching per year now relative to what it was, I don't know, three years ago or something like that? And then, on insurance, I think this is the first time at least I remember you talking about new product development specific to insurance. Can you give us an example of a meaningful new product there?

Frank D. Martell - Chief Operating Officer

Yeah. So, we have – in terms of the numbers of new products, I'd say that we're now on a cadence of three to five material launches a year, which for a company our size I think is probably appropriate. It could vary from year to year, but that's – I think, as it relates to insurance, we have different products that have been launched around different weather forensic models, for example, and different post-event surveillance.

So, obviously, when you have a weather event and it impacts properties, we have a rapid response and surveillance product that's been launched. So, there's a number of other ones as well. But as we – when we originally expanded our insurance footprint, we talked about accelerating the growth rates from kind of a low-single digits, and I think this is starting to – we're starting to realize that objective, which I think is, again, a good validation of the integration of accelerated growth opportunities in some of these areas. And we think VSG kind of fits the same type of bill. Obviously, it's a much, much bigger market space, so the growth rates can be higher. But we're quite pleased with the insurance – the acceleration in insurance growth.

Jeff P. Meuler - Robert W. Baird & Co., Inc. (Broker)

Got it. Thank you.

Operator

Thank you. Our next question is from John Campbell of Stephens, Inc. Your line is open.

John Campbell - Stephens, Inc.

Hey, guys. Good morning. Congrats on a great quarter.

Anand K. Nallathambi - President and Chief Executive Officer

Thanks.

John Campbell - Stephens, Inc.

Yeah. Just first on the guidance around margins, I think, in the first half, you guys – I think incremental margin was about 11%. Guidance looks like it's about 25% on the back half. Just trying to get a better grip on that ramp in the leverage just throughout the year. I mean, is that just largely from the tapering VSG integration spend?

Frank D. Martell - Chief Operating Officer

It's a couple of factors. Expenses should trend down in the back half of the year, so that's number one. And number two is, obviously, we've got FNC, which is a higher margin area for more of the second quarter than first quarter. And then we have basically our cost management program benefits as well, kind of progressed. So, those are kind of the three areas.

John Campbell - Stephens, Inc.

Okay. And I think you guys might have originally called out maybe $10 million to $12 million in VSG integration costs. Have we largely seen all of that in the first half of the year?

Frank D. Martell - Chief Operating Officer

No, it runs through – it still runs through the balance of the year. It comes down in the fourth quarter, assuming everything goes to plan, and so far so good. So, we still have – there are still integration-related costs. Obviously, it's a significant undertaking, we're dealing with our major partners there, so we have to also manage to their needs as well. So – but everything is going really well.

John Campbell - Stephens, Inc.

Okay. And then, the restructuring of the debt, it looks like you guys have increased the flexibility a little bit. Just curious about M&A pipeline or maybe what the appetite for M&A is from here.

Frank D. Martell - Chief Operating Officer

Yeah. I think, we were – as Anand kind of mentioned, we're focused on doing smart deals, so nothing major necessarily on the horizon at this point in time. We're pretty busy right now integrating what we have. But certainly Jim has done a great job of expanding our powder, and I think we have a tremendous capital structure now. So, if something really synergistic or valuable appears, we might be able to capitalize on it. But, as of now, we're kind of in the integration mode.

Anand K. Nallathambi - President and Chief Executive Officer

Yeah. If we look at anything, it'll be probably product extensions and stuff. I don't think we are – at this point, at least, I don't want to say never or no to anything, but we don't have anything that's significant in our pipeline but just around that product offerings or project extensions.

John Campbell - Stephens, Inc.

Thanks for taking our questions, guys.

James L. Balas - Chief Financial Officer, CoreLogic, Inc.

Thanks, John.

Operator

Thank you. Our next question is from Geoffrey Dunn of Dowling & Partners. Your line is open.

Geoffrey Murray Dunn - Dowling & Partners Securities LLC

Thanks. Good morning, guys. A couple of number questions to start. Can you detail the incremental expense saves, the business reinvestment and the integration expenses in the PI segment this quarter just to see what the moving parts are?

James L. Balas - Chief Financial Officer, CoreLogic, Inc.

I'm sorry. Can you repeat that, Geoff?

Geoffrey Murray Dunn - Dowling & Partners Securities LLC

Just to break down, I think you called out $15 million of total extraneous costs this quarter. Can you break down the business reinvestments versus the integration expense and then also the incremental efficiency gains?

James L. Balas - Chief Financial Officer, CoreLogic, Inc.

In terms of the saves themselves, we included the $30 million as part of the full year. We're progressing against that. And the way I would look at it amongst the segments, it's pretty equally distributed between the two segments in corporate. And in terms of the investments, those are, kind of, coming along as planned.

Geoffrey Murray Dunn - Dowling & Partners Securities LLC

Yeah. I'm actually looking for the numbers, if you have them. Was it $4 million of reinvestment this quarter and $6 million of integration costs? How does it break down? How does that $15 million break down?

Frank D. Martell - Chief Operating Officer

Yeah. I think you can work with Dan on the details. I think in terms of roughly just some of those, as we kind of articulated in the earnings release, relate to areas like compliance and information security that apply broadly across the company. I'd say the biggest chunk that would be specific would be the VSG related, which is obviously all, probably 40% of the total, would be related to that.

Geoffrey Murray Dunn - Dowling & Partners Securities LLC

Okay. I'll follow up with Dan. The other question I had is on the purchase market. I'm curious. It seems like maybe purchase, when you strip out HPA, is lagging some of the projections that we started off the year. What's your sense of the purchase market health going through year-end and into next year? Refi volatility is going to continue, but I'm curious as to your thoughts on the health of the overall purchase market.

Anand K. Nallathambi - President and Chief Executive Officer

I think the purchase market is starting to civilize to some extent. There is going to be always puts and takes. The refi activity, that's going to be determined by rates and we don't think – well, there's a lot of people are saying that fed is not going to touch the rates, but there is also thinking that fed could make a rate change at the end of the year. So, refis are going to be dependent upon that. But we see a solid footing on purchase that's going to only increase with new homes coming in and also single family renters moving into homes.

Geoffrey Murray Dunn - Dowling & Partners Securities LLC

Are you worried at all with the affordability if rates do start to go up a bit?

Anand K. Nallathambi - President and Chief Executive Officer

I don't necessarily worry about it. I think with the current criteria, it's pretty tight. So, if there is anything, I don't think it's a question of affordability. It's probably going to be a question of how credit capacity is being viewed by the lenders and regulators. So, that still has to settle down.

Geoffrey Murray Dunn - Dowling & Partners Securities LLC

Okay. Thanks, Anand.

Operator

Thank you. Our next question is from Bose George of KBW. Your line is open.

Chas Tyson - Keefe, Bruyette & Woods, Inc.

Hey, guys. This is actually Chas Tyson on for Bose. I just want to ask about VSG and the timing there. I know you mentioned that you've assembled the leadership team and done some feedback meetings. But maybe, if you could give some more color about the timing of introducing the enhanced technology and data to the former RELS and LandSafe businesses. And then, potentially maybe think about kind of inorganic growth and expanding your market share significantly.

Frank D. Martell - Chief Operating Officer

Chas, this is Frank. Thanks for the question. Yeah, so I think we've made tremendous progress at VSG. We're really happy about assembling a great team. And I think we've got a really, really strong team, which is I think unusual to assemble that so quickly. So, we feel that's pretty good and will give us a leg up in terms of how quickly we can do things.

This year, it's very important that we integrate our appraisal operations. We think we have the best service level in the industry today with both RELS and the LandSafe businesses. We want to be able to combine them and keep that level of service or expand it. So, that can be the biggest focus this year is to make sure that happens so we come out next year and that's where essentially the gates open in terms of organic growth for those two firms.

We have the biggest staff appraiser panel in the U.S., which is a tremendous competitive advantage, so we think that that from an inorganic perspective there's tremendous growth there. We want to make sure that we're targeted in how we do that. Obviously, there's margin implications, etc. So, we want to make sure that we're careful. But that is a tremendous opportunity for us if we get that right this year and we feel pretty good about that.

I think, in terms of the synergies, we provide – the exciting thing to me is we provide tremendous gradations of property valuation services, anything from an AVM up to a full property inspection and many points in between so those give our clients a wide array of different solution sets that they can apply to different types of activities within their shop and we can do that under one roof. So, we think that that's a 2017-type activity. We're working on the IT side there to be able to enable that delivery, so that's more of a 2017, but it's very exciting.

And the third thing is we operate, if not the most important, one of the most important valuation industry consortiums, working a lot to expand and build on that very important source of insight for our clients, the consortium and that's where companies like FNC come in and provide tremendous additional data that can be put through those types of vehicles, so those I think will come forward into promise in 2017, but for now, really focus on the integration of the appraisal companies, assembly of the management team, and really (45:24) talked about getting the industry constituents – some consensus with the industry constituents in terms of where to focus and what the biggest pain points are, et cetera.

Chas Tyson - Keefe, Bruyette & Woods, Inc.

Okay. And then, on FNC, I know you had said that there were differences in the client list between what FNC was surveying and what CoreLogic had been surveying. I mean, is that a process that you started of shopping that around to clients? And can you talk about how conversations are going there and what we should think of from maybe a growth trend on that particular revenue stream?

Frank D. Martell - Chief Operating Officer

Well, FNC has over a hundred lender clients and those tend to be – there's some large clients, but they tend to be more clustered in the mid and what we call the mid mass markets. That's an area that we've invested behind the last maybe three to four years to build out our footprint. And so, it's very symbiotic from that standpoint. I think where the opportunity lies for us is some of the mid mass market clients that may or may not use some of our other data sets like flood or credit, we think we can package through the FNC platform more of our content and that will be again kind of a 17-type because requires some technology and some distribution enablement.

Chas Tyson - Keefe, Bruyette & Woods, Inc.

Okay. And then, just one last one, if I could squeeze it in. I think you guys passed on March 31 one of the last DataQuick unlocks for customers there to switch off. Did you guys see any significant customer attrition from that? And has that been a factor in property information growth over the last couple years?

Anand K. Nallathambi - President and Chief Executive Officer

No. I think that was just a – I think you're referring to the FTC consenting rate towards helping realty track. And that seems going according to plan. And I don't think we have had any significant impacts from that. It's a very minor part of our focus in the market.

Chas Tyson - Keefe, Bruyette & Woods, Inc.

Okay. Thank you very much.

Anand K. Nallathambi - President and Chief Executive Officer

Okay.

Operator

Thank you. Our next question is from Chris Gamaitoni of Autonomous Research. Your line is open.

Chris Gamaitoni - Autonomous Research US LP

Good morning. Thanks for taking my call. On the $4 billion in annual revenue you mentioned in the appraisal industry, is all of that open to you, given your current product set? And what market share do you currently have?

Anand K. Nallathambi - President and Chief Executive Officer

It's by product. What we talked about was the total addressable market. That's the $4 billion out there. But we don't certainly cover everything. But when it comes to AVMs, we have a pretty large share out there with our own product and also with white label products and private label products out there. So, there is still opportunity and hard to go about it. The front end of the appraisal market is a wide open market. That's where everybody – even you can have solutions that control the appraiser's desktop and help them to funnel information into an entity like FNC to go into the lenders.

So, there are pockets in areas of growth where we could really address. It's tough to kind of put a market share out there. We are trying to kind of figure out all these things. And I think once the integration for VSG is done, we'll have a better feel for what are the big pieces of the market that recover where we want and what we consider to be longer term market share opportunities for us.

Chris Gamaitoni - Autonomous Research US LP

Okay. And then, on – just to clarify, on the underlying growth rate of 3% for core products, is that constant currency or including FX headwinds that you previously stated?

Anand K. Nallathambi - President and Chief Executive Officer

That's excluding FX.

Chris Gamaitoni - Autonomous Research US LP

So, that's constant currency?

Anand K. Nallathambi - President and Chief Executive Officer

Correct.

Chris Gamaitoni - Autonomous Research US LP

And in your guidance, are you maintaining the same prior outlook for the decline in the dollar, I think, the 5% throughout the year?

Frank D. Martell - Chief Operating Officer

Yeah. We've factored in a modest. The fact of the matter is I think the U.S. dollar has – our viewpoint is it's kind of trending a little bit stronger. I don't think it's a material change, but it's a little bit more of a drag than we thought.

Chris Gamaitoni - Autonomous Research US LP

Well, thanks so much for taking my call.

Anand K. Nallathambi - President and Chief Executive Officer

Thank you.

Frank D. Martell - Chief Operating Officer

Thanks.

Operator

Thank you. Our next question is from Kevin Kaczmarek of Zelman & Associates. Your line is open.

Kevin Kaczmarek - Zelman & Associates

Hey. Thanks, guys. A number of large lenders, notably Bank of America, P&C and Fifth Third, among others, have announced major upgrades to their – either their loan origination systems and/or mortgage servicing software systems over the past few quarters. Can you tell us about how your relationship is with some of these lenders? And how it changes when a major software and workflow change goes through like this? I mean, how do you get in there and try to increase the use of your flood, credit and data valuation products in that scenario?

Anand K. Nallathambi - President and Chief Executive Officer

Yeah. I think, as a settlement service provider, we have very strong connections with our lenders out there. And if they switch software, we usually – we work with them and – to write the interfaces and the data maps to include our products in their offerings out there. But there's two areas that we work with. One is with the lenders themselves would request it, if they are switching it from one provider to another.

And the other area is we also work with the providers out there. I think of credit for example, it's kind of like the de facto standard with any origination system that you would touch. So, we do try to work with them on placing our products with good placement.

Kevin Kaczmarek - Zelman & Associates

Okay. And if we're thinking about maybe some incremental revenue from those opportunities, do you have a sense of where you might find it, maybe in flood or some valuation products or data?

Anand K. Nallathambi - President and Chief Executive Officer

As to the extent that it's incremental in terms of installation, yeah. But most of these things, if they are switching from one provider to another, we are already there.

Kevin Kaczmarek - Zelman & Associates

Okay. All right. I think all the rest of my questions have been answered. Thanks a lot.

Operator

Thank you. Our next question is from Oscar Turner of SunTrust. Your line is open.

Oscar Turner - SunTrust Robinson Humphrey, Inc.

Good morning. Thanks for taking my questions.

Anand K. Nallathambi - President and Chief Executive Officer

Hi, Oscar.

Oscar Turner - SunTrust Robinson Humphrey, Inc.

Hi. So, you mentioned, I think, in you opening comments that there were some headwinds from lenders reducing spending. Can you provide more color on the types of products that banks are curtailing spending on because I thought that increased regulation could be somewhat of a long-term tailwind for you guys as lenders reduce the number of vendors?

Anand K. Nallathambi - President and Chief Executive Officer

Yeah. I think what that meant was standards in the past couple of years were not established out there. And now, we are seeing a little bit, especially with TRID being behind us for a while and some of the other things that they have relationships with, whether it's CFPB or other regulatory agency. They kind of know what is expected of them.

Prior to this, lenders had to make their own guess. So, as they do it, there was a lot of information to be gathered about knowing your customer, so to speak. Now, they know clear standards have been established. So, there – that was the shift a little bit. I think, in the long term, there will be tailwinds for us because of all the regulatory impacts because the kind of things that the lenders have to comply with now is a lot more than what they had before. And a lot of those things are going to be served by providers such as us.

Oscar Turner - SunTrust Robinson Humphrey, Inc.

Okay. Thanks. And then, I saw that credit inquiries were up 17% in the quarter. But I think credit screening revenue was up low-single digit percentage. Can you just talk about what's driving the lower pricing there?

Frank D. Martell - Chief Operating Officer

Yeah. Oscar, I think Dan can parse out the – there isn't lower pricing. There could be some mix differences because, within our credit volumes, we have auto and we have a lender. So, there's some different mix – it could be a mix issue. But we have not had a price change or a price decline.

Oscar Turner - SunTrust Robinson Humphrey, Inc.

Okay. Thanks.

Operator

Thank you. Our next question is from Jason Deleeuw of Piper Jaffray. Your line is open.

Eric M. Robinson - Piper Jaffray & Co. (Broker)

Yeah. Thanks, guys. You've got Eric Robinson on the line here for Jason. Thanks for taking the call. Just on the VSG kind of business and that revenue for the quarter. Is that a fair run rate, kind of, assuming going forward here? And was FNC included for the full quarter?

Frank D. Martell - Chief Operating Officer

No. FNC was basically two months of the quarter. And I'd say, in terms of a run rate, obviously, property valuation, there's a seasonal characteristic to it. So you will typically see a stronger second and third quarter than first and fourth quarters. I'd say that we're only beginning. So I think there's growth opportunity beyond the volumes that you saw. Obviously, we're – primarily, our volume is primarily being driven by the RELS and the LandSafe, which are two firms, Wells Fargo and Bank of America driven. So, as I mentioned earlier, once we have a broad market offering, then obviously the volumes should increase significantly.

Eric M. Robinson - Piper Jaffray & Co. (Broker)

Got it, got it. And then, just on the VSG margins itself, what kind of – or could you talk about the specifics that are needed to improve those VSG margins over time? I know that FNC comes on at a higher margin, but if we think about the cadence of the margin expansion there, what are the specific drivers that could help those margins?

James L. Balas - Chief Financial Officer, CoreLogic, Inc.

Yeah. I think if – to me, there's two areas. One is on the – there's a data and analytics component to VSG and a platform component. That's at margins rates that are higher than our aggregate margin percentages. So we obviously want to grow in those areas, and that will affect the margin percentage in the right way.

In terms of the volumes that relate to property appraisal, we think that we can, from a process perspective, improve cycle times and reduce the inefficiencies in the process, thereby improving the margins. And then also realize the benefits of scale, very similar to what we did in flood, credit and tax over the last three or four years is to scale up and drive efficiency and automation.

So we think – we talked about this before. We think the margin rates in the aggregate for VSG shouldn't look a whole lot different than the total company margin rates once the full platform is built out.

Eric M. Robinson - Piper Jaffray & Co. (Broker)

And then you think that would take a couple-year timeline here. Is that the right framework to think about? Or -

Frank D. Martell - Chief Operating Officer

Yeah. It'll take two, three years, I think, to really come to full realization. Obviously, we're going to make progress along the way. FNC is a high-margin company, obviously. Our data analytics are high margin. So, from that perspective, we have a lot of high-margin assets already in the portfolio. And as Anand mentioned, if we look at the M&A landscape, that would be a nice area to tack on some capabilities.

Eric M. Robinson - Piper Jaffray & Co. (Broker)

Got it. All right. Thanks for taking my questions.

James L. Balas - Chief Financial Officer, CoreLogic, Inc.

Thank you.

Operator

Thank you. Our last question is from the line of Glenn Greene of Oppenheimer. Your line is open.

Glenn Greene - Oppenheimer & Co., Inc. (Broker)

Thanks. Good morning. Thanks for squeezing me in. A few number questions. I guess the first one, just sort of thinking of the 3Q EBITDA, you sort of talked about it being roughly in line with 2Q to maybe modestly up. Most of the mortgage forecasts at this point are actually up sequentially 3Q versus 2Q, and I would think that the $15 million of sort of one-time costs you had this quarter would moderate. So I guess what I'm getting at is that 3Q seems awfully conservative, or I'm missing something.

Frank D. Martell - Chief Operating Officer

Yeah. I think if you look at the, certainly, the MBA quarterly forecast, I hate to get that granular, but it's really – I think it's – they're calling very – essentially a flat quarterly viewpoint. So, hopefully, it's better than that, but I think they're talking about 500 versus like 520, so it's pretty – and then a lot of that's price, and so I don't think there's going to be a huge upswing. I think some of that depends on your point of view about refi and how long the refi activity is going to be elevated because of the Brexit and all that kind of stuff. But as Anand said, we're not counting on that to necessarily drive a lot of upside in the third quarter.

James L. Balas - Chief Financial Officer, CoreLogic, Inc.

Yeah. And just to add to Frank's comments, we're going to have integration costs associated with FNC. But also we'll have some real estate costs as a result of our productivity program there as we're consolidating footprints that we'll hit in the second half of the year.

Glenn Greene - Oppenheimer & Co., Inc. (Broker)

So, as it relates to that, I think when we entered the year, we were talking about the $10 million to $12 million of VSG sort of one-time costs and there was another $10 million of costs related to the savings program and it seems like at least year-to-date you're through that. But now you're talking about incremental costs, so there are additional one-time costs or what's the magnitude of the one-time costs above what you talked about entering the year?

Frank D. Martell - Chief Operating Officer

No, I don't think they're one-time costs, Glenn. I think the costs we talked about are things like compliance, infosec and I think those – every – we're in the same boat probably more or so than our competitors because of our scale. We have to invest in ongoing and compliance and I think that's a strength.

I think one of the discussions earlier was about compliance and the regulatory environment. I think it's our strength and clearly we've benefited for the last couple of years. It's like the quality where people are looking at, quality vendors and we're certainly one of them, so we have to invest in those areas. I don't think those are one-time...

Glenn Greene - Oppenheimer & Co., Inc. (Broker)

Okay.

Frank D. Martell - Chief Operating Officer

The integration stuff is lumpier in one-time, but the infosec, that kind of stuff is a cost of doing business. There may be a quarter that's a little heavier than others, but that's kind of an ongoing in my opinion.

Glenn Greene - Oppenheimer & Co., Inc. (Broker)

Okay. And then, just to frame it relative to the 3% you sort of called out the organic growth for the core products, the 3%. As we've looked at the back half, is there a way to think directionally about some more organic growth parameters for PI and RMW? How should we be thinking about that?

Frank D. Martell - Chief Operating Officer

Yeah, Well, we are focused significantly on raising that growth rate. As I mentioned, we have a lot of levers to do it. So, we're going to fight like nobody's business to get those growth rates up in the second half of the year and I think we had a pretty good selling season towards the back half of the second quarter, which gives us some confidence level. But it's a little bit of uncertain times and on it are a list of people are – I think we lose track of the fact that a lot of our clients are spending hundreds of millions of dollars on the regulatory environment, and that's sapping in their ability to look at proactive and other spending areas that traditionally they would have done.

So – but I think, having said all that, we have a good product array coming out in the market. We have good traction on our new products and we think that growth rate should come up. We'll prove that over the second half of the year.

Glenn Greene - Oppenheimer & Co., Inc. (Broker)

And just one more I'll just squeeze in. But the bridge to the $0.15 change in EPS, I guess, something like $0.10, $0.11 of it is the EBITDA change and I guess the balance is the refinancing?

James L. Balas - Chief Financial Officer, CoreLogic, Inc.

Yeah, that's reasonable. It's about $0.04 to $0.05.

Glenn Greene - Oppenheimer & Co., Inc. (Broker)

Okay. Great. Thanks a lot, guys.

James L. Balas - Chief Financial Officer, CoreLogic, Inc.

Thank you.

Operator

Thank you. I'm not showing any further questions. Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Everyone, have a great day.

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