Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

PHH Corp. (NYSE:PHH)

Q4 2007 Earnings Call

February 29, 2008 10:00 am ET

Executives

Nancy Kyle - VP of Investor Relations

Terry Edwards - President and CEO, PHH Corporation and PHH Mortgage

George Kilroy - President and CEO, PHH Arval

Analyst

Kenneth Posner - Morgan Stanley

Louis Syke - Tennant Capital

Jordan Hymowitz - Philadelphia Financial

Gabriel Kim - Wellington Management

Ben Johnson - Goldman Sachs

Marcelo Lima - Horn Eichenwald

Operator

Good morning ladies and gentlemen. Welcome to the PHH Corporation 2007 Fourth Quarter and Year-end Earnings Call. Your lines will be in a listen-only mode, during remarks by PHH management. At the conclusion of your remarks, we will begin the question-and-answer session. At which time I will give you instructions on entering the queue to ask your questions.

Today's call is also being webcast and recorded for replay purposes. The audio replay can be accessed either on the company's website at www.phh.com or via telephone at 1-888-203-1112 or 1-719-457-0820, pass code 4005399, approximately two hours after the conclusion of this call. It will be available until March 31, 2008. This access information is also described in the company's earnings release, and I will repeat it again at the end of our session. This call is scheduled to conclude in one hour.

At this time, Nancy Kyle, Vice President of Investor Relations will proceed with the introduction.

Nancy Kyle - VP of Investor Relations

Good morning everyone, and thank you for joining us. On the call with me today are Terry Edwards, President and CEO of PHH Corporation and PHH Mortgage, and George Kilroy, President and CEO of PHH Arval. If you did not receive a copy of our earnings release, please call our investor hotline at 856-917-7405 for a faxed copy or access it on our website at ww.phh.com.

During our call today, we will be making certain statements, which constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. For example remarks about committed funding capacity being adequate to fund our mortgage operations for the next 12-months; estimates about cost reduction initiatives, new client signings and expectations for refinance activity; our expectations to enter into new private label outsource arrangements and our belief that we are well positioned to operate in what will likely be a difficult year for the financial services sector.

These forward-looking statements and others are based on our current expectations and assumptions and are subject to known and unknown factors which may cause actual results to differ materially from those expressed or implied.

For a more detailed discussion of the risk factors and assumptions that could cause our result to differ materially from those in the forward-looking statements, please refer to the risks described under the heading, Cautionary Note Regarding Forward Looking Statement and Risk Factors in our annual report on Form 10-K. If you need copies of those documents please call on our investor hotline at 856-917-7405 or you may access them on the SEC’s website at www.sec.gov.

And now I would lie to turn the call over to Terry.

Terry Edwards

Thanks, Nanc. Thanks for joining us. First let me tell you what I am going to tell you and then I will tell you and then I will summarize. Hopefully what I am going to talk about is going to cover a lot of the questions that many of you might have as a result of reading the release today.

I will touch on the result summary, I will touch the mortgage production segment, and I know there will be a lot of question around that. So we will spend a good deal of time in my preliminary remarks addressing the production segment, because the big question is when are we going to get that profitable.

I will touch on servicing in the fourth quarter results. I will touch on the vehicle business and the record year that it had, and I will go through an outlook for the mortgage company and the vehicle business, and I will discuss the book value of the company, and go through the key areas of risk related to the mortgage company, try to leave everyone with a sense that book really is book when you are talking about this mortgage company.

Lastly I will touch on a brief liquidity discussion. So that's the plan. So let's start with the result summary. For the year the production business mortgage segment lost $225 million, for the quarter it lost $65 million. The Servicing business for the year made $75 million and for the quarter it lost - it made $5 million. The Vehicle business made a $116 million, which is a record year and for the quarter it made $35 million. And then we had cost associated with the merger of $12 million for the year, $4 for the quarter.

The quarter was actually profitable, despite the fact that pretax wise we were not profitable because of utilization of some loss carry-forwards that were generated as a result of the sales of the MSR.

Digging into the production segment; for the year it lost $225 million. We can explain $183 million of that from what we'll call one-time events that we don't expect to repeat. $116 million is related to the credit crunch, so that's where despite the fact that we avoided subprime and largely Alt-A, we were hurt because we had scratch and dent which we talked about in the third quarter. We had closed-end second and then we had spreads widened on all the others products that we offer from primarily prime jumbo loans. And then and as we said in the fourth quarter we were hard by close-end seconds.

In addition margin as a whole was hurt throughout the industry. We assessed about $54 million, when we take the margin for the year relative to the run rate that we saw from margin in December. We also had facility closer cost of $9 million and severance cost of $4 million. So, when you look at production, that's a $183 million of the $225 million loss for the year. And as I get in to our outlook for the year, I'll get in to other cost take-outs that we've taken beyond those that we've discussed in the press release that hopefully start to move this segment toward where we all want it to be breakeven or better.

For the quarter, production lost $65 million. The fourth quarter is always going to be a difficult quarter just because of seasonality. Seasonality was particularly impacted this year because of the wheels came off the bus in the housing market beginning in August. So applications in September, October, etcetera rolled into the fourth quarter, so volume for the fourth quarter was off 13% and only $8.3 billion.

As we've talked about with many of you overtime, our platform is largely retail, and as a result there's a high degree of fixed cost. So when volume goes down to a level like $8 billion it's really, really difficult to make money in the fourth quarter.

In the fourth quarter itself there were some one-time events also. The severance and facility cost, $8 million of that hit in the fourth quarter, closed-end second sale that we touched on in the press release that hurt us for about 11 million, and there is where we sold, we did a AAA security during the fourth quarter and we sold at an end result of 76. We held the residual and booked the residual very, very, very conservatively.

In addition, in the fourth quarter, because rates declined throughout the fourth quarter, the value that’s attributed to the originations business for the MSR, because rates declined that had about an $11 million impact and that benefit wound up in effect over on the servicing side of the business.

In addition, during the fourth quarter, we laid off about 300 people. Now normally when we make a headcount adjustment, we tell our people we are done for the time being. As you would expect we represent some great brands in this business, and therefore we need great people. So any time we have to let go people, it's very depressing for all of us. And usually what we want to do is, we want to say to everyone, all right, we made the cuts and all is good, we don’t need to make any other cuts.

In this case we said there might be a Phase II, because everyone in the management is committed to getting the originations business back to the profitability that it achieved prior to 2005. So we said to our people there might be Phase II and it was conditional upon new signings and the level of interest rates. And just before Christmas as a result of some new signings that we talked about in the press release, coupled with a level of interest rates, we said to our people that we were not planning any additional cuts. I make this point so that everyone understands that we are committed to getting the originations business profitable.

Moving to Servicing. Servicing was profitable in the fourth quarter despite the following events. We increased the captive insurance reserves by $7 million, we wrote our MSR down - in the quarter by 17 basis points. If you compare us to some of our competitors in the industry, you will see our 17 is the lead dog in terms of write down with the exception of one other player, a bank in the Midwest, these are located in Tennessee wrote it down more.

So industry players wrote their MSR down far less than we did, and as we result, this probably hurt us to the tune of about $14 million when you get in to the write down for the servicing versus how much was covered by the hedge. The sale of servicing as we talked about in the press release, there was about $12 million of expense associated with that, and then we also increased our foreclosure reserves by another $9 million. So that's servicing.

Moving on to the Vehicle business. As I indicated, we had a record year. It was a benefit from a foreign capital tax of $10 million, but even if you take that out, the vehicle business George and company had a fantastic year, and that's despite the headwinds related to the GE transaction. As you would expect our competitors tried to take advantage of the fact that PHH and GE were going to come together and therefore here are reasons why you should work with XYZ versus PHH or GE.

So moving to the outlook; first let's start with the mortgage segment and specifically production. We believe we've right-sized our originations platform to target $39 billion in originations. As we indicated cost take-outs were $36 million. Now if you go back to what I said at the top, $225 million was the loss in '07. I said a $183 million was one-time events, so the gap between the $225 million and the $183 million are some $42 million.

We expect with actions that we've already taken, that we'll take out at least that much in cost as we move into next year. So the combination of those cost take-outs is a result of lower headcount, reduced facilities cost, lower commissions, lower incentives and higher productivity should enable us to get that cost out.

So as we put the puzzle together for the origination's business, that's the matter to our madness. Eliminate the one-time events that were related to the credit chunk, some pick up in margin that we've seen recently we're very proud of our competitors and how they've been pricing recently, and that's in a large part due to the fact that margins in the past few years have been subsidized by subprime and Alt-A and Option ARM. And as you know we didn't plan that space and therefore we had to get by on the thin margins associated with the prime business.

As a result of those products disappearing from the marketplace, margins as a whole has to improve in the prime space where we play, so that's a benefit for us. At the end of the day, we are back to 90s, where in the 90s projects - products were originated and fully documented, which is our strength.

As we look at the landscape, 14 of the top 50 lenders in 2006 are gone, plus many of the small players are no longer in the business. New signings and prospects have momentum, as we talked about 12 signings during '07 and then recent signings of Dime Savings and Comerica. The industry as a whole, mortgage is not a friendly word. As one of our folks would describe it, this is an outsourced marketer's dream if you are an outsource provider in the mortgage space.

In addition, consumers are turning to trusted retail brands, trusted retailer banks. They are moving away from the brokers, they are moving away from some of those other brands that have seen their market, their value of their brand deteriorate in the market place, and as result our brands, our banks, our clients are winning. This is both in the private label space and this is both in the brand space that we represent, the Coldwell Banker, Century 21 and ERA. So bottom line is, we believe the market share of our clients is increasing and therefore that should be a benefit for us.

Obviously all this is positive and therefore we believe that the combination of the production segment to the extent that we can get that close to breakeven or better, coupled with some benefits from servicing, we'd like to think that we can get the mortgage business to profitability, a place we haven’t been for the last couple of years.

Now, that is a bold statement to make in the environment that we live today. As you know, I don’t think I need to say anymore about that, given just what has been going on in the housing market, what's been going on in the credit markets, etcetera. So the build to the $39 billion, we built that up from the ground up client-by-client, dialed back the business that was purchase related, primarily our business related to Realogy, dial that back slightly. We still expect Realogy to do well, but that dialed up back slightly because our overall purchase market is expected to be down.

We viewed each of our other clients, dialed them up slightly for the increased refi activity that's going on out there. Took the full benefit from clients that were signed during ’07 for a full year of ’08, and then some anticipated benefit from the recent signings coupled with some anticipated new signings and that's how we get to a build of $39 billion in volume and that's how we build out the infrastructure to support those great brands that we support. So that's the story on our outlook for mortgage.

Shifting to vehicles. During the past 12 months, our sales momentum slowed because of lack of clarity around ownership. With that resolved we are now seeing sales investments that we've made in the past year, start paying off with recent signings. I must tell you that next year will not be a record year for the vehicle business. The cost of debt will be a drag. Our cost has increased and this affects the entire industry in varying degrees and it will play out. Some combination will be passed on to clients versus overtime and to the extent that some clients decide to go out to bid this year they will be the first to experience an increase associated with the credit cost.

Credit exposure for the vehicle business, we should note is a non-event because of the quality of our book as evidenced by our track record. So shifting to the book discussion where we believe book is book when you're discussing our mortgage business. As a company the book equity is $1.5 billion, our book value per tangible shares is $25.87. Since the spin we've been running in place, meaning book equity has been about $1.5 billion for three straight years, and the way we got there was mortgage performance offset by great vehicle performance.

Now, let's review with the areas of risk for our mortgage company on the balance sheet at year-end. There are four areas, MSR, captive insurance, recourse loans and mortgage loans held for sale. As I touched on a little bit, we believe our MSR is solid at 1.19% at year-end. We know this because there's a [big four] accounting firm that does a survey and based on where we stand on that survey, our value is conservative relative to that survey results.

In addition, we've got the best prepay story in the business, and as those of you who have followed us over the years know, the nature the platform, the nature of the retail based platform, all of our folks on the phone and the folks in the field have business coming into them naturally because of where their placed day-in, day-out. So they are not working the roller desk day-in, day-out, in effect chewing on the value to servicing portfolio. But the value of that prepay story is not necessarily reflected in the values. So, I would tell you that value you'll see overtime.

We sold servicing within one basis point of where we had it book, so that's another statement that says our servicing is worth what we think it's worth. And then in addition to that, when we review industry data that's out there, when we compare our multiple of servicing strip to the MSR we are at the low end of our competitors. So bottom line MSR is solid.

Turning to captive insurance; we have $32 million in reserves currently. Currently based on what we do, we expect the future value of premiums to be equal to the expected future value of losses. Now that expected future value of losses is based on industry data. So in that case, we don’t get the benefit for the out-perform of the credit book that we generate. And as we know, as you look at our delinquencies, our track record is we do perform better than the industry.

So the good news is present value of expected revenue versus present value of expected losses are similar or equal and we have $32 million in reserves. In addition, by insurance regulation we have $222 million in restricted cash to play claims if required. And according to one of our partners, our captive is number one in terms of their book for performance, and that’s I believe out of 65 captives.

Turning to recourse, there's two buckets of recourse $485 million of loans that have been sold over the years with recourse, 5% of those loans are 90 days delinquent. Now what I should tell you is, 65% of those loans were originated in 2003 or before, and 19% were originated in 2004. So the most exposed years, '05, '06 and '07 represent only 16% of this portfolio.

Shifting to another $2.4 billion of recourse risk that we have, it relates to a program where we have a different flavor of mortgage insurance and there is an 18 month look associated with this exposure. So if a loan goes a 120 days delinquent during that 18 months look, we have to buy that loan back. We halted this program back in September.

So as a result of stopping this program and the program we've got a partner with this program and at the end of the day in this partnership it is a win-win partnership, and our partners said this program wasn’t working very well for them. So we said okay we'll stop it, if it's the right thing to do. It wasn’t stopped because we weren’t comfortable with the risk, but it was stopped because it wasn’t working for our partner.

So as a result by June 2009 this $2.4 billion of recourse exposure will wind down to zero. We are also carrying a $130 million in REO and with that we have got $20 million in reserve for this risk. All-in credit reserves including the captive insurance business are approximately $80 million versus a year ago $50 million. With regards to mortgage loans held for sale, we do not have a hell of a portfolio position as many of our competitors do, so all assets are marked, so again in this case book is book.

Regarding liquidity. At year-end we had $50 million of cash that we could use freely. We had $321 million of unsecured capacity via our bank lines. As we say bank lines, because traditionally we would access the commercial paper markets backed by these bank lines, but as we all know the commercial paper market has dried up. And then we also had $679 million in warehouse facility, and we've just added another $500 million of warehouse facility. So as I said, we are back to the 90s. So fast return on GSE-backed loans mean less time in a warehouse, and therefore overall less reduced facility requirements.

So since August we have continued access to secondarily market to support prime jumbo loans and this is because of the quality we support. And those of you who are following us know that we've renewed our warehouse facilities and the vehicle asset-backed facilities over the last six months. So from here, as the rating agencies have requested, we need to move our maturities out. So that's our plan and is our attention to add more liquidity so we can grow the business.

So in summary, we feel good about both of our businesses. We feel that we can get through this incredible credit crisis that exist in the mortgage and overall finance sector. We are working hard to get the mortgage business back to profitability. We think things are lining up to get us there, and we'll update you throughout the year, of course, on how we are doing on that journey on a quarterly basis.

As I said vehicle will be down as we work through the increased cost associated that we expect everyone in our industry to how to deal with. And bottom line is, we feel like as it relate for the mortgage business book is clearly book. And as I said tangible book value per share is $25.87. So we think we are in a good position in the future, although there will be bumps in the road as we work through the credit crisis.

So now George and I will be happy to take your questions. I want to make you aware of the fact that George is at a client conference, so we can't see each other. So the hand off from time-to-time is not seamless that's the reason for that.

Natasha, we'll be happy to take questions.

Question-and-Answer Session

Operator

(Operator Instructions). We'll take our first question from Kenneth Posner from Morgan Stanley. Please go ahead.

Kenneth Posner - Morgan Stanley

Hi, Terry. Good morning to you.

Terry Edwards

Good morning to you, Ken.

Kenneth Posner - Morgan Stanley

So I wanted to ask a little about the $39 billion volume forecast that you guys are using for '08, and so you guys have built it up as you explained very, very carefully and thoughtfully. What kind of assumption are you using for the overall mortgage industry in '08 versus '07, just in terms of whatever industry sources or assumptions you are working with?

Terry Edwards

We use the Fannie Mae January forecast.

Kenneth Posner - Morgan Stanley

Okay, great, thank you. And then the other question I wanted to ask you is, you mentioned that the rating agencies have asked you to move maturities out a little bit. Can you be more specific on what you need to accomplish there?

Terry Edwards

Yeah. As a result of being under contract for a merger, our financing was stuck in place. So we would ideally like to move, access more liquidity and move the maturities out, because we are looking at our warehouse facilities have rolled over each year and we are looking at the asset-backed facilities related for the vehicle business rolling over each year. And while we just demonstrated that we could clearly get that done in the most difficult of circumstances, it's more prudent to move that out to the extent that we can get that done, that gives the rating agencies more comfort and hopefully we can start to move our ratings in the upper direction.

Kenneth Posner - Morgan Stanley

And can you remind me how much of maturing unsecured debt you have in '08?

Terry Edwards

About $200 million.

Kenneth Posner - Morgan Stanley

Great. Thank you very much.

Terry Edwards

You are welcome, Ken. Thanks for the coverage.

Kenneth Posner - Morgan Stanley

You're welcome.

Operator

We will take our next question from [Louis Syke from Tennant Capital]. Please go ahead.

Louis Syke - Tennant Capital

Hi Terry and welcome back to the world of public conference calls.

Terry Edwards

It's is nice to be back Louis. We have met yet.

Louis Syke - Tennant Capital

I had a couple of questions for you. One; around your comments that the business is right-sized for $39 billion in originations, and it sounds like you have the cost cuts in place to get that to breakeven. What is your expectation with regards to some gains on sale margins? I mean if gains on sales hold up like in the first two months of this year what kind of a profit would you see for the year?

Terry Edwards

We are pleased with what our gains on sales are being priced in the marketplace. So I would tell you that current pricing aligns with our plan to get the mortgage production segment to the breakeven point.

Louis Syke - Tennant Capital

Okay. So if prices at the level of January and February then you would roughly breakeven?

Terry Edwards

I would tell you that breakeven is achievable if those prices hold.

Louis Syke - Tennant Capital

Okay.

Terry Edwards

We feel pretty good about [life] if that is the case.

Louis Syke - Tennant Capital

All right and then on you know when

Terry Edwards

I realized your threw me a soft ball here, but you know the world's difficult out there. So we just want to continue to hedge our bets, put our heads down and perform. And as the result come about, we look forward to sharing them with folks.

Louis Syke - Tennant Capital

And then on the servicing business you break up this net loss from risk management and it looks like at the last six quarters, and every quarter you had a loss whether interest rates are up or down and the competitors have been reporting gains there as the liquidity dries up for [bores] and become harder to refi your mortgages and so prepayment rates should be going down at least relative to where the benchmark rates are. What's going on there? Are these sort of temporary losses or you're just becoming more conservative in valuing the MSR or what's your expectation on that line item going forward?

Terry Edwards

Well, the first question was a soft ball; this one's a little bit more difficult. But it's actually pretty simple to answer. At the end of the day, our MSR we have during the past two quarters written it down more aggressively than we've seen in the industry. Our assessment of the industry is that, they are making assessments that because of the credit dislocations many, many people cannot refinance because they are in essence locked into their existing mortgage. We, because of the nature of our book, our customers are not necessarily locked in. So as a result, we are writing our MSR down more aggressively and others, and at the end of the day that value will come out over time.

Louis Syke - Tennant Capital

Right. And you still not reflecting the fact that the whole Realogy half of the business as much less prone to refi and then the market on average?

Terry Edwards

Well, the whole book as a whole is less prone to refi activity, and again that's the value that will come in over time. So, it gets back to where MSR is solid?

Louis Syke - Tennant Capital

But other than that, as you look at '08, how do you feel about that line item?

Terry Edwards

Servicing to the extent that interest continue downwards as they have, servicing could see some pressure. But we would expect to make up the pressure in servicing in the originations business from pick-ups in the natural hedge. For example, when rates dipped in January, our volume really picked up and ran above that $39 million run rate. Now that was for four week period, that was at a time when the industry, when the media said, rates are at a two year low, then rates are at a four year low. So we were very, very busy during that four week period.

Then rates spiked up and as rates spiked up, the volume turned off. So you are back in to a scenario of, okay, $39 billion type run rate basis. So my point there is, if rates were to dip, the volume will spike again and in that case on a run rate basis will exceed $39 billion, but we'll have to write down the MSR. At this point since we are where we are. We are at the tipping point for heavy refinance activity. The hedge is not set up to be fully hedged. Hedges are expensive right now, and as a result we rely on the natural hedge to the extent that rates dip, so therefore that would mean an immediate markdown on the MSR that overtime would be offset by benefits from the natural hedge on the origination or production segment.

Louis Syke - Tennant Capital

And if you have a quarter or the rest of the year with interest rates not changing any more, then you would expect there would be impact from that risk management to be zero?

Terry Edwards

Yeah. Close to neutral.

Louis Syke - Tennant Capital

Okay. And finally on the captive, you mentioned your $222 million in restricted cash for that is the potential exposure if you are completely wrong about your expectations there. Is that what the exposure is capped to, I mean is there any scenario?

Terry Edwards

No the number is little bit north of $600 million in total exposure. You know that's basically Armageddon.

Louis Syke - Tennant Capital

But I mean is there a way for the mortgage insurance company to pull that money from you even though you don’t have it in the subsidiary?

Terry Edwards

No, I mean it's available there to pay losses.

Louis Syke - Tennant Capital

The 222?

Terry Edwards

Yes.

Louis Syke - Tennant Capital

But other than that you could walk away from it. I mean if the writing is on the wall, then those losses could be 600 and then you would just walk away from that. I realized that we are talking about a crazy scenario.

Terry Edwards

Let just get back to you on that one. I mean I don’t see, it's too crazy a question for one thing, based on the way our book has performed. So the maximum exposure is $665 million, but the whole concept of walk away, I don’t even want to talk about that.

Louis Syke - Tennant Capital

And how much reinsurance will be right in the last three years, for ’05, ’06, ’07?

Terry Edwards

That will in the K. It will be out shortly.

Louis Syke - Tennant Capital

Can you actually break out how much you would reinsured by --?

Terry Edwards

By a year, yes.

Louis Syke - Tennant Capital

Okay.

Terry Edwards

It was a $1.7 billion for 2007 or $1.9 billion. Now I should tell you and there is a total of $10 billion on the books. I should tell you that our plan has continued to stay in this business. You know this business has done well for us and this business is going to get better. And here is why it's going to get better. The closed-end second business is dried up, so in some ways the mortgage insurance business has been cherry-picked over the last couple of years with customer selecting a closed-end second loan to avoid MI. since that's not available any more, any loan above 80 LTV is typically going into the MI bucket.

In addition with underwriting and program cuts that are now in place where it's hard to do at 97 LTV, it's almost impossible to do a 100 LTV, the changes in credits scores that are required. As a result of those changes the book is getting better that way also. So we still feel good about this business, we feel good about the fact that we've got $32 million in reserves, we feel good about the projections present value - the present value projections of revenue and losses that I went through, and we feel good about the ability for the [captive] to contribute to us in future years.

Louis Syke - Tennant Capital

Okay. Thanks Terry. I'll let somebody else go on.

Terry Edwards

Thank you, Louie.

Operator

(Operator Instructions). We'll take our next question from Jordan Hymowitz from Philadelphia financial. Please go ahead.

Jordan Hymowitz - Philadelphia Financial

Hey, guys congratulations on a very good quarter actually.

Terry Edwards

Thank you.

Jordan Hymowitz - Philadelphia Financial

Couple of questions. First of, on the fleet management side what would you say your run rate of earnings currently is?

Terry Edwards

That's where we have to be really careful Jordan, because of the increase credit cost and we have to see that plays out. It's going to be our goal to try to pass much of that along, but that's going to play out overtime. In addition the increased credit cost it's a function of - it's an anomaly, it should go away at some point; but clearly we're not going to have a record year. I would tell you that the increased credit cost is a least $30 million, if we are not able to claw some of that back throughout the year. But as you would expect our management team is doing everything they can to determine how to claw that back, and then we will evaluate the market place and determine what's permanent and what's not.

Jordan Hymowitz - Philadelphia Financial

So $30 million pretax, I assume. Correct?

Terry Edwards

Correct.

Jordan Hymowitz - Philadelphia Financial

Okay. And next question is your volume. It's been as close to 3% to 5% in the past few years, and it was down a little bit this quarter. What do have in volume expectations?

Terry Edwards

You are talking about the vehicle business?

Jordan Hymowitz - Philadelphia Financial

Yeah.

Terry Edwards

George, you want to take that?

George Kilroy

Sure. Jordan we expect the volumes for most of our key accounts to be about flat in '08 to '07 where we ended up in '07. Still we have a couple of one-off clients from '07 that will probably impact the business, so that new signings will just get us back to flat.

Jordan Hymowitz - Philadelphia Financial

Okay. And my last question is, can you describe just a little bit the dynamics of higher oil? Is that in a positive, is that a negative? I am kind of confused by it.

George Kilroy

It's pretty much a non-factor. The higher the price of oil, we get a minor increase in our revenue. But that is somewhat offset by carrying cost. So it's not really much of a factor.

Jordan Hymowitz - Philadelphia Financial

Will you guys now that the deal is off, being marketing or talking to investors? I have been trying to call the past couple of weeks with not a lot of success at this point. I mean would you guys open yourselves up to talking to potential investors again or?

George Kilroy

Yeah. We are back.

Jordan Hymowitz - Philadelphia Financial

Okay. If you could ask Nancy or someone to call me, I would really appreciate that.

George Kilroy

Nancy is sitting there taking notes.

Jordan Hymowitz - Philadelphia Financial

Thank you.

George Kilroy

Thank you, Jordan.

Operator

(Operator Instructions). We'll take our next question from [Gabriel Kim] from Wellington Management. Please go ahead.

Gabriel Kim - Wellington Management

Hi, good morning.

Terry Edwards

Good morning.

Gabriel Kim - Wellington Management

Hi. Just following on the last gentleman's question about the impact of higher interest cost on your Fleet Management business, what's the lag around which you are able to get that call back from customers? How long does that take?

Terry Edwards

George, you want to take it?

George Kilroy

[Technical Difficulty]

Gabriel Kim - Wellington Management

Okay. And I presume you saw some of this cost pressure in the fourth quarter.

George Kilroy

There was a bid in the quarter. Yes.

Gabriel Kim - Wellington Management

Can you provide some details around how you're -- just going to the mortgage production, how is that pipeline building year-to-date?

George Kilroy

Can you put your phone on mute?

Gabriel Kim - Wellington Management

Hello

George Kilroy

If you could just put your phone on mute, there's a lot of feedback.

Gabriel Kim - Wellington Management

Okay. Sorry.

George Kilroy

(inaudible). I mean, right now because of the boost that we got from the pickup and the business that I was talking about earlier from the drop in rates in January. We are on target for $39 billion.

Gabriel Kim - Wellington Management

Okay. Could you just the split between - so when you're really up to $39 billion, you talked about annualizing the customers you signed in '07 and then new customers signings in this '08. What are the relative magnitudes there between those two pieces?

Terry Edwards

There is about -- it's almost $2 billion as a result of the clients, the newer clients.

Gabriel Kim - Wellington Management

Incremental in '08?

Terry Edwards

Yes.

Gabriel Kim - Wellington Management

Okay. And what's the annualized benefit for -- the fully annualized benefit for the '07 guys?

Terry Edwards

About $1 billion.

Gabriel Kim - Wellington Management

Okay. And the last question on the mortgage pipeline, can you talk about FHA/VA, and is that becoming a bigger, more significant part of the mix?

Terry Edwards

Yes.

Gabriel Kim - Wellington Management

Okay, is there any more detail [based] on that or?

Terry Edwards

No, as you would expect FHA is a place for folks with lower credit scores. So that is absorbing and that business is growing year-over-year.

Gabriel Kim - Wellington Management

At good margins?

Terry Edwards

Yes.

Gabriel Kim - Wellington Management

Okay. So I've also just had a little bit of difficulty in getting through to you guys, so if I could just get on in Nancy's list that will be very much appreciated.

Terry Edwards

Purposely everyone has had difficultly to getting through to us.

Gabriel Kim - Wellington Management

Okay.

Terry Edwards

Thank you.

Operator

(Operator Instructions). We will take a follow-up from question from Kenneth Posner. Please go ahead.

Kenneth Posner - Morgan Stanley

So, I am angling for the prize for the most technical question.

Terry Edwards

Great.

Kenneth Posner - Morgan Stanley

You talked about the present value of premiums being equal to the present value of expected losses in, I guess it was your captive program?

Terry Edwards

Yes.

Kenneth Posner - Morgan Stanley

I was just curious if you could give us a sense of what the expected losses are, roughly in terms of basis points of defaults or severities or what you would think about it?

Terry Edwards

It's approximately $80 million of expected losses associated with $80 million of future premiums. And again, everyone should be careful with that because our book typically outperforms the world. The good news is we've got $32 million in reserves; the bad news is, no one knows how bad this housing market is going to get.

Kenneth Posner - Morgan Stanley

That’s true. Thank you very much.

Operator

We will take our next question from Ben Johnson with Goldman Sachs. Please go ahead, sir.

Ben Johnson - Goldman Sachs

Hey, a couple of questions. First, how often are you turning your mortgage loans held for sale on your balance sheets.

Terry Edwards

Mortgage loans held for sale are turning very rapidly. The GSE backed business which is now 80% of our business is turning within the month. So it closes in a month and for the most part it settles in the month.

Ben Johnson - Goldman Sachs

And you pushed on financing cost and how that will impact your fleet leasings? How would continued decline in residual and resale values impact the outlook or would it?

Terry Edwards

George, you can take that soft ball.

George Kilroy

You are talking about residual values on the lease?

Ben Johnson - Goldman Sachs

Yes.

George Kilroy

Remember our leases are, we don't have residual risk on 96% of our leases. So that's not a big driver for our business. The resale value just in the market, in general, is expected to be flat to a little bit up this year. But again that benefit goes to our clients.

Ben Johnson - Goldman Sachs

And can you articulate or maybe comment on how you or what your leverage goals are for the company? Whether be that to equity or how you look at your balance sheet and how you plan to manage your gearing going forward?

Terry Edwards

Our debt-to-equity is at an all time low of 4.1 to 1. Our bank agreements allow us to go to 10 to 1. The rating agencies are comfortable all the way up to 6 to 1. So we are a finance company, we are far on the leverage right now. So the idea would be overtime to push that leverage back up.

Ben Johnson - Goldman Sachs

And would you envision, do you expect you are adding leverage relying on the secured market or the unsecured market?

Terry Edwards

We'll access whatever we think is the most efficient cost of capital.

Ben Johnson - Goldman Sachs

Okay. Thank you.

Terry Edwards

Okay. And following up on Ken’s question; when I make that projection on future losses and future revenue associated with the mortgage insurance business to captive, that assumes no new business. So that's you free at the business and that's what produces. Obviously, we expect to do more business as I indicated as we like that business.

Operator

Thank you. (Operator instructions). We'll take our nest question from Marcelo Lima with Horn Eichenwald. Please go ahead.

Marcelo Lima - Horn Eichenwald

Hello, good morning. I was wondering if you had given any thoughts to perhaps spinning off against splitting the company in two between the fleet business and the mortgage business. I am not so sure and correct me if I am wrong, there doesn't seem to be a lot synergies between the two businesses and seems like it wouldn’t make sense to split them in two what's your take on that?

Terry Edwards

The synergies between the two business start with the credit rating, obviously the vehicle business has been able to keep the wheel on the bus, if you will, as the over all company as the mortgage businesses had a couple of tough years. In effect these two years for the mortgage business will wind up being good years as the decks are cleared and the mortgage and landscape will get better overtime, and as I said we're back to prime base products, fully documented loans, the business that we do and we excel at, and it will dominate the future.

So, but the time being a standalone mortgage company trying to go out and raise debt is not an easy trick to pull off. So for the next three years one should assume that the two businesses are going to remain together with no plans to separate them.

Marcelo Lima - Horn Eichenwald

So in another words you're saying that, these two businesses together and get a better rating then let's say the mortgage business could get individual because the fleet business sort of makes money when the mortgage business isn't making money in this environment.

Terry Edwards

That's correct.

Marcelo Lima - Horn Eichenwald

All right. Thank you.

Terry Edwards

You're welcome.

Operator

(Operator Instructions). It appears that we have no further questions at this time. I will turn the call back to the management for any further comments.

Terence Edwards

Thank you, Tasha. Thanks everyone for spending your morning with us. We really appreciate your interest in our company, and we look forward to being back in the market discussing our business as we go forward. And we look forward to talking to everyone in about 90 days with an update for the first quarter. Thank you.

Operator

This concludes the PHH 2007 fourth quarter and year-end conference call. Once again, ladies and gentlemen, the replay will be available in approximately two hours at the company's website at www.phh.com or by dialing 1-888-203-1112 or 1-719-457-0820, using pass code 4005399. It will be archived until March 31, 2008. You may now disconnect your lines and have a great day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: PHH Corp. Q4 2007 Earnings Call Transcript
This Transcript
All Transcripts