CoreLogic, Inc.
Q4 2016 Earnings Call Transcript

Published: 24 Feb 2017

[Operator:]

Good morning, and welcome to the CoreLogic Fourth Quarter 2016 Conference Call. All participants will be in listen-only mode. After today's presentation there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Dan Smith, Investor Relations. Please, go ahead.

[Dan L. Smith:]

Thank you, and good morning. Welcome to our investor presentation and conference call where we present our financial results for the fourth quarter and full year 2016. Speaking today will be CoreLogic's President and CEO, Frank Martell; and CFO, Jim Balas. Before we begin, let me make a few important points. First, we've 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 details concerning these risks and uncertainties, please refer to our SEC filings, including the most recent Annual Report on Form 10-K and the subsequent 10-Qs. Our forward-looking statements are based on information currently available to us, and we do not intend and undertake no duty to update these statements for any reason. Additionally, today's presentation contains financial measures that are non-GAAP financial measures. A reconciliation of these non-GAAP measures to their GAAP equivalents is included in the appendix to today's presentation. Unless specifically identified, comparisons of fourth quarter financial results to prior periods should be understood on a year-over-year basis that is in reference to the fourth quarter of 2015. Finally, please limit yourself to one question with a brief follow-up. We will take additional questions at the end of the call as time permits. Thanks. And now, let me introduce our President and CEO, Frank Martell.

[Frank D. Martell:]

Thank you, Dan, and good morning, everyone. Welcome to CoreLogic's fourth quarter 2016 earnings call. I will lead off the call today with a recap of our 2016 operating performance, including growth, profit margins, and capital return. I will conclude with some observations on important market trends. Jim will summarize our fourth quarter and full year financial results, and discuss 2017 guidance before we go to Q&A. Before I begin with my prepared remarks, I want to briefly address Anand Nallathambi's short-term medical leave. CoreLogic's Board of Directors granted a leave of absence on February 13, so Anand can focus on his health. During this time, Anand and his family appreciate our respect for the privacy as well as our support and good wishes. Anand is an outstanding leader, and a close friend, and on behalf of the entire CoreLogic family I wish him the very best. Anand and I have worked closely over the past five-and-a-half years to execute against our shared vision of creating an innovative data-driven enterprise that delivers unique property level insights to the global housing ecosystem. Since 2011 we grew revenues at an annual compounded rate of 12%, adjusted EBITDA by 15%, and adjusted EPS by 30%. At the same time, we invested in our business transformation and long-term growth, and returned more than $1 billion in capital to our shareholders. Over the past five years our strong operational and financial performance has driven our share price up more than three times. Now turning to our 2016 results. CoreLogic had an exceptional year both operationally and financially. Our full-year revenues, operating income, adjusted EBITDA, and adjusted EPS were up 28%, 35%, 18% and 27% respectively. Consistent with past years, in 2016 we outperformed market volumes in our core mortgage-related operations. We expect a similar market outperformance again in 2017. Jim will provide more color on this when he discusses our financials in a few minutes. In terms of our operating performance we focused on first building market leadership in our core Property Intelligence, Underwriting and Risk Management solution business units. Second, driving operational leverage and expanded margins through process reengineering, work flow optimization and cost efficiency. Third, optimizing our technology infrastructure and expanding our innovation center. And fourth and finally, returning large amounts of capital to our shareholders. A significant component of our high rate of growth during 2016 was our strategic investment in building a scaled leadership position in property valuation solutions in the U.S. As you may remember CoreLogic is a leading provider of valuation solutions in Australia and New Zealand. During 2016 we integrated LandSafe, RELS, and FNC into CoreLogic and built out our valuations management team. Over the next 12 to 18 months, we will focus on building operational capabilities and solutions offerings as well as diversifying appraisal related revenues. The U.S. residential property valuation market is poised for transformation. We believe that our scale as well as our technology, data, and analytics will prove to be advantageous in the race to transform the way real estate assets are valued. As we've said in the past, the opportunity to transform the valuation space and bring greater transparency to the underwriting process will be a multi-year endeavor and represents a significant long-term opportunity for us. Importantly, in the fourth quarter and for that matter in the second half, we generated strong and accelerating organic growth rates from our core operations. For both Q4 and the final six months of 2016, our rate of organic growth was approximately 7%. This compares with a 3% growth rate for the first half of the year. For the full year of 2016 our organic growth rate was approximately 5%. More than half of our organic growth in 2016 came from such areas as share gains, pricing as well as new and enhanced products. We also capitalized on strong growth in our insurance, spatial and international operations as well as improving U.S. mortgage market volumes. 2016 share gains, pricing actions, and the launch of new enhanced products should provide us with momentum, and help to somewhat offset the impact of the forecasted slowdown in U.S. refinancing volumes during 2017. Regarding cost management actions and margins, over the past several years, we've made important strides in our pursuit of first quartile levels of operational excellence. Every single member of the CoreLogic team is focused on quality and service improvement, process and organizational efficiency and cost productivity. In late 2015 we set a goal of reducing our costs by at least $30 million in 2016. I'm pleased to report that we more than achieved this target by consolidating facilities, reducing staffing costs, outsourcing certain business activities, and other operational improvements. As we previously announced, we also expect to reduce run rate costs by an additional $30 million in 2017 as we reduce complexity and simplify organization, refine and automate work processes, and further shrink our real estate footprint. Importantly, our consistent focus on driving scale and operating leverage, cost productivity and cash flow, allows us to reinvest in leading edge project development technology and risk management programs. This allows us to outperform U.S. mortgage volume trends, and to sustain our long-term competitive advantage, and broaden our capabilities. As we've discussed previously, CoreLogic is committed to achieving 30% plus adjusted EBITDA margins over the next three years based on a normalized U.S. mortgage market, and after accounting for the build-out of our valuation solutions platform. We expect to achieve our margin goals through a combination of profitable growth, favorable revenue mix as well as business model transformation, and cost productivity. CoreLogic is committed to aggressive and consistent capital return. In 2016, we repurchased 5 million shares, representing a capital return of 59% of our free cash flow. In 2017, we plan to repurchase at least 3 million additional shares or about 4% of our outstanding share count. Although, our market cap has increased significantly over the past several years, we believe that our current share price 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 shares remains a significant source of long-term value creation. My final prepared remarks today will focus on market trends. As we've mentioned in the past, the U.S. mortgage market is progressively transitioning from its dependency on high levels of refinancing to a purchase driven cycle. We believe that this transition will be largely completed in 2017. We expect purchase volumes in 2017 to increase from 2016 levels fueled by growth in population of first-time home buyers plus fewer cash purchases. Millennials are also becoming an increasing source of new housing demand and will be so for the foreseeable future. We believe that a return of the U.S. mortgage market to a more purchase driven foundation is good news for the medium to longer term for CoreLogic and for the industry as a whole. The end of the refinancing boom of the last five years although challenging in 2017 sets the stage for more predictable and sustainable growth pattern in U.S. mortgage volumes in the years ahead. We believe the ongoing growth in home purchase activity and a return to normalized level of refinancing support a new normal mortgage market of $1.5 trillion to $1.75 trillion going forward. This bodes well for our future as we have a long-established track record of consistently outperforming market volume trends through a focus on driving market leadership, scale as well as smart acquisitions. I believe that our success in transforming CoreLogic into a high-performing global leader is a direct result of our continued successful execution of our strategic imperatives which are focused on delivering unique property insights. These insights allow participants in the housing ecosystem to make better decisions in the areas of prospect identification, underwriting and continuous risk management and monitoring. In closing, I would like to thank our employees, clients and shareholders for their continued support. We delivered outstanding results in 2016 and I believe our performance demonstrates the value creation opportunities inherent in our strategic plan and our consistently strong operational execution. I appreciate your time today. Jim will now discuss our 2016 financial results in more detail and outline our 2017 financial guidance.

[James L. Balas:]

Thanks, Frank, and good morning, everyone. Excuse me. Today I'm going to discuss our fourth quarter and full year 2016 financial results, and then outline our 2017 financial guidance. As Frank mentioned, CoreLogic delivered a very strong operating and financial performance in 2016. From a financial perspective, our full year revenues, operating income, operating and free cash flow, and adjusted EPS grew at double-digit rates and were all at record levels. We also outperformed market volumes in our core mortgage-related operations in 2016 as we have done over the past five years. Notable 2016 financial highlights included one, high levels of overall growth and accelerating organic growth trends; two, our overachievement against our cost reduction targets with resulting expansion of our EBITDA margins; three, generation of record free cash flow levels; four, the simplification of our capital structure and a significant reduction in borrowing costs. And finally the repurchase of 5 million common shares which reduced our total share count by about 6%. Full year 2016 revenues of $1.95 billion were up 28% compared to 2015. Operating income from continuing operations was up 35% to $275 million as a result of revenue growth and cost management. Net income from continuing operations was down 14% to $110 million as higher operating income was offset by non-cash impairment charges attributable to the wind down of two investments and affiliates in debt extinguishment costs associated with our second quarter refinancing as well as the redemption of our senior unsecured notes. Full year adjusted EBITDA was $500 million, up 18% from prior year. Adjusted EPS was up 27% to $2.42 per share. Both adjusted EBITDA and EPS were significantly above our initial 2016 guidance. Finally, we generated $333 million of free cash flow. Fourth quarter revenues were $475 million, a 21% increase driven primarily by the PI segment. PI segment revenues rose 33% to $255 million driven principally by the valuation solutions group and growth in insurance, and spatial solutions, and international, which more than offset lower project related revenues. We also benefited from product launches and enhancements across the segments. RMW segment revenues totaled $222 million, 10% above 2015 levels as growth in tax, flood and credit services more than offset the wind down of non-core product lines. Operating income from continuing operations was up 111% to $57 million for the quarter. Benefits from revenue gains and productivity, more than offset investments made in productivity programs, technology, cyber security, and compliance. For the quarter, operating income margin was 12% compared to 7% in 2015. Fourth quarter net income from continuing operations totaled $6 million compared with $38 million in 2015. The decrease was driven primarily by non-cash impairment charges associated with the wind down of two investments and affiliates, which had no 2015 counterpart. In addition, 2015 income from continuing operations included a $26 million gain – after-tax gain associated with the acquisition of RELS. Diluted EPS from continuing operations totaled $0.07. Adjusted EPS was up 60% to $0.56 for the quarter. Growth in adjusted EPS reflects the operating upside previously discussed, as well as lower interest expenses and the positive impact of share repurchases. Adjusted EBITDA was up 32% to $116 million in the fourth quarter largely due to revenue growth and the benefits of cost productivity programs. Fourth quarter 2016 adjusted EBITDA margin was 24% compared with 22% in the prior year. The PI segment adjusted EBITDA totaled $60 million compared to $47 million in 2015 driven by higher revenues and the benefit of expense productivity programs. RMW adjusted EBITDA was $66 million up 33% from 2015 levels as a result of organic growth and the impact of cost reduction programs. Finally, free cash flow continued to be very strong through the fourth quarter. Full-year free cash flow totaled $333 million, a 67% conversion rate of adjusted EBITDA. I will close my prepared remarks today with a discussion on our 2017 financial guidance and capital allocation strategy. For the full year of 2017 we expect to generate revenues of between $1.825 billion and $1.875 billion. Adjusted EBITDA of $450 million to $480 million and adjusted EPS of $2.15 to $2.40. Our guidance is based upon the following important assumptions. First, U.S. mortgage origination unit volumes down 20% to 25% from 2016 levels as purchase volume increases are more than offset by declines in refinancing activity. Next, we are targeting cost savings totaling at least $30 million. Third, we're assuming a successful diversification of appraisal related revenues associated with our valuation solutions group. Fourth, we are assuming no change in U.S. dollar conversion rates against the Australian and New Zealand dollars, and the euro. And finally, we have factored in the repurchase of 3 million common shares. Our 2017 guidance implies a significant outperformance of projected U.S. mortgage market volume trends. This outperformance is consistent with our actual results over the past five years and reflects the strength of our strategic plan and durable business model. Our long-stated capital allocation strategy remains in place. We will continue to reinvest in product and service development, productivity, cost management programs and we will opportunistically repurchase our common shares, and retire outstanding debt. In terms of the first quarter of 2017 based on seasonality and our current view of origination unit volume trends and investment timing, we believe that adjusted EBITDA should be approximately 85% of first quarter 2016 levels. To sum it up 2016 was another outstanding year for CoreLogic, strategically, operationally, and financially. Over the past five years, we have produced double-digit compound growth rates of revenue, adjusted EBITDA, and adjusted EPS. We have an aggressive plan to grow the company's market leadership and expand margins in 2017 despite the projected compression in U.S. origination volumes. Thanks for your time today. I will now turn the call back over to the operator for Q&A.

[Operator:]

Our first question comes from Darrin Peller with Barclays. Please go ahead.

[Darrin Peller:]

All right thanks guys. Let me just start off with the impacts in terms of what's included in your guidance around first the VSG side of the business I understand that it's subject to market headwinds. I guess number one, maybe if you can help quantify the overall company's exposure including VSG to every $100 billion of originations now versus what you guys had before? That would be helpful. And then number two for 2017 what do you actually anticipate VSG doing in terms of revenue growth or EBITDA growth as per your guidance? I understand again some of it is origination some of it maybe client specific? Thanks guys.

[James L. Balas:]

Thanks Darrin. So first on the VSG piece in terms of revenue growth. VSG will be down in 2017, we'll see that probably more pronounced in the first half of the year. As you all know on the appraisal side, we have basically two large clients. We expect some diversification from a vendor management perspective. We expect that growth rate to improve in the second half as we onboard new clients, but we don't anticipate that happening until call it the beginning of the third quarter. In terms of your question on the per $100 billion nothing has really changed in terms of the core businesses ex VSG, that $15 million per $100 billion remains around the right range to estimate. So the balance of our declines will normalize over time, but will be more pronounced due to the impact of having the VSG acquisitions within the company portfolio.

[Darrin Peller:]

Okay. And just to be clear on VSG I mean the expectation for the second half of the year, is that I mean, the new client additions are they coming in as expected? I mean, I know it's maybe taking a little longer just given the market dynamics, but do you have a good pipeline still of number of clients or of sizable clients that can actually offset the market volatility that we're seeing to some extent?

[Frank D. Martell:]

Yeah. Darrin, this is Frank. We have a good pipeline and it's really developing I think exactly in line. It takes a while to get through the normal on-boarding process with the clients. Obviously, you've got a lot of people involved on their side from a procurement and a compliance perspective, et cetera, but everything is going according to plan. I think that as Jim alluded to that really, we hit RELS and LandSafe for captive operations, we have two clients, so we're subject to non-market related forces there...

[Darrin Peller:]

Yeah. Yeah.

[Frank D. Martell:]

...principally, their diversification. I think in the case of one of the two major clients, I think a sharper drop in volumes related to perhaps some issues related to those – unique to those firms – to that firm. So but – we expect to work through that and come through in the second half of the year with new substantial progress on the diversification, and new revenue to offset some of that.

[Darrin Peller:]

Okay. All right. And then just one last follow-up on the overall organic growth rate of the business, in the second half of the year you called out a 7% growth rate I know some of that was mortgage, I think half of that about was mortgage-related, but when we look at the outlook in 2017, can you give us a sense of what the business has grown organically? Is it still three is 3%-ish – 3% to 4% range? And then the drivers of that again as it still – I mean, how much is still coming from pricing versus new products versus the insurance, international and some of the other growth drivers? Thanks, guys.

[Frank D. Martell:]

Yeah. I expect organic growth rates in 2017 to be similar or better than 2016. We had good momentum in the second half, which I thought was great products, we have growth in new products and product enhancements area. I think pricing, its momentum build, so we'll have additional momentum in 2017. So I think those are good areas. Spatial, international, insurance those are all areas we'll continue to grow from an organic perspective. So I think all the levers that were put into place and then which are diversified pretty well I think we'll have a positive flow-through effect in 2017. So I think that's good news for the company.

[Darrin Peller:]

Okay. All right, guys. I'll leave it there. Thanks.

[Frank D. Martell:]

Thank you.

[Operator:]

The next question comes from Kevin McVeigh with Deutsche Bank. Please go ahead.

[Kevin McVeigh:]

Great. Thanks, and best wishes obviously to Anand for speedy recovery. Frank or whomever just any sense of – as you think about the 2017 guide what would cause you to kind of come in at the low end versus the high end of the range, and ultimately what do we think about in terms of free cash flow?

[Frank D. Martell:]

So we expect – Kevin, this is Frank, and thanks for the – wishes for Anand. I think cash flow percentage conversion I expect to be in line with the 55% or better range for 2017. So I think that's – I don't see an issue there. As it relates to the guidance range I think a lot of it is just the severity of the compression in refinancing volume, and this is – the good news in 2017 is from a volume perspective, and we're unit driven versus dollar driven obviously. So I think if refi compresses further, and there's debates about the rate hikes and how long that's going to be et cetera and how many they are going to be, but I think refi is the swing factor. I think purchase will continue to be underpinned by solid fundamentals, and should grow in 2017. So I think it's really the swing factor is the refi compression. As I mentioned I think ultimately getting to a more purchase driven cycle is more predictable and it's a solid framework for growth going forward so as painful as refi compression maybe for the industry in 2017 it resets us on a firm foundation.

[Kevin McVeigh:]

Got it. And just as we think about acquisitions because my only other question was, were we initially thinking 4 million shares in terms of buyback and now that's 3 million shares, does the incremental capital go to acquisitions? How do we think about buyback relative to acquisition and my thinking it was initially 4 million shares and went to 3 million shares?

[Frank D. Martell:]

No. It was actually 8 million shares over 2016/2017 so we did 5 million shares.

[Kevin McVeigh:]

Got it.

[Frank D. Martell:]

So it's really more we pulled forward. As we have done in the past, we'll continue to look at the level of share buyback that we're doing in line with the cash flow, and we are an aggressive capital return focused company, and we will continue to do that, so as cash flow permits, and as we feel we can, we will – we'll look at that 3 million shares target, but I think it's a very solid starting point for modeling purposes.

[Kevin McVeigh:]

Great. Thank you.

[Operator:]

The next question comes from Jason Deleeuw with Piper Jaffray. Please go ahead.

[Jason S. Deleeuw:]

Thank you, and I also just want to wish all the best for Anand. First question is just on the revenue growth by segment, if you could just kind of help us with the PI segment versus RMW segment. We got VSG revenue, it sounds like you expect that to be down in 2017 and there is still some origination sensitivity to the data and analytics business, so just kind of help us think about that PI revenue growth versus the RMW segment revenue growth?

[Frank D. Martell:]

Yeah. So. Hey Jason.

[Jason S. Deleeuw:]

Hi.

[Frank D. Martell:]

Obviously the most sensitivity mortgage volume, it resides in the RMW segment. VSG is obviously also sensitive, but we have a different dynamic there with the client concentration. And frankly, we do have a quarter's worth of FNC in the numbers in 2017 that weren't present in 2016, so there are some offers but, so most of the market related pressure falls in the RMW segment. As I mentioned earlier, we have growth across the PI segment as it relates to international spatial insurance which is a fairly significant proportion of the revenue in that segment. In addition, we have property licensing business in that segment which are multi-year contract that don't fluctuate with market volumes so I think the PI segment from a revenue perspective has less compression than the RMW segment. We don't parse out that granular level of detail but that's how it shakes for 2017.

[Jason S. Deleeuw:]

Great, and so then also thinking about the segment margins, the PI segment has got the benefit of VSG coming through, and potentially those margins could ramp, can you just kind of talk about the margin dynamics for the PI segment and the RMW segment? I'm kind of assuming RMW margins would be down with the revenue and volumes, but for the PI segment could the margins do better than that? Could they be up even just because you got a ramp of VSG?

[Frank D. Martell:]

Interesting by the way, just 2016 margins if you kind of exclude pro forma the VSG, the company excluding that initiative actually we are pretty close to 30% margin, adjusted EBITDA margin. So we had – that was a great result in 2016. I think as it relates to 2017 as we work through the diversification of revenue stream in VSG, the margins are going to continue to be below the company's average obviously. So that's going to suppress margins in the short run, and PI ultimately it will be a margin expander as we get through the diversification, and we get some of the product change that were – are on the drawing board. Ultimately it will be a stronger margin expander as we get out of 2017. But the balance of the company I would expect to continue to generate progressively improve margins through the cost management programs, (31

[Jason S. Deleeuw:]

Okay. Thank you.

[Operator:]

The next question comes from John Campbell with Stephens, Inc. Please go ahead.

[John Campbell:]

Hey guys, good morning.

[Frank D. Martell:]

Hi.

[John Campbell:]

First off just want to (32

[James L. Balas:]

That's right John. (32

[John Campbell:]

Okay, so got it. So looking like $98 million or so, so that's down $8 million from 1Q 2016. I don't think there's that much of a shift in the origination market from year-over-year and I think you guys also had a few million in VSG integration cost in the prior-year quarter, so I'm sure there's some degree of conservatism with the guidance but am I missing something that's causing that incremental pressure in the quarter?

[James L. Balas:]

Yeah. It's 85% of the – so Q1 of 2017 will be 85% of Q1 of 2016, not Q4. So just to clarify that, and then the range that we provided or the estimate we provided is, there's really two pieces to it. As one there is the market which we're thinking is 10% to 15% down and then we also have some timing related to some initiatives and investments that we have going on, it's just more of a timing piece that will impact the first quarter. So that's how we arrived at the range.

[John Campbell:]

I got it. And so you should expect some of the back half of the year to maybe benefit from a pull forward of investment?

[James L. Balas:]

Correct.

[John Campbell:]

Okay that's helpful and then on the $30 million in cost saves, I know you guys did a lot last year that was kind of geared towards real estate consolidation. Can you walk back through kind of what the bits and pieces are this year and then maybe what segment is benefiting the most from that take out?

[James L. Balas:]

I don't think it's going to be favoring significantly one segment versus the other. It's going to be the same make up as what we looked at in the prior year. Where we're going to have some continued advancements of our real estate consolidation and then coupled with productivity effectively lowering our cost on the labor and with the parties.

[John Campbell:]

Okay. And then just if I could squeeze in one more, the (34

[James L. Balas:]

The tax rate is 35% that's slightly lower than last year's 35%. We've been hovering in that 35%, 36% range over the last three years. So we have some R&D cuts that help drive it down and to mix with our international.

[John Campbell:]

Okay. And then interest expense kind of mid-50%-s?

[James L. Balas:]

Yes. Interest we have – we've assumed, as you know the 10 year spike in the fourth quarter interest expense should be down by about $4 million. So we have the benefit of the refinancing activity being offset slightly by modestly higher rates.

[John Campbell:]

Okay that's helpful. Thanks guys.

[James L. Balas:]

Great.

[Operator:]

The next question comes from Brandon Dobell with William Blair. Please go ahead.

[Brandon B. Dobell:]

Thanks, good morning guys. Focusing on that 5% organic growth rate number you guys gave out maybe refresh around what's in there, how you calculate it, what's not in there and is that a metric that we should expect you guys to provide going forward?

[James L. Balas:]

For 2016 about half of it was market and then a little bit more than half on a full year basis was market, and then the balance was from new products and from pricing. It became more half towards the back half of the year where our growth rate was 7%, and the reason for the rise to 7% in the back half of the year was we saw the impact of pricing initiatives as well as new products starting to take root. But we expect those trends to continue into 2017.

[Brandon B. Dobell:]

And should we expect you guys to get that metric out on a quarterly basis or is this just going to be an annual number?

[James L. Balas:]

We've generally highlighted the impact from market and pricing, and so forth. So I would expect that to continue.

[Brandon B. Dobell:]

Okay. And just one quick follow-up there on your pricing commentary there since that was the second half impact there should be some spillover into the first half of 2017 I would suspect but...

[James L. Balas:]

That's correct.

[Brandon B. Dobell:]

...is there an ongoing, I guess kind of broader opportunity for continued pricing power, and is there any specific part of the business where you feel you've got more headroom than someplace else?

[Frank D. Martell:]

Yeah. We – Brandon, we actually put a lot of effort into pricing, both structurally and opportunistically. Some of the pricing is cost of living and inflation related, and some of it is product features and functionality. So, for example, in the credit business we introduced, as you know, trended reporting, which was a significant price increase related to that activity. So it's a little bit of both of those types of things. So, I think, we have good momentum on pricing. It's difficult because we have a lot of clients who are working through that and making the pricing effective. There's a little lag, but I think that we have progressively built on that. So, I think, as we go forward, the impact of pricing will be more consistent and more significant as a proportion of our organic growth make up. So, we – I think, it's very encouraging I think as we go forward, and it does, I think every business has some component of the price now, which is good news. Some, maybe, far less than others admittedly, but I think, on balance, it's a meaningful number for the company and I think we're getting expansion of that benefit.

[Brandon B. Dobell:]

Okay, great. Thanks.

[Operator:]

The next question comes from Glenn Greene with Oppenheimer. Please go ahead.

[Glenn Greene:]

Thanks. First I just want to go back to VSG, maybe for Frank, you can sort help me think through this. But it sounds like since there's couple of dynamics going against it, you've got the diversification with a couple of clients with one specifically, maybe, having some challenges. And is it reasonable to assume that you have the same sort of market track on the VSG business in the first half of the year until you start to get the share gains in the second half, and then maybe it flattens out? And also in the context of that, how should we be thinking about VSG margin? Should we be thinking sort of like low teens EBITDA margin in 2017?

[Frank D. Martell:]

Sure. Yeah. So, Glenn, I think as Jim kind of alluded to, so it's a little bit of – it's going to be tale of two halves, I think, pretty much. If you look at the first half of last year, we had better volumes than we were predicting for the first half of this year. So you have a volume issue in general in the market. The two – we have the phenomenon of two clients versus a diversified client base. So we're really subject to those two clients. I think as we said in the past, they both have diversification, long-term diversification programs of their own. And so it's a function of how quickly they implement those and so on and so forth. I think they will implement them progressively. It's not a rapid evolution, I think, at the end of the day. But also frankly we are subject to their – how they do in the marketplace, and I think that that will vary over time. I think as we get into the first half of the year, we still have that client concentration. I think as you get into the tail end of the second quarter, and into the third quarter, we will have additional clients onboarded so you are going to see a benefit of that -- an escalating benefit as we had through the year. I think in the first half of the year the margin rates are not going to be as high as I would like them to be in the short run just because of this phenomenon of having the volume drop, and trying to deal with that with fixed cost structures, et cetera, the integration et cetera. So it's just going to take us, I think, the first half of the year to get through that transition cycle, and then start to bring on this revenue. I think that's going to help with the profit margins in addition to some of the cost efficiencies that we are bringing out of those business units as well as we integrate them and get them out in the market.

[Glenn Greene:]

Okay. And then you had made a comment about the 30% EBITDA margin target and I think you sort of referenced it in three years which I would take to mean 2019 timeframe and maybe that's exiting 2019. But sort of thinking about it in the context of this year, the mid-point of the guide implies a 25% EBITDA margin for the reasons we've sort of alluded to. And I think you also referenced to a normal mortgage market which you define as $1.5 trillion to $1.75 trillion. So I just want to understand the key variables to give you that kind of order of magnitude margin ramp in 2018, 2019 and also just clarify are you assuming a $1.4 trillion market this year? Sorry it's a multipart question.

[Frank D. Martell:]

No I think that we've always traditionally been anchored to the MBA numbers plus or minus -- I think the latest number is about $1.55 trillion-ish for the MBA dollars. If you look at -- the impact of that from a unit perspective, it's a little bit worse. That's why Jim had the 20% to 25% range, because the unit trends in this down cycle are worse than the dollar trends modestly. So that's just one thing to consider there. In terms of the margins, though, I think we said on previous calls and it's just the same as I kind of alluded to earlier. If you look at the VSG impact in 2016 margins it was about 400 basis points roughly speaking. So we were pushing 30% margins for the core non-VSG related assets of the company. You know, we are – we've got the $30 million cost reduction. That's 100 basis points to 150 basis points of margin. So that efficiency those gains, and we still have additional room on the -- I think process efficiency, the organization simplification, the real estate consolidation to keep the cost savings mantra going for the next couple of years. So that will help on the core business. And I think – as we mentioned VSG I think it's revenue diversification, it's automation and cycle time reduction on the appraisal side and pricing are the key levers to get those margins up to where we think they should be in the longer-term which is closer to the 30% level certainly than they are today.

[Glenn Greene:]

Okay. Thank you.

[Operator:]

The next question comes from Chas Tyson with KBW. Please go ahead.

[Chas Tyson:]

Hi. Good morning, guys. Just wanted to echo the comments about Anand obviously, thoughts and prayers with him as he focuses on his health. So first question is just on the diversification you talked about with the big clients in VSG with other mortgage-related products we've seen lenders use between two, three or four providers for vendor products. Is that what you think you'd see from your VSG clients or is it different than that?

[Frank D. Martell:]

Yeah, so I think the normal situation would be several vendors, certainly for major lenders and so we would be one of many but since we really have no share beyond the two clients we have, it's all incremental benefit to us. I would expect that within the – certainly within the lenders that we've targeted we would be a major player in their volumes but not the exclusive obviously.

[Chas Tyson:]

Yeah. That makes sense. And then on the sales pipeline you guys are building, can you talk about potential new clients relative to your current clients obviously your current clients are pretty outsized in the market, but the clients that you're looking to onboard in the second half of this year, are they top 10 clients, are they top 25, are they top 50, or are they smaller than that – just curious about the sizing?

[Frank D. Martell:]

I would say from a VSG perspective they are in the top 30 lenders. Some are depository traditional lenders some are emerging lenders that are non-depository originators.

[Chas Tyson:]

Okay, got it. If I could just squeeze one more in. I know you talked about two halves for VSG this year but are you anticipating the total year will be below the unit volume decline that you're anticipating 20% to 25% of VSG on a revenue basis?

[Frank D. Martell:]

Yeah. Absent the two major clients taking significant market share which I don't think has been indicated in their public statements. I would say that that's correct. That we would see less overall revenue because frankly the market is down 20%, 25%.

[Chas Tyson:]

Okay, Thank you.

[Operator:]

The next question comes from Jeff Meuler, Baird. Please go ahead.

[Jeff P. Meuler:]

Yeah. Thank you. What was your estimate of the unit volume in the market year-over-year in 2016? Just trying to reconcile the attribution of the organic growth to the market given the market share gains with the unit growth so what's the assumption there?

[Frank D. Martell:]

Are you talking 2016 to 2015?

[Jeff P. Meuler:]

Yes.

[Frank D. Martell:]

Okay. So overall if you look at the MBA and you back out the home price depreciation you should arrive somewhere in the high-single digits to 10%.

[Jeff P. Meuler:]

Okay. And then I guess what's the conversation with clients post election I know that we have a tough refi environment we're getting into, but have you started has there been increased discussion with clients about potential regulation repeal, and what that could mean for your business or more data and analytics projects? Is that starting to occur in the sales pipeline at all?

[Frank D. Martell:]

Look I think at this point it's a little bit early days. I think people are hopeful there'll be less of a regulatory overhang. But it's different by different area within each of these lenders. So but I think everybody is cautious and not trying to jump the gun here. I don't think anybody believes there'll be a complete roll back of the regulatory framework as it currently stands. And I think you also have the other factor, which is how many rate hikes are going to happen but I think for most of the lenders obviously it's a positive from a financial point of view for them, but it's also negative from a mortgage market perspective. Although the mortgage market I think, and why I'm very encouraged by the shift of purchases, there's a lot of demand out there for homes and so that's a more durable trajectory that's not necessarily going to be rate sensitive. So there'll always be a level of refinancing activity but clearly we're looking at 50% to 60% compression in refi activity in 2017, and that depends on how the rates are going. So I think it's a bit of a mixed picture everybody's trying to sift through at the moment. I think it's encouraging. We definitely have ongoing dialogue about our new products and services that we're offering, so I think also frankly, we were seeing good growth in insurance, international. Energy is coming back which is good for our spatial business, so those are all good green shoots for organic growth.

[Jeff P. Meuler:]

Okay. And then just finally given that the tax rate is only I think it's going to be down slightly, if you could just clarify how you're treating ASU 2016-09 and the adjusted EPS methodology, and if it's included is there at all material benefit? Thank you.

[Frank D. Martell:]

No, we use a planning rate, so we don't incorporate discreet items, no material impact.

[Jeff P. Meuler:]

Thank you.

[Frank D. Martell:]

Thanks.

[Operator:]

The next question comes from Oscar Turner with SunTrust. Please go ahead.

[Oscar Turner:]

Good morning, guys. Thanks for taking my question.

[Frank D. Martell:]

Hi.

[Oscar Turner:]

I was wondering can you provide more color on the long-term growth opportunity in non-U.S. mortgage verticals? Can you remind us of the revenue contribution today and then are there any specific initiatives that should accelerate growth and what's the time line for those?

[Frank D. Martell:]

Sure. So Oscar, I think as you know or may know we have significantly shrunk our overall U.S. mortgage market exposure the last three years, four years. Roughly 60% of our revenue is exposed to U.S. mortgage volumes at this point. Some are more of a model exposure but that roughly is the current exposure level. It continues to drop by design. We still like our positions in mortgage. We have market-leading positions in a few areas, mostly data-driven analytics area, so we like that as a base of generates good cash flow. But we have more than doubled our international business. As an example, the last couple of years, we have a very significant footprint, I think a quality footprint in insurance. Our spatial business is also double-digit grower. So those will continue as long as they continue to grow at a faster rate than the overall obviously the proportionality of our non-mortgage business will increase. So I think we'll drift down from the current 60% to less. As I mentioned, we had a relatively good business in energy, which got blown up by the drop in oil prices and gas prices, and now things have rebounded and there's life in that market as well. And then I think one opportunity that we've built up, but we have significant room to grow is in the public sector, which needs data and analytics for planning and other – so the infrastructure program that the President's proposed should that get off the ground, those are things that can use our services from a planning and an implementation standpoint. So there's a lot going on in the non-mortgage area but I would say that our core mortgage businesses have done great. They have good margins. We've taken share, and they generate a heck of lot of data that we can use in the analytics piece and some of the other products. So I like our position in mortgage going forward.

[Oscar Turner:]

Okay. Thank you.

[Operator:]

The next question comes from Kevin Kaczmarek with Zelman & Associates. Please go ahead.

[Kevin Kaczmarek:]

Hey, guys, thanks for taking my questions. Within VSG, is there any potential for some M&A activity that maybe could accelerate what you're doing there?

[Frank D. Martell:]

We are pretty disciplined on the M&A front. I want to make sure that we have properly integrated the assets that we have, and I want to make sure we get through the client diversification efforts that we have. There is tons of things out there but it's a vast array of things that we just – we want to just stay disciplined. So I don't think there is a specific answer to that question other than we look at everything, we've passed on everything in recent past, and if there's something that's terrific we'll look at it, if there's something that's – if it's not we're not going to jump at stuff.

[Kevin Kaczmarek:]

Okay. And I guess if we are thinking about organic growth in the VSG business, I know people have asked this a number of ways but, I guess, thinking about it from a market share perspective, if you had BofA and Wells maybe trailing off a little bit and you have some other clients coming on. Do you think maybe you can hold your market share over the course of 2017 or might that be too aggressive a goal?

[Frank D. Martell:]

I think as long as those two clients are – their shares are moving in line with the market. I don't think it'll be a meaningful share change for us. I think in the short run obviously you're leaking revenue from those two clients, but you're adding it. So I think it's going to be assuming there's nothing extraordinary, I'd expect that to be kind of, as we get out of 2017 we'd be roughly the same position we're in today share wise.

[Kevin Kaczmarek:]

Okay. Thanks a lot.

[Operator:]

The next question comes from Geoffrey Dunn with Dowling. Please go ahead.

[Geoffrey Murray Dunn:]

Thanks good morning. This is more just for clarification. In your additional guidance on 2017 you qualified your expense target as a gross expense save. Do we need to think about reinvestment differently and differently about how much is actually dropping to the bottom line or is that just an additional word that's not changing how we should think about things?

[Frank D. Martell:]

No. So I think that when Jim said gross it's really, Geoff only the costs associated with implementing the plan to get to the net. The growth doesn't mean we are reinvesting in something else. (55

[Geoffrey Murray Dunn:]

So consistent with the past?

[Frank D. Martell:]

Correct. Yeah.

[Geoffrey Murray Dunn:]

Okay. All right. Great. Thank you.

[Operator:]

The next question comes from Alex Veytsman with Monness, Crespi, Hardt. Please go ahead.

[Alexander Veytsman:]

Yes. Hi guys. Just wanted to ask you about that your spatial and international segments obviously both have grown very nicely in terms of the top line. Could you provide some insight into the margins that you are seeing from those two businesses and I guess kind of how that would help buttress your 30% target?

[Frank D. Martell:]

Alex so both of those business units have higher margins than our aggregate company margin level.

[Alexander Veytsman:]

So that's above 30% basically?

[Frank D. Martell:]

Correct. Yes.

[Alexander Veytsman:]

Okay. Got it. Got it. That's helpful. And then just slightly shifting gears I know you talked about the 55% EBITDA to free cash flow conversion target before this, but it looks like for 2016 you did about 70% the year before it was probably in the 60%-s around 60% is this really kind of the new normal 60% to 70%, and kind of 55% the bare minimum. I guess the question is you know with EBITDA expected to be down next year, the question is how much do you expect in free cash flow (57

[Frank D. Martell:]

We've done a lot of good things over the years to move the needle on that, and I would say for 2017 there's two pieces. There is obviously the decline with the market, and then the other component that we're going to see later in the year is we're going to have a pension payment determining a pension plan, which will be a good slug of money as well. So that's why we stuck on the 55%, longer term there may be an opportunity to nudge that higher.

[Alexander Veytsman:]

Okay.

[Frank D. Martell:]

By the way, just to clarify that it's not, this is a pension payment related to one of the acquired companies; it's not a broader CoreLogic pension plan, just to be clear.

[Alexander Veytsman:]

Got it. That's helpful. Thank you.

[Frank D. Martell:]

Great.

[Operator:]

This concludes our question-and-answer session and the conference is also now concluded. Thank you for attending today's presentation. You may now disconnect.