Q3 2022 Real Matters Inc Earnings Call
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Good morning, ladies and gentlemen, and welcome to the real matters third quarter 2020 conference call.
At this time all lines are in listen only mode. Following the presentation. We will conduct a question and answer session require immediate assistance. Please press star zero for the opera being recorded today Thursday, the 20 <unk>.
Okay.
I would now like to turn the call.
Conference over to Lynn both regard.
Welcome to round out our financial results.
June 32022.
Yeah.
He gave off to Brian Wang and Chief financial.
We issued a news release announcing our Q3.
Okay.
Information and the accompanying slide presentation for more detail you can also find additional information about these risks in the <unk>.
Factors section of the company's annual information form for the year ended September 32021, and which is available on SEDAR and in the Investor Relations section of our website.
As a reminder, we refer to non-GAAP measures in our slide presentation, including net revenue net revenue margin adjusted EBITDA and adjusted EBITDA margin non-GAAP measures are described in our MD&A for the three and nine months ended June 32022, where you will also find reconciliation to the nearest <unk> measure with that.
I'll turn the call over to Bryan Bryan.
Thank you and.
Good morning, everyone and thank you for joining us on the call I will kick things off today by discussing some of the highlights of our third quarter and some of the key drivers behind our numbers.
Bill will then take a deeper dive into our segment financials and I will wrap up the call with some brief remarks prior to taking questions.
We reported consolidated revenues of $78 $7 million consolidated net revenue of $18 1 million.
And consolidated adjusted EBITDA of $1 million in the third quarter.
The business delivered solid market share gains and strong operational performance.
As we continued to weather a very challenging mortgage market headwinds.
We ranked at the top of scorecards and U S appraisal, which resulted in market share gains with some of our largest clients.
And we also expanded our net revenue margins in U S appraisal by 130 basis points.
In U S title, we continue to perform at the top of our tier one and two clients scorecards and expanded our year over year share with a key tier two clients.
In todays lower volume environment lenders have begun to reduce the number of vendors they use and top performers like us stand to benefit from vendor consolidation as a result.
Mortgage rates rose further in the third quarter, reaching the highest level since 2008 at nearly 6%.
The purchase market showed tepid demand in the early part of the spring buying season, while rate refi demand has declined significantly with little rate incentive remaining at today's 30 year mortgage rate.
Over the past 60, plus years, the 10 year Treasury yield has never risen more than five quarters sequentially.
And of the five times it has in four of those occasions. The rise in the 10 year Treasury yield was followed by a similar fall in the four quarters that followed.
The rapid rise in home prices and mortgage rates has caused affordability metrics to reach levels never seen before even during the housing bubble in 2003 to 2007.
In particular, the median mortgage payment relative to median incomes now exceeds 27% compared to the historical high of 25% in 2006.
Home prices relative to median incomes recently hit $4 nine.
Sure.
Exceeding the record high of $4 two X seen in 2005.
We estimate the U S mortgage origination market volumes were down 56% in the third quarter.
With purchase transactions down an estimated 17% and refinance transactions down an estimated 76, 2%.
U S appraisal mortgage origination revenues, which includes purchase and refinance were down 38, 7% year over year compared to an estimated 39, 5% decline in total addressable origination market volumes.
As market share gains and new client additions helped soften the impact of the market decline.
Yes.
We increased market share with five of our largest clients year over year, and we launched two new lenders in U S appraisal.
Our market estimate includes a year over year decline in the use of GSV waivers, which isn't due in large part to the significant decline in rate refinance activity.
As we discussed during our second quarter call.
<unk> have more equity in their homes than ever before and we are working with our clients and leveraging our platform to help consumers take advantage of their taxable equity.
We saw the early stages of this trend in our third quarter results as other revenues in our U S. Appraisal segment increased 53% year over year to $8 3 million, principally due to higher home equity volume serviced.
In our U S title segment third quarter centralized title revenues declined 83% year over year against an estimated market decline of 76, 2%.
Performance remains the key driver of growth in our U S title business as we continue to advance the sales cycle with more franchise type clients and convert the pipeline to new client launches.
We launched two new title clients in the third quarter.
And our Canadian segment third quarter revenues were down three 3% year over year, due principally to FX and lower market volumes for appraisal services, which were partially offset by increasing market share with a number of a number of our large Canadian bank clients and modestly.
Higher revenues from insurance inspection services.
With that I'll hand, it over to Bill Bill.
Thank you, Brian and good morning, everyone.
Turning to slide four and five for a closer look at our financial results.
You asked a tradable segment revenues decreased 32, 9% year over year to 57 3 million due to lower addressable market volumes, which was partially offset by market share gains with existing clients and new client addition.
Transaction costs in our U S appraisal segment decreased 34% year over year, leading to a 130 basis point expansion of net revenue margins to 22, 6%.
And in delivering net revenue of $12 9 million.
The expansion of net revenue margin was due in part to the mix of mortgage origination volume service and leveraging our field professional network and our lower market volume environment.
It was partially offset by an increase in lower margin home equity volume service.
Operating expenses in this segment decreased nine 8% to $6 8 million due to lower payroll and related costs.
And more often computer and communication expenses.
Adjusted EBITDA in our U S appraisal segment declined to $6 1 million from $10 5 million in the third quarter of fiscal 2021 and.
And adjusted EBITDA margins contracted by 47% owing in large part to lower addressable market volumes.
Turning to our title segment revenues declined 79, 8% year over year on lower estimated refinance market volumes.
<unk> revenues totaled <unk> 3 million and represented a decline of one 3 million from the third quarter of fiscal 2021 due to rationalizing this service offering last year.
Transaction costs in our U S titled segment decreased 74, 8% and net revenue margins declining to 59, 2% from 67, 2% in the third quarter of fiscal 2021.
The contraction in net revenue margin was due to servicing a higher proportion of lower margin home equity volumes and servicing a lower proportion of incoming originated origination orders order volume that closed.
Operating expenses in the U S title decreased 53, 1% to $6 7 million from $14 4 million in the third quarter last year due to lower volume service.
As we navigate through this part of the mortgage cycle, we've been aligning our cost structure to a lower market volume operating environments.
Our business is built to scale, which allows us to benefit from outsized margin gain on the upside. It also affords us the opportunity to scale down our cost structure.
Like these.
We posted an adjusted EBIT loss of $3 4 million in the third quarter of fiscal 2022.
From the $4 $3 million, we generated in the same quarter last year.
<unk> for the impact of lower refinance volume.
In Canada revenue decreased three 3% on a year over year basis to $15 8 million, while net revenue margins expanded by 80 basis points due to the mix of appraisal services supply leveraging our field professional network and our lower market volume environment and higher net revenue margin from it.
Sure it's inspection services.
Canadian segment operating expenses were zero point $6 million in the third quarter up from <unk> 5 million in the third quarter of fiscal 2021.
And adjusted EBIT margin decreased to 69, 6% from 76% in the same quarter last year due to modestly higher operating expenses.
In total third quarter consolidated net revenue was $18 1 million compared to $38 6 million reported in the third quarter of fiscal 2021 on lower revenues generated by our U S appraisal and title segment, which was due in large part.
Our addressable market volumes.
Consolidated net net revenue margins were 23, 1% in the third quarter down from the 29, 8% we posted in the third quarter of fiscal 2021, reflecting lower proportional net revenues.
Rated by our title segment and lower net revenue margins in this segment due to servicing a higher proportion of lower margin home equity volume and a lower proportion of incoming order volume that closed.
Consolidated adjusted EBITDA was <unk> 1 million in the third quarter of fiscal 2022 down from 11 8 million in the same quarter last year.
Consolidated adjusted EBIT margin decreased <unk>, 4% due primarily to the performance of our title segment and lower market volumes in.
In the quarter, we purchased 5 million shares at a cost of $26 million, if thats going public in 2017, we have purchased 24% of our outstanding shares.
We ended the quarter with cash and cash equivalents of $53 million at June 32022.
We are very comfortable with our existing cash cash equivalents.
Which we believe is more than sufficient to weather the downside of the current mortgage market cycle.
We will continue to be thoughtful about capital allocation going forward being opportunistic with our current and CIB, while maintaining a strong balance sheet.
I'll turn it back to Bryan Bryan.
Thanks, Bill well.
While today's mortgage market environment presents some challenges.
Matters is on solid ground, we have a healthy balance sheet and the fundamentals of our business remains strong.
We continue to win market share based on our performance and we are focused on managing our margins and cost as we navigate through these market headwinds.
Our sales team is laser focused on leveraging the home equity opportunity to expand our channels with existing clients and to win new title business.
Our business was built on the fundamental principle that scale network management and performance would allow us to weather the peaks and valleys of the mortgage origination market.
As Bill said earlier, it's what allows us to generate strong increment incremental margins in higher volume environments, and it's also what affords us the flexibility to adapt to lower volume environment, while still winning market share and taking advantage of market disruptions to win new business.
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We are steadfast in our commitment to these fundamental principles as we manage the business through this part of the cycle.
And remain focused on the long term earnings capacity of our franchise.
We remain confident in our fiscal 2025 objectives.
With that operator wed like to open it up for questions now.
Thank you Sir.
Ladies and gentlemen, we will now begin the question and answer session.
If you would like to ask a question. Please press star followed by the number one on your telephone keypad.
If you would like to withdraw your question. Please press star followed by the number two please.
Please standby for your first question.
Your first question comes from Daniel Chan of TD Securities. Please go ahead Sir.
Hi, good morning, So there is.
The <unk>.
Downsizing across the entire industry and you guys have been downsizing as well. It's just what are your plans for capacity going forward are you done with the downsizing or is there more to come just any color on how to think about margins. How do you manage margins would be helpful.
Sure Good morning, Dan and thanks for the question, yes, so listen as we as we discussed we've got a very flexible cost structure that we can scale up and down to whether the peaks and valleys and and so that will very much depend on where the market goes as we as we head into the next few quarters.
We have this quarter been laser focused on keeping the business EBIT neutral.
So depending on the volume over the next upcoming quarters, we will continue to keep that type of operational execution and.
And focused on keeping the opex, where our operating costs in line with the with the volume.
Okay. Thanks, that's helpful and then on the share repurchases.
So you'd be opportunistic with the CIB.
Just wondering whether there is a cash level that you'd like to keep on your balance sheet.
Yes, so in the past, we've talked Dan and very much today is the case that because of the mid tier one type base of customers that we've got we've always felt them with between somewhere between 25% and $50 million was the right amount of cash for us to have on hand, as you know with of course, we've got no debt.
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We closed the quarter at $53 million in cash so I think on the NCI as you know we have been.
I think very thoughtful working with our board. This past quarter, we took the the outstanding shares that we bought since IPO, we've taken that up to 24%.
So as we look forward I think we'll be we'll be very thoughtful about the NCI. We did meet with the board yesterday and so we'll continue to be active but I think youll see it at much lower rates. So so we will be active but definitely with lower engagement lower numbers.
Okay, and then just one last one obviously a very challenging market. When you look at the opportunities in the market. What's the bigger opportunity is it winning new clients or is it winning share at existing clients you did talk about the opportunity to consolidate.
Wondering how your go to market.
Is being adjusted just given the dynamics there. Thank you.
Great well I think Dan you almost answered the question with the three elements that you threw in there. So I think the first element for US is we will continue to focus on our performance, which as I mentioned, we had a very solid quarter from a performance and therefore market share allocation we were <unk>.
Scorecards with our tier ones.
On the appraisal side and therefore, we were granted market share with five of our top 10. This past quarter. So I think solid performance there on the title side, we're top of the scorecard with our tier one and tier twos and so we were allocated some share with our tier two in the quarter. So that's fundamental principles that draw.
The business that our networks can outperform the other span will continue to focus on that even as the volume is lower and so our expectation is that there is market share gains there.
Second piece is consolidation so we've actually seen some of that this past quarter at least on the appraisal side of the business, where we've seen our lenders take a look at the portfolio of providers that they have and narrowed those down and because of where we stand on the performance scorecard not surprisingly we ended up.
Picking up share when they do downsize their vendor group.
So opens up opportunity on the title side of our business to actually insert some of the sales conversations that we're having in the refi space Dan to leverage all of that good work. We are doing an appraisal to insert ourselves when they are thinking about that on the title side.
And the third piece is around home equity and so you saw that in our numbers on the appraisal side of our business. This past quarter, where we were up 50% in other revenue and that's mostly home equity and so the team has done I think an excellent job ensuring that we are prepared for what we assume will be.
Continuing uptick in home equity volume and the real focus on home equity for US is we want to that opens up another avenue of conversation on the title side of the business, where we win home equity we get into the home equity space. Our view is that allows us the opportunity to move in.
To all of the title space, including refi. So those are really the three big drivers from a sales and an opportunity standpoint, Dan going into Q4.
Thanks, Brian .
Thanks, Dan.
Your next question comes from Richard Tse of National Bank Financial. Please go ahead Sir.
Thank you.
Brian I was wondering if you could maybe elaborate a little bit in terms of the share gains on the appraisal side can you maybe sort of point to or give us some better color on who you're taking share away from most.
Yeah, Richard Good morning, Richard.
I think the story pretty well remains the same that there's sort of two things going on one is over the refi boom and the increase in volume some of our tier ones added more sort of regional players. So that they can service some high volumes in certain.
In parts of the U S and so I think when you see the volumes start to come down which of course it did not just on refi this quarter, but also on purchase they take a look at their vendor base and usually they stick to their national players, that's where they focus.
Their attention and therefore removes some of the more regional players. So I think thats one piece that we are definitely seeing starting to play through so spectrum consolidation piece.
And so the other piece of course is just the performance back to our networks be able to deliver better performance as I said across the board. This last quarter. We were number one with all of our big tier one. So we are taking share from the frankly, the big national competitors that we have.
Generally across the board so I mentioned five of Ken.
A piece of it's consolidation of piece of it is just over performance.
Great and then with respect to title Unquote.
What's the status of the discussions with the tier ones in terms of.
Eric adding into that side of the business here.
And so I think the conversations as you can imagine right now Richard R.
Are somewhat challenged simply by the market dynamics and what's going on in the market a lot of lenders are very internally and inward focused right now they are figuring out capacity some of the big tier one that actually exited home equity are now thinking about getting back into home equity so they've got the strategic and operational priorities.
That they're managing through the Rfps remain open so we reconfirm that with with the big tier ones that were in discussions with so I assume those will move forward, but they may move forward at a slower pace of course than we'd like.
The two opportunities I think number one is with the tier one that we have there is an opportunity in the upcoming quarters two to open up a second channel with them Theres. These two channels that they have a direct and our retail channel where in one of the two channels and.
It's been made clear to us, but there is an opportunity in the second channel once they are technically capable. So I think that's one opportunity.
And then the second one of course these around home equity and the conversations we've had around that so our sales team is very focused on making sure. We're having a robust conversation with the targets that we have not only around title refi, but also being able to support them as the home equity volume as we assume well.
Continue to increase over the upcoming quarters.
Okay, and just a last one for me obviously, you're doing a good job at search for hedging of the business in this difficult backdrop.
So when it comes to things like the data strategy you talked about years back.
Do you kind of see that let's say.
As being kind of put on the backburner, a little better or are you still pursuing that.
In terms of where you want to go over a few years out from now.
Yeah. So we spent the day with our board yesterday, reviewing our strategic plan, which we do every year and in the discussion of course was around 2025.
And the different pillars that we have and we've talked about the three legs of the stool. So took them through appraisal title and the data strategy and I think where we sit right now Dan I think the data strategy, although theres things that we can do within organically within the business the real focus will be.
An acquisition longer term and where things sit right now from a price standpoint, and just a market standpoint, I would definitely say that it is its on the backburner. The focus remains right now on the targets that we set in 2025, which we again feel very confident about around market share and the margin.
And so in the short term operational execution is definitely central player.
Okay, great. Thank you.
Thanks Richard.
Your next question comes from.
The Choppiness of BMO capital markets. Please go ahead.
Hi, good morning.
Brian regarding the wafer usage, you mentioned has come down because of the purchase refi mix, although looking at the industry data that wafer usage. Among refis has also come down.
Any color for why that would be the case.
Good morning Fellows.
Yes, I mean, I think we play back the real about a year ago, maybe even a year and a half ago. When the waiver rates did go up our view at the time was that that was the right thing to do with the tremendous surge in.
And demand that came into the market and the function of the GSE is to help provide liquidity and stability to the market. So I think them raising the waiver rates made made sense and I think what we said was we assume that over time that will start coming down to.
Sort of pre pandemic rates.
And I think thats, what youre seeing so youre seeing them sort of move back into what I would call a pre pandemic pre pandemic positioning.
With the rates dropping down as you saw this quarter down sort of around 10%.
From the $19 nine that we had last quarter. So.
And just the way the Gse's function I think they step in and get quite involved when they need to and in this particular market I think they're taking a step back and Thats why we keep them looking a lot more like they did.
Pre pandemic standpoint.
And maybe sort of a related question late last year that GSE has announced a question Mark desktop appraisal and so what are you seeing in that regard.
Yes, so they did announce that and.
And we've seen at least in our business.
Very very little movement on that right now Dana so.
We'll see what happens over time, but to date.
Desktop volume really hasn't moved in any way that we would assume that it would move so.
So we really haven't seen too much of a probe any progress really in moving.
And that moving forward in the market.
Great. Thanks, I'll, let pathway.
Okay. Thanks.
Your next question comes from Martin <unk> of ATB capital. Please go ahead.
Mr. Jonathan.
You bet.
Okay.
Near term.
Yes.
In the past you have mentioned a number of reasons that kind of create a floor for refinance volume even in <unk>.
Interest rate environments like this.
Are you seeing where would you say the market is right now relative to where you think the floor could be I mean can it like dive below that lower for a time.
Especially at times like this when there is a bit of a shock and just kind of trying to get my head around.
That market could look like even with <unk>.
Far fewer people in the money to refinance.
Good morning, Martin and <unk>.
You are putting me on the hot seat as usual to forecast, what's going to happen from from our rates and market standby standard standpoint, which I appreciate.
I think what we're looking at is we're looking right now at refi starting to come down to is really historically low levels. If again, if you take a look at our 2025.
Strategy that we laid out at Investor day in 2020.
Assumed that the market would be bottom bouncing and that we would be looking at a $2 billion Tam.
On the refinance side by 2025, so I mean thats the way we looked at bottom bouncing I don't think we're that far off of that from a bottom balance. So in the next quarter or two assume that will be in and around that area.
Your comment around could we go well below the market would have to tell us about it as we said there is some conditions in there Martin things like people need to refinance their mortgage every year I mean mortgages come due every year so.
So we sort of look at a 4% of renewals need to happen each year, and so theres going to be some refi in.
In the market you've also got not just rate refi, but you've got cash outs.
In the mix and so it is very much of course depends on rates and so we'll have to see what happens with rates over the next little while we're prepared on that side, but if rates do continue to click up as we've mentioned our assumption is that home equity will potentially become a larger player and on that front.
We've been delivering home equity.
For years, and we will continue to use that as a lever depending on the volume that comes in around home equity on the title side of our business to continue to make inroads on the refi side. So I'd say, that's the way we're looking at at the refinance market over the next couple of quarters.
Great. Thank you.
So cash out and home equity home equity you're helping your appraisal.
Are you seeing that in cash.
Are you seeing that help for both cash other than home.
Equity in title.
Are we seeing the same type of help from tax cash out the cash flow rate is below market, where at both sorry below Martin low where we were generally historically its been and thats because usually the way American consumer looks at tapping into their equity in their home.
Is one of two ways, they either decide they're going to do cash out or theyre going to do home equity. So as I say, it's very sort of race dependence on which avenue. They go down and as we mentioned we've seen the rate.
Home equity increase.
On the appraisal side of the business, we haven't seen as much of that home equity increase yet on.
The title business, but the assumption Martin is that one of those two will come into play and we will respond and manage the volume depending on whether it's accounts.
It is home equity.
Great. Thanks, and the tier two new lender you mentioned was that in title or appraisal.
The tier two lenders that we gained market share with was in our title business. As you know we've got a couple of tier twos and we've got a tier one Martin so.
One of the tier twos.
One that we gained market share within title in the quarter.
Alright, fantastic guys Thats all from me our pipeline.
Thanks, Brian .
Ladies and gentlemen, as a reminder, if you would like to ask a question. Please press star one now.
Your next question comes from Robert Young of Canaccord. Please go ahead.
Hi, good morning. Thank.
Thank you said earlier in the call.
The RFP process on title was expected to be a little bit slower and I was just curious have you just talk about maybe some of the catalysts that.
We can watch for that Mike.
The assignment.
I mean, some of the tier ones might get more open to this I know in the past.
The suggestion that business were a little bit slower that might give them more time to consider newer vendors in title I guess now they're distracted with other things I was just curious if you think forward what might be something you would look at this might be assigned or catalyst for more.
Sure.
Well, thank you Rob good morning.
From a macro view Rob.
The market would settle itself.
Some of the big moving pieces would settle I think it would probably.
Really turbocharged frankly, the sales effort I think because of the moving pieces that are currently going on in the market.
With the rate movement with everything from that to affordability to.
Inventory is theres a lot of things I think the lenders are working through right now and considering and we've mentioned the flex into home equity for those that are out of home equity to potentially get back into home equity. So theres sort of some of those big decisions that are being made within lenders and of course looking at what's going on with that.
Fed has happened yesterday, what's the impact on the overall rates I think that's going to if that became a little more settled Rob I think that would make for a much easier conversation with some of the lenders that we have and it would move things things along a fair bit I think the area that we've been focused on.
<unk> is pivoting.
And trying another area of advancement with those lenders, which is around the home equity space. So it's something we put a little bit more on the front burner, where it may have been a little more on the back burner in the past from a sales perspective, and because we think there is home equity volume that's going to come in and as <unk>.
Some of those players get back into home equity I think it's an excellent opportunity for us to make inroads there and use that as a launch pad over into into the refinance side on title.
Okay, and then I imagine some of the factor would be similar but on decentralized title.
The step into that business.
Should we think about that similar to M&A is that something that might be delayed or is that something you might look at more seriously now in a different type of a market.
We'll continue to look at it.
<unk> continues to be something that that we've got some of the team working on but I think as I say in this market doing things incredibly different lead dynamically more uniquely being really innovative with with lenders its tough to get bandwidth from them to really focus on doing.
Some things a little differently and as you know through our conversations in the past around purchase title. Our focus is is to definitely do things in a different way than they are being done today, we think that's the real opportunity and.
So I think the lenders are very focused on operations and on strategy in certain areas and our team is as I mentioned really focus Rob on operational execution in the very near term.
To make sure that we're we're running the business in line with with what's going on in the market.
Okay, and maybe two other smaller ones.
The consolidation opportunity with some of the lenders is that early is there a lot of opportunity. There I think you said that nationwide.
Nationwide lenders have.
Providers that are not nationwide is there a big opportunity for consolidation there yet to go.
Yes, so I would say the answer to that is yes. We think there is a real opportunity around consolidation as I say, there, we're probably a little bit focusing very short term opex type take work you've seen some of the challenges that those players have had from a people standpoint.
I think now Theyre starting to look at their vendor basis, and I think there is reviews I know what I mean of course, we're involved in some of them, but we think there is definitely a good opportunity to continue to find market share gains through consolidation over the next few quarters.
Okay and last one for me just around the net revenue margins and lower volumes is there an opportunity to.
Retain more of the economics relative to what your payout the appraiser, the notary or whatever.
Field agent may be.
Yes.
Back to the operational execution and the focus on that Rob that of course has been a significant focus on both sides of the border. This past quarter and I think we've seen that in the results. So you saw both.
The U S up 130 basis points and candidate up 80 basis points. So very strong performance from both of them I think around managing the net revenue margins and taking advantage of the network as we've always said this is the.
The real long term market value in the network is that we can scale up and down and when the volume does start to come down and we can manage.
The cost structure of it in line with those volumes and definitely drive stronger net revenue margin. So again this deferred for me anyways and I think for the board when we took them through this.
This is what the expectation is and I think when we look out to 2025 and the margin targets that we've set we think we're now definitely.
<unk> to be on path to hit those targets.
Okay. Thanks, Thanks for taking the questions.
Thanks, Rob.
Ladies and gentlemen, there are no more questions from the phone lines. So this will conclude your conference call for today.
We would like to thank everyone for participating and ask that you. Please disconnect your lines.
Okay.
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