Q3 2023 Real Matters Inc Earnings Call
Okay.
Good morning, ladies and gentlemen, and welcome to the real matters third quarter 2023 conference calls at this time all lines are in listen only mode. Following the presentation. We will conduct a question and answer session. If at any time. During this call you required immediate assistance. Please press star zero for the operator. This call is being recorded on Friday July 28 2023.
I would now like to turn the conference over to Lynn Beauregard. Please go ahead.
Thank you operator, and good morning, everyone welcome to Royal matters Financial results Conference call for the third quarter ended June 30 of 2023 with me today are real matters, Chief Executive Officer, Brian Lynch, and Chief Financial Officer Rodrigo Sanchez.
Before market opened we issued a news release announcing our results for the three nine months ended June 32023 release accompanying presentation as well as statements and MD&A are posted to the investors section of our website every all matters dot com.
During the call we may make certain forward looking statements, which reflect our current expectations of management with respect to our business and the industry in which we operate however, there are a number of risks uncertainties and other factors that could cause our results to differ materially from our expectations.
Please see the slide entitled cautionary note regarding forward looking information in the accompanying slide presentation for more detail.
You can also find additional information about these risks in the risk factors section of the company's annual information form for the year ended September 32022.
It 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 <unk>.
And adjusted EBITDA margin.
non-GAAP measures are described in our MD&A for three and nine months ended June 32023, where you will also find reconciliations to the nearest ISR rest measures with that I'll turn the call over to Bryan Bryan.
Thank you Lynn.
Everyone and thank you for joining us on the call today.
I'll kick things off by providing an overview of our third quarter performance and some of the key drivers behind our numbers Rodrigo 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 delivered positive results in the third quarter as we saw solid improvements in our financial performance across all three of our reporting segments, which brought the business back to positive adjusted EBITDA.
<unk> revenues and net revenue were up 22% sequentially.
Notwithstanding the impact of interest rates and market volumes going forward. This was the first time, we posted sequential revenue growth in seven quarters.
Consolidated adjusted EBITDA increased both sequentially and year over year to one $7 million in the third quarter our.
Our results were driven by sequential net market share gains across all three segments in the third quarter as well as an uptick in market volumes part of which was attributable to spring market seasonality.
As we noted during our last quarterly earnings call. The U S mortgage market seems to be bottom bouncing below 30 year lows.
10 year Treasury yields inched higher during the third quarter and spreads remained wide relative to historical averages, which pushed 30 year mortgage rates closer to 7% for a good portion of the quarter.
Even with the backdrop of a challenging rate environment and continued housing supply constraints. Most U S. Metros soft home price growth stabilize which helped drive seasonal demand for housing and a corresponding increase in purchase origination volumes.
According to the National Association of Realtors existing home sales increased 7% year to date through May.
Market refinance transactions were nominal in the third quarter bottom bouncing off all time lows.
Cash out refinance transactions remain the principal driver behind the baseline levels of refinance origination we are seeing today, making up more than 80% of volumes. We continue to believe that the refinance market will return to more normalized levels in the future and we have capacity in place.
And the ability to scale the business to meet the demand of higher market or organically driven volume growth.
Our position on lender scorecards helped us deliver sequential market share wins across the board in the third quarter and.
In U S. Appraisal, we recorded net market share gains year over year, and we launched one new channel with an existing client and U S title, we on boarded the additional market share we won with our tier one lender and we launched one new channel with an existing client.
In Canada, we launched five new clients and increase market share in the third quarter.
And U S appraisal purchase origination revenues were up 25% sequentially and refinance origination revenues were down 2% quarter over quarter.
Other revenues were up 37% quarter over quarter due to higher home equity volumes from market share gains.
I think it's safe to say that the mix of volume were seeing between purchase and refinance is unlike any market we've seen over the last 30 years.
<unk> transactions today make up close to 80% of the volume on a market size that is extremely low by historical standards. The.
The silver lining for our U S appraisal business is that the breadth of our client base allows us to capture the economics, the economics, regardless of market mix.
We posted strong net revenue margins of $27 five and use appraisal in the third quarter as a result of our operating model.
Our team was actively engaged with existing and potential clients during the third quarter, leveraging our number one ranking on scorecards and our position as industry leaders to garner additional market share and to open the door to new opportunities to grow the business. We continued to advance the sales pipeline.
In the third quarter.
U S title segment revenues were up 17% quarter over quarter and up 41% for centralized title.
We were very pleased with our performance entitled in the third quarter as we held the number one spot on our tier one lender scorecard and onboard in volume from the market share increase we received at the end of the second quarter.
U S title net revenue margins in the quarter were up 840 basis points sequentially, principally as a result of a higher proportion of centralized title volumes.
We narrowed our adjusted EBITDA loss in U S titled a $1 6 million in the third quarter from the $2 $3 million loss, we posted in Q2 2023.
We have worked diligently to reduce our cost base entitle over the last 12 months, which included the deployment of technology that has made us more efficient while permanently transforming the cost to run the business at scale.
This positions us well for a variety of scenarios, including a lower volume environment in the short term as well as higher expected volumes over the medium and long term.
Canadian segment revenue was up 34% sequentially and adjusted EBITDA increased to $1 3 million in the third quarter on higher volumes from market share gains.
With that I'll hand, it over to Rodrigo Rodrigo.
Thank you, Brian and good morning, everyone turning to our third quarter financial performance I'll start with our U S. Appraisal segment, where we reported revenues of $33 5 million down 42% from the same period last year, mainly due to lower <unk> mortgage origination volumes partially offsets.
Net market share gains with existing clients and new clients additions other.
Other revenues from home equity and defaults were up 4% year over year.
U S appraisal net revenue was $9 2 million for the third quarter down 29% year over year, we continue to see a stronger net revenue margins in the third quarter with an increase of 490 basis points compared to the third quarter of 2022.
Our ability our ability to leverage our platform resulted in a significant year over year margin increase.
U S appraisal operating expenses declined 36% year over year to $4 4 million in the third quarter.
U S appraisal adjusted EBITDA was $4 8 million for the quarter, a decrease of 21% from the third quarter of fiscal 'twenty two.
Adjusted EBITDA margins increased to 52% from 47% we posted in the third quarter last year as a result of an improved net revenue margin profile and the reduction of operating expenses.
Turning to our U S title segment revenues declined 53% year over year to $2 6 million due to lower refinance origination volumes.
Revenues related to centralized title services declined 63% year over year.
Other title revenues of <unk> 2 million, representing revenue from home equity services were down zero point $3 million compared to the third quarter of fiscal 'twenty two.
U S titled Net revenue was $1 2 million down $2 1 million from the third quarter last year and net revenue margins contracted to 45, 2% from 59, 2%, mostly due to a change in product mix.
We've reduced our U S title operating expenses by $4 million year over year to $2 8 million due to lower refinance markets volumes. We recorded an adjusted EBITDA loss of $1 6 million for the U S title segment compared with a loss of $3 4 million in the third quarter of fiscal 'twenty two.
An improvement of 50, 454%, mainly due to year over year reduction in operation operating expenses that I just mentioned.
In Canada, we posted revenues of $9 9 million for the quarter, a decrease of 37% on a year over year basis net revenue margins expanded by 550 basis points year over year as we continue to leverage our appraiser network in a lower market environment.
Our Canadian segment operating expenses declined 20% year over year to half a million dollars.
This reduction of expenses combined with increasing net revenue margins helped increase Canadian adjusted EBITDA margins to 73, 7% from 69, 6% in the third quarter of 'twenty two.
In total Q3 consolidated net revenue declined 33% to $12 1 million compared to the $18 1 million, we reported reported in the third quarter of fiscal 'twenty Q, largely due to lower market volumes across all three segments.
Consolidated net revenue margins increased to 26, 4% from the 23% we posted in the third quarter of fiscal 'twenty two.
Selecting the higher net revenue margins in U S appraisal and Canada.
Consolidated operating expenses, excluding stock based compensation were down 42% year over year to <unk>, 10, and a half million need to third quarter.
As Brian mentioned earlier, we posted positive consolidated adjusted EBITDA of $1 7 million this quarter up from <unk>.
66000 in the third quarter of fiscal 'twenty two.
Finally, I'll briefly turn to our balance sheet, which remains quite strong with no debt and increasing our cash position to $42 5 million at June 30 was 23, reflecting the positive cash generated from our operating activities during the quarter.
With that I'll turn it back over to Bryan Bryan.
Thank you Rodrigo.
In summary, we were very pleased with our performance in the third quarter.
We were leaders on lender scorecards, we made good progress on market share across the board and we saw our margin profile improve.
Our results also reflected moderately better market conditions from a combination of seasonality and bottom bouncing refinance volumes.
We posted positive consolidated adjusted EBITDA of $1 7 million in the third quarter demonstrating growth on both a sequential and year over year basis.
We believe we are very well positioned from an operations perspective to take on additional volumes when the market recovers.
As a result of the work we've done over the last 12 months to scale down expenses. Our operations today are more efficient and we are permanently transformed the cost to run the business at scale.
Because of the cyclical nature of the mortgage market. We've always looked at this business with a long term lens and that Hasnt changed.
While we are cautiously optimistic that the market will bottom bounce in the near term. We believe we are on the right trajectory and so our focus is on long term growth growth through market share gains with our top tier blue chip client base.
And growth through new client additions.
We believe in the long term earnings potential of our business and we remain focused on our fiscal 2025 objectives.
With that operator wed like to open it up for questions now.
Thank you ladies and gentlemen, we will now begin the question and answer session should you have a question. Please press star followed by the one on your Touchtone phone you will hear a three ton prop acknowledging your request and your questions will be pulled in the order. They are received should you wish to decline from the polling process. Please press star followed by the Q&A. If you are using a speaker phone please lift there.
Handset before pressing any keys. Your first question comes from Daniel Chan with TD Cowen. Please go ahead.
Hi, Good morning, guys just wondering if there's any progress on.
On the second telling clothing channel with your tier one and how quickly are you expecting that to ramp.
Good morning, Dan. Thanks for the question, yes. So so good news on title from the last quarter was that we were able to onboard the doubling of market share that we talked about at the end of Q2.
So the team I think did a fantastic job and with that we also performed at the top of the scorecard for the quarter. So feeling feeling good about where we're at with tier ones currently on the title platform we.
We talked a little bit last quarter about rfps, starting to find their way into conversations and we continue to see that so we've got a couple of of lenders or.
Are definitely starting to move down that RFP process stand. So it's hard to time it since they manage the timelines around it but I would say that we're making progressive forward actions with the tier ones that we have the RFP conversations going on with right now.
That's good to hear and thanks for that Brian If you do win these rfps over the next couple of quarters, what's the timing we should expect for you to get that revenue generation to get to revenue generation on this.
Yes.
And it's quite similar when we talked about how we on boarded our appraisal customers. So when we when we look at that Onboarding and the ramp on those businesses, we looked at trying to get to 5% to 10% market share year, one and then growth from there, 15% to 20 and up into the 30% in year three so wed.
Expect something quite similar to that as you know they test and learn a little bit in the first sort of six to nine months and then we start seeing a.
Little more volume I think in the near term Dan the opportunity for US we've talked about the second channel opening up with our current tier one. So the team is quite focused on getting that second channel open by either the end of this fiscal or the first quarter of the next.
Okay, Thanks, and it's been a while since you've launched your first tier one and it sounds like Youre performing well, saying that you are at the top of the scorecard there.
Surely you've had a lot of key learnings and feedback from that tier one any chance, we could see a faster ramp up just given that you are.
Are you pretty much got a mature product heading into these.
Other two rfps.
Well, Dan I'd say the biggest driver of that will be volume. So we'll have to see where the volumes at as they are bringing on us as a new vendor and I think if we're continuing in our bottom balancing environment it might be a little tougher to ramp with a lot more speed. If there is some more volume coming in than you are.
We could see a quicker ramp than maybe what we've expected in the past and as you've mentioned I mean, we have had that tier one on the platform for a couple of years and it's sort of right in line with that getting to 20% that.
That we expect in the second year, we're pretty well on on.
Of course for that this year with this tier one.
Great. Thanks, I'll pass the line.
Thanks, Dan.
Your next question comes from Richard Tse with National Bank Financial. Please go ahead.
Hi, Thanks.
Thanks for taking my question that James filling in for Richard I was just wondering with Corelogic, leaving the market do you see any more competitors exiting at some point in.
How might that impact your market share moving forward. Thanks.
Hey, Thanks, James Yes, you mentioned one of our competitors exiting and so that is definitely part of the increase in share that we saw on the appraisal side of the dockets. This past quarter, we actually had really solid growth with one of the tier ones that used to be.
A customer of our competitors, so very solid progress with that tier one pushing us pushing them up sort of near the front of our our market share expectations of getting to 50%. So so really good quarter there.
As far as other competitors will have to see James how things shake out over the next couple of quarters.
We have there are only a few a handful of big National players as you know that we compete with.
So theres been a little bit of movement, but frankly, I wouldnt say theres been a significant amount of movement. There in the title side of the ledger there are.
We compete with the Big title Insurance company. So we don't see a lot of movement necessarily there in a couple of other other title companies that we compete with there is definitely further down the mix. There are lots of vendors that are probably struggling in this environment and we've seen some of those but I think at the top of the house Im not sure theres going to be a significant move in the.
And the competitive field, but of course, we'll have to see.
Great. Thanks, I'll pass the line.
Alright, Thanks James.
Your next question comes from Thanos, Michel Pullam with BMO capital markets. Please go ahead.
Hi, good morning.
Can you remind us how we should think about net revenue margins.
As volumes recover let's say in a scenario, where we have a strong recovery volume start trending up.
30, 47%.
Do we start to see the volumes, maybe the net revenue margin pull back a little bit in the near term as a full scale capacity or what were the dynamics.
Peter.
Yes, good question Dennis.
You know our focus has been on our 'twenty five targets on both the net revenue and adjusted EBITDA margin line and so right now youre seeing in the appraisal business that we are hitting those targets between 26 and 28% at the 27 five and so I think Sandoz you should expect.
With us to stay within that range. So even as volume comes on I think we've now put the business in such a place from an operating cost standpoint that we should be in good shape I have mentioned before that we've got capacity at the current volumes. So on the appraisal side, we still got 30% of capacity.
Where you'll see more torque of course is on the adjusted EBITDA line because of that capacity that we've got so we'll continue to make our way towards that 65% to 70% in this past quarter you saw some improvement there.
As you mentioned.
And on the title side, we will definitely see that continue to tick up once we get more volume so that the refinance space is very low right now so we'll definitely see some uptick as you saw again in this quarter.
On our net revenue line, so with volume as you have mentioned I mean, if the volumes where it is now then we'll probably see something similar for the next couple of quarters, but if we were to get a big bump you would definitely see that line go up towards our 60% to 65% target that we laid out.
On the adjusted EBIT side, that's where there's a bit of a drag right now simply because we need to have the operating cost structure that we've got now we brought that down to sort of a minimum operating model and so the new volume that comes on we've got lots of capacity on the title side three to four times the volume we can.
We'd be doing right now, but that's what we need to have for being a national provider. So I think there'll be a lot of torque right now in the business.
If we were to see that and I've mentioned in my.
Opening that the fact that we've reduced the operating costs some of them permanently which is really digitizing some of the workflow that would only incrementally add to the torque that we'd see in the margins.
Great and can you update us in terms of what youre seeing in the industry as far as.
I guess.
Appraiser capacity, what I mean by that is.
Obviously, you have your network.
Is going to allow you to scale very well as volumes rebound do we have a situation, though where some appraisers are exiting the profession.
So maybe you will do fine as long as the preferred maybe there'll be some industry constraints.
If that helps you incrementally gain share and what was the dynamic youre seeing in that regard.
Sure. So I think its pretty status quo on the network side of things than US I think where we've been focused is and where the industry is frankly focus is bringing more appraisers and so we're very involved in some what I think are quite unique training programs with the appraisal Institute.
With chase so we're working in partnership to bring more in with a real focus on diversity. So I think there's a real focus needs to start bringing in more talent.
And right now as you can imagine with the volumes where they are there is a lot of network capacity to manage so.
We're in really good shape.
Alright, I'll pass the line.
Thanks Dennis.
Your next question comes from Gavin Fairweather with Carmax. Please go ahead.
Oh, Hey, good morning, Thanks for taking my questions, maybe just to start out you referenced the business efficiency gains a few times can you maybe just give us some examples of some of the areas where you've found some efficiency in the business.
I don't know if you'd want to put a number on kind of the productivity gains that you've uncovered throughout the cycle.
Yeah. So again the focus is definitely been around taking a look at the processes that we currently manage the workflow on both sides of the business I think we've really dug in the last.
12 months on the title side of the business with with the volume where it's at and so where we're seeing real improvements there as you know theres a couple of different big components to the workflow one is around the title search area. So I think we've really found some ways to digitize some of the work that folks were due.
In the past I think we can do a lot more of that now in an automated fashion as well as at the end of the process. There is a lot of balancing that goes on.
Documents at the end and so again I think the team has done a really great job of finding ways to automate some of the processes around there. So that's why when I talk about.
Do things some of the operating costs permanently that's really what we're looking at the other piece to that Gavin is with the moves to the cloud, which we've talked about there's real advantages that are built into that and so frankly.
Pivoting to entitle to appraisal, we're spending a good chunk of time on appraisal right now looking at how we automate some of the quality areas. Some of the appraisal appraiser management areas. So I think.
In this type of environment is exactly what the team should be focused on and we're already seeing some.
Some good results from that.
Awesome and then maybe just a couple from an industry perspective.
Just on the abnormally widespread I guess when you speak to your lenders is there some catalyst or a set of macro conditions at the point to that that should lead to some spread compression are you hearing anything on that front.
Well I think the broad answer to that Gavin is just that there is still some uncertainty in the industry. I mean, I think that's really what's driving it. So I think we will see after this quarter as you know last quarter one of the concerns was just.
Round the.
Tier two tier three banks, what was that going to look like how was capital and their capital management looking so we'll have to see how that plays out with results coming out this quarter.
And the fed has been moving around there sort of position on pausing on rates and moving rates back up again so.
When you have that Gavin when you had some of that uncertainty as to what the next little while it looks like we still have inflationary conversation, we have recession comment all of that sort of stuff. Unfortunately.
Ads for the uncertainty and so that's why I think as you say I mean, we've had historically high spreads for a while so when we look into 2024, we think theres some opportunity there I'd be very surprised if over time with the market hopefully settling that they wouldn't start bringing those spreads to a much more reasonable.
Normalized long term average, which I think is 170. So that tells you how off we are at 300.
That's great that's it for me thank you.
Thanks, Ken.
Your next question comes from Martin <unk> with ATB capital. Please go ahead.
Thanks, so much.
Do you have visibility on the spread between.
What people are refinancing at versus what they had before they refinanced.
And the reason I ask is there is this perception that people only refinance if they are.
A certain amount in the money.
And so just hope I'm just wondering do you have visibility on that and maybe you could talk to that last point regardless.
Yes, so I mean, I'd start sort of at the top of the house Martin So when we take a look at refinance as you know the majority of refinance right now is.
80%.
Rate is 80% cash it right. So that is that is individuals that are making I assume life decisions of one form or another they are getting prepared for weddings theyre, sending kids to college those sorts of things. So to your question I'm not sure whether in the money is necessarily driving the Saar.
Here for them to cash out there its a life. It's a life event right they need cash out of their home and so again, that's 80% of the volume that's going through there.
And then on the rate side I think it just sort of depends right. So as we mentioned.
There is there is still a significant opportunity that's now growing we've mentioned in the past that.
As people are getting mortgages now at six 7%, there's a pool thats growing which we look at as very very opportunistic right high rate mortgages and so right now we actually get some more data. This morning, which is pointing to the fact that about 15% of mortgages.
Our now 5% plus.
So for US again, as we look forward that pool is expanding the rates right now look like they are $66 75 to over 7%. So that pool is only going to continue to expand and so all we need is the rates to start moving more towards that 5%, which will open up a significant amount of opportunity.
That's great color. Thanks, very much that's all for me.
Thanks, Brian much appreciate it.
Your next question comes from Robert Young with Canaccord Genuity. Please go ahead.
You bet.
Yes.
Would you put that cash.
That turns into a trend I know you havent been active on buyback or anything like that so.
How do you think about that cash if it stabilize and growing.
Thanks, Thanks, Rob and I appreciate the optimism. So as you said good news the cash is growing again.
And so it was in the short term right now as you know, it's all about making sure we've got a healthy balance sheet.
Talking to more tier ones about getting into the title business. So I think at least in the near term Rob the focus will definitely be on continuing to hold onto the cash that we have.
Looking longer term that will be.
But we'll have to see how it grows and then we will talk of course around the strategic opportunities that might present themselves, but right now definitely the focus is on investing in the core business, which we continue to do I just mentioned talking about continuing to drive down the cost base through automation using technology. So.
That's I think where we will continue to focus our efforts and continue to maintain a really healthy.
Our balance sheet.
Okay, and then on that.
Effort to work down the cost base.
I think you already touched on this a bit so I apologize, if it's covering past ground, but.
Is that net revenue margin benefit or is it opex benefit is of both and then.
Hard to.
Maybe quantify by how.
How much more do you think you can do there.
Yeah.
Yeah. So a lot of that is around adjusted EBITDA, Rob that's real affected because as I say I mean for us the real focus in the business right now we have initiatives going on around how do we scale as efficiently as possible.
That's really.
We are the focus of the.
<unk> capabilities will hit the balance sheet, I think we'll get a little bit on sort of the P&L and I think we'll get a little bit out of.
Maintaining that net revenue margin by doing some of the things that we're looking at doing on the appraisal management side of things.
Okay maybe.
Slightly different way if you look at your 25 2025 targets.
Do you think.
These cost benefits.
The ability to scale maybe Ed.
Slightly lower cost could it <unk>.
Drive to maybe potentially offsetting the higher EBITDA expectation in 2025.
Is everything still relatively similar to the way you would have looked at it a couple of years ago.
Yes, I think it's pretty close Rob because there's lots of other things going on in the business around mix and such so I think the focus absolutely is on the targets that we've got today I think the stuff will help enable us to get there and in the plan will be to get there hopefully with a little more volume that's really as you know thats really what we need is just some more.
And the system to see the scale dynamics really play their way through.
Okay, maybe last question.
I think I would benefit from this hopefully others will as well, but just the home equity volumes can you give us sort of remind us how that differs from the core and if you look out to a better market is that something that you will.
Our footprint in or is that something that you would wind down over time, maybe just give us a sense of how that changes the business.
And then I'll ask one.
Sure. Thanks, Rob so on the home equity front.
As the business plays that we definitely need to make sure that we service our tier one customers with the products that they.
They demand and so.
Although the core origination business is of course is by far the large proportion of our business.
And the profitable part of our business and the one that we can really drive margins through we do continue to offer home equity and other types of light type products. So I guess question answer number one Rob will be yes, we will continue to provide home equity.
This protect this particular quarter past quarter is is actually quite a representation of a tier one lender that continues to provide us with great market share from an origination standpoint, but also continues to require that we do.
We continue to supply good home equity services to them and so we've actually grown our home equity market share with them.
Mencer it with the origination increase in market share. So so really sort of strong growth around that.
To your point the margin profile is a little bit more challenging for us compared to the core origination, but as you've seen this past quarter. We have brought on some good home equity volume, but youre still seeing that 27, 5% net revenue margin on the on the appraisal business. So I think the team is doing an excellent job as we bring on home equity volume.
Of making sure that we're continuing to keep our eyes on the unit economics, and the net revenue type margins.
Alright, thank you.
Yes.
Thank you and gentlemen, as a reminder, should you have a question. Please press star followed by the one.
There are no further questions at this time, ladies and gentlemen. This concludes your conference call for today, we thank you for participating and ask that you. Please disconnect your lines.
Thank you.
Thank you have a good day.
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