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Edited Transcript of JGWE earnings conference call or presentation 28-Mar-17 2:00pm GMT

Thomson Reuters StreetEvents

Q4 2016 JG Wentworth Co Earnings Call

Randor Apr 21, 2017 (Thomson StreetEvents) -- Edited Transcript of JG Wentworth Co earnings conference call or presentation Tuesday, March 28, 2017 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Erik Hartwell

The J.G. Wentworth Company - VP of IR

* Roger O. Gasper

The J.G. Wentworth Company - CFO, CAO and EVP

* Stewart A. Stockdale

The J.G. Wentworth Company - CEO and Director

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Conference Call Participants

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* Justin Wohler

* Ryan Watson

* Jon Groveman

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by. Welcome to the J.G. Wentworth Company Fourth Quarter 2016 Earnings Call. (Operator Instructions) Please note that this call is being recorded today, March 28, at 10 a.m. Eastern Time.

I would now like to turn the meeting over to your host for today's call, Erik Hartwell. Please go ahead, sir.

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Erik Hartwell, The J.G. Wentworth Company - VP of IR [2]

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Thank you, operator. Good morning, everyone, and thank you for joining The J.G. Wentworth Company's Fourth Quarter and Full Year 2016 Earnings Conference Call. Today, we'll be hearing from Stewart Stockdale, our Chief Executive Officer; and Roger Gasper, our Chief Financial Officer. After their prepared remarks, we'll open the call for questions. We've included a brief presentation to accompany our remarks and can find the link to this webcast included in the earnings press release. The slides for today's presentation have been posted on the Investors section of jgw.com, along with our earnings press release.

Statements in this conference call and in our earnings press release, other than historical facts, are forward-looking statements. Actual results may differ materially from those projected in forward-looking statements. Factors that might cause the actual results to differ materially are discussed in our earnings press release. The company disclaims any intent or obligation to publicly update or revise any forward-looking statements regardless of whether new information becomes available, future developments occur or otherwise.

One of the items we will speak about today is segment adjusted earnings before interest expense, taxes, depreciation and amortization or segment adjusted EBITDA. Segment adjusted EBITDA is a measure of our segments' profitability that our CEO uses to asses segment performance. We define segment adjusted EBITDA as our net income or loss under U.S. GAAP before noncash compensation expenses, provision for or benefit from income taxes, amounts related to the consolidation of the Structured Settlements, securitization and permanent financing trusts we use to finance our business, our senior secured credit facilities interest expense, debt issuance and related expenses, depreciation, amortization and certain other expenses. Not all companies calculate segment adjusted EBITDA in the same fashion. And therefore, these amounts, as presented, may not be comparable to other companies. Additionally, segment adjusted EBITDA is not an indicator of cash flow generation. Please refer to our earnings release for the reconciliation of our segment adjusted EBITDA to our loss before income taxes.

And now I will turn the call over to our Chief Executive Officer, Stewart A. Stockdale.

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Stewart A. Stockdale, The J.G. Wentworth Company - CEO and Director [3]

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Thank you, Erik. Good morning, everyone, and thank you for joining our call today. Our results for the fourth quarter and full year 2016 reflect the focus and execution we have maintained throughout the year on our key priorities to: One, turnaround the Structured Settlements segment; two, grow Home Lending; three, innovate and expand Payment Solutions offerings; and four, diversify our funding sources and access to capital markets.

On a segment adjusted EBITDA basis, we saw improvements year-over-year. Home Lending achieved $7.5 million of adjusted EBITDA in the fourth quarter, up $6.8 million compared to the same period a year ago. Home Lending results were aided by a $443.4 million increase in locked loan volume in the fourth quarter of 2016 over the fourth quarter of 2015.

For the full year 2016, Home Lending achieved $31.2 million of adjusted EBITDA.

Structured Settlements achieved $6.8 million of adjusted EBITDA, an increase of $4.5 million from the same period a year ago. Structured Settlements results primarily benefited from the decrease in operating expenses with expenses lower by nearly $8 million compared to last year.

The fourth quarter also benefited from a favorable cost of funds resulting from the strong execution of the 2016-1 ABS transaction completed in late October. We achieved the previously stated annual run rate cost savings target, delivering nearly $43 million against the goal of $40 million to $45 million.

Savings are primarily from advertising, compensation and benefits, interest and professional and consulting categories. For the full year, Structured Settlements delivered $16.2 million of adjusted EBITDA.

In our Home Lending segment, we continued to see strong operational performance in the fourth quarter of 2016. Locked loan volume was $1.1 billion, a 63% increase compared to the fourth quarter of 2015. Closed loan volume reached $975 million in the fourth quarter and was nearly double the volume on a year-over-year basis.

While the mortgage category generally experiences a slowdown in the fourth quarter, we performed much better versus the fourth quarter of 2015. For the full year 2016, we originated more than $3.4 billion in loan volume and increased earnings by over 100% compared to 2015.

By nearly all accounts, the acquisition and subsequent growth of the Home Lending segment has been very successful.

We were able to drive strong growth in originations and earnings in 2016 through the investment in new marketing channels, the expansion of personnel in our direct lending branches, increased back-office operational capacity, coupled with the deployment of technology and process improvements. Additionally, throughout the year, we have grown the mortgage servicing portfolios, unpaid principal balance, UPB, to $4.1 billion at the end of 2016. This represents an increase of $1.1 billion from the $3 billion at the end of 2015.

The MSR portfolio had a fair value of $41.7 million as of 12/31/2016. Key metrics of the MSR assets such as delinquency rate, runoff and loan mix have remained stable as we have scaled the business. Over the course of last year, we have brought in dedicated leadership to our servicing team and expect to continue to grow the MSR asset. We believe that as the MSR asset increases, it will contribute a larger percentage of our earnings over time.

As part of the continued investment in Home Lending and keeping pace with the evolving mortgage landscape, we are enhancing our digital mortgage capabilities, leveraging Ellie Mae's Encompass Platform, we will be expanding consumer options to allow for greater self-service and look to enable a streamlined mortgage application experience.

We were recently recognized by Ellie Mae and inducted into the their Hall of Fame, receiving both the President's Award for Encompass Excellence and the award for Excellence in Compliance Automation.

On the marketing front, we believe the strength of the J.G. Wentworth brand and the associated brand awareness has helped boost performance throughout 2016. We continued to lay the foundation to build out the direct-to-consumer channel. The addition of experienced, direct marketing leadership has helped to accelerate and activate new lead sources. These lead sources are a combination of aggregators and rate tables along with the expansion of our own paid and organic search. We've launched with Bank Rate in the fourth quarter and subsequently launched with Zillow and SproutCore earlier this year. We expect to add and optimize various sources over time to achieve the desired performance. We also believe our direct mail activities will be a key driver of growth and have launched additional direct mail campaigns targeting the portfolio, remarketing and prospects.

We believe our established affiliate and retail channels also stand to benefit from the increased marketing activities that elevate consumer awareness of The J.G. Wentworth brand across all channels. We are very pleased with the growth in contribution of Home Lending in the fourth quarter, and especially, for the full year of 2016.

We believe our diverse set of Home Lending products, origination channels and sound operational and compliance discipline allows us to effectively adapt to the changes in the mortgage landscape.

Turning to the Structured Settlements business. The results in the quarter largely reflect the scope and impact of the changes we have been making throughout the year as we strive to stabilize the key business drivers for this segment. Aided by the favorable cost of funds in the quarter, we were able to deliver another quarter of sequential improvement. Expenses in the quarter improved sequentially from the third quarter and were down $5.7 million.

Total receivable balances purchased, PRB, was $165.5 million compared to $171.5 million in the third quarter. A key differentiator in the Structured Settlements business is our diversified funding platform.

Throughout 2016, we executed 2 private placement transactions and returned to the ABS market in the fourth quarter with a strong execution. We recently completed our 2017-1 ABS transaction with strong investor demand, including an expanded investor base. We continue to evaluate and explore alternative funding sources to provide us with the flexibility to meet the needs of the business. We expect that the strategy will also enable us to effectively pursue a larger mix of transactions in the marketplace that may have previously been unattractive on a profitability basis.

The actions we have taken throughout 2016 have resulted in a streamlined marketing and operations organization. And we believe we are better positioned to react to the ebbs and flows that ultimately impact consumer demand for annuity and structured settlement payment purchasing. The Structured Settlements business continues to be highly competitive. Our strong brands, deep knowledge and years of experience differentiate us in the marketplace. We continue to be the market leader and remain committed to servicing our customers in need of cash now.

Lastly, let me update you on our Payment Solutions activities. Since the last quarterly call, we launched the GIVE SOME! PLAY SOME! product with the New Mexico Lottery Authority. As a reminder, the product combined a $20 virtual Visa Gift Card with a $5 scratch off lottery ticket and carried a $3 fee. In general, the new innovative product was well received by retailers, and we will be incorporating lessons learned from the pilot related to product construct and expanded distribution options.

We are also making progress with the Winstreak product. The Winstreak offering provides for a payment solution for cash in and cash out and can also include a loyalty component to complement a casino's brand and customer retention strategies for both land-based and online gaming operators. We will be the program manager for the payment transaction and a service provider to the gaming operator. We have a pipeline of opportunities that we are pursuing, and we expect to finalize agreements with a few large operators to launch later this year.

Overall, the results of the fourth quarter and full year 2016 reflect the continued focus and execution across the company. As I look back at 2016, both businesses operated with a strong sense of urgency against 2 very different market realities. For Structured Settlements, it was critical to stabilize performance and significantly reduce operating expenses. And in Home Lending, the team needed to invest and expand to handle record volume -- record levels of production, fueled by favorable conditions. We believe both businesses are in a better position operationally than a year ago.

As we look to 2017, we recognize that interest rate headwinds may introduce additional challenges, and we are taking action to position each of our businesses accordingly. For Home Lending, our goal is to pivot to a larger percentage of purchases and adapt to changes in refinance mix.

In Structured Settlements, we expect the rising interest rate environment to impact our cost of capital. Our goal is to balance a sufficient level of profitability while maintaining unit volumes.

Now I would like to turn the call over to Roger Gasper to walk through the financial results. Roger?

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Roger O. Gasper, The J.G. Wentworth Company - CFO, CAO and EVP [4]

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Thank you, Stewart, and good morning. We are reporting in the fourth quarter of 2016 consolidated total GAAP revenues of $106.6 million, a $22.3 million increase from the $84.3 million we reported in the fourth quarter of 2015. The increase was due to a $14.5 million increase in total GAAP revenue generated by our Home Lending segment, coupled with a $7.8 million increase in Structured Settlements total GAAP revenue.

The $14.5 million increase in Home Lending's Q4 GAAP revenue was due primarily to an increase of an $8 million in the changes in the mortgage servicing rights net and an increase of $3.7 million in realized and unrealized gains on the sale of mortgage loans held-for-sale, principally due to the $443 million increase in loan lock volume. The increase in Structured Settlements GAAP revenue from the prior period was driven by $12.4 million increase in realized and unrealized gains on VIE and other finance receivables, long-term debt and derivatives, partially offset by a $2.9 million decrease in interest income.

Our consolidated GAAP net loss decreased $106.8 million from $107.4 million in the fourth quarter of 2015 to $600,000 in the fourth quarter of 2016, due primarily to a $91.8 million decline in consolidated total expenses, coupled with the previously discussed $22.3 million increase in consolidated total revenues, partially offset by a $7.2 million change in our consolidated income tax provision.

The $91.8 million decrease in our consolidated total GAAP expenses primarily reflects the impact of the $91.7 million impairment charge recorded in Q4 of 2015, for which there was no comparable charge in the current quarter.

Decreased operating expenses in the Structured Settlements segment during the fourth quarter of 2016, resulting from our previously announced cost savings initiatives, were essentially offset by an increase in Home Lending operating expenses, generated by the increase in locked and closed loans volumes.

For the full year 2016, we are reporting a consolidated net loss of $98 million, a $99.1 million decrease from the $197.1 million loss reported for the full year of 2015. The decrease in our net loss was principally due to a $75 million decrease in our Structured Settlements segment's pretax loss coupled with a $27 million increase in pretax income generated by our Home Lending segment.

The $75 million decrease in Structured Settlements pretax loss was primarily the result of: one, a $121.6 million impairment charge recognized in 2015 compared to a $5.5 million impairment charge recorded in 2016. And two, a net $13.1 million decrease in various operating expenses reflecting the benefits realized from our cost savings initiatives and partially offset by a $54.2 million decrease in total revenues, partially driven by lower TRB purchase volumes.

The increase in Home Lending's pretax income is driven by the nearly $4 billion increase in loan lock volume that was principally due to the company having acquired the mortgage business on July 31, 2015. Therefore, the consolidated results for 2015 included only 5 months of Home Lending's operations.

From a cash management standpoint, at the end of the fourth quarter, we had unrestricted cash and cash equivalents of $80.2 million, approximately $6.5 million less than the $86.7 million we had at the beginning of the quarter, but $22.9 million more than the unrestricted cash on hand as at the beginning of the year.

The increase in unrestricted cash from the beginning of the year was due principally to having issued in Q3, $207.5 million in notes that were collateralized by the cash flows from residual interest and reserve cash related to 36 of our securitizations. The proceeds of which were used in part to repay a $131.4 million in previously outstanding VIE long-term debt.

Subsequent to Q4, we closed in mid-January, the prefunding of our '16-1 securitization that generated net cash proceeds to the company of $15.9 million. Additionally, we completed on March 22, a $131.8 million asset-backed securitization. We were pleased with the strong demand from the ABS market as this was our first monetization transaction of 2017. If you recall, we completed 2 direct asset sale transactions and 1 securitization in 2016. Both the ABS and direct asset sale channels demonstrate the diversity and flexibility through which we can access the capital markets.

Thank you. And operator, at this time, we are now ready to open the call to questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from the line of John Groveman, a private investor.

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Jon Groveman, [2]

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Roger, you didn't mention what the amount of cash that was generated from the latest securitization?

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Roger O. Gasper, The J.G. Wentworth Company - CFO, CAO and EVP [3]

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That's correct. We typically don't provide that until the quarterly release. So we'll not disclose that.

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Jon Groveman, [4]

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I mean, it's March 28.

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Roger O. Gasper, The J.G. Wentworth Company - CFO, CAO and EVP [5]

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I realize that. I realize that.

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Jon Groveman, [6]

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It's really we should be getting an update on this current quarter, really. I mean, it's -- and that leads to my next question. I mean, you got January, February and March under your belt, the quarter is almost over. Any color on this quarter?

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Roger O. Gasper, The J.G. Wentworth Company - CFO, CAO and EVP [7]

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As you know, historically, we really haven't given guidance on what we're forecasting and projecting for the future periods. And so we're going to continue with that paradigm and withhold any guidance in this call as well.

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Jon Groveman, [8]

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All right. The other question I have is, I looked at the statements and there is a $6 million derivative gain. Is that derivative gain from the Structured Settlements business?

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Roger O. Gasper, The J.G. Wentworth Company - CFO, CAO and EVP [9]

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Yes, it's within the VIE -- primarily within the VIE securitization and permanent financing trust.

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Jon Groveman, [10]

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Right. So that was basically the hedging profit?

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Roger O. Gasper, The J.G. Wentworth Company - CFO, CAO and EVP [11]

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Exact. Well, it's the hedging gain on the derivatives associated with some of our previous securitizations.

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Jon Groveman, [12]

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Right, right, right. And what's the elephant in the room? What's going on with trying to take care of an extend or renegotiate the term loan?

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Stewart A. Stockdale, The J.G. Wentworth Company - CEO and Director [13]

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This is Stewart. Thank you for the question. As we said for the last few months, we -- our focus is on deleveraging the company. And we have hired a consultant to help us through that process. We will be disclosing that in our filings in the next couple of days.

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Jon Groveman, [14]

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Well, apparently, it was on the Newswire that you hired Evercore, whether that's the name or not, but I think that's pretty much been disseminated?

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Roger O. Gasper, The J.G. Wentworth Company - CFO, CAO and EVP [15]

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Yes, and then as we didn't comment at that time. We did hire a consultant. And obviously, our focus is on how do we -- how and when do we delever the company. It's top of mind. And it's something that I am spending a lot of time with, with Roger and Steven Kirkwood, our General Counsel. So it's top of mind and top priority.

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Jon Groveman, [16]

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And the million-dollar question is, and I'll ask it anyway, whether you're going to answer it or not. What's the likelihood that equity value would be maintained in some sort of renegotiation of the debt? Any value for the equity holders?

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Stewart A. Stockdale, The J.G. Wentworth Company - CEO and Director [17]

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I think at this point in time, it's premature to say. We're looking at all options available to us with respect to the deleveraging scenario that we just talked about. But at this point, I think it's too early to give out...

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Roger O. Gasper, The J.G. Wentworth Company - CFO, CAO and EVP [18]

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Do you've any color on that?

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Stewart A. Stockdale, The J.G. Wentworth Company - CEO and Director [19]

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On the ultimate outcome.

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Jon Groveman, [20]

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And do you have any expectation about how far along you are in this process? How far into it are you or are you just -- I thought you might have been working on this thing for a while. And it sounds like, you just hired somebody in the last whatever month, but that doesn't seem correct, is it?

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Roger O. Gasper, The J.G. Wentworth Company - CFO, CAO and EVP [21]

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Well, we're not going to -- we didn't comment on the press release or the...

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Jon Groveman, [22]

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Right. Whatever that's (inaudible).

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Stewart A. Stockdale, The J.G. Wentworth Company - CEO and Director [23]

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(inaudible) from several weeks ago. And so we prefer not to comment now on when we engage the consultant. But it's obvious, I think we've been saying now for some period of time that if you were to come into possession of excess cash, which arguably at 12/31 and even at 9/30, we are in possession of such excess cash. So we would look to and try to do something with the debt. Put it this way, we're not in the first or second inning and we're not in the eight or ninth, but it's still too early to decide what the outcome of the game's going to be.

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Jon Groveman, [24]

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That's good color. One last. First of all, I mean, on the expense side, you guys are -- I mean, I don't know how you did it, but you keep, and I think you probably finished whether you keep squeezing water from a stone. I mean, it's pretty amazing. My last question is just out of curiosity. What's the rationale behind and maybe it's just me, but I have noticed an incredible amount of TV commercials, which I thought you were going away from because the age of the Internet and the competitiveness of the Internet and now I'm seeing tons of TV commercials. What's the rationale behind that?

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Stewart A. Stockdale, The J.G. Wentworth Company - CEO and Director [25]

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No. We've always done. Obviously, we've always done TV and continued to do that. We did...

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Jon Groveman, [26]

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Is it more now than before or is it just...

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Stewart A. Stockdale, The J.G. Wentworth Company - CEO and Director [27]

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No. We did test, maybe it's when you see it. We tested some more prime time, and we tested on weekends. So it's probably, you're probably now watching TV in the middle of the day, so you're probably now seeing some of those because we're testing that. We also did some opportunistic buys, which means that we go to certain networks and we tell them to buy. They have available inventory at very low prices.

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Jon Groveman, [28]

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Cheap. Yes, yes, yes.

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Stewart A. Stockdale, The J.G. Wentworth Company - CEO and Director [29]

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Whatever and that's how we typically buy. So it's probably you're just seeing more, but it is, I mean, TV is obviously much more fragmented, it's less effective than it is, it still generates awareness for us and that something that we evaluate all the time on where to put our dollars. And we will continue to evaluate that, but that's why, why you're seeing more spots.

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Jon Groveman, [30]

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And how are you guys dealing with the volatility in the fixed income market? I mean, it's a Jekyll and Hyde market.

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Stewart A. Stockdale, The J.G. Wentworth Company - CEO and Director [31]

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Well, and as you know, it impacts both our businesses, right. On the mortgage side, rates have steadily gone up and since the election. And even if they go up, what we prefer that they be stable versus being up and down, because I think consumers are more prone to lock in the loans versus a rising rate or a decreasing rate even. But I think they were really good...

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Jon Groveman, [32]

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10 years going down 30 basis points in around a week and a half.

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Stewart A. Stockdale, The J.G. Wentworth Company - CEO and Director [33]

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Yes. And it went up a lot in the previous few months, right?

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Jon Groveman, [34]

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Yes.

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Stewart A. Stockdale, The J.G. Wentworth Company - CEO and Director [35]

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So it's been an interesting ride.

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Jon Groveman, [36]

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I'm sorry. One last question. How many more securitizations would you anticipate for the balance of 2017?

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Stewart A. Stockdale, The J.G. Wentworth Company - CEO and Director [37]

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We anticipated doing 3 deals, whether they are ABS transactions or private placements. We were probably still on the 3 rotations. And as we said before, we'll always survey the market. And if it's better, and long-term we always believe the ABS will be best for us. But if in a particular quarter, the ABS isn't working in our favor and we have the option to do a private placement, we won't hesitate to kind of do best execution.

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Operator [38]

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Your next question comes from the line of [George Munk ], an investor.

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Unidentified Participant, [39]

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What are the prospects or the plan to getting off the pink sheet?

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Stewart A. Stockdale, The J.G. Wentworth Company - CEO and Director [40]

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Well, I mean, we moved to the OTCQX and right now, we don't have any plans to move away from it. Right now, our focus is to delever the company. What happens as a byproduct of that then though that will be the kind of the next step as to what happens to what kind of list we're on. But right now, the focus is on deleveraging the company.

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Operator [41]

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Your next question comes from the line of [ Goran Mayfield ] from Fort Washington.

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Unidentified Analyst, [42]

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I just had a question about the residential interest and reserve cash that was sold off. Could you explain a little bit further which securitizations that were -- have the residual in reserve sold and whether you are retaining any interest in those?

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Roger O. Gasper, The J.G. Wentworth Company - CFO, CAO and EVP [43]

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This is Roger. I can -- we can follow up after the call with a specific residual or the specific securitizations that were included, obviously, listing all 36 would be rather time consuming. But if you want to send me an e-mail or reach out to me in the office, I'll be happy to have that go through those, that list with you separately. With respect to the second part of the question is, do we retain a residual in the residual? The effective answer is, no, we do not. All of the cash flows related to those residual interests were being used to pay down the $207.5 million in notes that were issued in conjunction with the transaction.

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Operator [44]

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Your next question comes from the line of Ryan Watson from Jefferies.

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Ryan Watson, [45]

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Just a point of clarification on that last question. Any securitizations that you do going forward though, do you retain a residual interest in those or do those also go into the pool?

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Stewart A. Stockdale, The J.G. Wentworth Company - CEO and Director [46]

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No, those do not go into the pool. Those will be retained by the company. So I think it was up to '15-3, if I'm not mistaken when the last securitization included in the residue transaction, just to clarify the earlier caller's point.

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Ryan Watson, [47]

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Okay. And what -- is there any way that you could anticipate what your -- on your balance sheet, what the residual interest balance would be by maybe year-end that is not encumbered?

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Stewart A. Stockdale, The J.G. Wentworth Company - CEO and Director [48]

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Again, I don't -- we have historically not given guidance. I think if you're trying to think how you might be able to triangulate that, but I can't think of a way within the context of the SEC filings, how you might be able to discern that. I'll give it a more thought and if I can think of a way for you to discern that from a publicly available information, I'll let you know.

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Ryan Watson, [49]

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Okay. Would you be able to provide what the residual interest is in the '16-1 and the '17-1 securitizations, which are not encumbered?

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Stewart A. Stockdale, The J.G. Wentworth Company - CEO and Director [50]

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Well, we haven't released the 10-K yet or 10-Q, obviously. So I have to be somewhat careful. That will be filed hopefully there within the next 24 to 48 hours. So if you want to reach out to me after that and then we can have a conversation about that. I'll be happy to do so.

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Ryan Watson, [51]

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That's fine. And then two more questions. On the unrestricted cash of $80 million, you stockpiled a decent -- a fair chunk at this point. If you look out at your business over the next 24 months, do you anticipate outside of doing any sort of balance sheet restructuring that you have enough liquidity to get you to the maturity of the term loan?

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Roger O. Gasper, The J.G. Wentworth Company - CFO, CAO and EVP [52]

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Yes. Absolutely, yes.

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Ryan Watson, [53]

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Okay, okay. And then one final question. Is there anything in the Structured Settlements business that I mean, I think most of us are aware sort of, of the secular changes in that business over the last few years. Has anything changed recently either to the positive or negative in that business as far as the competitive dynamic, pricing dynamic that you can speak to on this call?

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Stewart A. Stockdale, The J.G. Wentworth Company - CEO and Director [54]

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No. I mean, I think, it continues to be extremely competitive. And I think that the access to capital has been overwhelming. So a lot of competitors are finding ways to fund themselves. And it's not just through the ABS market. It will be interesting to see as rates tend to go up this year, at least that's prediction, to see what kind of funding these players have. We monitor the competitors, we see which ones are doing well and which ones aren't doing so well. And there is some that we get a sense that are doing very well. And we do know that some of them pricing pretty crazily. And we'll see how the earnings to them evolve over time. But generally speaking, I mean, it remains very competitive. So we always have to balance kind of our increase in buy rate with the units, right? Because that's kind of the ongoing dance that we have to do. We can leave the buy rate where it is and not make a lot of money when we try to inch it up and you just want to make sure that you won't lose a lot of volume, because it is very competitive and every deal is competitive. And of course, the consumer really isn't thinking buy rate. I mean, the consumer is thinking how much cash is company A versus company B going to give them. And so that's something that we struggle with everyday. Not only in kind of the new deals, but obviously, it's very competitive as in the second deal, because these are court filings. You get a lot of competitors that make a living just out of scraping those court files and going after the second transaction with their customer.

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Ryan Watson, [55]

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I see. Okay. So -- and then -- so the bulk of the improvement then really year-over-year is really like you said, just into operating expenses being cut to a level that are still functional for you?

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Stewart A. Stockdale, The J.G. Wentworth Company - CEO and Director [56]

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Yes, and then what we're trying to do is, obviously, we cut quite a lot of expenses. And we remained market leaders. We still have a 2-brand strategy. And so we've kept the chassis doing well. And we're hoping that when that market does turn that we will continue to be in good shape. So as much as we have cut, I don't think that we've heard our ability to be competitive and be market leaders in the category. It's just we have taken a lot of prudent steps to cut when it was $43 million of run rate between 2015 and to going into 2017. And then, we're also subject to what our cost of funds is. In the fourth quarter, we did benefit. We had a really good execution. It was the first time that we've been back into the ABS market in the year. It was good to see that we were well received back into the ABS market. So we had -- we went on the roadshow and talked to a lot of investors. We talked to quite a number of new investors. And this new ABS deal was also nicely subscribed and we had a number of kind of partners that have been with the program for quite a few years and some very exciting new partners as well. So -- but nonetheless, cost of funds, it did go up and is expected to go up for the remainder of the year if you listened to any of the prognosticators.

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Ryan Watson, [57]

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And then just a good indicator of that is a 10-year swaps, basically?

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Stewart A. Stockdale, The J.G. Wentworth Company - CEO and Director [58]

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Correct. For that business, the 10-year swaps for the mortgage, we tend to follow the treasury.

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Ryan Watson, [59]

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Okay. And I'm sorry, I just thought of another question while you're talking on the mortgage side of things. Is there any seasonality in that fourth quarter number if I looked at your closed and locked volumes, quarter-over-quarter, I see a decline, albeit, year-over-year a very strong growth. Is there something I should read into that?

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Stewart A. Stockdale, The J.G. Wentworth Company - CEO and Director [60]

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Yes, there is seasonality. And I think, everybody in the mortgage business will tell you that Thanksgiving and then going into the holiday season, things tend to really slow down. I think this year was especially think of it as a double whammy because right after the election, rates really shot up and it really slowed the refinance market. And so people have gone more to purchase and will recall cash out refinance. But I would read those 2 things, the seasonality plus the very rapid increase in rates that happened right after the election as things that impacted us. I think we still had a pretty decent quarter. It was better than the year before, but it certainly a slowdown versus the third quarter. And there is some seasonality, but also the spike in rates impacted our locks, which is really the early stage of our earnings process.

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Operator [61]

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(Operator Instructions) Your next question comes from the line of Justin Wohler from Candlewood.

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Justin Wohler, [62]

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I was wondering if you could clarify whether -- where the location of the current $80 million of unrestricted cash is, whether it's at subsidiaries or intermediate holdcos?

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Roger O. Gasper, The J.G. Wentworth Company - CFO, CAO and EVP [63]

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It's currently residing where it always has been, which is in the subsidiaries of the company and...

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Justin Wohler, [64]

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Okay. And last year's 10-K included language that suggested an ability for the subsidiaries to make significant dividends or distributions up to the company or it's holdcos, have any such dividends been made to date?

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Stewart A. Stockdale, The J.G. Wentworth Company - CEO and Director [65]

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No, sir.

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Roger O. Gasper, The J.G. Wentworth Company - CFO, CAO and EVP [66]

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No.

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Justin Wohler, [67]

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And can you clarify what dividend capacity if any you had year-end under the term loan?

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Stewart A. Stockdale, The J.G. Wentworth Company - CEO and Director [68]

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That will be included in our 10-K filing when we file it in the next 24 to 48 hours.

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Justin Wohler, [69]

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Okay. And can you clarify lastly, whether the company is a guarantor for the term loan?

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Roger O. Gasper, The J.G. Wentworth Company - CFO, CAO and EVP [70]

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Whether -- which?

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Justin Wohler, [71]

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Whether the company or JGW LLC, the intermediate holdco are guarantors for the term loan?

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Roger O. Gasper, The J.G. Wentworth Company - CFO, CAO and EVP [72]

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They are not.

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Stewart A. Stockdale, The J.G. Wentworth Company - CEO and Director [73]

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Thanks for the questions. If there are no further questions. I thank everybody for listening and we'll be in touch.

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Roger O. Gasper, The J.G. Wentworth Company - CFO, CAO and EVP [74]

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Thank you.

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Operator [75]

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This concludes today's conference call. You may now disconnect.