Fidelity National Financial Inc (FNF) 2010 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Fidelity National Financial first quarter earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. Instructions will be given at that time. (Operator Instructions). And as a reminder, this conference is being recorded. I would now like to turn the conference over to our host, Dan Murphy. Please go ahead, sir

Thank you. Good morning everyone. Thanks for joining us for our first quarter 2010 earnings conference call. Joining me today are Al Stinson, our Chief Executive Officer, Randy Quirk, President, and Tony Park, CFO. Our chairman, Bill Foley, will join us later for the question and answer session. We'll begin with a brief strategic overview from Al Stinson. Al will also provide an update on the title business and our other operating companies, and then Tony will finish with a review of the financials. We'll then open the questions -- open for your questions and then finish with some concluding remarks.

This call may contain forward-looking statements that involve a number of risks and uncertainties. Statements that are not historical facts, including statements about our beliefs and expectations, are forward looking statements. Forward looking statements are based on Management's beliefs as well as assumptions made by and information currently available to Management. Because such statements are based on expectations as to future economic performance and are not statements of facts, actual results may differ materially from those projected. We undertake no obligation to update any forward-looking statements whether as a result of new information, future events, or otherwise.

The risks and uncertainties which forward looking statements are subject to include, but are not limited to, the risks and other factors detailed in our press release dated yesterday, and in the statement regarding forward looking information, risk factors and other sections of the Company's Form 10K and other filings with the SEC. This conference call will be available for replay via webcast at our website at fnf.com. It will also be available through phone replay beginning at eleven o'clock AM Eastern Time today through May 22nd, 2010. The replay number is 800-475-6701 and the access code is 152826. Let me now turn the call over to our CEO, Al Stinson.

Thank you, Dan. This quarter was a typical seasonally impacted beginning to the year, as we started slow in January, coming out of the holiday season and built momentum as we made our way into the month of March. Open order counts were relatively stable during the quarter, after the first two weeks of January, as we averaged between 8500 and 8800 from the second half of January through March. Closed order counts were seasonally soft during the first quarter and were further impacted by the new RESPA closing requirements.

We also continued to aggressively manage our cost structure in the first quarter, eliminating nearly 600 additional positions during those three months. The 2 1/2 months of consistent open order activity, the first quarter seasonal delay in order closings, and the continued cost reduction should allow us to produce stronger results in the title business during the second quarter.

Tuesday, we announced the signing of a definitive agreement under which we will sell our 32% equity ownership stake in Sedgwick to two private equity firms, including one which was a 40% owner of Sedgwick when we made our initial investment in January of 2006. Under the terms of the definitive agreement, the total cash purchase price for Sedgwick, including the repayment of debt, will be about $1.1 billion. We expect to receive net proceeds of about $220 million for our 32% equity ownership stake, resulting in a pre-tax gain of about $95 million. Closing is expected during the second quarter of 2010, subject to customary closing conditions and the receipt of any necessary regulatory approvals. The sale of Sedgwick clearly achieves our ongoing goal of creating significant value for our shareholders and is the culmination of a very successful four-year investment for FNF. We are very proud of the growth that Sedgwick experienced during our mutually beneficial partnership with the company and we wish them future success with their new investment partners.

We realized a significant gain from one distressed debt investment in our portfolio, MSX International. We originally purchased the bonds during the first half of 2009 for a total purchase price of about $22 million. In early March, we sold these bonds for total net proceeds of about $48 million, a pre-tax gain of $26 million.

Yesterday our board of directors declared an increased quarterly cash dividend of $0.18 per share. The $0.18 per share cash dividend represents a 20% increase over the most recent quarterly cash dividend of $0.15 per share. We are confident in the few future prospects of FNF and we hope that this significant increase in the dividend conveys that confidence to our share holders.

During March we amended and extended our existing credit facility, decreasing the total size of the facility from $1.1 billion to about $951 million and pushing the maturity date on a $925 million tranche out to March 2013. We had one lender who declined to extend and thus we still have a $26.25 million tranche that matures in October of 2011. Pricing on the $925 million tranche was increased to LIBOR plus 150 basis points at our current ratings, while the $26.25 million tranche, pricing remained at LIBOR plus 47.5 basis points. We did not retain the option to increase the facility to $1.1 billion, and financial covenants remain the same. This amendment and extension enhances our longer term liquidity profile and continues our strategy of conservatively managing our balance sheet and liquidity position during these uncertain times, as our debt to total cap ratio ended the quarter at about 21%. In March we also repaid a $50 million subordinated note we issued to LandAmerica as part of the Lawyers and Commonwealth acquisition. We borrowed under the credit facility to accomplish this so there was no net impact on total debt.

Let me turn to the title business. Total open order volumes were relatively stable, once we got through the first two weeks of January. We opened about 7,000 orders per day in the first two weeks of January, 8500 open orders per day in the second half of January, more than 8500 open orders per day during February, and nearly 8800 open orders per day in March. Open order counts for the first half of April have averaged about 8300 per day, with a dip below 8,000 in the first week of April and then a rebound above 8600 last week. While order counts were relatively stable, they were down sequentially from the more than 9,000 open orders per day for most of the fourth quarter of 2009. In response, we did eliminate an additional 600 positions in the title operations during the first quarter. In the first few weeks of April, head count in the title operations has remained relatively unchanged.

We had a stable quarter in the commercial title business, we opened about 17,200 commercial orders in our national commercial divisions and closed about 9800 commercial orders, generating $48 million in revenue on a fee per file figure of $4900. This represented increases in fee per file and total revenue and a consistent close order count versus the first quarter of 2009.

Commercial revenue accounted for about 17% of total direct title premiums in the first quarter. Specialty insurance revenue was $89 million for the first quarter, an increase of about $2.5 million from the first quarter of 2009. Flood insurance generated $32 million in revenue. Personal lines insurance also contributed $32 million in revenue, and home warranty produced $19 million in revenue. Pretax earnings were $6 million, and the homeowners' business produced a loss ratio of 72% for the quarter. Pre-tax earnings were down due to increased homeowners' losses from flooding in the Northeast and soot and smoke damage from California fires. Cascade sold a substantial tract of timberland during the quarter for $13.7 million. Before any cash distribution from that sale, our carrying value for Cascade was $87 million. We do expect a cash dividend in the second quarter.

While we do not consolidate the results of Sedgwick, they produced revenue of $178 million and EBITDA of $23 million in the first quarter, for an EBITDA margin of 13%. Our 32% share of Sedgwick's first quarter earnings was $1.5 million. We also do not consolidate the results of Ceridian, but they produced revenue of $379 million, an EBITDA of $76 million, an EBITDA margin of 20%. Our 33% share of Ceridian's quarterly loss was $7 million. Overall we recognized $11 million in losses from our equity investments.

Let me now turn the call over to Tony Park to review the financial highlights.

Thank you, Al. FNF generated $1.2 billion in revenue for the first quarter with pretax earnings of $43 million and cash flow used in operations of $88 million.

Four major factors drove the majority of this decline in cash flow from operations. First we received a $73 million federal income tax refund in the prior year quarter. Also, total title and specialty insurance claims exceeded the provision by $42 million this quarter. Annual bonus payments in the first quarter were nearly $30 million larger than the prior year due to improved operating results in 2009 versus 2008. Finally, the $48 million of cash proceeds from the sale of the MSX bonds was reported as cash flow from investing activities, not cash flow from operations.

The title segment generated $1.1 billion in total revenue for the first quarter, a 15% decline versus the first quarter of 2009, as closed orders fell by 22% and the fee for file increased by 15%. Pre-tax earnings were $23 million and the pre-tax title margin was 2.2%. Title segment personnel costs decreased by $60 million or 15% versus the first quarter of 2009. And other operating expenses declined by approximately $45 million, or 16%. Overall, direct and agency title premiums both fell by 16% versus the first quarter of 2009, while personnel and other operating costs declined by 15% and 16% respectively.

Debt on our balance sheet primarily consists of the $411 million in senior notes due in 2011 and 2013, and the $450 million drawn under our credit facility. As Al mentioned, we repaid the LSG subordinated note during the quarter, borrowing under the facility to do so. Our debt to total capital ratio was 21% at March 31.

Total title claims paid were $96 million during the first quarter, in line with our expectations. We maintained our 7% provision level and expect to do so again in the second quarter. As Al mentioned, we realized a $26 million gain from the sale from the bonds from a distressed debt investment, MSX, causing a significant increase in our realized gains for the quarter. From a segment standpoint, this gain was recorded in the corporate and other segment. Finally, our investment portfolio totaled $4.8 billion at March 31. There are approximately $3.1 billion of legal, regulatory and other restrictions on some of those investments, including secured trust deposits of approximately $400 million and statutory premium reserves for underwriters of approximately $2.1 billion.

There are also some other restrictions, including less liquid investments like our ownership stakes in Sedgwick, Ceridian, and Remy, and working capital needs at some underwritten title companies, all of which total approximately $600 million. So of the gross $4.8 billion, approximately $1.7 billion was theoretically available for use, with about $1.55 billion held at regulated underwriters and approximately $170 million in nonregulated entities. We expect $100 million to $150 million of additional dividends from underwriters during the remainder of 2010.

Let me now turn the call back to our operator to allow for any questions.

(Operator Instructions). Our first question will come from the line of Mark DeVries with Barclays Capital. Please go ahead, sir

Yeah. Thank you. Are you guys seeing any improvement in the last couple months in the purchase re-fi mix that might suggest the average fee per file could start heading up?

I think we'll let Randy Quirk, President of the Title Operations, respond to that one.

Sure, Mark. We certainly have. The mix has shifted in the first quarter towards the resale side. We currently are running at 55% of our open orders. In April, our resale transactions we ended the first quarter with 51% of our resale orders opened up, our total order volume opened up for resales. It is affecting the fee per file as Tony mentioned. Our fee per file over the first quarter of last year went up 15%. We finished out the first quarter with about $1340 an average fee per file. That's increasing now. We're running about $1400, moving towards the mid-$1400 range as we move through April. We anticipate that range to hold through the entire second quarter.

Okay. Thanks. Can you guys provide any update on your efforts at Ceridian to improve the profitability outlook there?

Yes, sure. Under our new CEO, Lee Kennedy, Ceridian is showing improvement in the following areas -- number one, Comdata is showing dramatic improvement as trucking miles begin to improve nationwide. We're also implementing an extensive cross-sell program which is paying benefits. Lee is also in the early stages of a $50 million cost reduction plan. We're also rolling out our new InView payroll processing system as the year goes by. I think what you're going to see is some pretty good improvement there. But where you're really going to see the improvement is when unemployment begins to, you know, ebb and decline, our performance will continue to improve.

Okay. Great. And just one last question. With the stock now trading a little above book, can you just talk to your interest in buying back stock here and also kind of remind us where you stand on your authorization?

Tony or Dan, you might have to comment on the authorization. But, you know, we continue to evaluate stock buybacks. We've always been a buyer, as the stock gets down at book value or below. So we just continue to evaluate alternative uses of capital.

Yes. We have a $15 million share authorization. I believe we have more than 12 million shares available under that authorization. We have plenty of room for more buyback.

Okay. Great. Thanks.

Our next question will come from the line of Doug Mewhirter with RBC Capital Markets. Please go ahead.

Hi. Good morning. Just have a couple of questions. First, could you go into a little bit more into how I guess -- how you're estimating the impact of the new RESPA requirements and that's pushed a lot of the closings out in terms of -- does that turn 45 day closings into 60 day closings? Also, do you think that the new RESPA requirements may also affect your closing ratio? In other words, would that cause some people to drop out of the closing process or is it just a few more pieces of paperwork?

Randy, do you want to take that one?

What we saw at the beginning of the year with the changes was really more mechanical. There was learning curves on both the lender side and on the title insurance at large in terms of how to produce the documentation, how to prepare the good faith estimates, the HUD-1s. Systems had to be re-tooled. So it was really mechanical at the beginning of the year. We're probably through a lot of that already. It's pushing orders into the second quarter that probably would have closed, opened or closed in the first quarter. I believe we're through a lot of that. It's not necessarily extending -- that we know, it's not necessarily extending the closing period, but it didn't push back the volume of closings into the second quarter

Okay. Thanks. My second question is, I guess Tony, what are your expected uses of the proceeds from the Sedgwick sale?

I think initially, we would just apply those against our line of credit and pay that down. So we don't have any expected use other than that currently, but it certainly, you know, allows us more flexibility.

Okay. I guess my last question is around the commercial activity, looks like you had some little bit of organic growth now that the comparisons with the LandAmerica acquisition are behind you. This is despite hearing a lot of, you know, activity in the press about how a lot of commercial mortgages are --they increasing, going to 60 day delinquencies, sort of bearish factors in that market. Is that actually helping you? Are you seeing more workout transactions? People trying to sell the properties before they get in trouble with the mortgage? Or is it just general better economic conditions contributing to the rise in volume?

It might be a little bit of each. We are seeing more workouts. We're seeing more loan modifications, debt restructuring. We have seen a very steady stream of inventory coming in, as you see. Our fee per file went up a bit in the first quarter and our revenue did. We're -- we think it's been somewhat stabilized and many of our commercial people out in the field are feeling a bit optimistic.

Okay. Great. That's all of my questions.

Next we have a question from the line of Brett Huff with Stephens. Please go ahead.

Morning, guys.

Hi, Brett.

Two quick questions. Number one, can you just go through the fee per file decline sequentially again? We are a little confused about the drivers of that. Was that a RESPA-driven item or -- can you just give us more color on the drivers of that for 1Q?

Brett, one clarification. Are you talking sequentially Q1 2010 to Q1 2009 or fourth quarter to first quarter?

4Q to 1Q.

Okay.

Well, really, what that was is really the affect of the commercial revenue at the end of the fourth quarter. We did have an uptick there. You don't get a lot of commercial typically in the first quarter. So that was the reason for that decline. But, year over year, as I had already mentioned, the fee for file has come up from 1150 to roughly 1350. We're certainly heading in the right direction with the mix of business going to the resale side.

Brett, I was actually surprised it wasn't more of a decrease. Because typically the fourth quarter fee per file is very much impacted by commercial. So that was a very modest decrease Q4 to Q1.

Then you guys talked a little bit about the fee per file sort of running 1400 in early April and going to 1450, and you feel good about that. What are the drivers of that in particular? Is that some of the deals closing that got pushed out? Is it the price increase getting fuller effect commercial?

The real driver there is the mix of business. We're going to -- we're opening now, 55%, as I mentioned in April, is our resale mix. We're closing over 50% in April really for the first time in a couple of years. So that's the real driver as the fee per file pushes out.

Brett, you're seeing some pretty nice return to some pretty decent volumes in re-sale which definitely offsets, you know, the re-fi, as re-fis go down, that mix differential certainly drives increase in fee per file.

That helps. And then just detail the Cascade. Sounds like you sold off a chunk of that land. Can you just go through that math or those details again?

What we did, prior to the sale, our investment, FNF investment in Cascade for how much percent, Tony?

70.%

70%, was the $86 million. So, Cascade sold a pretty good chunk of land. That's an ongoing process. There is more to come in 2010 as a result of a series of transactions that are already pretty much in place. So Cascade is sitting there with the cash. Cascade's board will meet and decide how much of a distribution to make. So that will continue to push our investment down. Our investment will continue to go down as we reap the rewards at FNF from the sale of those properties.

Got you. But it didn't show up in your P&L this quarter?

That's the point I was trying to make in my comments. It will show up in Q2 when we make a distribution.

Just to clarify a little bit, if you look at the corporate segment, you will see, since we consolidate Cascade's books, you actually will see the impact of the sale. As Al mentioned, it didn't impact our investment to this point because we haven't had the distribution. But in terms of looking to P&L, you'll see about a $14 million revenue piece in the corporate segment. You'll see cost of sales which is in other operating expenses. So you'll also see a minority interest expense for the 30% we don't own. Net in our P&L you don't see much of a benefit, probably about $1 million, but you will see those components within the corporate segment.

Those are the two things I needed. Thanks for your time.

And we have a question from the line of Bob Napoli with Piper Jaffray. Please go ahead.

Morning, everybody.

Hi, Bob.

Question on, I guess, in this market, if you look at the MBA forecast, is for about a $1.3 trillion market, re-fis clearly are moderating, maybe some pickup in purchase. Re-fis are probably going to have the potential, if rates go up, to be low for an extended period of time. Again, margins, can you get your operating margins this year in a $1.3 trillion market, can you get the title margins to double digits or do you need a stronger market than that?

That's a tough one, Bob. We're trying to decide who wants to respond to your question. Very, very difficult. I'm not sure we can respond very specifically. We're going to do the best we can. Obviously, margins will improve fairly significantly as we move through the year.

Right.

We just simply don't know the strength of this resale market and all those mixed dynamics. There's a lot of good things or glimmers of some good things going on. I'm not sure I would want to go out on a limb and say we'd get to double digit. It's certainly a possibility.

We also don't know that $1.3 trillion is the right market. We're seeing consistent order flow, even through today and with that it doesn't feel like a $1.3 trillion market to us. Clearly the re-fi market has dropped off. The purchase market is still there and still pretty strong. And so we'd -- we would almost expect to see a significant fall-off in purchase and no commercial activity picking up, which doesn't seem to be the case to see a $1.3 trillion. When we're talking $1.5 trillion or $1.6 trillion, I think that changes it considerably in terms of what we think we can do from a margin standpoint.

Okay. Thank you. That's helpful. On Ceridian, how much do you have -- how much did you invest in Ceridian? I know you sold some off. What is it -- what do you have on the balance sheet capital invested in Ceridian today?

We have about $440 million invested in Ceridian today. We invested just under $500 million. So some of that has come down with losses experienced at Ceridian that we picked up in our equity in earnings and losses of subs. So it's down to about $440 million.

Now, are there any challenges on the funding side? I guess earnings have come down at Ceridian since the acquisition. I know you had -- I think it was funded mostly with longer term debt. I don't recall, were there challenges on the funding side?

Bob, we have no challenges at all at Ceridian. That debt facility is extremely attractive. We have no problems there. No covenant issues, no either short-term or intermediate issues.

The Comdata business. I know it's a fuel card. You said it's improved. Is it primarily the heavy duty trucks? Is that where you've seen the pick-up?

Yes, it really is, and what you're seeing -- we track the over the road miles which are beginning to improve pretty significantly. We're comping very strong month over month. That's really where it's coming from, as heavy truck traffic moves across the country, as the economy improves.

Would you sell that business to delever? Sounds like you don't really need to?

We don't need to. It's certainly an attractive piece at Ceridian that gives us a lot of flexibility, lot of options.

Okay. And Bill, on the investment side, you have some cash coming in from the sale of Sedgwick. I think when somebody invests in FNF, given your history, they know that there's the potential for other investments not related to title. Are there other areas today? Are you seeing opportunities to attractively invest FNF capital outside of the core business?

Actually, Bob, we've got an interest in the restaurant business again. So we made a small acquisition of a -- we are a 45% owner of Village Inn and Bakers Square. That investment has worked out very well for us. So we're continuing to look for opportunities in the restaurant space that are going through a restructuring or going through some sort of stress that we could consolidate those restaurants into our, it's called American Blue Ribbon Holdings, into that company. That's an area that we continue to be interested in.

And there are just other opportunities. As the market is still being difficult in the real estate sector, we feel there may be some other opportunities in real estate related businesses that are processing oriented or processing related. That's kind of where our head is right now. And then, of course, the Sedgwick sale has allowed us to comfortably increase the dividends by 20%. Further, will allow us to really evaluate a stock, more aggressive stock repurchase program, and puts us in a strong position relative to the bonds that are due in August of '11 which is about $167 million. Our credit facility's been restructured. We're stretching everything out on the long side. So I feel optimistic about the financial structure of FNF, much more so than I did maybe 15 months ago before we did that secondary offering. I don't know -- does that kind of handle the question.

Yes. That's very helpful. Last question. Just -- looking at some of these mortgage-related processing, real estate-related processing or service businesses, it seems like some of them have some pretty aggressive plans at ramping up title operations, I think primarily as agent. But are you seeing, is there any strategically, competitively, are there things like that that concern you that may take share from your direct business?

The industry is always only as strong as its dumbest competitor.

Yes. Right.

We have had a lot of competitors over the years that really haven't acted very intelligently in the market place. And there are a couple of competitors that are doing really kind of some silly things. And we just have to respond to them. We have to maintain our position in the market place and maintain our market share where it makes sense. We continually evaluate whether it makes sense to maintain market share or give up market share. And a lot of that relates to the agency side of the business. But the reality is we have well over half of the cash and surplus of the entire industry and close to 50% of the title premiums in the entire industry.

We're always going to be a target, but on the other hand, our cash investments, our capital surplus, is very strong. Lenders and other people doing business with title companies need to be cognizant of who they're doing business with and the strength of those competitors. LandAmerica is a good example. There are a lot of policy holders out there right now that potentially, had we not come into the bankruptcy proceedings, would not have had a policy that was viable. So, we continue to respond to the competition is the short answer.

Okay. Thank you.

(Operator Instructions). And next we'll go to the line of Matt Otis with KBW. Please go ahead.

Morning, gentlemen.

Morning.

Most of the questions have been answered but just a quick follow-up to something that was said earlier. Sounds like there are no head count reductions that have gone on so far in April. Does that mean you're kind of taking a wait and see approach as we go into spring or should we expect more through the second quarter?

Well, as you know, we did eliminate about 600 positions in the first quarter. We did that as the order volume had declined really for the most part on the back end of 2009. With the orders stabilizing right now, we're just staying with what we always did, and that's manage to the open orders. So we're going to be aggressively managing the head count. If the orders remain stable then the staffing will remain relatively stable. There's still some to do. We're still continuing with our consolidation effort in our profit centers around the country, most aggressively on the agency side. We are still doing consolidation which will provide for some staff reductions. We are staying with our tried and true game plan, which is to watch the open order count on a weekly basis, and manage our head count accordingly.

Fair enough. That's it. Thank you.

Okay.

(Operator Instructions). We have no questions in queue. Please continue.

We are particularly satisfied with the three recent transactions involving the sale of investments including Sedgwick, the MSX bonds, and the timberland sale at Cascade, all of which create value for our shareholders and strengthen our liquidity position. The first quarter was a typically seasonally slow start to the year. We expect to produce strong results in our title business during the upcoming months. Thanks for joining us this morning. Look forward to talking to you next quarter.

Thank you. Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.