Fidelity National Financial Inc (FNF) 2010 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the FNF fourth-quarter earnings call.

At this time, all participants are in a listen-only mode. Later there will be a question-and-answer session with instructions given at that time. (Operator Instructions). As a reminder, this conference is being recorded. Now I would like to turn the conference over to your host, Mr. Dan Murphy. Please go ahead sir.

Good morning everyone. Thanks for joining us for our fourth-quarter 2010 earnings conference call. Joining me today are Bill Foley, our Chairman, George Scanlon, our CEO, Randy Quirk, President, Tony Park, CFO, and Al Stinson, Executive Vice President. We'll begin with a brief strategic overview from Bill Foley. George Scanlon will provide an update on the title business and our operating companies. Tony Park will finish with a review of the financial highlights. We'll then open the call for your questions and finish with some concluding remarks from Bill Foley.

This conference 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 fact, 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 10-K and other filings with the SEC.

30 P.M. Eastern time today through February 4. The replay number is 800-475-6701, and the access code is 187500.

Let me now turn the call over to our Chairman, Bill Foley.

Thanks Dan. 2010 was a successful year for FNF on a number of fronts. The Title business experienced strong refinance volumes due to low mortgage interest -- due to the low mortgage interest rate environment. We continue to closely manage our expense levels, producing our strongest Title earnings and pretax margin in a number of years. The fourth quarter was particularly strong with a 13.8% pretax margin.

The strength of our 2010 earnings allowed us to set our annual 2011 common stock dividend at $0.48, or $0.12 per share per quarter, based upon a 2011 dividend payout ratio of 30% of 2010 earnings.

We remain the largest and most profitable title company in the country. Despite a potentially more challenging environment, we are focused on producing strong title insurance earnings in 2011.

We were also able to generate meaningful gains from our other (technical difficulty) companies. In the spring, we realized a $26 million pretax gain from the sale of MSX International Bonds, a distressed debt investment. On a percentage basis, that was a 120% gain in approximately 12 months.

In May, we also successfully closed the sale of our 32% ownership stake in Sedgwick, generating a pretax gain of approximately $98 million. The sale of Sedgwick clearly achieved our ongoing goal of creating significant value for our shareholders from a portfolio company, doubling our original investment, and was the culmination of a very successful four-year investment for FNF.

Finally, we sold approximately half hour investment in FIS stock through the Company's August tender offer, selling 1.6 million shares at a tender price of $29 million for a $22 million gain. We continue to own another 1.6 million shares of FIS with a current value of approximately $50 million.

We are also very excited about the prospects for Remy International, an auto parts manufacturer. We own approximately 47% of Remy that recently completed a debt refinancing and common stock rights offering. In December 2010, Remy closed on a new five-year credit facility and a new six-year term loan using primarily the new term loan proceeds to be paid (technical difficulty) existing first, second and third lien term loans. In January, a common stocks -- through a common stocks rights offering, eligible Remy shareholders exercised rights for approximately 19.7 million shares of common stock, resulting in proceeds of approximately $217 million, including the tender of approximately $93.5 million worth of Remy preferred stock. The debt refinancing and recent rights offering will reduce Remy's total debt plus preferred stock by $211 million from $535 million to $324 million. Remy will produce more than $120 million of EBITDA this year, in 2010, and we are excited about the Company's business outlook, simplified capital structure, and significantly reduced fixed-charge obligations resulting from the rights offering and the debt refinancing completed last December.

We can now turn our focus to a number of strategic alternatives for Remy that could generate meaningful value for FNF shareholders, including but not limited to a secondary offering. Ceridian, another portfolio company, is a 33% owned human resources payroll benefits and payment solution provider that spent much of 2010 focused on cost reductions. Under a new CEO, the emphasis will shift to improving revenue growth and cross-selling in 2011.

Cascade Timberlands, our 70% owned land holdings in Oregon, has several transactions pending that could result in sales in 2011.

Finally, American Blue Ribbon Holdings is a 45% owned company. It includes village Inn, Baker's Square, Max & Erma's restaurant chain. American Blue Ribbon Produced strong results in 2010, and we are excited about the prospects for 2011. We have a number of attractive companies and we are confident they [can] generate meaningful value for our shareholders over the next several years.

The continued strength of our balance sheet and liquidity position was a priority during 2010. In March, we amended an extended our existing facility, pushing the maturity date out to March 2013.

During May, we also issued $300 million of 6.6% senior notes with a May 2017 maturity. The net proceeds (inaudible) prefund the $165 million of debt that matures in August 2011.

In October, our Board of Directors set a dividend payout ratio of 30% of 2010 net earnings for 2011 common stock dividends. The combination of credit facility extensions, the senior note issuance, and the change in dividend policy enhances our longer-term liquidity profile, continues our strategy of conservatively managing our balance sheet and liquidity position during certain times, and provides additional holding company financial flexibility during 2011.

Despite the earnings strength of our Title business and the earnings contribution from investments and portfolio companies, FNF continues to trade below book value. During 2010, we repurchased nearly 9 million shares of stock for approximately $120 million, an average discount of nearly 15% to our year-end book value of $15.39. The majority of those shares, nearly 6 million, were repurchased in the fourth quarter of 2010.

Additionally, yesterday, our Board of Directors approved a 5 million share increase (technical difficulty) existing stock repurchase program. The stock repurchase program now authorizes the Company to repurchase up to 10 million shares of common stock through July 31, 2012.

Let me now turn the call over to our CEO, George Scanlon.

Thank you Bill. Refinance order volumes showed strength early in the quarter and then exhibited a normal seasonal slowdown over the last five weeks of the year. Open orders averaged 11,300 per day in October and 10,500 in November before declining to 7,800 orders per day in December.

For the quarter, refinance orders comprised approximately 66% of total open orders. The month of December experienced the normal seasonal slowdown and possibly some impact of higher mortgage rates as absolute order levels declined and refinance orders fell to approximately 60% of total open orders. Open orders for the last week of December were 6,200 per day, but order counts for the first three weeks of January have increased back to approximately 7,800 per day, reaching nearly 8,400 last week.

We had a third straight strong quarter in the Commercial Title business. Commercial revenue accounted for approximately 24% of total Direct Title premiums in the fourth quarter compared to 17% in the fourth quarter of 2009 and 19% in the third quarter of 2010. We opened approximately 18,900 commercial orders in our National Commercial divisions and closed approximately 12,600 commercial orders, generating more than $99 million in revenue with a fee for file of $7,900. This represented a 68% increase in fee per file and a 64% increase in total commercial revenue versus the fourth quarter of 2009. We are encouraged by this third consecutive strong quarter of Commercial Title activity and are hopeful that this trend may be an indication of an improving commercial market as we move into 2011.

Specialty Insurance revenue was $97 million for the quarter, an increase of approximately $4 million from the fourth quarter of 2009. Flood insurance generated $37 million in revenue, Personal Lines insurance contributed $39 million in revenue, and Home Warranty produced $18 million in revenue.

The pretax loss of $1 million was driven by $13 million in costs associated with an October hailstorm in Phoenix. Because of this storm, the Homeowners business produced a loss ratio of 93% for the quarter.

Turning to our portfolio companies, we do not consolidate the results of these operations as we currently maintain minority ownership positions. Overall, we recognized $5 million in earnings from our equity investments in the quarter.

Ceridian produced third-quarter revenue of $375 million and EBITDA of $84 million, reflecting an EBITDA margin of 22%. Our 33% share of Ceridian's quarterly loss was $4 million. Through new technology initiatives and other sales programs and an ongoing cost focus, we look forward to increased topline and earnings growth at Ceridian in 2011.

For the three months ended November 30, Remy generated revenue of more than $285 million and EBITDA of $36 million. Our share of Remy's quarterly net income was $6 million. As Bill mentioned, Remy had a strong operating turnaround in 2010 and with the recapitalization now has the flexibility to consider a number of strategic alternatives that could generate meaningful value for FNF shareholders during 2011.

For the three-month period ended in November, American Blue Ribbon Holdings produced revenue of $115 million and EBITDA of $10 million. Our 45% share of their net income was $2 million.

Finally, during our last earnings call, we discussed a $50 million corporate cost reduction program. We pursued this program aggressively last quarter following the call and within five weeks of that announcement, we had exceeded our target and identified more than $50 million in cost savings. This included a personnel reduction of almost 300 physicians, representing more than 17% of the corporate, administrative and shared services headcount, which will yield over $21 million in savings.

An additional $30 million of other cost savings were also identified in the legal, accounting and finance, claims and IT departments. Approximately 95% those savings will be realized by March 31 and 100% will be fully realized by the end of the second quarter. We also identified nearly $39 million of tangential cost savings in other areas of the Company related to this effort that will [yield] reductions in operating expenses and claims management costs over time.

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

Thank you George.

FNF generated $1.6 billion in revenue for the fourth quarter with pretax earnings of $179 million and cash flow from operations of $113 million. Cash flow would have been even stronger except for the negative impact from claims paid in our Title and Homeowners businesses being $100 million higher than the total provision for losses. Book value is $15.39 per share at December 31.

The Title segment generated $1.35 billion in total revenue for the fourth quarter, an 11% increase over the fourth quarter of 2009. Direct Title premiums grew by 19% over the prior year, as closed orders grew by 18%, the fee per file was unchanged and the mix was heavily weighted to refinance transactions.

Pretax earnings were $207 million and the Title margin increased significantly to 13.8%. Title segment personnel costs increased by $45 million, or 12%, versus the fourth quarter of 2009. Other operating expenses increased by only $5 million, or 2%.

Direct Title premiums increased by 19% and total Title operating revenue grew by 9% versus the fourth quarter of 2009 while personnel and other operating costs combined increased by less than 8%. Additionally, personnel and other operating costs were a combined 48% of gross Title operating revenue for the quarter versus 49% in the fourth quarter of 2009.

Debt on our balance sheet primarily consists of the $701 million in senior notes due in 2011, 2013, and 2017, and the $250 million drawn under our credit facility. Our debt to total capital ratio was 22% at December 31.

Total Title claims paid were $177 million during the fourth quarter, continuing above expectations, principally associated with claims incurred during 2005 through 2007, and mitigated by a more favorable experience in recent years. Overall, our reserve position is still within a reasonable range of our actuary's point estimate. Additionally, we maintained our 7% provision level and expect to do so again in 2011.

Finally, our investment portfolio totaled $4.9 billion at December 31. There are approximately $3 billion of legal, regulatory, and liquidity constraints on some of those investments, including secure trust deposits of nearly $400 million and [specialty] premium reserves for underwriters of approximately $2 billion. There are also some less liquid ownership interest in Ceridian, Remy and American Blue Ribbon of more than $500 million. So of the gross $4.9 billion, approximately $1.9 billion was theoretically available for use, with about $1.7 billion held at regulated underwriters and approximately $200 million in non-regulated entities. We have significant flexibility at the holding company level and continue to maintain a strong balance sheet.

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

(Operator Instructions). Robert Napoli, Piper Jaffray.

Thank you. A question on the agent business -- there has -- I know you guys in the industry have talked for years about adjusting splits with agents. I just wonder what their strategy was in that regard, and how successful you think it can be.

This is Randy Quirk. We've been working on this for actually the last couple of years, going state-by-state, making split adjustments on an agent-by-agent basis based on profitability and the quality of the relationship. Most recently, we are involved in adjusting our splits in the state of New York from 85/15 to 80/20. That's going to become effective on April 1. We've been talking with our agents since November, October, November of 2010. It's something we need to do in order to continue to provide quality support, services and product to our agents. We believe that will work out well for us and for our agents. So, we continue to make that analysis on a case-by-case basis,. We continue to move through other states and take a look at the viability of the relationships.

But that move in New York you're doing on April 1, you said?

Correct, that will begin on April 1.

Then you plan to move that into other states if that is successful? I guess it really depends upon whether the industry follows or not.

Well, we have gone to other states already and made adjustments in Georgia, Michigan, Minnesota. We went to the Western states about a year and a half, two years ago. So, there are still other states we are looking at, and we will move along in that direction.

Thank you.

Mark DeVries, Barclays Capital.

Thanks. If we were to see a $1 trillion mortgage origination market this year as the MBA is forecasting, in that scenario could you talk about how you manage the tension between cutting expenses to try and preserve returns and not cutting capacity so much that you're not able to fully participate when the market finally recovers?

I'll take the first shot at this. If the MBA is correct, it means that we'll have a follow-up in the refinance volume and an increase in the purchase many, so therefore our fee for file will increase, so that's a good thing for us. Also we see some pretty good momentum going into 2011 with our commercial markets, so that doesn't play to our favor also. What we will do is we will continue to watch the open orders; we'll continue to manage our headcount to our metrics. We've done a lot of consolidation over the last two years in terms of facilities and some brand consolidation, so we'll stay with that. That's actually paid off pretty well for us in 2010. So we think we will be in pretty good shape in any market and will be in a position to make the necessary adjustments as we go through with the MBA and certainly there's going to be a reduced origination market.

I'll say also on the corporate side, we undertook that cost-saving program with a view that 2011 would be a more challenging year than 2010. So we are continuing to watch the cost side throughout the Company. As you know, the market can be volatile, government programs can be introduced that create new opportunities, but we manage the business on a weekly basis and take what the market is giving us. Also look at opportunities to grow revenue -- our national lender program. We think there is some opportunity there to potentially increase share of constantly recruiting talent. We are the strongest company, so we think we have a lot to offer salespeople. So this may create opportunities for us that others may see more diversity in.

Two other quick questions just to follow-up on the splits. Do you guys see any room for that to come down any further at this point?

No, I don't believe so. I think that 80/20 in New York will be sufficient. Again, as I said, we will look at these on a case-by-case basis. We really do analyze the relationships with the agent based on viability and profitability.

Then finally, dividend policy for 2012, would you expect that it would be comparable where you're looking at paying out 30% of the prior year's net income?

That's our present plan, just to wait and see how they year evolves and develops. We have been a very consistent dividend payer for years and years, and it's sort of paid at a stated rate and try to increase that dividend periodically. We felt, with the uncertain times, especially in the real estate market, that we ought to put a stake in the sand with regard to payout ratios, so that's what we did for 2011. All things being equal, that's probably what we will do for 2012, the same sort of payout ratio.

Great, thanks.

Doug Mewhirter, RBC Capital Markets.

Good morning. The first question is just very I guess basic numbers question. I just noticed your revenues in your Corporate segment had a pretty larger drop sequentially and year-over-year. I know that the corporate segment is kind of a catchall, but I was wondering if you had shifted any classifications around or if you exited a certain business which generated a lot of revenue in that segment. It just seems unusual.

That was actually a good catch. We moved one of our businesses that made more sense to be in the Title segment; we moved it out of the Corporate segment. When we made a change like that, obviously we have to restate the prior year in that regard too. So we moved our loan care business, which is our mortgage sub-servicing business, out of the Corporate segment and into the Title segment, and so now we have very little in terms of operations in the Corporate segment.

Actually, thanks for that answer. That was helpful. Actually, that falls into my next question. I guess would that explain the reason that your escrow fee growth outstripped your Title premium growth in your Title segment? Escrow fees had like a 17% jump and Title premiums were about 8%. So --

That would be part of it. I think -- I don't know if you're looking at year-over-year or quarter-over-quarter. I think Title premium increase quarter-over-quarter by about 19%. I think escrow fees increased by about 12%. But there was some drop-off in our OREO management business of about $12 million which would explain actually why that part went down. You may be looking at year-over-year.

Yes, year-over-year is what I was looking at.

Year-over-year, the loan care move would make sense. That was also a midyear acquisition, so part of it is growth and the rest of it is the fact that we didn't have it during the entire prior year.

Thanks, that's helpful. The last question is more of -- I guess more of a strategy type question. How are you positioned for the first quarter? I know you track open orders literally every day, every week, but do you have a certain bias to how you look at your costs going into the first quarter? It's seasonally slow. There's the bad weather, but the refi volumes seem to be hanging in there. Are you a little more defensive or are you still kind of on your toes?

We are very defensive during the first quarter of every year, [specialty] becomes more of a traditional cycle. That's what -- you can't call what we're in -- what's happening in the real estate market today traditional, but the first quarter is always the softest. We try and get our personnel cuts made sometime during the fourth quarter as order volumes start slowing down and into January, the first quarter and then hunker down and wait for, really wait for March, which is usually -- normally has quite a few workdays in that month, and it's sort of the kickoff of the spring season. So we are almost to February, we're almost through January. Things are okay. But this is, as you said, seasonally our slowest and our toughest period.

Thanks, that's all my questions.

Brett Huff, Stephens.

Good morning and congrats on a nice quarter. A couple of quick follow-up numbers questions I want to make sure I got. It was mentioned, the refi number, there was a 60% number. Was that for January or December? I think, for the quarter, it was 66%, but what was the 68% refi number?

That was December, 66% for the quarter.

Then the mention there were some cost cuts in Corporate obviously around $50 million cost cut program, congrats on that. That was an incredibly high number. But in terms of operations, what were the FTE cuts that you did in December or maybe early January in anticipation of the slow quarter? Was it more than normal or typical?

We ran through November into December. We had very high closing volume in those two months, so we were really unable to make any real significant cuts then. We have eliminated a little over 200 positions in the first three weeks of January, now that the closings have slowed down. So but with the high volume at the back end of the year, we couldn't make our move as we would typically. At the back end of 2009, we had lower volume going into the fourth quarter, so we were able to make adjustments a little bit earlier. But we are acting in January here in the first quarter. At the same time, as Bill had mentioned, we need to get through February and then spring should be the beginning of the new season for us.

Sure. One other question on the refis -- did you mention what the refi mix for January was so far?

The refi mix for January obviously has come down. We are a little closer to 55% refi mix on the opening side, and on the closing side also, actually. We'll catch resale closings at the back end of the month, so that will change by the time we get to the end of the month. But refis are softened, as they do typically in the first few weeks in January.

That's helpful. Then the last question, a little bit bigger picture. It sounds like you positioned the Company to be fairly conservative from a balance sheet point of view and cash flow point of view going into the year given what looks like what may be a tough origination market. How does M&A fit into that? I know often you're opportunistic, but can you give us an update on not just potential disposition, but any potential acquisitions?

We are continuing to be interested in the restaurant business. Our restaurant acquisitions have been normally through a bankruptcy procedure. On occasion, we're the [stalking] horse bidder. We are buying these companies at 1.5 to 2.5 of EBITDA. Our restaurant business that acquired Village Inn and Bakers Square about two years ago has net negative debt. We are about $18 million of cash and $[16] million of current debt. There are opportunities in that area, and they are fairly modest in terms of the capital requirement. We have some other ideas relative to expanding our data -- our involvement with real estate information and real estate data. We are looking at several different opportunities. They would be modest in nature, but could involve several hundred million dollars in terms of acquisition funds. That's really where our focus is right now. We do have the Remy investment, and we believe that's a logical situation for an IPO sometime this year to really make the (inaudible) company grow up and be what it should be. So that's nothing dramatic, at this point, but you never know. Things come our way once in a while.

Great, that's what I needed. I appreciate your taking my questions.

Bill Clark, KBW.

Good morning guys. Was there anything specific that drove the strength in the Commercial fee for file in the quarter? Any one-off catch-ups?

No, there really wasn't. We just had some larger deals close at the end of the year, which typically the fourth quarter is typically a good Commercial quarter. But it was really the size of the transactions that raised the fee for file.

Great. Thank you.

(Operator Instructions). Bob Napoli, Piper Jaffray.

Thanks. What prompted the CEO change at Ceridian? I think you got a great guy there.

We just felt that we needed to have someone who could really take control of the business and be not only a cost cutter but also had a strong sales background. Stuart is already making significant progress, and so we look forward to 2011. As we [start] with GDP growth and employment growth, they are having a good year at Ceridian. We really feel like we have weathered that storm, weathered a tough recession, and now we are ready to start growing that business.

Commercial (inaudible) have you seen -- do you feel like you've seen a real turnaround in the Commercial business transaction wise? Are you seeing valuations pick up? What are you seeing in the Commercial market. You obviously had a huge quarter.

There's a lot of refis of existing lenders' loans coming due. It's more equity going in. It's not as much -- it's not quite the distress situation you might otherwise have thought about a couple of years ago. It's appreciating assets and assets that have had debt paid down that are getting refi-ed or -- so it's, you know, it's probably the healthiest sector right now in the real estate business. It's appears to us that the demise of the commercial transaction, commercial business, was overdone. It just has come back.

Interesting. Then just finally, just to be clear, are the $50 million of savings, cost savings, $39 million identified? Is that -- are these permanent savings I guess, or what --?

Let me just give you -- separate those two. So there's $50 million identified. The majority of the actions have been taken, and as I think I said, 95% of that would be realized by the end of the first quarter. So, they are substantially through the headcount reduction, and it's implemented the other programs. So we are going to start to see the savings and probably pick up $10 million to $12 million of savings in Q1, then it will ramp up and we will be at $50 million run rate by the end of Q2.

Separately, when we were going through this exercise, we found an additional $39 million of savings that will either come through the P&L as savings in the field, or will come through lower claims costs over time. We've got a number of initiatives that are designed to reduce our cost of handling claims. That runs through the reserve, so you won't see that in the P&L immediately but it will be a cash savings. That's really one of our primary objectives for 2011. So I would separate the $50 million from the $39 million.

Then just the last question, the 30% payout ratio, just are you -- do you think you'll be able to maintain the current dividend at that payout ratio? I'm just trying to understand the message there.

We're going to take a look at it in the fourth quarter of next year and see how we have done during 2011. We'd love to go back and have a stated dividend payout ratio -- stated dividend as opposed to a payout ratio, but the Board three or four months ago decided that we should target 30% of after-tax earnings, and take the reduction in the overall dividend rate and reinvest that in ourselves by repurchasing common stock, which we did in the fourth quarter. So, we have stated really as clearly as we can that it's going to be $0.12 a share for this year. We've got four of those coming up. One was just declared yesterday. We'd be very hopeful that we could maintain that dividend, that dividend rate, and amount, but it will be targeted at 30% of after-tax earnings.

That is separate of the buyback, so the 30% would be dividends, and then excess capital above that for repurchase -- for buybacks? Is that a --?

Exactly. We have a lot of shares outstanding. We'd like to reduce the number of shares. Even when we buy back 5 million or 6 million shares in a quarter, it's a drop in the bucket. So we would really like to be in a position to buy back not just 5 million shares or 6 million shares or 10 million shares a year, but do a significant buyback. We just aren't quite in that position yet.

Can you raise debt in this market to -- the capital to repurchase shares? If your stock stays at this valuation, would you do that?

Well, we can. We do have, we have undrawn -- our current facility has about $700 million that's undrawn. It hasn't been a focus of the Board to actually borrow to buy stock back. So, we've been trying to use excess cash flow to buy stock back.

Thank you.

I would like to now turn the conference back over to Mr. Foley.

We are proud of our accomplishments in 2010. The Title business produced its best earnings and pretax profit margin in a number of years. We generated more than $145 million in pretax gains from our investments in portfolio companies. We continue to strengthen our balance sheet, focusing on enhancing our longer-term liquidity profile. As always, we remain committed to our ultimate goal of continuing to create value for our shareholders. Thank you for joining us this morning.

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