Fidelity National Financial Inc (FNF) 2011 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Fidelity National Financial 2011 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, and instructions will be given at that time. (Operator Instructions) Also as a reminder today's teleconference is being recorded. At this time, I will turn the conference call over to your host, Treasurer, Mr. Dan Murphy. Please go ahead sir.

Thanks and good morning everyone, and thanks for joining us for our first-quarter 2011 earnings conference call. Joining me today are Bill Foley, our Chairman, George Scanlon, CEO, Randy Quirk, President, and Tony Park, our CFO. We will begin with a brief strategic overview from Bill Foley, George will provide an update on the title business and our operating companies, and Tony will finish with a review of the financial highlights. We'll then take your questions and finish with some concluding remarks from Bill.

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 expectations, hopes, intentions or strategies regarding the future 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 financial and operating results 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 10K and other filings with the SEC.

This conference call will be available for replay via webcast at our website at www.FNF.com. It will also be available through phone replay beginning at 1 PM Eastern time today through May 6. The replay number is 1-800-475-6701 and the access code is 199329. Let me now turn the call over to our Chairman, Bill Foley.

Thanks, Dan. This is our strongest first quarter in a number of years as our direct operations benefited from strong refinance closings early in the quarter and consistent closings throughout February and March. Open order accounts were relatively stable throughout the quarter, although they showed some seasonal strength in the month of March, increasing more than 8% over the average for January and February. The commercial business continued to be robust as commercial revenue grew by 35% over the first quarter of 2010. This quarter shows that with generally steady order volumes, although at historic low levels, we can generate the 8% to 10% margins we target in difficult markets through our focus on strong expense management. During the quarter we eliminated more than 600 positions in our title operations and made significant progress on our previously stated $50 million cost savings project, identifying nearly $55 million in run rate cost savings. Our quarterly results also include one-time expenses of $9 million or $0.04 per diluted share, representing our portion of the costs related to the Remy debt restructuring in late 2010 and early 2011.

Overall this is a very positive start to what most experts have predicted will be a very difficult year in the mortgage and real estate markets. We believe that we have our Company positioned for strong performance for the remainder of 2011. We made modest stock repurchases during the quarter, repurchasing approximate 800,000 shares at an average price of $13.84 for total proceeds of $11 million. We have a bond payment due in August of this year of approximately $165 million and therefore are conserving some cash to ensure that can be made on a timely basis. Under our current authorization, we can still repurchase up to 9.2 million shares through July of 2012. We will continue to monitor the market and repurchase shares from time to time. Additionally, Remy filed an S1 Registration Statement in March to begin the process of selling common stock and becoming a publicly traded company. Remy intends to sell to up to $100 million of common stock in the public offering. Because of rules surrounding an IPO, we are restricted from discussing any other potential details of the transaction at this time. Let me now turn the call over to our CEO, George Scanlon.

Thank you, Bill, and good morning everybody. We are pleased with our performance to start the year in what is normally our most challenging quarter of the year. While total revenue for the Company was flat, we were able to almost double our pre-tax profits over the prior year. This resulted from a combination of favorable revenue mix and ongoing disciplined cost management, and also highlights the upside earnings leverage in our business when title volumes normalize in the future. We work hard to maintain our industry-leading margins, even in the face of cyclical headwinds, and this quarter is a reflection of the success of those efforts.

Despite forecasts to the contrary, as we enter the year refinance open order volumes continue to be strong into the first quarter. Refinance orders were 52% of open orders for the entire quarter. Overall, open orders averaged 7,900 per day for the first quarter, with January averaging 7,700, February, 7,600 and March, 8,300. Open orders for the first 3 weeks of April averaged 7,700, primarily due to the expected softening in refinance orders, as refi orders dropped to 48% of total open orders. Resell order activity for April has been consistent with March.

We had another strong quarter in the commercial title business. Commercial revenue accounted for 20% of total direct title premiums in the first quarter compared with 17% in the first quarter of 2010. We opened approximately 18,500 commercial orders in our national commercial divisions, and closed 10,600 commercial orders, generating nearly $66 million in revenue with a fee per file of $6,200. This represented a 24% increase in fee per file and a 35% increase in total commercial revenue versus the first quarter of 2010. We are encouraged by the strong start to the year in the commercial business, and based on our pipelines, are becoming more and more confident that the commercial market will continue to yield positive results in 2011.

Specialty insurance revenue is $96 million in first quarter, an increase of approximately $7 million from the first quarter of 2010. Flood insurance generated $34 million in revenue. Personal lines insurance contributed $37 million in revenue, and home warranty produced $19 million in revenue. Pre-tax earnings were $9 million, reflecting margins of 9.3%, compared with 6.9% in the first quarter of 2010. The homeowners business produced a loss ratio 69% for the quarter versus 77% for all of last year.

Let's turn to our minority-owned subsidiaries. Because they are minority owned, we do not consolidate the results of these operations. Overall, we recognized an $8.6 million loss from our equity investments. However, as Bill mentioned, that included one-time expenses of $9 million representing our portion of the costs related to Remy's debt restructuring. Excluding that one-time charge, we realized an $11 million improvement in earnings year-over-year on these investments, and generated a small profit for the quarter.

Ceridian produced fourth quarter revenue of $394 million and EBITDA of $98 million, reflecting an EBITDA margin of nearly 25% and 30% growth in EBITDA over the prior year. Our 33% share of Ceridian's quarterly income was a profit of nearly $1 million compared with a loss of $7 million in the prior-year period. For the 3 months ended February 28, Remy generated revenue of $289 million and EBITDA of $22 million. Our 47% share of Remy's quarterly loss was $11 million, $9 million of which was related to the previously mentioned debt restructuring. For the 3 month period ended in February, American Blue Ribbon Holdings produced revenue of approximately $190 million and EBITDA of $6 million. Our 45% share their net income was less than $1 million this quarter.

Finally, an update on our corporate cost reduction program. Through early April we have identified nearly $55 million in run rate cost savings with $22 million coming from personnel reductions and $33 million in non-personnel costs. We have achieved $33 million in annualized savings as of March 31, 2011, and expect to be substantially through the program by the end of the second quarter. Let me now turn the call over to Tony Park to review the financial highlights.

Thank you, George. FNF generated $1.2 billion in revenue in the first quarter with pre-tax earnings of $82 million and cash flow used in operations of $21 million. Cash flow is normally seasonally weak in the first quarter due to the payment of bonuses and commissions associated with the prior year. That had a $73 million impact on cash flow in the first quarter. Additionally, title claims paid in the first quarter exceeded the provision by $38 million. Book value was $15.46 per share at March 31.

The title segment generated $1.1 billion in total revenue for the first quarter, a 2.5% increase over the first quarter of 2010. Direct title premiums grew by 15% over the prior year as closed orders grew by 12% and the fee per file increased 2%, despite a higher mix of refinance transactions. The strong commercial revenue market had a positive impact on the fee per file. Agency premium declined by $60 million or 12% due to a substantial decrease in the agency pipeline accrual in the first quarter. When agent commissions are considered, net agency premiums declined by $4 million or 4% as the agency accrual decline also effects of commissions. The retention rate increased by 200 basis points over the prior year as we saw the benefit of canceling agents that had higher splits and we also saw stronger commercial business in some favorable commission split states, particularly Florida.

Pre-tax earnings were $103 million and the title margin increased significantly to 9.3%. Title segment personnel costs increased by $15 million or 4% versus the first quarter of 2010, and other operating expenses actually decreased by $6 million or 3% while direct title premiums increased by 15%. While we did eliminate 600 positions during the quarter, we had added many positions during 2010 to handle the refinance volumes, and overall head count was only down about 100 people from the first quarter 2010. Also, incentive compensation was higher in the first quarter 2011 due to higher profitability.

Offsetting that increase was the benefit of the $33 million in annualized run rate cost savings realized from the previously announced $50 million cost savings program, $7 million of which is reflected in these first quarter results. Overall, personnel and other operating expenses rose only $9 million over the prior year, while direct revenue increased by $73 million. Debt on our balance sheet remains the same as at year end, consisting 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 remained at 22% at March 31. Total title claims paid were $89 million during the first quarter, in line with our expectations. Overall, our reserve position is still within a reasonable range of our actuaries point estimate. We continue to provide for future claims at a 7% provision level and expect to do so throughout 2011.

Finally, our investment portfolio totaled $4.9 billion at March 31. There are approximately $3 billion of legal, regulatory and liquidity constraints on some of those investments, including secure trust deposits of $400 million and statutory premium reserves for underwriters of approximately $2 billion. There are also some [left] liquid ownership interests in Ceridian, Remy, and American Blue Ribbon of nearly $600 million, so of the gross $4.9 billion approximately $1.8 billion was theoretically available for use, with about $1.65 billion held at regulated underwriters and approximately $150 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.

Thank you, sir. (Operator Instructions) The first question will come from Bob Napoli with Piper Jaffray.

Good morning. Nice job in a tough market.

Question on Canada. Your large competitor took a significant right off on a guaranteed product in that market, and I believe you guys are in Canada as well. I just wondered if you have exposure to that product and what you've done differently there if anything?

Bob, this is George.

We are in Canada, but we did not offer a product like that and as a result we have no exposure similar to what our competitor had.

Okay. Thank you that's helpful.

You did look like you gained some market share in your direct business versus what the trends that we see on mortgage originations and at competitors -- do you think you're gaining market share? And, if so, why?

Well Bob, if you looked at last year, we did pick up some market share. We came in at the end of year over 39%. We don't play the market share game, because I think you know we focus more on consistent margin delivery.

But, the market could be shifting as you look at the competitive landscape, you look at the financial performance of our competitors. Certainly customers want a company that's financially strong and can stand behind the policies issued, so it's conceivable there could be some shift going on. We work hard in the markets we're in, and I think we've got a great group of experienced employees out there who are focused on consistent service delivery, and maybe there some differentiation going on that were starting to see the benefit of.

What's your feel for the market? It's hard to predict, obviously, the mortgage market, but now the forecasts are for the market to trend down to about $1 trillion this year, so it's down about 40% year over year. And, you're seeing some of that, I think you're seeing more of that in April, as you said you saw some tail off the refi market. What do you expect and have you cut enough expenses for the scenarios that are out there?

Well, I would say that the MBA has already revised their forecast from what they had coming into the year, and I think will probably continue to advise it. There's no doubt the refinancing market will come down this year -- and if everybody's hope that the resale market comes up and picks up some of the slack.

We monitor our weekly order activity and as you saw from the first quarter performance in what we've done consistently in the past, we manage our expense line to match the current level of activity, so as we look to the balance of the year we don't try to predict where the market's heading. There's clearly a lot of markets that remain challenged, but it's improving in other markets, so we run the business to deliver a good consistent profitability and take with the market gives us.

From an investment perspective, last question, you guys buy back some stock you have a debt payment in August, but are you seeing opportunities either for additional acquisitions in title? Would you make additional acquisitions or outside in your nontitle businesses? Are there other areas that you find attractive to put capital work in?

Bob, I think that -- well, what we are presently doing is we're taking a look in the restaurant sector and seeing if there's some opportunities there to just do some things with ABRH, which is Village Inn, Baker's Square, and now Max & Erma's, and it's doing very well with a very strong management team, so it's a segment that we believe we can grow our business fairly significantly.

We are also looking at services surrounding the title product and the performance of our title escrow and close function. And so, we have some ideas in that space; we just haven't executed on any of these things yet. Other than that, we have a few distressed debt situations that we have made modest investments in to have a toehold and in every one of those cases, we would be happy actually if we could control or take control of the company through some kind of reorganization process. In every case, we're the fulcrum security, so not large investments but large enough investments that we can be influential in terms of a restructuring, should that happen. Or if that doesn't happen we end up with a 15% to 20% yield on the investment over the term of the security, which are generally less than 2.5 years.

Thank you very much.

We (inaudible) in queue that will come from the line of Mark DeVries with Barclays Capital.

With your pre-tax operating margin in title already at 9% in what's arguably the most challenging seasonal quarter of the year, is it safe for us to assume that after you complete this $50 million of expense saves, you're pretty much done unless we get another leg down in mortgage activity?

Now, I think -- and Randy can speak to this as well as well as George -- but the reality is we've just gone through one of the -- just really 3.5 years of a constantly declining market with a couple bumps up for refinancing activity. When we were all talking last week, we felt like, boy, for the first time in about 3 years we kind of have things where we need them to be and that was reflected in that pre-tax margin in the first quarter, which was -- has been really our target to maintain that during difficult times. It's just taken a long time to catch up because the tail is so long.

So, we feel good about where we are, we don't like the fact that the market is so soft, and if there's not another leg down, were in pretty good shape. But, the MBA keeps on modifying their forecast and we just have to be ready to respond to it. We do have a profitable company that is running on really -- we only have 4 cylinders left, but those 4 cylinders are really running well on them. We'd like to modify the engine and add a couple cylinders, but for the time being we're just going to be a 4-cylinder company trying to respond to the marketplace.

Okay, great.

And then can you give us a look context on where commercial volumes have peaked in past cycles as a percentage of revenue? What I'm try to get that is what room there is for additional growth in commercial to offset any additional weakness we may see in residential this year.

I'd like to have Randy jumped in here after I just give you an initial thought. And -- what were seeing in commercial is -- are really the distressed -- a lot of distressed loans or loans that were potentially distressed loans of 5, 4, 3 and 2 years ago the rolled into something else on a short-term basis that are now going to longer term facilities at lower interest rates and a lot of power plant activity, a lot of large transactions. Casinos are now back in the mix.

And, we are in a fortunate position in that with the strength of our balance sheet and really having more cash and investments than the rest of the industry combined in terms of the title sector, that we are the company that developers and lenders go to for safety and security. Randy if you want to pick up on that all?

Sure, Bill.

Yes were running now what is 20% of title premiums and this can go higher. We build very well as we went through last year each quarter being stronger than the previous quarter on the commercial side. Again, as you know, we've already given the numbers, but we have 35% increase in revenue over first quarter of 2010, so that 20% number could go higher han it has been in the past as we continue to see some consolidation in the residential and refinance market.

Okay.

And I think the specific comment that was made about commercial earlier was that you are looking for positive results. Does that imply you are looking for growth over current revenue run rates?

Well, our commercial operations around the country are very optimistic on continued commercial momentum and growth as we move through 2011.

We expect to have a better 2011 than we had in 2010, but as you can appreciate the commercial transactions tend to be lumpier and so quarterly comparisons may not be as meaningful as we end the year.

Okay, thanks.

Thank you.

Our next question in queue that will come from your lineup Brett Huff with Stephens.

Good morning.

First of all, I just want to make sure I understood the cost cuts that are going on. I think you said you've completed $33 million, but then there was a $7 million number you mentioned this quarter. I just want to make sure I understood the difference between those 2.

Let me clarify that. We've taken actions on $33 million of the $55 million that we're currently targeting, and I want to emphasize as well that this is coming out of our shared services costs pool and is unrelated to the direct operations and the 600 people that Bill referred to yesterday. But, of that $33 million, those actions taken contributed $7 million in savings to the first quarter, and obviously, that will incrementally benefit quarters 2, 3, and 4.

And then, assuming we can get substantially through this by the end of the second quarter, I think you will see that run rate contribution get into the $12 million to $13 million range by Q3 in terms of what is contributing to cost reduction in that particular period.

Okay, that's great.

And then in terms of -- if the Remy ends up being monetize, if your share price is still hanging around these areas around book value, traditionally you've seen that as a good investment, is that a reasonable assumption for us to make, that you might deploy some capital there after any kind of debt payment?

I guess -- could you repeat the question?

Sure. If you generate some cash from monetizing Remy, however that might pan out, given your stock price, you've bought back stock when you've generated cash and investments like that, and I just wondered if that was still a likely outcome in use of that cash?

Absolutely, it is a likely outcome. I misunderstood the question.

Okay.

It's an inevitable outcome of having some excess cash unless we have a way to deploy it to really return value to our shareholders. We felt for many, many years that we've gotten ourselves in the situation with the various parcel spin outs and the distributions and so on that we've made that we've just got too many shares outstanding. And, we just really focused on trying to get the share count down.

At the same time, we want to ensure that we have plenty of resources to hit these debt payments and just keep on knocking down our overall debt while we are in an unsure economic environment. When the economy is back, whenever it comes back, and we start generating these higher margins on our title operations up, in that 15% range on much larger numbers, then we can start making some other serious investments, so we are being cautious. But, repurchasing shares is a very, very high-priority for us.

Okay.

And then, one last question just on the future state of the housing market, when you guys think about and look out and think of a, quote unquote, normalized market, is that a $1.5 trillion market? Or is it a $2 trillion when you are thinking about that 15% or mid-teens type pre-tax in title, what is the assumption for the demand curve for the market?

My number is always in that $1.8 to $2 billion -- or $2 trillion -- and then we're there again. What will happen is, as the market does start coming back, whenever it does come back, there's a significant amount of pent-up demand for house purchases. And it will be -- we will have a couple of years of really, really strong market and significant margins, because just as it takes us a while to catch up on the way down, it takes us well to catch up on the way up, and everyone really works hard and they're going 12 to 14 hours a day, but the results are that the cash flow and the profitability of the Company will be exceptional.

Okay; that's what I needed. Thanks your time.

Thank you and our next question in queue that will come from the line of Doug Mewhirter with RBC Capital Markets.

Hi.

Most of my questions have been answered. My one question is regarding the reserves and your incurred and paid claims. I noticed that you're paid claims are lower or have gone down a little bit from a year ago. However, they do remain relatively high relative to the incurred claim ratio. And I know that a lot of times if paid claims stay elevated, then the actuaries start putting pressure on your reserve picture. And -- how long is that -- I realize that a lot of it is from past paid claims, 2008, 2007, but how long do you think you could sustain this before you might have to look at your reserves?

Doug this is Tony.

We look at our reserves every quarter. I think what you're comparing is the provision rate, which is the current expense that we put up relative to the payments and it's really an apples and oranges comparison. The payments that we're making in the first quarter of 2011 still relate to 2005, 2006, 2007, 2008 et cetera, so we feel like payments in the first quarter came in as we would expect. And, as long as we continue to have payments that come at what we expect from an actuarial standpoint, we don't feel like we've got exposure to the reserve side.

We've been in the same position for the last 12 to 15 months in terms of performance in each of our various policy or groups, and I will just put it in some perspective. If you look at 2009 and 2010, they continue to trend very favorably at around the 5% level in terms of loss ratios. 2008 and 2005 are fairly consistent at about the 7.5% loss ratios and then 2006 and 2007 continue to have some minor adverse development and they are little bit above 8% in terms of loss ratios.

So, again we monitor it closely, we work with our actuaries every quarter, and at this point I'd say we are cautiously optimistic that we are well positioned within a pretty broad range as you can expect in this business with such a long tail. So, we feel good about our position currently.

All right. Thanks for the answers to all my questions.

Thank you and our next question in queue that will come from the line of Nat Otis with KBW.

Yes, good morning.

Most of my questions answered. Does the couple of very quick ones. First, just confirming what I think you already said which is that $55 million in expense reductions has nothing to do with your seasonal reduction in those 600 heads? Is that correct?

That's correct Nat. That's just focused on the shared services costs which is completely separate from the title operations.

All right. Great.

And then just lastly, going back to your monthly order counts, you talked about April at 7,700 for the first 3 weeks, anything -- maybe looking for little bit of silver lining in there, but -- any thoughts on how holiday week last week could have impacted and what you might be looking for to come back for the last week of the month?

Yes I think if we look at last week specifically, we kind of treated as a four-day week because of the Good Friday holiday. We normally get a little up tick towards the end of the month and we're hopeful we see that this month as well. Randy, any color on that?

Yes, I would agree. The orders did fall off last week because of that Friday, so they should come up a bit in the fourth -- the last week of the month, here.

All right, very helpful. Thank you.

Thank you and our next question in queue that will come from the line of Dan Hunt with Iridian Asset Management.

Hey, thanks.

On an earnings call earlier today, Lender Processing Services talked about underwriting some title insurance directly. I know the history between the two companies. I was hoping you could give me a sense of what the ongoing working relationship was and whether there was any change in that relationship?

Lender Processing Services for some time has been shifting business to their underwriter National. It's a very small underwriter and I believe it's a New York domiciled company. And a lot of it relates to our resolve to be very careful in terms of the way we write policies and what we write policies on and the pricing of those policies. And they have elected to move away from what I would call, very strict high level specific underwriting guidelines and standards to a slightly different standard, which apparently it's their business mold and business operation, so they have moved away fairly significantly from writing their policies on our underwriters.

And that's really part of the reason why our market share has dropped 3% over the last year and a half or so. So, they are anxious to get into the underwriting business, and I'm sure that they know exactly what they're doing. They have the depth of management to take care of it, but we are, as you know, as our audience knows, we have been working very hard and been very careful about the types of risk we take with agents and internally; and our risk profile that we are willing to assume is very, very high. We are just not going to take any risks.

Great, thanks very much.

Thank you and our next question in queue that will come from the line of Jamie Baker with B. Riley & Co.

Thanks for taking my question. I just had a quick one on the Remy reported number, is that -- the EBITDA figure that you reported -- is that inclusive or exclusive of the $19.4 million debt charge that they had?

That would be exclusive of that charge.

Okay, thank you.

At this time, I will turn the call back over to Mr. Foley for any closing remarks.

Thanks, everybody.

We produced our strongest first quarter in a number of years. This quarter shows that with generally steady order volumes, although at low historic levels, we can generate the 8% to 10% profit margins that we target in difficult markets through our focus on strong expense management. We believe we have our Company positioned for strong performance for the remainder of 2011. Thank you for joining us this morning.

Thank you, and ladies and gentlemen that does conclude your conference call for today. We do thank you for your participation and for using a AT&T's executive teleconference. You may now disconnect.