Fidelity National Financial Inc (FNF) 2011 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to Fidelity National Financial 2011 fourth quarter earnings conference. (Operator Instructions). As a reminder today's call is being recorded. At this time I would like to turn the call over to our first speaker, Dan Murphy. Please go ahead, sir.

Thanks. Good morning, everyone, and thanks for joining us for our fourth quarter 2011 earnings conference call. Joining me today are Bill Foley our Chairman; George Scanlon our CEO; Randy Quirk, President, and Tony Park our CFO.

We will begin with a brief strategic overview from Bill Foley. George Scanlon 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 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 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 10-K 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 noon, Eastern Time today through February 16th. The replay number is (800) 475-6701 with an access code of 231930. I will now turn the call over to our Chairman, Bill Foley.

Thanks, Dan. 2011 was another successful year for our Company despite a continued challenging environment for our Title business we were able to improve our title pretax margin excluding realized gains and losses by 320 basis points versus 2010. Our commercial business was particularly strong producing a 25% revenue growth over 2010. We were also successful in closing the sale of our flood insurance business in November. The total sale price was approximately $210 million generating a $95 million after tax gain or $0.43 per diluted share in the fourth quarter results.

We also signed a definitive agreement to sell an 85% interest in our personal lines business in late December for approximately $119 million, which resulted in a $9 million net loss or $0.04 per diluted share. We expect to close this transaction in the first half of 2012. These two divestiture's will produce total sale proceeds of approximately $329 million including $254 million in cash and $75 million in an 18 month note receivable allowing us to redeploy the capital into other uses that we expect to generate higher future returns and greater value for our shareholders.

On Monday we announced the signing of a definitive agreement to acquire all the outstanding common stock of O'Charley's that we do not currently own for $9.85 per share. We expect to commence a tender offer on or about February 24 and complete that process on about April 2nd, assuming a majority of the outstanding shares including our 9.5% ownership position are tendered.

We have been seeking an investment in a larger, scalable strategic restaurant operating company to compliment our successful investment in American Blue Ribbon Holdings. With more than 340 restaurants and over $800 million in revenue O'Charley's is an attractive company with three proven restaurant concepts in O'Charley's, the Ninety Nine, and Stoney River Steakhouse. There is a real opportunity to continue to improve the operating performance at O'Charley's and to build on their current momentum.

We look forward to having the ABRH and O'Charley's teams working toward that end. ABRH operates more than 220 Company owned restaurants, nearly 140 franchised restaurants, and generates approximately $455 million in annual revenue. We also look forward to the successful completion of the tender offer, and to welcoming all of the O'Charley's concepts and employees to the FNF restaurant family.

Finally yesterday we announced that our Board approved an increased quarterly dividend $0.14 per share an increase of 17% from the previous quarterly cash dividend of $0.12 per share.

I will now turn this call over to our CEO, George Scanlon.

Thank you, Bill. And good morning, everyone. We are very pleased to report strong fourth quarter results with continued strength in the commercial business, a strong pretax title margin, and a significant gain from the sale of our flood insurance business.

The Title pretax margin excluding realized gains and losses was 11.7% versus 11.2% in the fourth quarter of 2010. Total revenue was $1.3 billion and net earnings were $173 million or $0.78 per diluted share. For the full year, 2011 total revenue was $4.8 billion dollars and net earnings were $370 million or a $1.66 per dilute share.

As Bill mentioned a significant contributor to our performance was the commercial business. Our commercial operation produced nearly a $104 million in revenue for the fourth quarter, the strongest commercial revenue quarter in the history of our Company.

Commercial revenue accounted for more than 27% of total direct title premiums in the fourth quarter compared with 24% in the fourth quarter of 2010. We opened approximately 17,400 commercial orders in our national commercial divisions, and closed 12,500 commercial orders with a fee per file of $8,300. We expect the commercial business to remain strong as we enter 2012.

Open order accounts were relatively stable during the quarter. Overall open orders averaged more than 8,700 per day for the fourth quarter with October averaging 9,100, November 8,900, and December 8,200. The first two weeks of December averaged approximately 8,600 open orders per day, and then the normal seasonal holiday slow down began in the second half of the month of December. Not surprisingly the mix of fourth quarter business was weighted toward refinance orders at 63% of both open and closed orders were refinance related.

Additionally, open orders for the month of January increased significantly from the fourth quarter averaging more than 10,200 orders per day nearly a 20% sequential increase over the fourth quarter 2011 per day average and the highest monthly level since November of 2010.

Open orders per day increased further to more than 10,800 for the first three days of February last week. The increase was driven by traditional refinance transactions, as we are not expecting to see the incremental benefit of HARP 2.0 refinance transactions until the second quarter.

For the month of January, 65% of open orders were refinance transactions. We are encourage by the renewed strength in open order accounts as we enter 2012, and look forward to the incremental benefit from the HARP 2.0 transactions as we enter in to the spring.

We came into 2011 facing a significant projected decline in mortgage originations. Despite the challenging market outlook, we committed to making the necessary actions to protect our margins, and to maintain industry leadership in profitability.

Our shared services cost declined over $80 million or 22% in 2011, as we moved aggressively in making difficult but necessary decisions. We achieved greater productivity in our claims management processes, and while we are still paying a considerable amount of claims, we were able to lower our open claim count by 10%, reduce our claims management expenses by 23%, and lower our average cost of settlement by 19%.

Our field operations maintained their usual level of cost discipline. The revenue environment actually proved to be better as we benefited from the second half strength of refinancing and improving commercial market and steady retail market.

Our ServiceLink operations which focus on centralized refi processing and default management services had a very strong year. The end result for the Company was a title pretax margin excluding realized gains and losses of 10.9% versus 7.7% in 2010. While the outlook for 2012 remains muted we are encouraged by our 2011 performance and excited about the margin potential for our business when the market reaches further stabilization.

Let's turn to our minority owned subsidiaries which we do not consolidate in our financial statements. Overall we recognized $2 million in earning from our equity investments compared with $5 million in the prior year quarter.

Ceridian's third quarter revenue of $398 million was a 6% increase over the prior year quarter, while EBITDA was $71 million. The EBITDA margin was 18%, including a $22 million Goodwill write down due to the sale of a factoring portfolio in the comp data business. Before the write down EBITDA was $93 million a 23% margin versus 22% last year.

Our 33% share of Ceridian's quarterly loss was nearly $4 million roughly equal with the loss in the prior year period. For the three months ended November 30, Remy generated revenue of $292 million a 2% increase over the prior year, while EBITDA was $24 million including a $6 million impairment of intangibles related to a customer switching from a branded product to a private label. EBITDA margin before the impairment was 10%. Our 47% share of Remy's quarterly earnings was approximately $1.5 million.

For the three month period ended in November, American Blue Ribbon Holdings produced revenue of approximately $115 million flat with the prior year quarter, while EBITDA was $11 million a 10% EBITDA margin. Our 45% share of ABRH's net earnings was approximately $3 million this quarter.

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

Thank you, George. FNF generated $1.3 billion in revenue in the fourth quarter compared to $1.5 billion in the prior year fourth quarter as the decline in agency premiums and total orders closed were not entirely offset by stronger commercial revenue and an increase in the fee per file. However, net earnings were a $173 million compared to net earnings of $131 million in the prior year primarily due to the gain on the sale of the flood business.

Because the flood sale closed and the personal lines sale is deemed probable and can be estimated, they are both shown as discontinued operations in the fourth quarter; therefore, the flood sale after tax gain of $95 million or $0.43 per share and the $9 million net loss or $0.04 loss per share from the pending personal lines sale were both recorded in discontinued operations as after tax items.

For the full year 2011 total revenue was $4.8 billion and net earnings were $370 million or $1.66 per diluted share compared to $5.4 billion in revenue and $1.61 per diluted share for 2010.

The Title segment generated $1.2 billion in operating revenue for the fourth quarter a 14% decline from the fourth quarter of 2010. Direct title premiums decreased by 10% driven by a 13% decline in closed orders partially offset by an 8% increase in the fee per file. Agency premiums declined by a 24% over the prior year. A portion of which is consistent with the decline in direct revenue.

Also our agent count declined by 8% versus the fourth quarter of 2010 as we ended 2011 with approximately 5,100 agents. Additionally, agent revenue from LPS declined by $26 million versus the prior year quarter. And our New York agency revenue fell by $9 million due to our move to an 80-20 split.

Overall our agent commission split improved by nearly 200 basis points to 76%. The record $104 million in commercial revenue actually grew by approximately 2% over the fourth quarter of 2010 strong revenue performance of $102 million.

Title segment personnel cost decreased by $21 million or 5% versus the fourth quarter of 2010, and other operating expenses decline by $20 million or 7%. And as I just mentioned the agent commission split declined by nearly 2%. The net effect was an 11.7% pretax title margin excluding realized gains and losses an increase of 50 basis points versus the fourth quarter of 2010.

Debt on our balance sheet declined sequentially by $100 million from the third quarter as we paid down $100 million on our credit facility in December. Long-term debt continues to consist of the $816 million in senior notes due in 2013, 2017, and 2018. Our debt to total capital ratio was 20% at December 31.

The strength of our balance sheet continues to provide us with significant financial flexibility as we enter 2012. Total title claims paid were $153 million during the fourth quarter in line with our expectations. Our reserve position remains within a reasonable range of our actuarial estimates and we expect to provide for future claims at a 7% provision level for 2012.

Additionally we continue to see encouraging results from the 2009, 2010, and 2011 policy years. On the negative side major claims paid did increase by 19%, and represented 32% of total claims paid compared to 27% in 2010.

Finally our investment portfolio totaled $4.7 billion at December 31st, a decline of approximately $300 million from Septembers 30. The decline was due to a reclassification of $300 million into the prepaid and other assets line item as required under the discontinued operations presentation for the pending personal line sale.

From a regulated stand point we have $1.9 billion in statutory reserves, $1.5 billion in regulated cash and investments and $420 million in secured trust deposits, for a total of the $3.9 billion dollars in regulated cash and investments.

From an unregulated perspective we have $550 million in minority investments in Ceridian, Remy and American Blue Ribbon, and approximately $240 million in unregulated cash and investments for a total of $800 million of unregulated cash and investments.

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

(Operator Instructions). Our first question today comes from the line of Mark DeVries with Barclays Capital, please go ahead.

Thanks. Can you tell us about how the 20% month over month increase in open orders compares to the normal seasonal change you would expect to see in January?

Sure, this is Randy Quirk. The normal January is actually quite slow. January and February are typically tough months for us on the order counts. So the increase of 20% is a strong indicator of what we believe we will see in the first quarter. The record low interest rates certainly play well for us. The anticipation of HARP 2.0 that really -- that begins for us in April has really pushed order count up, so this is contrary to what we typically see. And should position us real well into the back end of the first quarter, and into the second quarter for our closings.

Do you have a sense for what the refi percentage is for the open orders so far this year?

The refi right now is running at about 65%.

Okay. Got it. As you guys pointed out you are not yet seeing any of the benefits from HARP 2.0 showing up in the numbers. Do you have any visibility on what that could mean incrementally to the volumes you are seeing?

Well we really don't right now, of course it will depend on interest rates. But it is getting a lot of attention. And we expect -- we hear the banks -- our major banks tell us that they are stacking up to handle our volume. We can't predict it, but we expect it will have some impact.

Okay. Sorry just to back up to clarify on the refi mix of 63%. Was that 63% for the entire fourth quarter?

Yes.

Okay. Got it. And then one last question. Does the O'Charley's acquisition give you the scale now you think you need for your restaurant platform or should we expect that there might be additional acquisitions around that?

Well, what we are looking at is probably a year integration of O'Charley's into ABRH platform. And in conjunction with that a repositioning of our relative ownership position vis-à-vis our partner in ABRH, The Newport Group, so that Fidelity FNF will be in a position to consolidate the results of the restaurant business.

There are going to be other acquisition opportunities, and as we acquire these companies as we have seen with Village Inn, Bakers Square and Max & Erma's. We get significant synergies every time we buy a business. And O'Charley's we expect to again have significant synergies between the Denver and Nashville offices.

And once those synergies are obtained we intend to do it again and to keep on growing this restaurant business. And keep on developing the synergies.

We have a very strong management team at ABRH. They are getting excellent results. Our ABRH financial statements over the last three years have improved to the point where we have no debt and we have about $25 million of cash on hand, and we are cash generating. So we intend to do the same thing with O'Charley's and hopefully we will find another opportunity nine months or a year out from the O'Charley's acquisition.

Okay. Thank you.

Our next question comes from Doug Mewhirter from RBC Capital Markets.

Hi, good morning. One of my questions is answered. I had another one. George or Randy, could you give me an idea of your view on the commercial real estate market now or even the commercial title market? I noticed the growth had flattened this quarter although it had flattened at a very high level.

Have you detected any change or do you just think that this is a natural order of things now that we have sort of bounced off a pretty low bottom?

If you talk to our commercial sales folks they will tell you that the back logs remain strong and the pipelines are good coming into 2012, so I think as we look to this year we don't see any loss of momentum. Last year we had good year-over-year and sequential growth every quarter, this year I'm not sure we'll get that same amount of growth. But there still is a lot of refinancing activity that has to come through.

We are well positioned with the bank, and REITs, and other investor groups to get our share of the market which is probably 40% to 45%. So we are optimistic as we come into 2012 and don't really see a slow down. And I think as we said on previous calls it was fairly broad based in 2011, and we hope that continues this year.

If I could just follow-up on that with more of a numbers question. What do you think, or I guess to avoid you having to make projections, what has been a historical, I guess, value per closed order for your commercial book?

Well, I will tell you the average fee per file on the commercial transaction is about $8,500 and that has held for the last --- through 2011.

Yes, you might point out though that back about two and a half year ago it was down in the high $4,000 so it has really improved.

Okay. I just didn't know if there was any possibility it would get closer to $9,000 or $10,000. I am not familiar with how the real estate cycle --.

I would say certainly as over time as property values increase the associated premiums will increase and so --- and that will happen over time. But I think as you are looking ahead to 2012 using that $8,500 number is probably in the current market the right way to think about it.

Okay. Thanks, that's all my questions.

Thank you.

We will go to line of Brett Huff with Stephens.

Good morning and congrats on a nice quarter and good a January.

Thanks, Brett.

One question on sort of the longer term view. When you look out at -- the title margins were very nice. And when you look out at the title margins in a normalized market, and I guess I am thinking normalized market with a similar split of commercial to you -- to right now, which is 25% or 30% maybe a [1.5 trillion] kind of housing turnover and probably a lower amount of refi than normal just given that I think the refi activity is really high now and maybe it will taper a little bit in a year or two.

What is your sort of thought on where the title pretax margin can go, and are those the right assumptions to give us that number?

I would say a 1.5 trillion size market with an emphasis on the resale component sounds pretty good to us right now. We model out different scenarios, Brett, and mid to high teens margins are what we think we could get with that kind of mix.

I think what we've shown this year, because as you may recall coming into this year the originations were projected to be below a trillion, we did 11%, 12% margins all year in a [1.2 trillion] market with a weighting toward refinancing.

So as it shift more to resale, we get $2 for every dollar of refinancing transaction so the revenue will grow and our margin should expand a little bit. We don't know when that is going to happen. Obviously refi is still strong and we are going to enjoy it while we can. We are watching the resale market which has been stable. Hopefully see an uptick in that as the economy improves and then as we look to 2013 and beyond that is where we should see the incremental improvement.

And then one housekeeping question. The personal lines went into the disco ops that happened versus our model a little early because, Tony, I think you said it hits the accounting definitions of probable and estimable, but how much of that -- have you talked about how much revenue that move from the top line to the below the line after tax number?

Well the personal lines business had revenue of about a $150 million annualized and it was fairly even quarter to quarter, so that's what we removed. The issue with that business was the volatility in the bottom line.

Right.

So we are going to keep a 15% stake in it. It will grow with the new owner. And we have a chance for upside and to frankly recover the modest loss that we realized in the transaction as it is structured now.

Great. And then last question on Chuck's. I understand that we have to work through some items in order to figure out how we are going to put the two, American Blue Ribbon and Chuck's together. In terms of the management your success with ABRH so far has been obviously good, will those same folks be the ones managing Chuck's going forward?

The CEO at ABRH, Hazem Ouf,is kind of our designated hitter in the restaurant business. He has a wide range of experience from family to casual to fine dining. Chuck's fits right into that wheel house right into his wheel house. So he will be the leader of Chuck's. And there will be obviously a large presence in Nashville, however, to the extent that we can get purchasing synergies, we can get synergies with regard to HR, finance, accounting, systems, that is really where we are going to try to develop these synergies of $20 million to $22 million as kind of a low end number.

So that would result in a restaurant company with an EBITDA going forward once the synergies are obtained of around $85 million to $90 million. And that is a pretty good base to operate off of. We are not going to put serious financing on the Chuck's acquisition. ABRH has no debt. Chuck's has a sale lease back, but no other debt. So it will be a small debt component, but basically it is going to be equity going into the business that is going to be shared between ourselves and Newport Group. But is going to be structured in such a way that Fidelity becomes a -- rather ABRH becomes a consolidated entity within our overall group.

One final question on that. It seems like there is about $35 million of EBITDA this year roughly, and then with the $20 million to $22 million in synergies that gets you higher, but how do we get to the $85 million $90 million? Is that assuming better comps and et cetera?

No, that's what Chuck's -- Chuck's is doing about $30 million or $31 million right now. So that is what they are hitting, plus the $22 million, plus the $35 million, so that is kind of where I come up with my $85 million to $90 million.

That includes ABRH in the mix.

Okay. I'm sorry. The $85 million to $90 million includes ABRH. Okay. That is what I needed. Thank you, appreciate it.

Our next question is from the line of [Travis Hogan] with [River Ridge Capital].

Hi, guys. You mentioned that there was a onetime item that impacted the EBITDA from Remy. Can you tell us when that occurred in the quarter and how material that was?

I think it was only about a $5 million intangible impairment. We book Remy's results one month in arrears. I don't recall which month that hit. I know it hit our fourth quarter, but again it was pretty negligible at $5 million or $6 million write off pretax.

Okay. Thank you.

Next we will go to line of Geoffrey Dunn with Dowling & Partners.

Thanks, good morning. Randy, I had a bigger picture question about kind of emerging from the downturn, and how the downturn might have affected the competitive dynamic of the industry.

Is there any sense that yourself and [FAF] might be better positioned on a competitive stand point relative to going into the down turn through your efficiency gains on things like claim processing, et cetera, and scale and just what you are able to deliver in the downturn to your customers relative to some of the smaller players? Is there a shift in preference out there for your brand or FAF's given what you are able to deliver?

I will tell you I think relative to scale our footprint, obviously, is significant on our direct side around the country. And our multiple brand strategy has served us well. So we are able to penetrate large metropolitan markets with more than one -- with one company, one brand, one group of sales efforts.

And on the agency side with our 5,000 plus agents we've got significant coverage throughout the states. We have improved the profitability on the agency side. I think those play well to our competitive situation. Coming out of the down turn into a hopefully at some point a more normal traditional market I think that footprint will serve us very, very well.

Randy, also we need to remember that we have a very strong direct operations base in the western part of the United States and in the upper mid west and New York to some extent and also --- in Florida to some extent, and Texas and so on.

That is a very expensive network to put together. A smaller company a regional company that wants to compete with us on the direct operation side, has to make a very large investment in systems, in facilities, in people and then they have got to try and get the business.

So we have that business base, and right now that has been impaired by the lack of resale transactions. But when the resale transactions come back we have the foot print, as Randy mentioned, to really respond to our customer needs and to a slighter lesser extent First American has the same sort of foot print. So we really believe we have a competitive advantage if and when this economy ever gets going, Geoff.

Okay. Bill, just to be clear you threw some numbers out there on Chuck's. You don't see any reason you couldn't improve their 4% to 5% margin to the 10% to 11% we see at American Blue Ribbon?

There is going to be an incentive package put together for Hazem Ouf and his management team and the continuing management team from Chuck's to equalize that EBITDA margin. We definitely anticipate that.

Okay. Thanks.

Thank you. And at this time, speakers, there are no further questions in queue.

We are pleased with our financial results this quarter particularly in our title and insurance business were we produced an 11.7% pretax margin excluding realized gains and losses.

Open orders for the month of January have increased nearly 20% sequential verses the fourth quarter of 2011, and are at their highest monthly levels since November 2010.

Overall we are confident that our title business is well positioned to produce strong industry leading returns in 2012.

Thanks for joining us this morning.

With that, ladies and gentlemen, that does conclude our conference for today. We do thank you for your participation and for using AT&T Executive Teleconferencing. You may now disconnect.