Fidelity National Financial Inc (FNF) 2012 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Fidelity National Financial first quarter 2012 earnings conference call. (Operator Instructions). As a reminder, this conference is being recorded today Thursday, April 26, 2012. And I would now like to turn the conference over to Mr. Dan Murphy, Treasurer. Please go ahead.

Thanks. Good morning, everyone, and thanks for joining us for our first quarter 2012 earnings conference call. Joining me today are Bill Foley, our Chairman; George Scanlon, CEO; Randy Quirk, President; and Tony Park, our CFO.

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, and 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 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 May3rd. The replay number is (800) 475-6701 and the access code of 243617.

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

Thanks, Dan. This is a great start to 2012 and our strongest first quarter performance in a number of years. Our Title business continues to perform extremely well despite what has been a sluggish real estate retail market. We have also been successful in continuing to redeploy capital to non regulated businesses with growth potential. To that end, we closed the O'Charley's tender on April 9th.

We currently own 95% of the outstanding shares of O'Charley's, and expect to have 100% ownership at the conclusion of a short (Inaudible) merger under Tennessee law in May. We then intend to merge O'Charley's into in our existing restaurant platform, American Blue Ribbon Holdings, and FNF will own a majority stake in the larger ABRH. After the merger , FNF will have a total cash investment of approximately $120 million dollars for a 55% ownership interest in the ABRH restaurant company.

That will have approximately $1.25 billion in annual revenue, $65 million in current annual EBITDA, and expected an additional $20 million as result of cost synergies. Our focus will be on integrating O'Charley's into ABRH and moving the O'Charley's margins closer to those of ABRH. We believe ABRH can create significant value for our shareholders in the future.

Also we expect to close on the sale of the 85% interest in our Personal Lines business on May 1st. Regulatory approval is pending which we hope to have in time for the May1st closing. FNF will receive $119 million in proceeds from the Personal Line sale. The sale of our Personal Line business makes strategic sense for our Company. The Personal Line business is regulated and carries higher earning volatility than we are comfortable maintaining.

We believe we can successful redeploy this capital in to non regulated opportunities with higher growth and more consistent return potential, like the O'Charley's acquisition, thus creating greater value for our shareholders. Combined with the recent flood business sale FNF generated $254 million in cash and a $75 million 8% (Inaudible) note due May 2013, as well as an $86 million after tax gain from the two divestitures.

Finally last week we amended our existing $925 million senior unsecured revolving credit facility that was scheduled to mature on March 5, 2013. Taking advantage of current bank credit market conditions to extend the maturity of a new four year credit facility to April 2016. Additional, the total size of credit facility was reduced to $800 million with an FNF option to increase the size of the credit facility to $900 million and pricing decrease by 55 basis points. With the credit maturity extended to April 2016, we have only one debt maturity in the next three years providing significant flexibility in the holding company.

I would now like to turn the call over to our CEO, George

Thank you, Bill. Good morning, everyone. We are pleased to report solid first quarter results with a strong pretax Title margin and continued strength across all of our Title related businesses. Reflecting the strong operating leverage in our business and ongoing cost management initiatives net earnings of $74 million increased $32 million or 75% versus the first quarter of 2011 on just a 5% increase in total revenue. Title pretax earning of $130 million grew by $23 million or 22% despite only a 6x% increase in total title and escrow revenue.

Our commercial Title business continued to perform well as revenue of $79 million grew 19% over the first quarter of 2011. With 19,200 commercial orders opened, 11,100 commercial orders closed, and a fee per file of $7,100. Open order accounts were strong during the quarter and grew 33% over the prior year. Overall open orders averaged more than 10,500 per day for the first quarter, with January averaging 10,200; February, 11,500;and March, 9,800.

The first three weeks of April have averaged approximately 9,600 open orders per day. With last week reaching 9.800. Not surprisingly the mix of first quarter business was weighted toward refinance orders. 64% of open orders and 65% of closed orders were refinance related. However, refinance orders peeked at 67% of total open orders in February, and then fell to 60% of total open orders in March as we saw a 12% sequential increase in resale related open orders in March potentially signaling the beginning a stronger spring selling season.

That trend has carried into April. As only 59% of total open orders for the first three weeks of April were refinance related. Remember that we earn approximately twice the revenue on a resale order, so the eventual mix shift toward resale orders will have a very positive impact on our future profitability.

Our order backlog heading into the second quarter is strong, and orders associated with the Harp 2.0 program are expected to accelerate benefiting our service link operations. Service link has added personnel in the first quarter to handle the increased order flow. Despite a difficult market service link has achieved compounded annual growth in revenue and EBITDA exceeding 30% for the past five years, and is well positioned to grow through high quality origination and default service delivery to major bank customers.

Overall our pretax Title margin excluding realized gains was 10.7%. An improvement of 270 basis points verse the first quarter of 2011. We continue to perform above our difficult market pretax Title margin goal of 8% to 10%, and remain confident that we will produce a mid to high teen pretax Title margin, and we see further stabilization and improvement in the residential resale market.

Let's turn now to our minority owned subsidiaries which we do not consolidate in our financial statements. Overall we recognized $6 million in earnings from our equity investments compared with the loss of $9 million in the prior year quarter. The prior year quarter included $9 million is cost associated with Remy debt restructuring. Ceridian fourth quarter revenue of $399 million was a 1% increase over the prior year quarter while EBITDA was $77 million a 19% EBITDA margin. During this period Ceridian implemented several strategic initiatives that resulted in both acceleration of expenses and write down of assets that total $31 million.

Before the impact of these item EBITDA was $108 million for an EBITDA margin of nearly of 27%. Our 33% share of Ceridian's quarterly loss was $7 million. For the three months ended February 29, Remy generated revenue of $284 million a 2% decrease from the prior year while EBITDA was $40 million an EBITDA margin of 14% and an $18 million improvement over the prior yea. Our 47% share of Remy's quarterly earnings was approximately $10 million.

For the three month period ended in February American Blue Ribbon Holdings produce revenue of approximately $96 million, 6% growth over the prior year period, while EBITDA was $8 million nearly a 9% EBITDA margin. Combined Village Inn, Bakers Square same store sales increased by more than 5%, while Max & Erma's same stores sales were up 0.5%. Our 45% share of ABRH's net earnings was approximately $2 million this quarter.

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

Thank you, George. FNF generated $1.2 billion in revenue in the first quarter compared $1.1 billion in the first quarter of 2011. As the increase in closed orders related to direct Title premiums and stronger commercial revenue more than offset a modest decline in agency premiums. Net earnings were $74 million compared to net earnings of $43 million in the prior year. The Title segment generated $1.1 billion in operating revenue for the first quarter a 6% increase from the first quarter of 2011. Direct Title premiums grew by nearly 10%, driven by a 10% increase in closed orders and a 2% increase in the fee per file.

Agency premiums declined by just 2% over the prior year as the impact of several of the items that were causing declines in agency revenue diminished including termination of agents, to move to a 80/20 agent split in New York, and LPS self underwriting business previously underwriting by FNF. Agency profitability grew under the first quarter agent split improved by a 120 basis points to 76%. Title segment personnel cost increased by $31 million or 8% versus the first quarter of the 2011, and other operating expenses grew by $11 million or 4%. And as I just mentioned the agent split improved by 1.2%. As George mentioned earlier service link added staff to handle the significant increase and open orders in the first quarter, and the revenue benefit will come in the second quarter. Overall the more variable based personnel cost increased more than the primarily fixed base other operating expenses reflecting the operating leverage to improved order accounts and the shift in the mix toward more purchase transactions. The net effect was a 10.7% pre tax title margin excluding realized gains an increase of 270 basis points versus the first quarter of 2011.

Debt on our balance sheet increased sequentially by $150 million from the fourth quarter as we borrowed in late March to fund the closing of the O'Charley's tender in early April. We expect to utilize some of the proceeds from the Personal Lines sale and the ABRH, O'Charley's combination to repay that borrowing. 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 22% at March 31st. The extension of the credit facility maturity to April 2016, and overall strength of our balance sheet continues to provide us with significant flexibility.

Total Title claims paid were $104 million dollars in the first quarter in line with our expectation. Our reserve position remains within a reasonable range of our actuary estimates, and we continue to expect to provide for future claims at a 7% provision level for 2012. We also continue to see encouraging results from the 2009, 2010, and 2011 policy years.

Finally, our investment portfolio total $4.8 billion at March 31st. An increase of approximately $110 million from December 31st. From a regulated standpoint we have $1.9 billion in statutory reserve, $1.5 billion in regulated cash and investment, and $430 million in secured trust deposits for a total of nearly $3.9 billion in regulated cash and investment.

From an unregulated perspective we have $550 million in minority equity investments in Ceridian, Remy , and American Blue Ribbon, and approximately $400 million in unregulated cash and investments for a total of $950 million in unregulated cash and investments. $180 million of that available cash was used in early April to fund the O'Charley's tender. Net of that amount we have approximately $220 million in available cash at the Holding Company. Let me now turn the call back to our operator to allow for any

Thank you. (Operator Instructions). Your first questioned to comes from the line of Jordan Hymowitz of Philadelphia Financial . Please go

It is actually Philadelphia Financial, but any way. Can you repeat what you said about LPS underwriting for FNF? I don't understand what you are saying in that regard.

Yes, Jordan, it is Tony. LPS used to have an exclusive arrangement with FNF where they underwrote all of their Title premiums with us, and I think it was maybe $300 million at the peek . That has diminished considerable to where they write most of that through an internal insurance company they called Nationally Title Insurance Company of New York, so they have pulled almost that entire amount of underwriting over into their insurance

Is that insurance Company also a title insurance Company?

Yes, it is.

So I'm confused. LPS has a Title insurance company that is competing with you?

Correct.

Okay. I will follow-up more. I was notAware of that.

Your next question today comes from the line of Doug Mewhirter of RBC Capital Markets. Please go ahead.

Hi, good morning. I know O'Charley's is still a public company and they haven't put out any filings, and I'm not sure if they will. But is there any way you can give any indications how conditions are there, how the quarter was. I guess you can't really give numbers, but are things looking good or anything you can say about that?

We can't disclose non public information. But I would say the warm weather certainly helped many of restaurant businesses with traffic. And our focus as we look at the three concepts that we have acquired would be more on the O'Charley's brand, which has been the consistent underachiever among the three brands. The Ninety Nine brand and Stoney River brand are actually performing pretty well. So we are going to be focused on the O'Charley's concept. We will obviously have more to say about that next quarter. As you know we are going to consolidate their results into ours.

Okay. Thanks for that. My second question are the service link operating margins similar to your Title margins, and also does there cycle sync well with your Title margins as well, or do they have sort of a different up and down cycle?

There cycle is a little bit different because their orders tend to come in larger amounts from the major bank. Their revenue and earnings on a quarter-to-quarter basis can be a little more volatile than our typical Title operations. Having said that, the margins are directionally about the same. They have the ability to scale up much faster, and as Tony mentioned we added some headcount in the first quarter because the order volumes increased dramatically over where they were last year, so that will be reflected in revenue and closings in the second quarter.

But it is a very good business. We work very closely with the major banks to get our share of what they are outsourcing, and as you know there is a tendency among those banks to outsource more today to qualified vendors and to consolidate the vendor base, and we are going to be the beneficiary of that.

Okay. Thanks. My last question looking at the Title business with the Title personnel costs. I know you track the cost on a weekly and monthly basis. Given that the refi trend has not gone away and purchase seems to be improving a bit. Do you feel you are pretty comfortable with where your staffing is at? Do you anticipate needing to hire any kind of temps for any kind of surge or is there even any room to get any leaner in that regard going into the second quarter?

Sure. This is Randy Quirk. As George had mentioned, we did staff up in the first quarter most of that coming into service link for the very reasons George had mentioned. About 1/3 of the staffing took place in our direct operations. This is all very, very dependant on order volumes which are dependent on interest rates, so we do watch it closely every month. Looking back in to 2011 as the market got soft in 2011, we actually were in a position to eliminate pretty close to 900 employees. So we are ready to move in any direction based on the order volume.

I believe that we will add more in the second quarter to service, particularly the closings. The openings in the first quarter pushed some very good inventory and momentum in the second quarter and should actually run into the third quarter the way it looks right now. So we will probably add a few more folks in the second quarter, but we are watching very, very closely and we are prepared to go in any either direction based on the order volume.

Great. Thanks. That is all my questions.

Your next question comes from the line of Brett Huff with Stephens Inc. Please go ahead.

Good morning and congrats on anice quarter guys.

Thanks, Brett.

Quick question on you mentioned purchase volumes were up. And I think you gave us a sequential number of 12%. Was that from 1Q to March, or what was that stat? I just missed it.

That was February to March, Brett.

It was up in March 12% sequentiallyfrom February.

That is correct.

Okay. Can you give us a sense of what theyear-over-year number was? Do you have that?

I would say 4% to 5% improvement in resale year-over-year. It had been very steady. We have seen an uptick in activity, obviously a lot of investor activity, a lot of cash sales, but certain markets are improving and stabilizing better than others and overtime we will benefit from that.

Okay and then incremental margins seemed pretty good. How are you guys thinking about those going forward? I guess, specifically in the Title business given 2Q it sounds like the open orders remain good in April so far. A lot of the stuff from 1Q should be closing in 2Q. It sounds like you will be staffing up a little bit. But is there any reason that incremental margins should be at least as good if not better in 2Q?

I would expect our second quarter margin to be better than this quarter.

Okay. And then in terms of refi, you talked a little about this, but I want to make sure I understand. It sounds like the rate driven refi such that you can tell between rate and Harp continue to be good , rates are low, et cetera. Harp you said you expect to accelerate. Is there anyway to think about how long you think the rate stuff will go on versus how long the Harp refi will go on? Any color you can give

I would say we are probably go to run out of steam on the non Harp refi maybe second quarter. They are still trickling in. But I think the acceleration of Harp will benefit us , we understand from the banks , into next year. So the second half is hard to get visibility into and as you know we managed the business based on weekly orders. We will see how it develops, but service link will clearly benefit from that Harp business, hopefully through the early part

Great. And then as you guys look forward and you are talking about the refi probably tapering . I know you manage the business weekly. As refi fall off and presuming purchases don't carry all the water going into 2013, kind of what are your thoughts on managing headcount? I don't know, Randy, if that is a question for you or George or

Sure. I will go ahead and take that one. Again as you mentioned we will just apply the same discipline and the same metrics that we have for years and years and years if things fall off in the second half. However we think we have some pretty good momentum on the refinance side with our footprint of 1,100 branches around the country. We are well positioned to serve the resale market. If it does slag, we will make our moves based on our productivity standards, which right now we are running at a pretty high level. But as I said earlier we are prepared to make the moves if the market changes.

Great, appreciate your time, and great quarter again.

Thanks, Brett.

Your next question comes from the line of Eric Beardsley of Barclays . Please go

Thanks. Could you provide anyadditional color on the strength in the escrow (Inaudible). It looks like it was up a bit more q-over-q than the closed orders.

Sure, Eric. I guess the 10% increase in directpremiums would have a direct correlation with our escrow fees, so that is part of the answer. The second part of the answer is that our valuation business which is part of our service link platform they do appraisal, and the surge in open orders, and I think we had a 33% increase in open orders in the first quarter, that surge in open orders generated some revenue on the appraisal side that we will see more revenue obviously in the Title and close side as we get in to the second quarter. But we did have a nice increase probably about $10 million or so in our valuation business year-over-year from those orders.

Great, thanks. And then when do you expect to realize the $20 synergies from O'Charley's?

That should really be generated over about the next 9 months. We already have our president of American Blue Ribbon is Nashville. We have been working with the O'Charley's management team for about four weeks. The plan is laid out, and it is going to require movement of some people between Denver and Nashville, and, obviously, consolidation of job positions. We don't need two or three CFOs, or two controllers, et cetera, et cetera. So we are going to get off to a little bit of slow start in May, and than it will start accelerating in June through the balance of the year. By the first quarter of next year that $20 million should be in hand.

Great. And then just lastly I am just wondering what the long-term strategy for that business is in terms of how long you would like to hold on to that?

We are really viewing the restaurant business as a core opportunity for us. As we consolidate the O'Charley's acquisition and that platform and get the synergies we know are there relative to purchasing employee synergies and facility synergies, we feel like there are several other chains that would be a natural fit into this platform. So our 2 year to 2.5 year goal is to build about a $2 billion revenue restaurant company.

And in some facet or other create a public entity that will allow shareholders to invest directly into that restaurant business while Fidelity maintains its majority ownership interest and we consolidate. So that is sort of the synopsis of our 2.5 year plan. We don't want to bury our management team with too many acquisitions too quickly. They are very, very strong . They are hard working, and if we don't load them up with too many deals all at once, we will have a successful

All right. Great thank you.

Your next question comes from theline of Bose George of KBW. Please go ahead.

Good morning. I just wanted tofollow-up on the EBITDA goals for ABRH. So apart from the $20 million of synergies there is also the upside of the margins converge, so I was just wondering how to think about how the margin trends will move overtime, and how long that will take?

Well, our goal at ABRH is minimum 10% EBITDA margins, and even the existing ABRH platforms are around 9%. O'Charley's is a good deal less than that. Let us get through these synergies, and give us an another three or four months after that and you will start seeing these margins expand and some pretty good results come out of this restaurant business.

With your shares now above book value. I was just curious about your thoughts on access capital in terms of balancing buybacks, dividends, and whatever else you might do with the capital?

We are receiving about $119 million on the Personal Line sale. We have one or two other modernization events that look like they are going to happen over the next three or four months, so at this time probably the allocation of capital is going to shift more toward a dividend increase as opposed to a share buyback. Then if the stock gets weak and we get down around book value, then we would go back to a buyback mode. That is really the balance we have had over the last three to four years.

Okay. Great. Thank you.

(Operator Instructions). Mr. Foley, thereare no further questions at this time. Please continue.

Thank you. This was a great start to2012 , and our strongest first quarter performance in a number of years. Our Title business continues to perform extremely well and we are excited about the redeployment of capital in to non regulated opportunities with higher growth and return potential like the O'Charley's acquisition that have the potential to create greater value for our shareholders. Thanks for joining us this

Thank you. Ladies and gentlemen, this does conclude the conference call for today. We thank you for your participation and for using AT&T executive teleconference. You may now disconnect your lines.