Fidelity National Financial Inc (FNF) 2013 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Fidelity National Financial first-quarter 2013 earnings call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session. Instructions will be given at that time.

(Operator Instructions)

As a reminder today's conference is being recorded. I would now like to turn the conference over to our host Mr. Dan Murphy. Please, go ahead.

Thanks. Good morning, everyone, and thanks for joining us for this first-quarter 2013 earnings conference call. Joining me today are our Chairman, Bill Foley; George Scanlon, our CEO; Randy Quirk, our President; and Tony Park, our CFO. We will begin with a brief strategic overview from Bill, a business overview from George, and then Tony will finish with a review of the financial highlights. We will then open the call for 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 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 1 PM Eastern time today through May 9. The replay number is 800-475-6701 and the access code is 287981. Let me now turn the call over to our Chairman, Bill Foley.

Thanks, Dan. The first quarter was a great start to the year with the continuation of the momentum we built in 2012. We achieved our strongest first quarter in the title business since 2004 producing pre-tax earnings of $171 million and a pre-tax margin of 12.3%. With an improving purchase market, continued low mortgage rates, and a stabilizing economy, we are confident in our ability to continue to produce industry leading earnings in our title business.

Remy continues to make significant investments in global growth strategy that are expected to benefit future performance, including improved coverage in the light-duty aftermarket business and the launch of a new plant and engineering center in Wuhan, China that recently opened. Additionally, the Company secured new business with key Asian customers, launched new products across the globe, and continues its operational reconstructing efforts. We believe Remy has positioned itself to take advantage of both an improving global economy and a growing automotive marketplace.

Our restaurant operations remained focused on continually improving financial performance, most specifically through the continued integration, redesign, and update of the O'Charley's concept. We have completed seven, full remodels at an average cost of approximately $250,000. These remodeled locations have averaged 17% in increase in sales. We've also completed 17 exterior-only remodels at an average cost of $75,000, with those locations averaging a 4% sales increase. We are emphasizing full remodels over exterior-only models in the future as we believe that will generate more sustainable improvement in customer counts and sales.

From an earnings perspective, the first quarter was a difficult one for our restaurant business due to extreme weather conditions and the reinstatement of the payroll tax. Additionally we closed three underperforming J Alexander's restaurants and one Max and Erma location. All of the attended charges were taken in the first quarter. From a capital perspective, we continue to be committed to paying a strong dividend as we increased our dividend to $0.16 per quarter in December 2012, a 14% increase.

We also continue to consider periodic share repurchases as a use of capital. In the first quarter we repurchased 1.4 million shares for total proceeds of nearly $34 million at an average price just about $24, a small premium-to-book value. This included a single block of 1 million shares at a price of $23.83. We continue to look at acquisition opportunities that will complement our existing, upscale dining concepts and augment our capabilities in the title and mortgage services. Let me now turn the call over to our CEO, George Scanlon.

Thank you, Bill. Good morning, everybody. As Bill mentioned, we had our best first quarter in the title business since 2004, generating a 12.3% pre-tax title margin and overall operating EPS of $0.42 per share before the negative $0.01 EPS impact from impairments related to the planned closing of three unprofitable J Alexander's locations and one Max and Erma's location, and the negative $0.02 EPS impact from a one-time $7 million executive separation expense at Remy. While we continue operate in a refinance driven marketplace, we are seeing a growing percentage of open orders coming from purchase transactions.

During the first quarter, 38% of total title orders opened were purchase transactions versus 36% in the first quarter of 2012 with purchase mix increasing each month during the first quarter, peaking at nearly 41% of open orders in March. Overall, purchase orders opened and closed per day increased by 7% and 14% respectively in the first quarter versus the prior year. Refinance orders opened per day decreased by 3% while closed refinance orders per day increased 31%.

For the month of April, purchase opened orders increased by more than 16% over April 2012. We are seeing increasing purchase activity in most of the markets we serve with prices firming and appraisals becoming less of an issue in closing transactions. Inventory shortages have created a supply-demand imbalance, which is contributing to the price appreciation as buyers want to take advantage of the low rate environment. We welcome the market recovery and the eventual return to a purchase dominated order mix.

Title pre-tax earnings of $171 million strengthened and grew by $42 million, or 33% over the first quarter of 2012. Our title pre-tax margin improved by nearly 170 basis points over the prior-year period. The commercial title business continued to perform solidly with $88 million in revenue, a 6% increase over the first quarter 2012, driven by a 16% increase in the commercial fee per file, offset by a 9% decline in closed orders. Open orders declined 6% versus the first quarter of 2012. We continue to expect the commercial business to perform well throughout 2013.

Open order accounts remain strong and consistent during the quarter and essentially flat with the prior year. Overall, open orders averaged 10,540 per day for the first quarter with January averaging 10,400; February nearly 10,700; and March 10,600. The month of April averaged more than 11,100 open orders per day with the last week of April hitting nearly 11,800, the strongest weekly per day open order performance of 2013. As I mentioned earlier, the mix shifted toward purchase transactions during the quarter as purchase transactions comprised 35% of open orders in January, 38% in February, and nearly 41% March. For April purchase transactions were nearly 40% of open orders, and as I mentioned, those purchase orders increased more than 16% over April 2012. This positive trend in opened orders gives us a strong inventory heading into the second quarter.

The Restaurant Group produced operating revenue of $356 million and adjusted EBITDA of $19 million for an adjusted EBITDA margin of 5.3%, a 20 basis point sequential improvement from the fourth quarter of 2012 despite a seasonally slow and challenging first quarter. Our upscale concept strengthened during the quarter, while the family and casual segment performance was overshadowed by the work in progress at O'Charley's. Several operational improvements have been implemented and our restaurant renovation program is off to a successful start.

We've also made significant progress on the original $20 million synergy target and expect to fully realize those savings by the end of 2013. We remain confident that we will continue to show improved financial performance in our restaurant operations as we move through 2013. Overall, the Restaurant Group contributed a pre-tax loss of $4 million from the first quarter, which includes the $5 million in impairments from the four scheduled restaurant closings.

Remy generated operating revenue of $284 million and adjusted EBITDA of $33 million for an adjusted EBITDA margin of 11.6%. Weakness in heavy-duty OEM sales was partly offset by improvement in the aftermarket business and margins were impacted by volume and mix as well as continued investment in the new plant in Wuhan, China. That plant is opened and will wrap up production this summer. Overall, Remy produced a pre-tax loss of $1 million for the first quarter as earnings were negatively impacted by the one-time $7 million executive separation expense.

Our minority owned investment Ceridian generated quarterly revenue of $400 million, essentially flat with the prior-year quarter and EBITDA of nearly $104 million for EBITDA margin of 26%. Our 33% of Ceridian's quarterly loss was $4 million, primarily the result of a valuation allowance on a deferred tax asset. Finally, in our first quarter of ownership Digital Insurance is off to a good start. It generated revenue of nearly $16 million and EBITDA $4.4 million, an EBITDA margin of more than 28%. Net income was just over $1 million. Let me now turn the call over to Tony Park to review the financial highlights. Tony?

Thank you, George. FNF generated more than $2 billion in revenue in the first quarter compared to $1.2 billion in the first quarter of 2012 as total title revenue grew by $210 million or 18%. The Restaurant Group added $351 million in total revenue and Remy added $285 million. Net earnings were $90 million or $0.39 per diluted share and book value per share grew to $20.99 at March 31.

The title segment generated nearly $1.4 billion in operating revenue for the first quarter, a 19% increase from the first quarter of 2012. Direct title premiums grew by more than 17% driven by a 19% increase in closed orders, offset by a 2% decrease in the fee per file. Agency premiums grew by 27% over the prior year as the agent count has stabilized over the past 12 months. Additionally, agency profitability increased as the first quarter, agent split improved by nearly 60 basis points to 75.8%. Title segment personnel costs increased by $53 million or 13% versus the first quarter of 2012. Other operating expenses grew by $22 million or 8%. Both of which are significantly lower than the 17% increase in direct title premiums and the 19% increase in total title operating revenue.

This quarter again highlights the operating leverage to improved order counts and the future mixed shift toward a more purchase driven market. The net effect was a 12.3% pre-tax title margin, an improvement of nearly 170 basis points versus the first quarter of 2012. Debt outstanding, excluding ABRH and Remy, was $981 million with no FNF maturities until May 2017. Additionally, there continued to be no borrowings under our $800 million credit facility as of March 31. Remy and the Restaurant Group had debt of $373 million, with $282 million from Remy and $91 million from the Restaurant Group. FNF does not provide any corporate guarantee on the debt of either Remy or the Restaurant Group. Our debt-to-total capital ratio was 23% at March 31, including the Remy and Restaurant Group debt.

Total title claims paid were $91 million during the first quarter, a decline of $12 million or 12% from the first quarter of 2012. We expect to continue to provide for future claims at a 7% provision level in 2013. We also expect claims paid to continue to decline in 2013 versus 2012. Finally, our investment portfolio totaled nearly $5 billion at of March 31. From a regulated standpoint, we have nearly $1.8 billion in statutory reserves, $1.6 billion in regulated cash and investments, and $500 million in secured trust deposits, for a total of more than $3.9 billion in regulated cash and investments.

From an unregulated perspective, we have $380 million in a minority equity investment in Ceridian, and approximately $325 million in unregulated cash and investments, for a total of approximately $700 million in unregulated cash and investments. There's also approximately $200 million in consolidated cash at Remy, the Restaurant Group and other subs that is necessary for their operations, and approximately $150 million in cash at subsidiaries that is restricted by minimum working capital or other requirements. Let me turn the call back to our operator to allow for any questions.

(Operator Instructions)

Mark DeVries, Barclays.

First question, can you help me understand why the average fee per file was down, granted down marginally, but down year over year when the mix of purchase was up?

The refi closings were higher in Q1 relative to the purchase closings. As we talked about the increasing percentage of purchase, which is around 40%, will start to cause that fee per file to grow the balance of the year.

Okay, got it. How should we look at the agent premium line? Now that you've stabilized your agent base and looking to grow that's a little bit, should we expect agent premiums to edge up over time as percentage of your total premiums?

I think the agents are more weighted toward the purchase market. As the purchase market continues to improve, the agency revenues will grow. Our direct revenues will grow, as well. On a relative basis, I think the proportion should be similar.

Yes, Mark, some of it depends on geography, too. As the West improves and its showing real signs of strong improvement on the purchase side, where we do not have much agency business, you will see our direct business grow a lot more. Whereas, when Florida recovers and part of the Eastern seaboard, where we have a lot more Agency business, you will see the Agency business grew there.

Okay, that makes sense. Then finally, a little more color would be helpful in the Commercial business. I think, George, you mentioned you expect it to do well. Thoughts on both transaction volumes, growth there, and also premiums? I guess you guys have some larger loan sizes close this quarter, if that's correct?

Yes, we are encouraged by the start to the year. As you know, we had a record fourth quarter and probably pulled forward deals that otherwise would've come into the first quarter, but we were ahead of last year. The inventory across the country looks very good. Randy, any color on that?

Yes. Actually, the open order inventory has really held through the last three quarters. There was not much of a fall off at the end of last year, in terms of the opening side. However the closings did get pulled into the fourth quarter. What we are seeing, really across the country, is larger transactions. We're seeing growth on the retail side, the energy segments coming back in. There's a lot of multi family activity. We're pretty confident that we are on a good run with some good momentum.

Should we look for may be mid single-digit, high single-digit growth in volumes and revenues in that business?

It could be lumpy, so if you're looking at it for the balance of the year, I think that is probably a reasonable place to be. We are going to have a big growover in the fourth quarter. We have got to make progress over the next couple. As Randy indicated, the inventory remains strong, and as rates remain low there is a lot of refinancing activity that's going on, new investment activity. I think that is probably a reasonable outlook.

Okay. Great. Thanks.

Bose George, KBW.

Actually, this is Ryan Osteen on for Bose. I was just wondering if you could talk a little bit about, or potentially quantify the impact that home price appreciation has had on your fee per file and margins?

Ryan, we do not have the ability to track that in our systems. I know some of our competition has reported on that. I would say that what they are experiencing is probably similar to what we are experiencing, but our systems just do not have the ability to capture the detail at that level. Clearly, as prices firm up, as values increase, we are going to benefit from that because our premiums do not go linearly with price increases, but they will increase over time as home values improve.

Okay, thank you. Second, you mentioned some seasonal weakness in the Restaurant business. Was that just whether related or other seasonal factors?

No, I would say that on the restaurant side, the payroll tax increase or the payroll tax reversal of the tax benefit that had occurred for the previous couple of years, had an impact in January, particularly in the family dining segment and the casual dining. That we worked our way through during the January and February. Then the weather was just terrible, really, in the East and particularly in the Northeast. We have 100 99 Steak Houses up in Massachusetts, Rhode Island, Connecticut and New York. They were actually closed for several days, so those comps just were not very good.

We also closed a Max and Erma's, as George mentioned, and three J Alexander's, which had been scheduled to close, but it was the result of lease negotiations and buyouts and so on. It took us about an extra 60 or 75 days to get those restaurants closed. We are actually looking for very, very much improved performance out of the Restaurant business beginning in this quarter, April, and continuing on through the balance of the year.

Thanks that's helpful. Could you just remind us of those targets you have in turn terms of EBITDA and margins for the Restaurant business?

Our EBITDA target margin for the Restaurant business has always been 8.5% to 10%. We are at about 5.8% right now. There is several percentage points to garner as we move forward through this year. We are continuing to generate synergy savings out of O'Charley's and also a lot of J Alexander's. We moved, as you may recall, the ten Stony Rivers that were part of O'Charley's over to be managed by J Alexander's. There's a lot of progress be made with those restaurants. April was very strong for the Restaurant business and we are looking for significant improvements as we go through the year.

Great. Thank you.

Brett Huff, Stephens Incorporated.

Quick question, as we look forward to 4Q. That is typically a tough quarter, especially if I think, as we think, that refis will at least taper down a little bit by then. I know this is predicting the future a little bit, but what is your thought -- should we expect such a large drop off in 4Q as we normally do in a more normal environment that isn't so refi driven? Or what should we expect for that?

Brian, I think, and obviously we don't really have any idea as we sitting here today. I think the projections are for refi to fall off. We had a very strong refi month in April. The rates are almost at record lows again. That seems to bring people back into the refinancing mode.

A lot will depend on the length of that, as you know the HARP program has been extended a couple of years. The government is going work to better promote that, as only about 20% of the eligible people have taken advantage of the program. That could give us some more runway, as well. Finally, as appraisals improve, people who otherwise do not qualify for that HARP program but did not have enough equity to refinance, may have the opportunity to refinance and take care of the market. The fall off in the second half of the year, projected by MBA, may not be as severe.

Depending upon that third quarter will determine the fourth quarter. Our expectation is that the purchase market will continue to improve. The inventory in most markets is lean, and so the builders are benefiting from that right now. As values firm up it may encourage more people to become sellers and therefore the fourth quarter may not be as bad as projected. We do not think it is going to be as bad as the MBA outlook.

Okay, that's helpful. In terms of title's staff, did you guys hire or fire? What was your net number sequentially?

Yes, in the first fourth quarter we added 232 employees. We are still working with temps where we can. As we go into the second quarter it will depend, certainly, on the order volume. When you get more to the purchase side, the transactions get a little bit more complex and laborious. We could see some additions in the second quarter, again depending on volume. We are also looking to expand our footprint and higher some good people into the organization in terms of recruiting. Always, the order volume dictates our staffing levels.

So, you said you added 232 for 4Q, what did you do for 1Q?

I'm sorry, that was for Q1.

A question on monetization of the Restaurant, Remy and some of the other assets. Have you guys given any updates on what your thoughts are there based on the trajectory, the progress were making an each of those?

In terms of the Restaurant business, we have now separated them into two components, the upscale casual, the J Alexander's and Stony River, and then the family dining and casual with the balance of the restaurants. We believe that adding one or two more brands in the upscale casual put us in the position to be able to start taking a serious look at an IPO for that group of restaurants.

We are right in the middle of a couple of different transactions that we're negotiating and trying to make sure we don't do anything foolish, but have complementary brands that could be merged or could be assimilated into J Alexander's. From the O'Charley's standpoint, that is the one where we have to give some time to the restaurant remodel program that is underway. As I mentioned, and it is probably to be expected, that when you just remodel the outside of a restaurant even if you change the look of the restaurant -- the look of the people inside and the service levels and the menus, you really do not get the hit, or the increase in sales.

So, we are seeing about a 17% average increase in same-store sales at fully remodeled restaurants but only about 4% in the restaurants that have been remodeled from the exterior only. We are moving full speed into a full-remodel program, trying to go state by state. Again, we will get about 50 or 55 full remodels this year out of the way. That means it's really going to take us through 2014 to get up to that 120, 130 fully remodeled restaurants to start getting the real benefit and start showing the power of O'Charley's. That would the more of a time frame for the family and casual would be later in '14 or '15 before there was some sort of monetization event such as an IPO.

And then any thought on Remy?

George, why don't you handle that one.

Yes. Remy, as you know is now listed on NASDAQ. We have a 51% ownership stake in that. We continue to work with the management team on growth opportunities. We see opportunities in the market to complement the existing business and get some top-line growth. We are looking at those, which would be self funded by Remy.

Ultimately, we need to get more liquidity in the stock, so if a couple of these opportunities materialize it may give us an opportunity later in the year to do that. I think the second half of their year is expected to be better than the first half. We, as you know, bought that company very well and are very comfortable with our investment level and earnings potential for the Business. I would not say anything immediate on the horizon, but again we're continuing to look at opportunities to grow the Business.

Last question from me. In terms of closer home to title and closing services and settlement services, can you enumerate the kinds of things that you would like to buy?

Well, I would say as it relates to the Title business, we are everywhere we want to be with 1,200 offices. As we look to our ServiceLink business we would like to augment the capabilities that we deliver to major banks. We have got a great business that we built over the last several years, and we've seen strong growth in that Business. We have picked up some companies that are more technology based and that brings us capabilities that we do not have today. We're working on some things that we think can lead to revenue down the road. I think you'd see that they were more boutiquey-type deals that we would be picking up over time. As any opportunity presents itself in the market that is related to that business, we are obviously very interested in that.

Okay, thanks for your time. Thank you.

(Operator Instructions)

David West, Davenport & Company.

This quarter you seem to really close a much higher percentage of the open orders. I think it was about 75% versus 63% last year and you mentioned the appraisal process was easier. Were there any other factors that accounted for that? Is the general credit conditions for mortgages getting a little easier?

I would say the closing percentages can move around and refi transactions will close faster than purchase transactions. Depending upon the mix, that cycle can compress. It depends also on the timing in the quarter when the orders were opened, so I would not read too much into that. As it relates to credit standards, I do not think they are easing. I just think more people are coming into the market because they know that the rates will eventually rise.

Unlike last year, the reading in the papers where prices are appreciating. A year ago everyone was projecting 3% to 4% price declines, and obviously we are in a market that is inflating. People have missed the bottom and they want to take advantage of the combined low rates and reasonable valuations. I think that is what is driving it. But I do think that the mortgage standards are as stringent as they were a year ago.

Thanks so much.

At this time there are no other questions in queue. You may continue, Mr. Foley.

The first quarter was a great start to the year as we achieved our strongest first quarter in the Title business since 2004. With an improving purchase market, low mortgage rates and a stabilizing economy, we are confident in our ability to continue to produce strong earnings in our Title business that will lead the industry. Thank you for joining us today.

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