Fidelity National Financial Inc (FNF) 2014 Q2 法說會逐字稿

Welcome to the FNF 2014 second-quarter earnings call. (Operator Instructions). And as a reminder, today's conference is being recorded.

I would now like to turn the conference over to Mr. Dan Murphy. Please go ahead.

Thanks. Good morning, everyone, and thanks for joining us for our second-quarter 2014 FNF earnings call. Joining me today are Chairman Bill Foley; CEO Randy Quirk; our President, Brent Bickett; our CFO, Tony Park; and also Kirk Larsen, our CFO at Black Knight.

We will begin with a brief strategic overview from Bill. Randy will review the title business, and Tony will finish with a review of the financial highlights. We will then take your questions, and finish with some concluding remarks from Bill Foley.

Please note that we are only focused on FNF on this call, and will take your questions related to FNF only. We will have a separate FNFV call at noon today.

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 facts, 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 fnf.com. It will also be available through phone replay beginning at 1 PM Eastern Time, today through May 8. The replay number is 800-475-6701, and the access code is 329754.

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

Thanks, Dan. We experienced significant margin expansion across our core businesses in the second quarter. The title business generated 14.6% total pre-tax margins, with the traditional title operation producing a 15% pre-tax margin, and ServiceLink contributing a 13.2% pre-tax margin. ServiceLink's pre-tax margin improved sequentially by 850 basis points from the first quarter of this year.

In Black Knight, the 41% EBITDA margin was a sequential improvement of 510 basis points from the first quarter. We are clearly seeing the positive effect of the cost synergies on our financial results at both Black Knight and ServiceLink. In fact, we have now realized nearly $275 million in total run rate synergies as of the end of June. Additionally, we are confident in again increasing our total synergy target to $315 million. We expect the cost synergies to continue to meaningfully impact Black Knight and the ServiceLink margins in the second half of 2014.

Black Knight had another strong quarter under our ownership, generating total revenue of $201 million, a 7% sequential improvement from the first quarter of 2014. As I just mentioned, the EBITDA margin was 41%, a sequential improvement of 510 basis points from the first quarter of this year. Black Knight is generating significant momentum in the business, with recent contract announcements that include Union Bank and New American Funding signing five-year MSP contracts; Guaranty Bank converting 25,000 loans to MSP; and the introduction of Closing Insight, a new industry solution to streamline mortgage loan closings that is a collaboration between Black Knight and Wells Fargo.

Closing Insight will be delivered to lenders through Black Knight's RealEC technology. Additionally, the sales pipeline in strong across MSP, default, origination, RealEC, and data and analytics. We expect a strong second half of 2014 for Black Knight, and believe the company is well positioned to continue to drive growth beyond 2014.

Finally, we successfully distributed the FNFV tracking stock to FNF shareholders on June 30, and FNFV began trading as a separate stock on the New York Stock Exchange on July 1. We are excited about the significant investor interest in FNFV, and look forward to creating value for FNFV shareholders through the active management of the existing portfolio of company investments; the monetization of portfolio company investments; and future potential add-on or new investments. As Dan mentioned, we will have a separate FNFV earnings call after this FNF call.

Let me now turn the call over to Randy Quirk to discuss the title insurance business.

Thank you, Bill. We saw a significant increase in our margins this quarter, both in our traditional title business and our ServiceLink operations. Overall, we produced a title segment margin of 14.6%, a 910 basis point sequential improvement from the first quarter of this year. We are encouraged to generate this level of margins in what is still a slow-recovering residential purchase market and a very soft refinance environment.

Total open order counts per day were fairly consistent, improving each month during the quarter. For the second quarter, total open orders averaged 8000 per day, with April at 7800, May at 8100, and June at nearly 8200. Of the 8000 orders per day, approximately 6300 were at FNT, and 1700 were at ServiceLink. The mix toward purchase transactions increased in the second quarter, with 60% of second-quarter open orders related to purchase transactions, as 71% of FNT open orders were purchase-related, and 80% of ServiceLink open orders were refinance-related.

We had another strong commercial title quarter, generating $115 million in national commercial revenue, a 3% increase over the second quarter of 2013, as the fee per file of $9800 grew 8%; and closed orders of $11,800 declined by 4%. We were also encourage that open national commercial orders increased by 9% over the second quarter of 2013. Additionally, we have begun to capture the impact of local commercial orders from our direct operations, in addition to the national commercial revenue we currently report.

For the second quarter, total combined direct commercial revenue was approximately $180 million. We plan to begin reporting total direct commercial revenue, order count, and fee per file in 2015. The fee per file in the second quarter was positively impacted by the continued mix shift favoring purchase transactions, as well as another strong commercial title quarter and probable home price appreciation.

The total fee per file of $1982 increased 27% versus the second quarter of 2013. The FNT fee per file of $2227 also increased by 27% over the second quarter of 2013. And ServiceLink's fee per file of $1038 was a 9% increase over the prior year. Also excluding our national commercial revenue, the total fee per file of $1705, a 24% increase over the prior-year quarter.

With a slow and steady seasonal improvement in the traditional title business, we were able to reduce total title headcount by approximately 100 positions during the second quarter, with a reduction of 200 positions at ServiceLink, reflecting the continued lower refinance order volumes; and an increase of 100 positions in our field operations, due to modestly stronger purchase volumes. We will continue to closely monitor staffing levels in hopes of generating even higher margins in our title business in the third quarter.

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

Thank you, Randy. Our core operations generated nearly $1.7 billion in revenue in the second quarter, with title generating approximately $1.5 billion in total revenue, and Black Knight contributing $201 million in total revenue. Adjusted core net earnings were $134 million or $0.47 per diluted share. Those adjusted earnings exclude several items, including $16 million in LPS-related transaction costs; $26 million in a synergy bonus accrual; $30 million of purchase price amortization; $14 million from legal accruals; and an $8 million benefit from a premium tax settlement.

The title segment generated nearly $1.5 billion in title and escrow revenue for the second quarter, a 9% decrease from the second quarter of 2013. Direct title premiums declined by 12%, and agency premiums declined by 17%; while escrow, title-related, and other fees actually increased by 7%, assisted primarily by the non-title premium revenue from the combined ServiceLink operation.

ServiceLink produced revenue of $227 million and adjusted pre-tax earnings of $30 million, for an adjusted pre-tax margin of 13.2%, a sequential increase of 850 basis points from the first quarter of 2014.

Black Knight, our mortgage technology company, generated second-quarter revenue of $201 million and adjusted EBITDA of $84 million; an adjusted EBITDA margin of 41%, which is a 510 basis points sequential improvement from the first quarter of 2014. Core debt outstanding remained at $3 billion, with no core FNF maturities until May 2017. We expect to begin paying down our credit facility and term loan in the second half of 2014. Our overall debt to capital ratio was 32.7% at June 30, and we expect it to be below 30% at year-end 2014.

Total title claims paid were $79 million during the second quarter, a decrease of $29 million or 27% from the second quarter of 2013. With the continued favorable trend in our claims payments, we made the decision to decrease our provision this quarter to 6% of gross title premiums. We expect to maintain this 6% provision level for the remainder of 2014.

As Bill mentioned, we have realized $275 million in LPS run rate synergies as of the end of June. We had a $52 million pre-tax benefit to earnings from the cost synergies in the second quarter.

Finally, our core investment portfolio totaled nearly $4.5 billion at June 30. From a regulated standpoint, we have $1.8 billion in statutory reserves; $1.5 billion in regulated cash and investments; and approximately $700 million in secured trust deposits, for a total of approximately $4 billion in regulated cash and investments.

From an unregulated perspective, we have approximately $190 million of unregulated cash at core FNF as of June 30. There's also approximately $190 million in consolidated cash and investments at Black Knight and ServiceLink, and approximately $85 million in cash at subsidiaries that is restricted by minimum working capital or other requirements.

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

(Operator Instructions). Eric Beardsley, Goldman Sachs.

Just on the $52 million of actual realized synergies, does that mean you are somewhere around a $208 million run rate, versus the $275 million? Meaning that there's still more synergies that were back-end-loaded in the quarter?

Yes, that's right. The $275 million is where we were at the end of June. Some of those synergies take place at the first part of the quarter; some in the middle; some at the end. So I think that's a fair number. We reported $215 million of run rate synergies through the first quarter, and $29 million of that had been reflected in our first-quarter pre-tax results. So you'll see the benefit of the $275 million in the third quarter. And then as that ramps up further, you'll see the benefit in the fourth quarter.

Great. And where are you seeing the incremental synergies kicking in during the second quarter, and also in the future across the segments?

It's really in all pieces. We're seeing it in Black Knight; we're seeing it in ServiceLink; and even some of the corporate buckets. I would say probably equally between Black Knight and ServiceLink, and probably less so in the corporate bucket, because we got a lot of those out on day one.

Got it. And right now is it mostly headcount that you are seeing? Or are there other efficiencies still, whether it be professional fees or consulting, and the like?

Kind of all of the above. Headcount and facilities, mostly.

A lot of consolidation of data centers is starting to occur. That's a big benefit. As they mentioned, facilities being consolidated or eliminated, in terms of rental and all the ancillary costs associated with renting 10,000 feet here or 100,000 feet there. So we're now starting to get into the tougher synergies versus earlier in our program, it was easy headcount synergies, corporate synergies, changing the health benefit plans, things like that. So that's why we're -- the rate of synergy achievement will now start slowing down somewhat now. But we've gotten so many synergies already, and the benefit really hasn't flown through our income statement yet.

Okay. And then just on the Black Knight segment, it looks like in the non-MSP revenue grew nicely from the first quarter, roughly 18%. Just wondering what drove that.

Kirk?

Yes, well, obviously it was across (technical difficulty) businesses, but one of the keys is our RealEC business; and specifically the Closing Insight suite that we announced earlier in the quarter. That, along with our origination technology business, are really the pieces that are growing outside of servicing.

Okay. Great, thank you.

Bose George, KBW.

Your title margins obviously came in strong. And volumes, you could argue, are not all that great yet. Can you just remind us where you think title margins could go from here, just given the increase you had this quarter?

Well, as we move into the third quarter, we're still looking at a real strong commercial market, and the mix -- the shift moves more over to the resale side. So we've got a better margin there. So, coming out on the title side at 14.6%, and the title group at 15%, we can do a little better as we get more closings on that resale side moving into the third quarter. We really -- the resales grew gradually as we moved through the second quarter, but we should start realizing an increase in closings on the resale side in the third quarter. So, both of those combined will press our margins up a little higher in the third quarter.

The other aspect is going to be ServiceLink. As ServiceLink continues to get the synergies flowing through their income statement, that will improve their margins. So they are at 13.2% in the second quarter, and they were 850 basis points less than that in the first quarter. So there's more to get at ServiceLink as well. And the ServiceLink margins actually drew down the overall title margin slightly in the second quarter.

And then just in terms of the commercial margins, are commercial benefiting the overall margins more than they did in prior cycles?

I'd say they are, because the commercial business, it's a lot of refinance of existing commercial loans that are either coming due, or people are taking advantage of the low-interest rate environment. And they're large fee transactions, and not -- in many cases, not overly complicated, so the margins are very, very good in commercial.

Okay, great. And that if you just -- last one, just on the debt. You guys mentioned the 30% debt to capital by year-end. Do you have a target for when you get back to the mid-20s?

This is Brent. We will continue to pay our debt down. We have some pre-payable debts that, as we roll into 2015, that we could continue to knock down our debt to cap. It is our objective to get down to the mid-20s. It will be a glide path to get there. But as we roll through 2015 and maybe into early 2016, we should be able to start hitting those targets.

We're getting a lot of cash flow, as you know, coming up from Black Knight and ServiceLink in terms of that intercompany note. And a lot of those proceeds that we -- and we have a mirror note, as well, that has some amortization. So you'll start seeing us more aggressively getting our debt paid down to get first below 30%, and then have a glide path to 25%.

Okay, great. Thanks a lot.

Mark DeVries, Barclays.

Just one more question on the synergies. First, is $315 million -- is that it? And if so, how long is it going to take to get to that run rate?

We're only going to commit to $315 million at this time. It's starting to get tougher. There are -- there's still areas, particularly as I mentioned in the data center consolidation of both ServiceLink and Black Knight -- that there's some savings that are yet to be achieved.

But I think we're going to just say that $315 million is our current goal and our current target. We hope to do better. But it's not going to be as easy as it was getting from $200 million to $250 million to $275 million to $300 million. The synergies are tougher to come by now.

Yes, fair enough. Do you think you'll get to that run rate -- the end of this year, or is it first half next year?

Probably the first half of next year. We're going to pick up a good piece of it in the next three or four months, but it will probably be in the -- we'll get there completely by June 30, 2015.

Okay, great. Can you discuss the reduction we saw in the deal-related intangible amortization expense, from $75 million last quarter to $30 million this quarter? What drove that, and what the run rate should be going forward?

Yes, Mark, this is Tony. The run rate going forward is what we have in Q2. We initially did our purchase price allocation as of January 2, and put some numbers up, and we continue to work through that as we finalize the allocation. We had some assets that were initially valued higher. And then we looked at them and readjusted that, so we had a little more goodwill and a little less in terms of amortizing intangibles. So that's why you saw higher purchase price amortization in Q1, and then saw that come down in Q2.

Okay. And in a related question, it looks like your core depreciation and amortization, excluding those intangibles in Black Knight, increased from $9 million to $23 million. Can you just talk about what the right run rate might be there?

Yes, I'm not sure specifically about the question. The run rate should be what you see in Q2. We can take it offline to clarify that, if that doesn't answer your question.

Okay, that's fine. And then just finally, can you give any color on how orders are shaping up so far, in the other part of the quarter?

Yes, the first three weeks of July, the orders are just a little off of what we had in June. And I believe we're at about 7900 orders a day. You know you had a holiday, and it's still early in the month, so just really holding, but just off slightly.

Great, thank you.

Mark Hughes, SunTrust.

The Black Knight pipeline, could you characterize how that looks year-over-year? And could you talk about the incentives you put in place for your salespeople to continue to build that up?

I'm answering the second half of the question first. We do have incentives we put in place that incentivize our salespeople for cross-selling activities. Black Knight, in the past, had really not cross-sold its various products and services. And now that is a big emphasis for all of the salespeople and all of the management staff at Black Knight, is if we're doing business with Bank A on the MSP platform, we want to sell them RealEC; we want to sell them the loan origination systems; we want to sell them data and analytics.

And that is helping -- that's just beginning to start generating some additional growth. We have a number of interesting contracts that are under negotiation at Black Knight. And we expect, during the next 90 days to 120 days, to have some positive announcements relative to additional MSP contracts. And also, in particular, the Closing Insight business, in which we're JVing with Wells Fargo, and we're talking to other major banks about becoming partners with us.

So the 7% organic growth that you saw in the second quarter for Black Knight, I view that as really a minimum target. We should be doing low double-digits in terms of Black Knight's growth. And Black Knight is an exciting company. It was really not managed aggressively, from a cost containment standpoint or from a sales standpoint, prior to our acquisition. And we have a terrific management team in place, and they are all focused on growing that business and increasing our margins.

Super, thank you.

Ryan Byrnes, Janney Capital.

Hopefully just two quick ones. The margins at ServiceLink have obviously improved pretty dramatically, pretty quickly. But can the margins at ServiceLink reach the high teens, similar to the rest of the core title business?

Well, ServiceLink's margins should really move that direction, because we haven't gotten the full benefit of the synergies that were attained in the second quarter. There are additional synergies that will be attained at ServiceLink over the next six months. Some could be headcount; some could be office closures; data center consolidations.

So, ServiceLink has a ways to go. ServiceLink really got hammered in the early -- late last year, earlier this year, with the dramatic fall-off in refinance transactions. But everyone at ServiceLink is now focused on expanding our valuation business, our BPO business, all of these sidelight -- all these businesses -- appraisal businesses. They are all in an expansion mode. So we're taking customers from the competition. And ServiceLink's margin will get better. They're just going to just improve. We had our low point, our trough, was probably in the first quarter this year.

Got you, great. Thanks for that. And maybe just a quick one for Tony. The net investment income, it seems to have bounced around a little bit. It was up $5 million sequentially. Are there any one-timers in the second quarter number, or I guess the first-quarter number?

In the investment income number?

Yes. Yes, the net investment income, yes.

No, no one-timers. That's just the yield on primarily the bond portfolio. There was nothing unusual in that. I think we had interest investment income of $33 million in the quarter in the core operation. Realized gains is where you see some one-timers, but there wasn't anything. That was zero for the quarter, in the core operation.

Got it, thanks. Thanks, guys.

Brett Huff, Stephens Inc.

Congrats on a nice quarter.

Thank you.

Bill, on the Black Knight, it sounds like there is lots of good stuff going on there. You did a lot of great work on the costs, and it sounds like you are excited about the organic growth on that front.

Are there other assets -- as you pay down the debt overall, and get down to maybe the mid-20s, where I think you and the regulators are a little more comfortable, if that's by the end of -- mid-end of next year, are there other interesting assets where you can apply your management expertise and get some synergies with Black Knight?

We've looked at a few acquisitions. We haven't executed against anything just yet, because we are focused on paying down debt. But that's really where Brent comes in, and he's constantly thinking about and looking at various acquisitions, or related businesses, that could supplement our Black Knight technology businesses. And there will be things out there. It's just going to take a little time while we work our way through attaining the synergies and getting our debt paid down slightly.

And Brett, if I could add to what Bill said -- our story is largely one of execution, both on the title side with Randy and his leadership team, and Black Knight executing on the opportunities that exist in front of us. It's really an organic path. We view M&A really to supplement that organic path, and to maybe add new product capabilities that we don't have, or new customer relationships that we don't have, or preferably both. But this really is an execution story.

We're going to leverage our customer relationships, leverage our product stream, try to get greater share of wallet with our customers, and hopefully deliver on the organic growth that Bill articulated with Black Knight, and the margins that Randy said in the title group.

And just a second one, just to give us a better flavor for how those conversations go with the bank. Is it usually entry point is MSP or title relationship, and then the Black Knight ancillary products come up? And how does that -- are you going to them, or are they coming to you; or how is that working?

Well, really, it's a combination, Brett. So, the entry point is normally the MSP platform, because we have such a dominant market share in that particular line of business. And from that we then move into mortgage to loan origination services, or products that we move into RealEC, which is our router. We then try -- we're now moving toward Closing Insight, which is a combination which combines all of our closing products, and allows us to the route all the different products and services to the various institutions.

So what we're really doing is we are cross-selling like crazy. And by cross-selling and using the MSP platform as the base, it's been very, very successful. It doesn't always come in the big, multimillion dollar contracts, or tens of millions of dollars of contracts. It might be $100,000 here, or it might be $500,000 there. But it's just the mass and the size of our product offerings that allows us to do all this cross-selling.

And, Brent, do you have anything to add to that?

I agree with that.

Okay, that's what I needed. I appreciate your time.

Geoffrey Dunn, Dowling & Partners.

You already answered my question on cross-selling, and I appreciate the color. Randy, what is the nature of the purchase business we're seeing in ServiceLink? Is that default, or is there actually centralized purchase being done?

Now, you are correct. That's the default services side, the REO transactions. And that runs about -- currently about 20% of the volume.

Okay.

Obviously, as 20% -- that number is 20% because the refi side has gone off, in terms of their mix. But it's all the REO and default services.

Okay. And then I was wondering if you'd be able to break down the revenue segments. And I know you gave the $122 million for MSP. Are you able to break down what default, the other technology, and data analytics revenue contributions were?

We're stumbling around whether we want to (laughter) -- whether we want to get into that or not.

Yes, we have not disclosed individual line items for Black Knight, and we're not going to do it right now, at this time.

I'm sorry, Geoff.

All right, thank you.

(Operator Instructions). At this time, we have no further questions in queue.

I'll turn the call back to Mr. Foley.

Thank you. We experienced significant margin expansion across our core businesses in the second quarter. We will strive to generate higher margins in those businesses in the third quarter, and we look forward to reporting those results. Thanks for joining us this morning.

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