Fidelity National Financial Inc (FNF) 2018 Q1 法說會逐字稿

Thank you for standing by, and welcome to the FNF 2018 First Quarter Earnings Call. (Operator Instructions) As a reminder, this call is being recorded and will be available for replay after 3:30 p.m. today through May 10. You may access the replay by dialing 1 (800) 475-6701 or 320-365-3844 and enter the access code 447137.

I would like to turn it over to Dan Murphy. Please go ahead.

Thank you, and good afternoon, and thanks for joining us for our first quarter 2018 earnings conference call. Joining me today are our Chairman, Bill Foley; CEO, Randy Quirk; President, Mike Nolan; CFO, Tony Park; and EVP, Brent Bickett. We'll 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'll then open the call for 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.

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

Thank you, Dan. The first quarter was a solid start to the year and for our title business, as we grew adjusted pretax title earnings by $11 million versus the first quarter of 2017 and produced 11.7% adjusted pretax title margin, a 60 basis point improvement over the prior year.

During the quarter, we used $82 million to pay our March common stock dividend of $0.30 per share. As you may recall, our board decided to raise our first quarter 2018 cash dividend to $0.30 per share, an 11% increase from the fourth quarter 2017 dividend of $0.27, which itself was an 8% increase from our third quarter of 2017 dividend of $0.25. We continue to seek ways to maximize return of value to our shareholders.

We also spent approximately $47 million to repurchase 15.4 million in face of a -- value of our convertible notes. Our diluted share count declined by 1 million shares because of the convertible repurchases, and those notes due in 2018 -- in August 2018 now have approximately $53 million of the original $300 million outstanding. Additionally, we did not directly repurchase any shares of common stock during the first quarter.

Since announcing the Stewart Information acquisition on March 19, we have begun the regulatory process necessary to get the transaction approved. There are a number of state and federal filings needed, but the 2 major filings are the HSR Antitrust filing and the Form A filings with the states of Texas and New York.

Those are the states of domicile for the 2 major Stewart underwriters. We made the initial HSR filing on March 30, 2018, and will work through the anticipated information requests over the coming months. We filed the Form As with Texas and New York on April 27, 2018, and we will wait for any feedback or information request from those states.

Also, over the last 6 weeks or so, our management and Stewart management have held more than 20 town halls style meetings for Stewart employees at locations around the country. At those employee meetings, we reiterated our intent to preserve the Stewart legacy as part of our long-term strategy of operating multiple title insurance brands under the FNF umbrella. The meetings were well received, and we consistently heard the employee excitement of putting the prolonged uncertainty that has existed at Stewart behind them and a desire to get back to focusing on their customers and growing their brand.

I'll now turn the call over to Randy Quirk to discuss the title insurance business

Thank you, Bill. We generated adjusted pretax title earnings of $186 million, an $11 million or 6% increase over the first quarter of 2017. Our adjusted pretax title margin of 11.7% was a 60 basis point improvement over the prior year. The residential purchase and commercial markets continued to drive our performance in the first quarter, as residential purchase orders opened per day increased 4% and closed purchase orders declined by 0.5% in the quarter, and total commercial revenue grew by 3% versus the first quarter of 2017.

On the refinance side, refinances -- refinance open orders declined by just under 6%, and closed refinanced orders fell by 16%. Despite the 0.5% increase in closed purchase orders and the 16% decline in closed refinanced orders, we are encouraged by reporting growth in both adjusted pretax earnings and the pretax title margin.

For the first quarter, total open orders averaged just over 7,700 per day, with January at more than 7,500; February at nearly 7,800 and March at more than 7,800. As I mentioned, purchase orders opened per day increased by 4% for the first quarter. For April, the total open orders were nearly 8,000 per day, and purchase orders opened per day grew by 3% over April of 2017. Additionally, refinance orders opened per day decreased 13% versus April of the prior year.

During the first quarter, we eliminated 346 positions in our field operations, which combined with the 407 positions eliminated in the fourth quarter of 2017, positioned us well for a slower seasonal first quarter. We entered the second quarter of this year with a lower headcount in the field operations than when we entered the second quarter of 2017.

Our direct business generated a 1.5% increase in direct title premiums versus the first quarter of 2017, while the agency business experienced a 3% decline in agency title premiums. Direct revenue benefited from a 9% increase in the fee per file, primarily driven by a higher percentage of purchase closed orders and the 3% growth in commercial revenue, offset by a 6% decrease in total closed orders, driven primarily by the 60% decline in refinance closings versus the first quarter of 2017.

Total commercial revenue of $230 million was a 3% increase over the first quarter of 2017, driven by a 5% increase of closed commercial orders, offset somewhat by a 3% decline in the commercial fee per file. Additionally, a 7% increase in opened commercial orders bodes well for the commercial business over the next several quarters. The total fee per file of 2,344 increased by 9% over the first quarter of 2017, as 62% of closed orders were purchase-related versus 58% in the first quarter of 2017.

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

Thank you, Randy. We generated nearly $1.7 billion in total revenue in the first quarter, with title generating $1.6 billion in total revenue and our Corporate and Other segment contributing $103 million from primarily real estate brokerage and technology revenue. Adjusted pretax title earnings were $186 million, an $11 million or 6% increase over the first quarter of 2017. Adjusted net earnings were $118 million or $0.42 per diluted share.

The title segment generated $1.6 billion in total revenue for the first quarter, a 1% increase over the first quarter of 2017. Total title and escrow revenue grew by 0.5% versus the prior year. Personnel cost increased by 5.7%. Salaries increased 5%, as we had higher staffing levels in January and February versus the prior year before ending March with approximately 55 fewer employees in the field than at the end of March 2017. Additionally, commissions and bonuses increased with the higher title earnings versus the prior year quarter.

Other operating expenses declined by 1.5%, as the major variable expenses in title plant and ServiceLink pass-through businesses declined with a small decrease in closed orders versus the first quarter of 2017. All-in, the title business generated an 11.7% adjusted pretax title margin, a 60 basis point improvement over the first quarter of 2017.

Interest income of $38 million was a $10 million increase over the prior year, as we continued to see the positive impact of higher short-term interest rates as we reinvest funds from maturing fixed income securities and also earn higher interest on the escrow funds in our 1031 Exchange business. Interest income was flat sequentially from the fourth quarter of 2017, but Q4 included $4 million of nonrecurring fees from the FGL transaction. So actually, our interest income in the quarter was up $4 million over the fourth quarter.

FNF debt outstanding was $748 million for a debt to total capital ratio of 13%. Our claims paid of $51 million were $4 million higher than our provision of $47 million for the first quarter. The carried reserve for claims losses is currently $47 million or 3% above our actuary's central estimate.

Finally, our investment portfolio totaled nearly $4.4 billion as of March 31. From a regulated standpoint, we have $1.4 billion in statutory reserves, $1.4 billion in regulated cash and investments, $825 million in secured trust deposits and $80 million in deferred revenue at our home warranty company for a total of approximately $3.7 billion in regulated cash and investments.

From an unregulated perspective, we have $300 million of unregulated cash as of March 31. There's $200 million in cash and investments at ServiceLink and other subsidiaries and $150 million in equity investments, all of which are restricted primarily by minimum working capital or other regulatory requirements.

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

(Operator Instructions) And our first question is from the line of Mark DeVries with Barclays.

I was hoping to get a little better sense of what drove the 60 basis point year-over-year improvement on the pretax title margins. How much of that was attributable to just growth in interest income? How much of that might have been some kind of a mixed shift as you continued to see more commercial and residential purchase? And any other factors like operating leverage that you could call out?

Yes. This is Randy. I'll start with the answer. A very good part of it was the mix of business moving over -- more towards the purchase markets than we had in the first quarter of 2017. We went up to 60% on the purchase side versus 62% in the prior year. Also, the commercial business again continued to be very strong for us as we moved through the first quarter and in fact, to moving into the -- in the second quarter. And in addition to that, we did make significant staff reductions in the fourth quarter. We eliminated over 400 positions in the fourth quarter, really late in the first quarter, December, and then we caught in January and February, eliminated another 350 positions. So really a combination of those 3 is what allowed for some improvement on again expense control. And then the shift in business, I'll let Tony comment.

Yes, Mark. And as you pointed out, we did have a stronger interest income line item, $38 million up against $28 million in the prior quarter. And that's a function of higher short-term rates, and we expect that to continue as we work our way through the year. Our IPX business is earning about 44 basis points above what we did last year on a rough average of $3.8 billion. So that's up about $17 million on an annual basis to the bottom line. And of course, as we reinvest the bond portfolio, we will -- we would expect to continue to earn more with rates moving up. We also had a small difference in the loss provision level. We were at 5% in the prior year quarter, 4.5% in the current year quarter. We'll continue to monitor that, but trends are very favorable there. And so that, we'll see if the 4.5% holds. But right now, we feel pretty good about that. We've also built on our cushion relative to our actuary's number.

Okay. Given the lift you've seen in your margins so far this year, is it reasonable for us to think about, for the full year, the pretax title margin being somewhere north of 15%?

Well, the way we look at it right now is with commercial holding and building through the year, we think the commercial side would be somewhat similar. The purchase market continues to get stronger. Even as we move through March and April, we continue to open up, in terms of volume, more on the purchase side. So again, a better fee per file. And at the same time, as I mentioned on the expense control, we're going to do a -- we're going to stay focused on our expenses and our staffing level. So again, we're looking at similar year and potentially, better if those things play out. Our target has always been 15%. We're going to push hard to get through there, but we'll need a -- a good commercial market will help us.

And next, the line of Mackenzie Aron with Zelman & Associates.

Thinking about the Stewart acquisition, can you just give us a little bit of a road map for the regulatory requirements that are still on the to-do list and the time lines and kind of milestones that we can expect from this going forward?

We had a pretty good discussion about this yesterday at the board meeting, and it's probably a late fourth quarter or early first quarter transaction close date. We have submitted, as we -- as I mentioned, we've submitted our HSR filing. And we're trying to be as complete as we possibly can in terms of anticipating the areas of -- areas that the government may be interested in learning more about. We really have seen no particular roadblocks or things that would preclude the transactions. It's more of a process. And we've had good meetings with Texas, with New York, with California. Really, we've had good meetings all across the country with all the states we had to file the Form As. And so things look good. They look positive. But it's just the process, and it's going to take a while.

Okay. That's helpful. And then also just interested in what you've heard since the deal has been announced. I know you mentioned you've done a lot of town halls with Stewart's employees. So curious on how those went and kind of what you heard from their team and then similarly, what you've heard from your own customers and just kind of any reaction in the field so far.

Yes. We have had -- we had contact with a number of their commercial customers. And frankly, there's no concern at all with regard to the transaction. Our commercial customers are primarily focused in the -- with law firms, and they originate the transactions for us, whereas Stewart's commercial customers are basically more developer-oriented or investor-oriented. So it's kind of a different -- a little bit of a different customer base. Then in terms of the town hall meetings, what we've -- what has occurred is that Stewart has been sort of in a transition mode for several years with the hedge funds that were involved in the company. And it was distracting for the employees, and they couldn't focus on doing their basic job of getting more customers, getting more business. And so Stewart's really suffered over the last several years. And I would say that when Randy and Mike and Roger go in and they have a town hall meeting, the meetings usually start out with the employees being apprehensive. And by the time the meetings are over, the employees are really happy. They are happy about the acquisition. They're happy about being part of the Fidelity family of companies. And we've reassured those employees that the Stewart brand is going to be expanded, not contracted, and it's going to be operated independently. So we're -- we know we have a good game plan with regard to the way Stewart will be integrated into our company, and the employees in the field are responding well to it.

And next, the line of Bose George with KBW.

This is Tommy on for Bose. Just looking at the corporate segment, was the decline in revenue just reflecting the normal seasonality with Pacific Union? Or can you just remind us like what a good run rate of the pretax income would be at -- in the corporate segment?

Sure. This is Tony. So revenue year-over-year were up about $30 million. I assume you're referencing Q4 to Q1, and that is seasonality in the brokerage business. There isn't a lot of seasonality in the technology side. So the run rate in technology is roughly $25 million a quarter, $100 million-plus annually. And brokerage does bounce around. We had about $75 million in revenue in Q1, but I think the fourth quarter was more like $90 million or $95 million. In terms of the pretax earnings or loss on an adjusted basis, we were at $28 million of pretax loss. And again, that's seasonal with the brokerage business, where we have a challenging first quarter and sometimes the fourth quarter, whereas the summer months are typically -- spring and summer are typically stronger. So I would say, to give you some direction on the corporate segment, somewhere in the low- to mid-20s loss in that segment probably makes sense to model. And of course, that includes interest expense of about $11 million.

Got it. And then can you just remind us what the impact on the diluted share count is going to be once that convert is redeemed? And what -- just remind us what the time line is at? I think you mentioned it in your opening remarks.

Sure. Yes, it's August. We have about just over $50 million left outstanding. It'll probably cost about 3x to retire that, roughly $150 million. And there's about 3 million shares impacting our diluted share count today. And as that get averaged out, I think when we get to the point where it's retired, I think it will impact the total annual diluted share count by about 2 million shares for the year.

Next, the line of Jason Deleeuw with Piper Jaffray.

A question that keeps coming up is on the Stewart deal and the $135 million of cost synergies kind of net of the interest expense but concerns that there are going to be revenue dis-synergies as you kind of work through the deal and try to realize those cost synergies. So now that you've had a little bit more time to look at the deal, is there any update on that? Should we be concerned about revenue dis-synergies or can we kind of count on getting the net benefit of the synergies just to the cost side?

Well, we believe you can count on getting the net benefit on the cost side. There may be some divestitures that will be required by the FTC. We're not -- those are not defined yet, but we have an adjustment in the purchase price of Stewart of FTC stock based upon any revenue divestitures. But we feel pretty -- well, we actually feel very confident about the synergy level that we can achieve. And a lot of it is not customer-facing, it's -- it is title plan production. It might be some corporate overhead, and there are a lot of different things that are duplicative of what we already have in various locations and various markets, different kinds of contracts with different suppliers. We're probably a little more efficient in terms of dealing with a number of suppliers because of our size than Stewart is. So we really feel good about this acquisition. We feel like it's just -- it kind of completes the Fidelity story, to be honest with you.

Great. That's helpful. And then the real estate tech investments, can you update us on success you're having with cross-sell initiatives? Is it helping drive more title business? And any help you can give us on growth rates? And can it -- I think it might be a little dilutive right now to earnings. But can those turn to be accretive transactions?

Sure. This is Randy. Yes. It's been very successful. The cross-selling has been actually onto the referral of the business. And we added another 400 platforms, clients to the Commission, Inc. platform in the first quarter. About 25% of that came from referrals in from the title group. We are seeing a close association with our real estate customers and our sales teams as a result of that. Revenue quarter-over-quarter was up Q1 of '18 over Q1 of '17, that was up 31%. And the overall platform year-over-year increase was at 36%. So we're pushing up pretty close to having a 300 elite teams on the Commission, Inc. platform. So it's going very well. We continue with our integration between the technology companies and our operating systems, the development of a -- of DigiSign, which would be an electronic document solution. So there's a lot in play. I know Bill has said in the past that this is going to take some time. We have a -- maybe a few more ingredients to add to this end-to-end platform. But so far, it's going very well, and it's been -- so it's a very good product, and there's a lot of enthusiasm for it.

(Operator Instructions) And now to the line of John Campbell with Stephens.

On the title personnel cost, you've grown that faster than the title rev for -- it looks like 4 straight quarters. It looks like you may be lapping that last tough comp and then you guys mentioned the commentary about the lower headcount going into 2Q this year versus last year. So are you guys expecting, I guess, a reversal of that revenue versus personnel expense growth trend?

Yes, John. I think -- I mean, we pointed out a few items there. We had some headcount growth that since then, as you mentioned, we took some out in Q4 and then some more out in Q1. So we would expect that to level off relative to movements in the revenue side. We've had a couple of unusual items or at least one that comes to mind is health insurance. We've been trending a little higher for the last few quarters there. I would expect that to level off, even come down a little bit. We've had some larger-than-usual claims. But I don't expect, at this point, is a trend. And if so, we'll take a look at the plan, but -- so that's one item that impacted the personnel costs a little bit. Of course, if you're looking at first quarter over first quarter, we had a very large acquisition. The Title Guaranty acquisition added about 400 employees. So that's, obviously, moving it. And then if you're looking at first quarter versus fourth quarter, as you know, payroll taxes restart at the end of -- at the beginning of every year. So I think we were down maybe about 5% in personnel costs in the title segment in Q1 versus Q4. But if you factor in payroll taxes, we were down about 9%. So that -- those are kind of some facts that might help you out. Yes, we do expect that to level off as we move forward.

Okay, great. And then back to the Stewart deal. I might be jumping the gun, but I mean, if we assume that closes, you guys have to maybe concede a little bit of that revenue. Any idea what the incremental -- I guess, the detrimental margin might be on that particular rev loss? I mean, is it 50%, 80%? Or is it going to basically depend on the loss of, I guess, direct versus agency rev?

Yes. It's -- obviously, agency revenue would be more on the top line and less on the net line. The direct revenue, we really don't believe that there's going to be much direct revenue loss or divestitures required. It may take us a little while to get the margins on the Stewart business up to the Fidelity margins. But we've done the same thing 3x or 4x in the past. We did it with Lawyers and Commonwealth and got their margins up. We did it with Alamo. We did it with Chicago. So we've done it. That's why we're very confident. We just -- this was just right up -- this is right in our strike zone, this kind of transaction.

And the next question from the line of Mark Hughes with SunTrust.

You seem to have a good confidence on the commercial side. How far ahead do you have visibility on commercial that you'd sustain this kind of momentum?

Yes, Mark. It's Mike. I would say, we usually have about a couple of quarters. If you look at our open orders in the first quarter, they're up a really strong 7% over last year and also 14% sequentially. So what -- when we see that and also look at some of the pipeline we have on our national deals, I think we feel pretty confident that we'll still have good commercial performance really through the second and third quarters. The other thing that makes us confident as we see, it's a pretty broad-based market strength, not only at our national business but our local commercial operations are seeing good activity and also good activity in multiple segments. So it just feels like it's going to be another strong commercial year.

Any preview on revenue per order in that 7%? How is it trending?

Well, we had -- I think we do report that. Quarter-over-quarter, all commercial fee per file was down slightly versus the first quarter of last year, but I wouldn't read too much into that. It can be very lumpy quarter-to-quarter with national deals. I really look more at the overall order activity to tell us really what kind of market we have. I will say that we do have some strong, both energy and hospitality transactions, in the pipeline that should show up over the next couple of quarters.

And there is a follow-up from John Campbell with Stephens.

Back on the April orders, are we lapping all of the M&A? Or is there some acquired orders in there?

With the acquisition, the first quarter last year was already there. The main acquisition was Title Guaranty, and that was in August.

Right.

Right.

Well, they were included, so.

Yes. Without the acquisitions, we see the increase of about 2.5%. So we've considered that in our numbers.

And there are no further questions in queue. I'll turn it back over for closing remarks.

Thank you. The first quarter was a solid start to the year for our title business. We also began working through the regulatory processes for the Stewart title acquisition and believe that this transaction will create meaningful long-term value for our shareholders. Thanks for joining us today.

Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation. You may now disconnect.