Fidelity National Financial Inc (FNF) 2018 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the FNF 2018 Second Quarter Earnings Call. (Operator Instructions) As a reminder, today's call is being recorded.

I would now like to turn the conference over to your host, Dan Murphy. Please go ahead.

Thank you, and good morning, everyone, and thanks for joining us for our second quarter 2018 earnings conference call.

Joining me today are our CEO, Randy Quirk; President, Mike Nolan; CFO, Tony Park; and EVP, Brent Bickett. We'll begin with a brief strategic overview from Randy. Mike will review the title business, and Tony 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 Randy Quirk.

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 1:30 p.m. Eastern Time today through July 25. The replay number is (800) 475-6701 and the access code is 451401.

Let me now turn the call over to our CEO, Randy Quirk.

Thank you, Dan. The second quarter was a very strong performance for our title business as we generated adjusted pretax title earnings of $338 million and a 17.1% adjusted pretax title margin, our best quarterly performance on both metrics in 15 years. I will let Mike Nolan go into more detail on the title business.

During the second quarter, we used $82 million to pay our June common stock cash dividend of $0.30 per share. We also spent approximately $39 million to repurchase $13 million in face value of our convertible notes and our diluted share count declined by approximately 2 million shares this quarter. The remaining $40 million of those convertible notes come due on August 15 and we expect to spend approximately $120 million to settle those maturing notes next month.

We ended the second quarter with approximately $350 million in available holding company cash. We continue to work through the regulatory process related to the Stewart Information Services acquisition that we announced on March 19. On May 31, we received the expected Second Request from the FTC asking for additional information and documentary material related to their HSR regulatory review of the transaction. We remain engaged in document collection and review and have been working cooperatively with the FTC to fully respond to the Second Request. The other significant filings are the Form A filings with the states of Texas and New York, both of which are now subject to review by those states.

As we mentioned on our last earnings call, our management and Stewart management have now held more than 40 town hall-style meetings for Stewart employees at locations around the country. At those employee meetings, we continue to reiterate our message to preserve and grow the Stewart legacy as part of our longtime successful strategy of operating multiple title brands under the FNF umbrella. We continue to receive positive feedback from those meetings.

Let me now turn the call over to Mike Nolan to discuss the title insurance business.

Thanks, Randy. We generated adjusted pretax title earnings of $338 million, a $28 million or 9% increase over the second quarter of 2017. Our adjusted pretax title margin of 17.1% was a 90 basis point improvement over the prior year and was our highest adjusted pretax title margin in the last 15 years.

The residential purchase and commercial markets continued to drive our performance in the second quarter, as residential purchase orders opened and closed per day increased 3% and 2%, respectively, in the quarter. Total commercial revenue grew by 6% versus the second quarter of 2017.

On the refinance side, refinance orders opened declined by nearly 19% and closed refinance orders fell by 14%. We are encouraged to see the single-digit growth in orders in both the residential purchase and commercial markets offsetting the double-digit decline in orders in the residential refinance market and feel our title business is well positioned to continue to deliver strong financial results through the remainder of 2018.

For the second quarter, total orders opened averaged 7,900 per day, with April and May at 8,000 and June at 7,700, with the June decline entirely due to refinance orders. As I mentioned, purchase orders opened per day increased 3% for the second quarter.

For the first 2 weeks of July, total orders opened were 7,700 per day and purchase orders opened per day grew by 1% over the prior year period. Additionally, refinance orders opened per day decreased 16% versus the prior year. During the second quarter, we did add 107 people or 1% to our field operations to handle the seasonal increase in volume. At June 30, we had 319 fewer employees in our field operations than at June 30, 2017.

Our direct business generated a 4% increase in direct title premiums versus the second quarter of 2017 while the agency business produced a 1% increase in agency title premiums. Direct revenue benefited from a 6% increase in the fee per file, primarily driven by a higher percentage of purchase closed orders and a 6% growth in commercial revenue, offset by a 2% decrease in total closed orders driven primarily by the 14% decline in refinance closings versus the second quarter of 2017.

Total commercial revenue of $276 million was a 6% increase over the second quarter of 2017, driven by a 4.5% increase in closed commercial orders and a 1% increase in the commercial fee per file. Additionally, the 7% increase in opened commercial orders bodes well for the commercial business over the next several quarters. The total fee per file of $2,579 increased by more than 6% over the second quarter of 2017 as 71% of closed orders were purchase-related versus 67% in the second quarter of 2017.

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

Thank you, Mike. We generated nearly $2.1 billion in total revenue in the second quarter, with title generating more than $1.9 billion in total revenue and our Corporate and Other segment contributing $161 million from primarily real estate brokerage and technology revenue. Adjusted pretax title earnings were $338 million, a $28 million or 9% increase over the second quarter of 2017. Adjusted net earnings were $239 million or $0.86 per diluted share.

The title segment generated more than $1.9 billion in total revenue for the second quarter, a 3% increase over the second quarter of 2017. Direct premiums increased by 4% versus the second quarter of 2017.

Personnel costs increased by 5%, relatively in line with the 4% increase in direct title premiums. Other operating expenses increased by just 2% as the major variable expenses in the ServiceLink pass-through businesses declined with the decrease in refinance-related business versus the second quarter of 2017. All in, the title business generated a 17.1% adjusted pretax title margin, a 90 basis point improvement over the second quarter of 2017.

Interest income of $45 million was a $12 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 earned higher interest on the escrow funds in our 1031 exchange business.

FNF debt outstanding was $734 million for a debt to total capital ratio of just under 13%. Our claims paid of $58 million were $2 million lower than our provision of $60 million for the second quarter. The carried reserve for claims losses is currently $49 million or 3% above the actuary's central estimate.

The tax rate in the second quarter was artificially low due to a onetime change in tax estimate from the release of a deferred tax liability related to the redomestication of our title insurance underwriters in 2017. We expect the tax rate to return to approximately 24% in the third quarter.

Finally, our investment portfolio totaled nearly $4.6 billion at June 30. From a regulated standpoint, we have $1.4 billion in statutory reserves, $1.4 billion in regulated cash and investments, $900 million in secured trust deposits and nearly $90 million in deferred revenue at our home warranty company, for a total of approximately $3.8 billion in regulated cash and investments.

From an unregulated perspective, we have $350 million of unregulated cash as of June 30. There's $300 million in cash and investments at ServiceLink and other subsidiaries and $145 million in equity method 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, Shawn, to allow for any questions.

(Operator Instructions) Our first question is going to come from the line of Mark DeVries from Barclays.

I was hoping somebody could comment on what we should expect for buybacks going forward, kind of when those might resume and what kind of pace you might undertake.

Sure, Mark. This is Tony. Our expectation is, during the kind of the pendency of the Stewart transaction, we're going to accumulate our cash so that we could fund the cash portion of that transaction, hopefully, with -- entirely with cash on balance sheet. So our expectation is, we would resume the buyback once we complete the Stewart acquisition. And then the expectation would be that we would be consistent buyers as we've done in the past. And that might be 25,000 or even 50,000 shares per day on a kind of consistent basis as opposed to opportunistically.

Okay. If the approval gets pushed out maybe towards the longer end of your guidance, might you start buybacks sooner? Could you accumulate enough cash that you'd have enough to meet the needs of the deal and then resume buybacks? Or should we just expect that even if it's like through the end of 2Q when this closes, that buybacks won't start until then?

No, I think it's very possible. If we're not in a blackout period and we've accumulated enough cash to fund the cash portion of the transaction that we would absolutely resume the buyback.

Okay. That's helpful. And then finally, I think, Mike, I think you indicated that at least the open orders in commercial bode well for the next couple quarters. Be interested in just getting some broader comments on the outlook for commercial through the balance of the year and into next.

Yes, Mark. It's been a very, very strong commercial market. And I've said in the past that we're seeing a very broad-based market. 2017 was our second-best year for revenue. And as we stand through the first half, we're up 6% on revenue, but I would really point to the total commercial orders being open up 7% as a real indicator that we've got a very strong market and we should expect it to finish strong in 2018. It's a little hard to call for 2019. You could look to forecasters like the Urban Land Institute. I think they call for maybe a modest decline in 2019, but they're guessing kind of like everybody else. But right now, the orders look very strong, and I think it bodes well for the commercial.

Our next question will come from the line of Bose George from KBW.

Actually, first, just on the margin. When we think about the margin going forward, is there any reason why you shouldn't be able to do a 17%-plus margin just in the third quarter and then before the seasonal slowdown in the fourth? And then going forward after that, can you -- how could we think about margin trends into 2019?

Yes, Bose, this is Randy. A very, very strong performance for commercial in the second quarter, particularly the month of June came on very strong. The mix of business that moved over to the purchase side running 72%, 73% purchase transactions in the second quarter. And we positioned ourselves well in terms of our staffing, our expense load, by making reductions in the fourth quarter of '17 and the first quarter of 2018. As Mike had said, we have very good momentum going into Q3 with the open order volume. Commercial looks good. Purchase is holding steady. We've already built in the refi falloff. So we expect we'll have another very, very good quarter in the third quarter in terms of margins. Whether we hit that number again is very difficult to tell. We need to have the timing of a lot of these events coming together. But we're coming out with some great momentum. We're very positive on it. We believe we're strong on the expense side. And so without putting an exact number on it, we look forward to a good third quarter.

Great. That's helpful. And then just any thoughts on just the margin going out into '19?

Well, that's a little tough. We'll go through our budget process here in a few months, and we'll be looking into '19. We're not quite in that process yet. Again, a lot of it, we're going to be thinking about the impact of interest rates, if any. Interest rates actually have not affected us on either the purchase side or the refinance side going through the first half for this year. So it's a little tough. We don't quite look out that far just yet, but it could bode well for us to have another strong year in 2019. We really expect it will do that.

Okay. Great. And then actually just on the investment income. That number was up reasonably well, more so than we saw in first quarter versus fourth. Anything unusual there? And just can you remind us how rising rates, both long and short rates, impact the investment income?

Yes, Bose, this is Tony. We are, as you noted, getting a pretty nice benefit from rising short-term rates. It's more like maybe $10 million a quarter year-over-year when initially we thought it was more like $5 million to $7 million. Now part of that is our 1031 exchange business, which I mentioned in my comments. We have about $3.9 billion currently in that off-balance sheet portfolio earning about 170 basis points on that. We've been fairly consistent in terms of balances in that business. It's a very strong business for us. So we earned about $15 million in the quarter. And I would expect that to probably go up a little bit in Q3 and then maybe a little bit more in Q4. There was, as you probably recall, we get a onetime dividend from title plant investments in Texas each second quarter. So it's in this second quarter. It's also in the prior year's second quarter of about $4 million. So that will come off in Q3. And so interest income probably comes down a couple of million maybe in Q3 and then maybe bounces back up in Q4 to kind of what we delivered in the second quarter. Hopefully that helps.

Our next question will come from the line of Mackenzie Aron from Zelman & Associates.

First question, can you just give us some more color and an update on the real estate tech investments and what's flowing through the revenue on the corporate side? Seems like it was another strong quarter from the revenue as well as the pretax income.

I'll give you the numbers on the revenue and the pretax. Really, of the $161 million that we saw in the corporate segment, a lot of that is seasonal revenue on our brokerage side, which we've talked about before. And so we had about $133 million in brokerage revenue of that $161 million. The technology revenue is growing, but it's not nearly as seasonal so about $26 million on the real estate technology revenue. In terms of pretax, brokerage made about $7 million, technology made about $4 million and then of course, the corporate expenses that we have in that segment, including $11 million in interest expense, kind of offset that. So we delivered a $17 million pretax loss, which was actually better than we anticipated. We were thinking somewhere in the low 20s. So a little bit better profitability in that segment this quarter.

And this is Randy. I can take the real estate tech side of that. Our Commissions, Inc. company, again, is doing very, very well. We've got good referral activity coming into Commissions, Inc. from our sales reps and the FNF brands. The revenue growth year-over-year for Commissions, Inc. is 30% on their software. They've got an additional 30% clients boarded on their platforms. So that's coming on very well for us. In our Real Geeks company, about 20%, 25%, 30% growth in that company and a revenue growth of 63% year-over-year. So they're maturing. We're creating some additional software solutions, bringing these companies together to build out the end-to-end technology platform we've been looking for. We're involved with integration with our operating system. So revenue is growing and we're progressing nicely.

Okay. That's helpful. And then just looking at the purchase orders and the closing trends, looks like you guys are growing maybe stronger than what the overall market or at least what one of your peers has reported so far on the order side. Is there anything to call out from either a geographic mix or whether any recent M&A that's flowing through there?

Mackenzie, it's Mike. A little bit of it is the M&A, maybe 0.5% or so in terms of the growth. But we really saw some strong performance, particularly in the Midwest markets and our Southeastern markets, Texas and Florida, in the quarter. Some of the Western markets were stronger in the first quarter and have come off a little bit in the second. But it's really been more, as I said, the Midwest and Southeast.

Our next question will come from the line of Jason Deleeuw from Piper Jaffray.

Just looking to get an update on a good number for the corporate expense run rate going forward. There was the outperformance this quarter. So just any help you can give us on what we should expect going forward.

Yes, Jason, this is Tony. I would say that the third quarter -- I mean, we do have our strongest quarter probably of the year in brokerage in Q2 -- but the third quarter should be pretty strong as well. I would anticipate somewhere in the $20 million loss range in the corporate segment. So we'll continue to see improvement on the real estate tech side. Brokerage ought to be close to where it is, maybe down a little bit. And the corporate expenses are pretty stable for the most part. So Q3 should look more like $20 million. And then we do see a seasonal falloff in brokerage in Q4. So I would expect that, that may get closer to kind of the mid-20 number.

Got it. And then there's -- you had talked before about building the end-to-end real estate transaction platform, and you already have some of those pieces in place. Can you just update us on the strategy there? Is the investment thesis, is it still the same? Is it playing out? And do you think you'll need additional tech investments to kind of see the strategy through?

Well, yes, this is Randy. We're -- I think as Bill had mentioned in the last -- probably the last couple of earnings calls, that this is going to take a little time. As I had already mentioned, we're developing out the platform. We've got integration going between the 3 companies and our operating system. So we're still in that process of pulling this all together to where you have a seamless end-to-end technology solution for elite teams of realtors and agents that would take the process and the same system all the way from lead generation to the sale, to the close and to post-closing solutions. So that's the strategy. It's underway. We may, along the way, we look at other opportunities to fill in some additional software solutions into the process.

However, it's not a short-term play. This will take a little bit of time to develop. Not only does it provide that solution and endears ourselves to these -- to our potential real estate customers, but it gives a nice offering for our title reps, our title operations, to come into the relationship with the real estate side of the market at a much higher level. So there's a few different strategies in play here. One to develop the system, one to put the title in a better position with our real estate agents.

Got it. But just to be clear, it sounds like you may not have all the pieces. So it sounds like it's an evolving strategy still, so there -- maybe there's other activity as you kind of build out the platform.

Yes. I think that, that's correct. This is going to continue to evolve.

Our next question will come from the line of John Campbell from Stephens Inc.

Just back to the buybacks. If the Stewart deal, if we just assume it's blocked, you guys would obviously be sitting on a pretty big position of accumulated cash. So just curious about the direction you might take, just assuming that Stewart is a no go. I mean, is it some type of accelerated kind of buyback plan or is it a larger kind of independent or regional title company that you guys might look to do?

Yes, well, as you probably saw in the release yesterday, we did have an expiring authorization. So our board met yesterday and re-upped that. So now we have a 25 million share authorization. And yes, if for some reason we weren't able to close on the Stewart transaction, then kind of it puts a lot of different things on the table. We have a very low leverage at sub-13% debt-to-cap. We have cash flow generation that's still very strong. We have cash on balance sheet that, of course, will accumulate between now and when we would expect to close Stewart. So yes, I mean, we pay a dividend, and we typically look to increase that dividend in the fourth quarter every year. And that consumes about $325 million or so in cash annually, but we would still have a lot of dry powder as I just noted. To the extent -- I mean, we probably revisit other acquisitions that we've done kind of over the last 3 years in terms of smaller agents, but there'd still be plenty of cash to be aggressively in the market on the buyback, and I would expect us to do just that.

Okay. And then eliminating the rest of the convert next month, that obviously is kind of indirect buyback for you guys. What was the share count reduction that's cleared?

So currently in our diluted share count are just about 1 million shares in the second quarter. And year-to-date, we have about 2 million shares related to the convert that's still outstanding. We have about $40 million in principal outstanding, which will take about $120 million to retire that during the third quarter. And once that's gone, then we won't have that dilution in our numbers anymore.

Okay. And then last one for me. In the title business, the escrow line, it looks like that's grown faster than title premiums, I guess, the last 3 quarters. What's driving that? Is that sustainable? And then any kind of color on the margin that comes out of that escrow line?

From my recollection, our escrow fees are running pretty consistently with title, the title premium number. So 4-ish percent that I saw growing there. So then you get into kind of other areas. And in there, as you know, we've got a lot of different things. We have FNF Canada. We have a number of ServiceLink businesses. I would say LoanCare is a big driver of that. We have valuations in that. We have field services in that. We have home warranty in that line item. I'm trying to think of what else. But there are a lot of bits and pieces, option in that. But I would say, for the most part, I think growth is fairly consistent, maybe a little bit stronger than what we see on the title side. But you ought to probably see or expect to see more of the same, with maybe just a little bit more seasonality. So Q2 and Q3 might be a little stronger than 1 and 4.

(Operator Instructions) We have a question from the line of Geoffrey Dunn from Dowling & Partners.

Randy, can you -- I wanted to just dig into a little bit of the -- I think you mentioned that the June drop-off in open orders was refi driven. So can you give us an idea of purchase opened per day for the 3 months in the quarter as well as refi just to see how those results trended?

Sure. The purchase open, as I think Mike has said, was in July, the first 9 days of July -- of course, we had a holiday in the middle of the first week -- are running -- the overall orders are running flat with June at about 7,700. On the purchase side, we're up 1% so that's holding well. April and May, we're running -- the number here -- April and May, we're consistent and we're off slightly in June. So June and July are running at the same level. Again, it's very early on in July so we'll -- but we're optimistic. The volume in -- as Mike had said in the Midwest and Texas, they're running over 80% mix of business towards the purchase side. In California in the West is still running at that sort of 72% level. So we think that's going to continue through July, August and into September.

All right. I'm not sure I completely followed that. So purchase was consistent kind of April through early July or it dropped off a bit in June?

It dropped off in June and is holding in -- 1% up in July.

Okay. And then with respect to refi, was it a big drop off in June or a consistent slide through the quarter?

No, pretty consistent. In fact, refi has been consistent the last 4 or 5 months, a little over 2,000.

Yes. It's been flat for the last 3.5 months. It fell off a bit from the first quarter as rates moved up a little bit as you recall.

Got you. Okay. And then with respect to the 1031 business, Tony, is there anywhere to see those off-balance sheet assets, stat filings or anything?

No. There really isn't. As I said, they've been pretty consistent at anywhere from kind of, oh, $3.5 billion to $4.2 billion. It's been a strong business for us for a long time. So that isn't a number that moves around a whole lot. And we continue to work with our banks to take advantage of rising rates. And so we're -- that's kind of an ongoing process. But no, there really isn't anywhere to see those, but you could kind of use $3 billion and $3.25 billion or so of a balance and assume that 170 basis points currently. And we kind of -- we stay close to that. And to the extent we continue to see short-term rates rise, we're going to get benefit on that.

All right. And on that short -- basically, a short-term deposit rate, are you sharing any of the interest yield with the 1031 customer or do you take the whole thing?

Yes, the customer gets some. They get a small portion of that.

Of the 170 or 170 is your net?

170 is our number.

Thank you. At this time, I have no further questions in queue.

The second quarter was our strongest financial performance in 15 years for our title business. We also continue working through the regulatory process with the Stewart Title acquisition and believe this transaction will create meaningful long-term value for our shareholders. Thank you for joining us today.

Thank you. That does conclude our conference for today. Thank you for your participation and for using AT&T Executive TeleConference. You may now disconnect.