Fidelity National Financial Management Discusses Q2 2012 Results - Earnings Call Transcript

About: Fidelity National Financial Inc. (FNF)
by: SA Transcripts

Fidelity National Financial (NYSE:FNF) Q2 2012 Earnings Call July 24, 2012 11:00 AM ET


Daniel Kennedy Murphy - Senior Vice President of Finance and Investor Relations of Fidelity National Financial

George P. Scanlon - Chief Executive Officer

Anthony J. Park - Chief Financial Officer, Principal Accounting Officer and Executive Vice President

Raymond R. Quirk - President


Bose George - Keefe, Bruyette, & Woods, Inc., Research Division

Mark C. DeVries - Barclays Capital, Research Division

Brett Huff - Stephens Inc., Research Division


Ladies and gentlemen, thank you for standing by. Welcome to the FNF 2012 Second Quarter Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to our host, Mr. Dan Murphy. Please go ahead, sir.

Daniel Kennedy Murphy

Thank you, and good morning, everyone, and thanks for joining us for our Second Quarter 2012 Earnings Conference Call. Joining me today are George Scanlon, our CEO; Randy Quirk, our President; and Tony Park, CFO. George will begin with a brief strategic overview and provide an update on the title business and our other operating companies, and Tony Park 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 George Scanlon.

This conference call may contain forward-looking statements that involve a number of risk 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 through webcast at our website at It will also be available through phone replay beginning at 1 P.M. Eastern time this afternoon through July 31. The replay number is (800) 475-6701 and the access code is 253284.

Let me now turn the call over to our CEO, George Scanlon.

George P. Scanlon

Thanks, Dan and good morning, everyone, and thank you for joining us today. Our second quarter results built upon the momentum we generated in the first quarter of this year. Refinance volumes have been very strong, but we're also seeing an improving residential resale market as those purchase orders are up nearly 6% for the first 6 months of 2012 versus the same period in 2011.

I will speak more specifically about the title business after a brief strategic overview.

During the quarter, we completed the acquisition of O'Charley's and the consolidation of O'Charley's into American Blue Ribbon Holdings. FNF now has a 55% owned restaurant group for a total cash investment of approximately $110 million with $1.25 billion in annual revenue, $65 million in current annual EBITDA and an expected $20 million in additional cost synergies.

Our focus is on integrating the various operations, achieving our targeted synergies and moving the O'Charley's margins closer to those of ABRH.

To that end, we have closed 14 underperforming O'Charley's locations since the acquisition, made several management changes, switched advertising agencies and are in the process of evaluating several other significant cost savings opportunities.

We look forward to reporting on our integration process over the coming quarters.

In June, we announced the proposed acquisition of J. Alexander's for $72 million. Last evening, J. Alexander's announced the expiration of their "go shop" period and that 2 written proposals were received for potential alternative transactions.

While J. Alexander's completes their process, we remain very interested in consummating the transaction and believe that our offer provides a compelling value for J. Alexander's shareholders.

The transaction requires J. Alexander's shareholder approval and should our offer be accepted, we expect to close the acquisition in the fourth quarter of this year.

We completed the sale of an 85% interest in our personal lines business in May for $119 million in total proceeds. We believe we can successfully redeploy this capital into nonregulated opportunities with higher growth and more consistent return potential, thus creating value for our shareholders.

In the short term, we used the bulk of the proceeds to pay down our credit facility borrowings.

Also Cascade Timberlands recently signed a definitive agreement to sell its land holdings to a third party for $90 million. We recognize approximately a $6 million asset impairment based on Cascade's signing of the definitive sale agreement.

The transaction is subject to certain closing conditions. Upon satisfaction of those conditions and a proposed late third quarter closing, Cascade can declare a dividend for the sale proceeds and begin the process of winding down the company.

FNF owns 70% of Cascade Timberlands and we expect approximately $40 million in after-tax cash proceeds assuming that we are able to close the transaction.

Finally, we reinstituted our stock repurchase program near the end of the second quarter. In late June, we repurchased 135,000 shares for a total cost of just over $2.5 million.

As we have in the past, we will continue to assess share repurchase as a potential use of capital in the future.

Let me now provide an overview of our results of operations. We are very pleased to report strong second quarter results that clearly highlight the significant operating leverage in our title insurance business. We saw across-the-board improvement in our direct agency and commercial operations. Our intensive focus on managing claims cost more efficiently has continued to provide savings and our lower claims cost are helping to drive improved cash flow and a stronger balance sheet. While the overall real estate market remains challenged, we are proud of our results in the ongoing efforts of our employees to deliver high-quality services in a cost efficient manner.

We're also excited to report initial operating results for our newly consolidated restaurant group. These results only reflect a partial quarter and we look forward to providing investors improved transparency into our restaurant operations in future quarters as we continue our successful integration.

Reflecting the strong operating leverage in the business, title pretax earnings of $192 million increased more than $48 million or 34% versus the second quarter of 2011. And the title pretax margin of 14.4%, grew by 280 basis points over the prior year period and 370 basis points sequentially from the first quarter of this year.

This quarter's excellent title margin performance represents our best quarter since 2005 and is even more impressive considering we are operating in a market in 2012 that is 40% the size of the 2005 originations market.

The severe market correction has compelled us to drive more efficiencies and agility into our operational structure and positions us for expanding margins as the market and mix of transactions eventually improves.

Our commercial title business continued to perform well as revenue of $98 million grew 4% over the second quarter of 2011 with 19,700 commercial orders opened, 12,500 commercial orders closed, and a fee per file of 7,900.

Overall refinanced volumes are very strong. Commercial continues to perform well and we are starting to see some improvement in the residential resale market.

Open order accounts were stronger during the quarter, growing 30% over the prior-year quarter and gaining momentum each month.

Overall, open orders averaged more than 10,400 per day for the second quarter with April averaging 9,600; May 10,400 and June, 11,300.

The first 2 weeks of July have averaged approximately 11,000 orders per day with the second week at 11,300 open orders per day continuing the strong open order trend as we entered the third quarter. Not surprisingly, the mix of second quarter business was weighted toward refinance orders as 62% open orders and 60% of closed orders were refinance related.

Refinance orders were strongest in the month of June comprising more than 65% of open orders that month. At ServiceLink, 40% of second quarter open orders were HARP refinance transactions. While refinanced transactions are grabbing the headlines, we also saw a 7% increase in purchase orders open in the second quarter versus the prior year period.

We are cautiously optimistic that this activity may signal the beginning of a slowly improving residential resale market. We are confident in further margin expansion as we experience continued improvement in the residential real estate market.

We began recording results in our restaurant group segment in 2 steps during the quarter. O'Charley's operating results were included beginning April 9. We began consolidating American Blue Ribbon, which includes O'Charley's, on May 11.

The third quarter will mark the first full quarter of financial results from the consolidated restaurant group. Total operating revenue was $253 million for the restaurant group for the partial second quarter with adjusted EBITDA of $11.3 million and an adjusted EBITDA margin of 4.5%.

The adjusted EBITDA excludes $9.9 million in acquisition and restructuring expenses related to the O'Charley's acquisition and the American Blue Ribbon consolidation.

It also excludes a $71 million gain on that consolidation of American Blue Ribbon as accounting rules required us to mark the investment to market upon consolidation.

For the entire quarter, same-store sales increased 0.5% at the legacy American Blue Ribbon concepts and were essentially flat at the legacy O'Charley's concepts.

Average check per guest averaged more than $10.50 at legacy American Blue Ribbon and nearly $14 for the O'Charley's concepts, both 2% increases over the prior year period.

In future quarters, we expect to discuss the restaurant operations in 3 areas: Casual dining, which will include O'Charley's, Ninety Nine and Max & Ermas; family dining, which will include Village Inn and Bakers Square; and upscale dining, which currently includes Stoney River Legendary Steaks.

We also have 2 primary minority owned subsidiaries which we do not consolidate in our financial statements.

Overall, we recognized $2 million in earnings from these equity method investments.

Ceridian's first quarter revenue up $368 million was a 3% decrease from the prior year quarter while EBITDA was $90 million, a 25% EBITDA margin versus 22% in the prior year period.

Our 33% share of Ceridian's quarterly loss was $1.6 million.

Ceridian also recently entered into an agreement to extend the maturity of $1.8 billion of existing 2014 term loans to 2017.

The net effect was to extend the debt maturity profile from 2.8 years to 4.4 years.

2014 maturities were reduced from $2.1 billion to approximately $300 million.

The remaining maturities are in 2015, 2017 and 2019, providing Ceridian with the balance sheet flexibility to continue to improve financial performance as the economy expands over the next several years.

For the 3 months ended May 31, Remy generated revenue up to $298 million, a 3% decrease from the prior year while EBITDA was $31 million and EBITDA margin of 11%.

Our 47% share of Remy's quarterly earnings was approximately $2 million.

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

Anthony J. Park

Thank you, George. FNF generated $1.7 billion in revenue in the second quarter, compared to $1.2 billion in the second quarter of 2011 as title revenue grew by approximately $180 million and the newly consolidated restaurant group contributed approximately $253 million in operating revenue for the quarter.

Net earnings were $147 million, compared to net earnings of $80 million in the prior year and cash flow from operations was $238 million versus $53 million in the second quarter of 2011.

The title segment generated $1.4 billion in operating revenue for the second quarter, a 16% increase from the second quarter of 2011.

Direct title premiums grew by nearly 20%, driven by a 30% increase in closed orders and a 5% decrease in the fee per file.

Agency premiums increased by 7% over the prior year, trailing the direct premium increase as the increase in refinanced order volumes is generally more direct than agent driven.

Agency profitability grew as the second quarter agent split improved by 185 basis points over the prior year to 76%.

The second quarter agent split was virtually identical to the first quarter of this year.

Title segment personnel costs increased by $58 million or 15% versus the second quarter of 2011, and other operating expenses grew by $39 million or 16%, while open and closed order volumes grew by 30%.

As I just mentioned, the agent split improved by nearly 1.9%. The net effect was a 14.4% pretax title margin, excluding realized gains and asset impairments, an increase of 280 basis points versus the second quarter of 2011 and a sequential increase of 370 basis points versus the first quarter of this year. Both clear reflections of the significant operating leverage in our title business.

Debt on our balance sheet decreased sequentially by $114 million from the first quarter of this year as we repaid $200 million on our credit facility during the second quarter, leaving an outstanding balance of $50 million on our credit facility.

Offsetting this decrease, was the addition of $85 million of debt from the consolidation of the restaurant group. There is no guarantee on that ABRH debt.

FNF long-term debt continues to consist of the $816 million in senior notes due in 2013, 2017 and 2018.

Our debt to total capital ratio was 19% at June 30.

Total title claims paid were $101 million during the second quarter, in line with our expectations and a decline from the $148 million paid in the second quarter of 2011.

Our reserve position remains within a reasonable range of our actuarial estimates and we expect to provide for future claims at a 7% provision level for the remainder of 2012.

Full year 2012 claims paid are expected to decline versus 2011 as we move further away from the larger loss years of 2005 through 2008 and continue to see encouraging results from the 2009 through 2011 policy years.

We recorded a $10.8 million claims recoupment loss impairment in the second quarter. A number of years ago, we received financial participation in a commercial project as recoupment of a title claim.

That project is no longer viable so we had to write off the asset through claim loss expense line item.

Finally our investment portfolio totaled $5 billion at June 30, an increase of approximately $200 million from March 31. From a regulated standpoint we have $1.8 billion in statutory reserves, $1.6 billion in regulated cash and investments, and $560 million in secured trust deposits, for a total of nearly $4 billion in regulated cash and investments. From an unregulated perspective, we have $500 million in minority equity investments in Ceridian and Remy, and approximately $400 million in unregulated cash and investments, for a total of $900 million in unregulated cash and investments.

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

Question-and-Answer Session


[Operator Instructions] Our first question comes from Bose George of KBW.

Bose George - Keefe, Bruyette, & Woods, Inc., Research Division

The first question I had was just on the title margin. I was wondering if you could provide some help on how we could think about the potential benefit to the margin as the mix starts shifting towards purchase.

George P. Scanlon

Bose, this is George. We're still in a very heavy refinance mix right now, but we generate twice as much revenue per resale transaction as we do for a refinanced transaction. So we would expect incremental margin growth on those resale transactions as they change. So all else being equal, if you reversed the weighting today to 65% resale, 35% refi, we would expect to achieve higher margins.

Bose George - Keefe, Bruyette, & Woods, Inc., Research Division

Okay, great. And then I'll ask just a couple of things, just on the other businesses. After the sale of Cascade, are all the revenues at the corporate segment level going to be gone?

George P. Scanlon

No, we've got some small real estate operations that are included in the corporate segment; not material to the overall results, but they still will be ongoing.

Bose George - Keefe, Bruyette, & Woods, Inc., Research Division

Okay. And is that just like -- in terms of our modeling, just a few million a quarter or?

George P. Scanlon

Probably, mid teens. Tony is that...

Anthony J. Park

Yes, I would say $10 million to $15 million in revenue, but in terms of operations, it's pretty immaterial. I would say that roughly a run rate of $20 million to $25 million cost associated with that corporate segment per quarter is probably a good way to model it.

Bose George - Keefe, Bruyette, & Woods, Inc., Research Division

Okay, great. And then just -- lastly just on the J. Alexander merger. I just wanted to make sure I understood what you're doing with the spin of ABRH on NASDAQ. Just wanted to see if you could walk through that?

George P. Scanlon

Well, essentially, we're offering the J. Alexander shareholders $12 per share of value, 50% payable in cash, 50% in the form of a $3 cash payment, and the balance in equity of the combined entity. And it's a reversed merger effectively and when the transaction is completed, those J. Alexander shareholders would own 6% of a public traded company that would take the J. Alexander revenues from about $150 million, $160 million, up to about $1.4 billion.

Bose George - Keefe, Bruyette, & Woods, Inc., Research Division

Okay. And at that point, would that entity reflect all your restaurant holdings?

George P. Scanlon

It would and the FNF ownership of that entity would be about 52% in total.


Our next question comes from Mark DeVries of Barclays.

Mark C. DeVries - Barclays Capital, Research Division

First, I have a follow-up question on the margin. Are you seeing any kind of difference in loan size purchase versus refi that might impact that kind of normal relationship of generating kind of twice the revenue on a purchase that you do on a refi?

George P. Scanlon

No, we're not seeing any meaningful change in that, Mark. It's always been the case that it's been about twice as much. Obviously, that's affected by real estate values, by the size of the loans that are involved. So we think there's upside down the road as real estate stabilizes and begins to even modestly appreciate, but our expectation is that those incremental dollars fall to the bottom line and there's more to fall to the bottom line. So we think we can get into the high teens margins when we do get that rebalancing and obviously in the market today, while it's heavily weighted toward refi, we are encouraged by the 7% pickup in resale transactions that we saw in the second quarter and 6% year-to-date.

Mark C. DeVries - Barclays Capital, Research Division


George P. Scanlon

Still have long ways to go though.

Mark C. DeVries - Barclays Capital, Research Division

Got it. And I'm sorry I missed it earlier when you -- what percentage of the refi volume did you say is coming from HARP?

George P. Scanlon

Well I think in total, probably about 15%, approximately.

Mark C. DeVries - Barclays Capital, Research Division

Okay. Is that building momentum right now or...

George P. Scanlon

It is and our expectation for the second half is that it will be stronger than it was in the first half. It's very customer specific, so as the major banks are reaching out to their customers, some have been going faster than others, but I think overall, our expectation is that HARP volumes will increase in the second half versus the first half.

Mark C. DeVries - Barclays Capital, Research Division

Okay. And then finally assuming you do close J. Alexander, what are your expectations for the revenue and EBITDA contributions from that?

George P. Scanlon

Well, right now, if you look at J. Alexander, they're about $160 million in revenue, round number is about $10 million in EBITDA. Our expectation upon the completion of the acquisition would be to achieve additional synergies, would be to put it in our upscale dining concept segment with the Stoney River Steakhouse business. And it's a well run operation, high-quality food and service. It's got a few underperforming locations, but overall, is a concept that we're excited about and we think would make a nice addition to our portfolio.


Our next question comes from the line of Brett Huff of Stephens.

Brett Huff - Stephens Inc., Research Division

One, people have been asking about the margin, I want to dig in one more on that. 14.4% is a really nice margin given that we're not really in resale land yet. And as we look to 2Q, presuming that the refis continue to come in nicely and kind of the resale trends continue reasonably the same, is there anything that you see in 3Q that should change our view that the margin should be similar for 3Q versus 2Q?

George P. Scanlon

Brett, this is George. I'll have Randy add some color, but I would say that based on the inventory buildup that we saw in the second quarter, which will convert into revenue in the third quarter, we would see very similar performance. Commercial can be a little unpredictable in the third quarter and deals can slip into the fourth quarter, but outside of that, I think both on the refi and resale side, we feel pretty good about our visibility and think we could have another very good quarter.

Raymond R. Quirk

Yes, I would agree, George. We had real good openings in the second quarter. So we should have strong closings in the third quarter both on the refi and we should have some pick up on the resale closings also in the third quarter. So in commercial, again, our commercial group has indicated real strong momentum in really all the national markets. So the margins should be in the same ballpark.

Brett Huff - Stephens Inc., Research Division

Okay. And then I think somebody before asked about restaurant contributions or revenue and EBITDA. When we think about the debt that's going to be on it, et cetera, et cetera, just roughly what kind of contribution do you all see from that on the net income line? I mean is it going to be breakeven? Or kind of give us just a rough ballpark in your view.

George P. Scanlon

Well I would expect it to be positive, Brett. This quarter is not a good indicative quarter because it's a partial quarter on the revenue and EBITDA side and there is still some noise in terms of costs associated with the integration. We'll see some of that noise continue into the third quarter and we should start to see the realization of the synergies end of third quarter into fourth quarter. So I would expect a positive earnings contribution from restaurant, but I think realistically it's probably into next year before we get into more of a normalized financial reporting and a stronger run rate. As we've said, we're targeting $20 million of synergies. Our expectation is to achieve about $8 million of that this year. And clearly the focus in the integration of the 3 different concepts from O'Charley's is on the O'Charley's concept, which represents about $500 million of the $8 million -- $800 million of revenue that we acquired. Stoney River and the Ninety Nine restaurants have had very consistent performance and do not require, frankly, much work on our part, so we're spending disproportionate time on the O'Charley's restaurants, which have been the underperformers. And that's where we see the most upside opportunity. Obviously, in the meantime, the other ABRH concepts continue to move along. We continue to invest in the stores and update the interiors and exteriors and continue to outperform our competition as we see it.

Brett Huff - Stephens Inc., Research Division

On the recoupment issue, just to make sure I understand, so the timeline on that -- this is really a resolution to something -- a claim that happened many years ago. So it's no real reflection on current claim trends, correct?

George P. Scanlon

That's correct, Brett. It's just -- we took back equity in a failed project and ultimately did not realize what we had hoped to realize in the recovery. And as a result, we took that $10 million hit this quarter.

Brett Huff - Stephens Inc., Research Division

Are there any other items like that in your portfolio of reserves or is this a fairly unique situation?

George P. Scanlon

This is pretty unique, Brett. We have, I think, one other one that I know of. It's a property that is marked to value, or is supporting or holding its value, but other than that it was unusual. This took place all the way back in late 2006. I think the other one was a similar timeframe. Generally, our recoveries are more in -- we do take some real estate back, generally dispose of that pretty quickly. Most of our recoupments are in cash and then on occasion, we will have an investment like this, but this is pretty unique.

Brett Huff - Stephens Inc., Research Division

And then last question, just a fee per file outlook. It was a little bit better than we expected this quarter. It sounds like that might have given the refi strength, we're just trying to figure that out. Any thoughts going forward?

George P. Scanlon

Yes, Brett we don't try to guess at the fee per file. As you know, we don't provide guidance. So we would think that over time, obviously as the resale mix improves, that we would see an increased fee per file, but we're very happy with the way it's holding up and hope it continues.

Brett Huff - Stephens Inc., Research Division

And I guess, last question. Have you guys thought about sort of normalized earnings? And I think you'd sort of laid out a situation where maybe the market is a little bit better overall than this in terms of dollar volumes, but the mix is flipped. You've talked about high teens pretax margins and title in that scenario. Any thoughts on what a more normalized EPS run rate would be in your calculations?

George P. Scanlon

Brett, it's so hard to say what normalized means. I mean, I think we're realistic about the world we live in and we look at the MBA forecast or the Fannie Mae forecast and obviously they're projecting a shift in mix between resale and refi starting next year. What we all need to see is resale to continue to strengthen and in a more meaningful way. What we do know is we don't need a $2 trillion market to make a lot of money. And our EPS will grow as that mix shifts and again, as we get into the high teens margins, that $2-plus per share target is achievable and I think we've worked hard over the last several years to, frankly, position the organization to take incremental profit on a modest uptick in revenue. And I think you're seeing that in the numbers this quarter.


[Operator Instructions] We have no additional questions. Please continue.

George P. Scanlon

Thank you. This quarter clearly highlighted the significant operating leverage in our title business as our 14.4% pretax margin grew by nearly 280 basis points over the prior year and 370 basis points sequentially from the first quarter of this year.

We also began consolidating our restaurant group and look forward to reporting on our margin improvement progress over the coming quarters. Thank you 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.