Fidelity National Financial, Inc. (FNF) Earnings Call Transcript & Summary

Good afternoon, and thank you for joining us. I'm Barclays Consumer Finance analyst Mark DeVries, and I'm pleased to be joined by Fidelity National's President, Mike Nolan; CFO, Tony Park; and F&G's CEO, Chris Blunt. We'll be conducting a fireside chat, but we'll break it up with some polling of the audience, and we'll also have some time for any questions that come from you during the session. If you'd like to ask a question, you should have an option to enter on the upper left-hand side of your screen. Or you can try to e-mail directly to me, and we'll do our best to address your question in the time we have today. Before my first question for management, I'd like to lead off with a question for the audience. To participate, please click through to the polls on the left side of your screen. After you respond, you should be able to toggle back to the video of the discussion.

Turning to that first question for the audience, what do you view as the biggest catalyst for FNF over the next year? Better-than-expected purchase orders? Better-than-expected refinance orders? Better-than-expected commercial orders? Better-than-expected revenue per order? Strong performance from F&G? Or other? [Voting]

With that out of the way, let's turn to questions for management. Could you just give us an update on how purchase orders are trending so far this quarter? And refi as well and the outlook for both for the rest of the year?

Sure, Mark. It's Mike. The trends continue to be very positive really for both. We've continued to see just sequential improvement really every month since the kind of the fall off on the purchase side we had in April. But for the third quarter specifically, our resale order per day are up about 13% for the quarter. So July was plus 10%; August was plus 16%; and September, which is admittedly only 8 days, is up 12%. So that's very positive. And August was our -- at least at this point, our peak open order month for resale. Contrast that with last year when it was April. So we've really kind of seen a pushing out of that spring selling season into a summer season. Having said that, we would expect kind of seasonality to be coming back into play and that purchase orders would trend probably down a little bit, just like they do every year as you move into the winter months and into the first quarter. Similarly, on the refi side, very, very strong continued refi volume. We're up 19% sequentially from the second quarter, and we had a very strong second quarter. And quarter-to-date, we're up 85% over the third quarter of 2019. August was just a little bit over 8,000 orders a day, our second best month of the year. And I think as we continue through the balance of the year, I'd expect refi's to stay pretty strong. We might see some fall off on the open side. The closing activity should be very, very good in the third quarter and really even into the fourth. So I'll stop at that point.

Okay. That's helpful. Any update you can provide on what you're seeing on commercial trends so far in 3Q how the pipeline is looking for that business?

Yes. It's similar in some respects to what we've seen in the residential side, kind of this continued improvement in open order volumes since the lows of the pandemic. In July and August, we're about 6% ahead of July and August of last year for open orders per day. And our open number per day for July and August is actually above the full year 2019 average. And remember, 2019 was a record year. So we're essentially back at pre-pandemic commercial levels for open orders. And that was historic levels. So that's very, very encouraging. Having said that, we're still seeing more energy and improvement on the local side, which tend to be the smaller transactions versus national. I would say, overall, we're seeing less really large transactions vis-à-vis the past 3, 4, 5 years and similarly with the multi-sites are down as well.

Okay. And as far as the pipeline, are you seeing any kind of increase in activity in some of those larger national commercial deals?

We've seen some, but I -- it's hard to point to a trend. I think some of the local markets, for example, like New York, are still performing much softer than probably other parts of the country, and that's always been a very important commercial market. Still see good export activity out of New York, but it's still lagging prior years.

Okay. Got it. Another question for the audience here before we ask something from management. Next question for the audience. What is the biggest risk to shares that you see here? Weaker-than-expected-residential order count? Weaker-than-expected commercial order count? Weaker-than-expected in revenue per order? Credit losses in the F&G business? Or other? [Voting]

Moving back to you guys. What's your expectation for commercial fee per file over the coming quarters? It sounds like given the strength in -- sorry, in the local markets that they maybe remain a little bit depressed, is that kind of consistent with what you're expecting here?

Yes. I would think -- one way to think about it is that commercial fee per files should improve in the third quarter vis-à-vis the second quarter. And I would anticipate commercial revenue to improve compared to the second quarter, but it's still most likely going to lag last year. I think the fourth quarter could consider kind of having that same trajectory with kind of improvement from the third quarter, but still lagging prior year. And then hopefully, as we get into 2021, that could start to readjust. Again, I think the fact that the overall open order levels have returned to really kind of historic levels, I think, is very, very encouraging.

Okay. And if you -- have you been seeing, whether it's commercial or residential, any kind of change, maybe improvement in kind of the pull-through of open orders to close the orders as we've kind of moved through this pandemic?

It's pretty interesting. I certainly did not expect this when we were in the throes of the pandemic, particularly on the residential purchase side. I thought time to close would really lengthen. I thought cancellations would increase lower closing ratios, and it absolutely didn't happen. I mean our average days to close for residential purchase and refi is 45 to 50 days, very much in line with what we've seen historically. On the commercial side, I think we did see a little bit of a closing ratio dip in the second quarter, but that seems to be returning to kind of normalized levels. I think year-to-date, we're around 55%, kind of open to close, and that's just a little bit below kind of where we were last year. So that also seems to be normalizing as well. And we just haven't seen a lot of cancellations even on the commercial side.

Okay. And where did -- on the commercial, where did you see that open-to-close trough?

I would say it was really -- I have to look at my numbers, but probably more as we were in the second quarter with the kind of the throes of the shutdowns in April.

Okay. And would that have been more like well below the 55% you mentioned?

Well, I'd have to do the math. But I don't think it was even down that low.

Okay. Okay. That's helpful. Can you -- moving to the next question, can you remind us what the margins are on the refi product versus purchase and how staffing needs may differ? And then what is the margin difference for a centralized refinance transaction compared to the distributed refi?

Yes. This is Tony. I'll take that one. So I can't answer it exactly the way it's asked, but we certainly know the margin profile of our centralized process. And right now, with refi orders where they are with these kind of volumes, we're above 35% in that centralized service link processing channel, if you will. When we get to the distributed footprint of 1,300 offices, we don't cost account specifically for the product type. So we have the same folks working on refi and purchase and commercial or even if it isn't the same people, it's a blend of various personnel costs and operating costs and we don't break that down specifically. So it's a little bit challenging to figure out the margin profile of each of those pieces. I will tell you that our margins average anywhere from 20% to probably 25% on a pretax basis in those distributed offices. And again, they handle residential purchase, residential refinance as well as local commercial orders. On a revenue-per-file basis, the purchase orders are trending a little over $3,000 and the refinance are about $1,000 per order. So it's about a 3:1 difference if you look at the -- purely the revenue side of the equation.

Okay. That 3:1 is a little bit different than the 2:1, which I think has been kind of the -- at least how the revenue contribution has been historically explained. What's kind of driving that widening out, I mean.

Yes. I think it's trended up over time. I think at one point for us, it was closer to 2:1 and then it migrated to 2.5:1. And then even a year ago, I think it was about 2.8:1. But the refi number has not changed. It's $1,000. What we've seen really is -- and this could be home price appreciation or it could be mix-related, in other words, larger deals versus smaller deals. I'm not sure. But we've just seen a migration of, call it, $2,700, $2,800 per purchase order a year ago to $2,900 to $3,000 to $3,100. And it might be geography, a lot of things go into these simple averages. But you're right, Mark, we're definitely seeing a trend in that direction that the discrepancy has widened a little bit.

Okay. Yes. I mean you just mentioned maybe something close to about 35% margin on centralized and maybe 25% on distributed. Is it a similar earnings contribution? In other words, maybe a lower incremental revenue on the centralized, but you get to about the same dollar of earnings on a centralized than you would on a distributed refi?

So the dollars -- the fee per file is going to be the same. I mean ServiceLink is a national processing company. They're getting $1,000 and pocketing 35%. And on a local refi, again, it's hard to tell. I think the average fee is going to be very consistent. And it might vary a little bit by geography, but certainly, the averages are consistent at about $1,000. It's probably not quite as efficient because it's not a factory. They're doing different stuff. I think it's still very good margins. It's probably -- at these levels, I think it's probably mid- to high-20s, if I had to make a guess, and it is a bit of a guess, but it's still very, very profitable.

Okay. Great. Yes, turning back to a question for the audience. The next one is, what is the best use of excess cash flow here? Increase the dividend? Buy back shares? Delever the balance sheet, M&A or other? [Voting]

Next question for management I have. How long can we expect the boom to continue here if rates stay where they are? Can you just touch on kind of the addressable market for refis and the rate incentives needed to really maintain this strong market you're seeing?

Yes. It's an interesting question and probably one to really give a precise answer on. Black Knight does do an analysis. They put a mortgage monitor report, I've talked about that before. I think it's every other month, but they're -- their July report shows that at about 3% interest rate, there's still about 18 million candidates to refinance, which is a very high level, of course. Now we know they're not all going to do that, but it's still a very high level. And they -- I have the report here. I was looking at it. If rates go up, 1/4 point we'll call it, that addressable market falls by 13%; and if they come down by 1/8 of a point, it goes up 10%. So very rate-sensitive, of course. But it appears that rates are going to stay by anyone's guess, I think, right now, pretty low for the foreseeable future. We're opening more orders in the third quarter than we did in the second. And closing should be very, very strong. So I would anticipate that we have a very strong finish on the refi side. What happens next year, I think, is pretty tough to guess. I was looking back at Fannie Mae's forecast in September of 2019 for the refinance market for 2020, and it was $566 billion. So...

You did a little better than that, right?

Yes. It's going to be better.

It's going to be better than that.

We don't give guidance, but we're pretty sure it's going to be better.

Great. Can you talk a little bit about your expectations for margins for the back half of the year? As the mix shifts back to purchase volume in 2021, also what kind of impact will that have, if any, on your margin?

Yes. We had a great margin, obviously, in Q2 at 18.4% and even year-to-date at 16.5%. Very strong, and that's -- we've well documented. We've had really strong refi volume and improving a very steep V-shaped recovery on the residential purchase side and then commercial is coming back as well. So Q2 turned out better than expected, honestly, especially when we started out Q2, we weren't really sure how good it could be. We were worried about single-digit margins or worse. Obviously, with the cost cuts that we made and the volumes that we got, it was very good. We don't really try to provide margin guidance as we look forward. I will say that we're continuing to see strength in all areas. There's no reason why Q3 can't duplicate or improve upon Q2. And depending on seasonality, when that hits and how hard that hits, Q4, it's maybe hard to know. But I think the year is going to be very good. I'm comfortable in saying the year is going to be very good in the second half should be very good. And then as you get into 2021, again, we're guessing a little bit because we don't know what it looks like, I would expect, although no guarantees, I would expect refis to come down. I think they almost have to only because they've been so strong in 2020. But at the same time, I don't see why purchase has to come down, maybe purchase continues to grow and commercial continues to rebound. And 2021's probably another very good year. I just don't know how it'll stack up against 2020 because of the refi volume, which is a bit of a wildcard.

Okay. Given those comments, Tony, how are you thinking about the fee per file as we go into 2019? It sounds like do you get more of a purchase market and then you layer on top of that potentially continued home price appreciation that we should see the fee per file drifting higher in the coming quarters. Is that fair?

Yes, I think that's right. I mean Q2 was well off of what we've seen in the recent past because of the mix. There was so much refi volume that we closed in Q2. But certainly in Q3, with more purchase volume -- still strong refis, but more purchase volume, I would expect the -- and home price appreciation, I would expect fee per file to trend upwards. And then, of course, when you layer in a typical -- typically very strong Q4 commercial you always or almost always get a strong fee per file in the fourth quarter. So yes, I could see that trending upward. If you get into 2021, again, a lot of it's going to be driven by mix. We just talked about the wide disparity in fee per file between a residential refi and a residential purchase.

Yes. Okay. And can you remind investors kind of how home price appreciation impacts the average fee per file? Like what percentage of that makes it through to the higher fee?

Yes. Again, it varies a lot as pricing by state and sometimes it can be fairly dramatic from one state to the next. It is a sliding scale. It's not dollar for dollar. I would say it's probably $0.60 on the dollar or 60% ratio of home price appreciation that probably falls to the revenue number, if that makes sense.

Yes. Yes. So if product volume expectations are realized in 2021, how should we think about kind of staffing levels and expense management?

Yes. It's Mike. As always, Mark, we manage the open order activity. And that's what we did through the pandemic and as volumes have come back, we've had to add staff. I think we've added about 1,100 people in the third quarter so far. And we've got quite a bit of volume. As volumes start to shift, and if we see in 2021 that orders are falling off, then we'll make the necessary adjustments just like we have in the past.