Ladies and gentlemen, thank you for standing by. And welcome to the FNF 2018 Third 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, Dan Murphy. Please go ahead.

Thank you. Thank you for joining us this afternoon for our third 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 your 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. This conference call will be available for replay via webcast at our website at fnf.com and will also be available through phone replay beginning at 3 p.m. Eastern Time today through November 1. The replay number is [800] 475-6701, and the access code is 455027. Let me now turn the call over to our Chairman, Bill Foley.

Thank you, Dan. The third quarter was another solid performance for our title business as we generated adjusted pretax title earnings of $297 million and a 15.6% adjusted pretax title margin. I'll let Randy go into more details on the title business. On the capital allocation front, we used $82 million to pay our September common stock cash dividend of $0.30 a share. We issued $450 million of 4.5% 10-year senior notes in August and used the majority of those proceeds to repay the existing $300 million outstanding borrowing on our credit facility and $123 million to sell the maturity of the $40 million in the face value of convertible notes. Additionally, more than $300 million in combined underwriter and non-underwriter dividends were paid up to FNF, the holding company, in the third quarter. We also received cash proceeds of $43 million at closing from the sale of Pacific Union with some potential for future earnout payments in cash and stock of the acquirer. The net result was that we ended the quarter with nearly $600 million in available holding company cash. It's about the precise amount that we'll need to close the Stewart Title cash portion of the transaction when that transaction's ready to close. Additionally, with the recent weakness in the stock and our earnings blackout ending after the market closes today, we have decided to restart our stock repurchase program tomorrow at least 15,000 shares per day. We continue to work through the regulatory process for the Stewart Information Services acquisition that we announced on March 19. We are currently engaged in the Second Request related to the FTC's HSR regulatory review of the transaction. Responses to nearly all the FTC's request for information and documentation have been submitted. The Form A filings with the states of Texas and New York are being reviewed by those states. We have been approved by Canada and also the U.K. We still anticipate a first or second quarter 2019 closing for the transaction and continue to believe that the Stewart acquisition will create meaningful long-term value for our shareholders. I'll now turn the call over to Randy Quirk to discuss the title business.

Thank you, Bill. We generated adjusted pretax title earnings of $297 million, a $10 million or 3.5% increase over the third quarter of 2017. And our adjusted pre-tax title margin was 15.6%, a 30 basis point increase over the prior year. The commercial and residential purchase markets continue to be the main drivers of our performance in the third quarter as total commercial revenue grew by 8% versus the third quarter of 2017, continuing a very strong year for our commercial business. While residential purchase open orders per day increased by 0.3%, and residential purchase closed orders per day declined by 1%, this was offset by an 11% increase in the fee per file that provided 3% growth in direct title premiums over the prior year. On the refinance side, refinance orders opened declined by nearly 28% and closed refinance orders fell by 25%. For the third quarter, total opened orders averaged 7,200 per day, with July at 7,500, August near 7,200 and September at 7,000 per day. As I mentioned, purchase orders opened per day increased by 0.3 points for the third quarter, a moderate softening from the 3% to 4% growth of purchased orders we saw in the first 2 quarters of the year. For the first 3 weeks in October, total orders opened were 6,600 per day, and purchase orders opened per day declined by 3.5% over the prior year period. Additionally, refinance orders opened per day decreased 31% versus the prior year. As we enter the seasonally shorter, slower fourth quarter and then the first quarter of 2019, we have started making headcount adjustments to respond to the lower seasonal order volumes. During the third quarter, we did reduce headcount in our field operations by 278 positions or 2%. At September 30, we had approximately 900…

Thank you, Randy. We generated nearly $2.1 billion in total revenue in the third quarter, with the title segment generating nearly $2 billion in total revenue, and our Corporate and Other segment contributing $137 million from primarily real estate brokerage and technology revenue. On September 24, we did close on the sale of Pacific Union, and we expect our Corporate and Other segment revenue to primarily consist of our real estate technology businesses beginning in the fourth quarter. Adjusted pretax title earnings were $297 million, a $10 million or 3.5% increase over the third quarter of 2017. Adjusted net earnings were $218 million or $0.78 per diluted share. Excluding realized gains of $50 million due to the new mark-to-market accounting treatment of equity and preferred stock securities in our investment portfolio, the title segment generated $1.9 billion in total revenue for the third quarter, a 2% increase over the third quarter of 2017. Direct premiums increased by 3% versus the third quarter of 2017, and agency revenue was essentially flat. Personnel costs increased by 3%, in line with the 3% increase in direct title premiums. Other operating expenses increased by 5%. However, that includes a onetime $6 million sales tax contingency that was excluded from adjusted pretax earnings and $6 million in higher home warranty losses versus the prior year. Excluding those 2 items, other operating expenses increased by just 1% versus the prior year. All in, the title business generated a 15.6% adjusted pretax title margin, a 30 basis point improvement over the third quarter of 2017. Interest income of $48 million was a $16 million increase over the prior year as we continued to see the positive impact of higher short-term interest rates on both the interest we earn on the escrow funds in our 1031 exchange business…

Thank you. [Operator Instructions] Our first question comes from the line of Bose George with KBW. Please go ahead. Mr. George your line is open.

Sorry, I had the mute on. My first question is on investment income. Last quarter, you guys had that title plant dividend, the $4 million. So was there anything unusual this quarter? Or was it just the increasing strength of rates going up, et cetera?

Yes, Bose, there is one item in here that -- I mean, unrelated to title plant income, but it relates to our deferred compensation plan, which is a gross up of the balance sheet and also of the income statement. So it's a deferred comp. It's not our asset or our liability for that matter because it's fully funded. But any realized performance in that portfolio gets -- runs through our investment income. So we have $4 million of investment income. And again, as I mentioned, it was grossed up. So we also had $4 million of personnel costs. So it -- no pretax income impact, but it is a onetime item. And that'll show up periodically. It's really hard to model. I can't give you a number. But as that asset, I think, is probably a $150 million asset and liability on the books, as we earn earnings on that, it's going to flow through this line item. Other than that, the $48 million is pretty pure. We had a couple million dollars more in IPEX interest income relative to Q2 and a little stronger performance on our cash and short-term portfolio because of rising rates.

Okay, that's helpful. Thanks. And then actually on the Pacific Union sale, can you just remind us what the revenue and earnings contribution was from Pacific Union?

Sure. I mean, a couple different pieces. If you look at revenue from all of brokerage, we have about $97 million, with about $2 million in adjusted pretax. Pacific Union was the lion's share of that. They're probably $10 million of other brokerage revenue. So call it $87 million in Pacific Union. And the impact to the P&L, we did realize a gain of about $10 million, which we've carved out of our adjusted earnings, but we realized a gain of $10 million. And as Bill mentioned, we received cash of about $43 million with the potential -- with an earnout to receive more in the future.

Okay, great. Again, just one more. I don't know if you said this. But can you give us the order trends for October?

Yes, this is Randy. The order trends for October -- I'll run through the 3 weeks on all orders and on the purchase orders also. But on October 5, we opened up 6,800 orders per day; on October 12, 6,400 orders per day; and October 19, 6,500 orders per day. Actually, we got a little bit of a refinance lift in that last week. On the purchase side, which has been stepping down because of coming into the seasonal aspect of the year and somewhat of an influence with the interest rates. On the purchase side in October, October 5, we were at 4,250 per day; October 12, we were at 4,000 per day; and October 19, 4,000 per day. So it really held over the last couple of weeks. We just see a little softening. Again, we're starting a little bit early with the seasonal downturn. And we think the interest rates are somewhat of the culprit. Q - Bose George Okay. And actually, just off the top of your head, do you know how that is running year-over-year, the purchase?

We're up about 2 points. Mike, we're up about...

Yes.

It's a little over 2% year-over-year on the purchase open side.

Okay, great. Thanks a lot.

Thank you. We have a question from Mark DeVries with Barclays. Please go ahead.

I was pleased to hear about the resumption of the buybacks. Was hoping to get some color on how we should think about kind of capital returns post the closing of the Stewart deal. Should we expect the cadence of the buybacks to remain the same? Increase? Should we expect more kind of smaller M&A deals? Any color will be helpful.

Yes. I think that what you have to -- what we have to be cognizant of is that we're going to have about 12 months with Stewart Title of really integrating that company into the Fidelity system, and that's going to be our focus. And as -- and we're going to be -- there are going to be a fair amount of synergies coming out of Stewart Title. That will enable us, after probably the first quarter, which is always a kind of a cash-short quarter for us because of bonus payments, and we pay the dividend. And after the first quarter, that will allow us to really reevaluate the level of stock repurchases. I mean, my goal would be that we repurchase at least the equivalent number of shares that we're going to issue in the Stewart transaction over the next -- over the 12 months following that transaction. I mean, we obviously -- we have too many shares outstanding. We want to get that share count down, and we just want to make sure that we're in good shape to close Stewart when the time comes to close it. And right now, with the cash that we've generated over the last 8 or -- 8 months or so, we really have the cash in the bank to write the check on the -- for the cash portion of the purchase price and then the balance is stock. So we're -- our capital allocation going forward is really going to be dividend payments and stock repurchase, once we kind of get into the second quarter and start having the cash generation -- or the cash flow-generating capability that we normally have the last 3 quarters of the year. I hope that answered the question.

Yes. No, that's very helpful. Just one more question. Was hoping to -- if you can comment at all on what you're seeing from Stewart's franchise since the deal was announced. How well that's holding up? And what the implications are for the ability to kind of extract value from that deal?

We're actually really pleased with the way Stewart has responded, and the field has responded to our town hall meetings and our individual meetings with various managers. If you noticed, Stewart held their revenue in the third quarter and actually improved their margins. So we're going to get a bump from that. And so, we're really pleased with the way the Stewart employees and the Stewart corporate staff have responded to the acquisition. It's like they were kind of, had lost their way for a few years with, the board was a little bit dysfunctional, and they had some hedge funds that were, wanted, they wanted to sell their positions. So it didn't become the family company that it used to be. So we're really pleased with Stewart. They've got a 10% market share, and we think we can hold most of that market share and expand it, particularly on the agency side.

[Operator Instructions] We do have a question from the line of Jason Deleeuw with Piper Jaffray. Please go ahead.

I'm just wondering what the M&A impact was and the order count for the third quarter. And have we lapped that now? Or just remind us, is that still helping us in the fourth quarter or not?

Yes, this is Randy. The only real significant acquisition that came into the title side over the last year was really a Title Guaranty of Hawaii. And when you look at the purchase side of the transaction, we only included count because we closed the deal on August, September of last year. We only included their order count in last September. But when you get into October and have an apples-to-apples comparison, they're running 50, 60 purchase transactions a day. So the impact is really insignificant. There's, and there were really no other acquisitions through the year quarter-over-quarter that would impact the numbers much. We think, we're down to maybe about 0.5% maybe impact on that acquisition.

Yes. We really felt like after we started negotiating the Stewart transaction that we needed to slow down on the individual agency transactions/acquisitions. So we put a hold on that after Title Guaranty and really didn't buy anything because we have been engaging in these negotiations with Stewart. And we didn't want to have the distraction of having other companies come into the, other agencies come into the fold, become part of the Fidelity family, particularly while we were working on Stewart. So there's not going to be much going forward in terms of overlap.

And then the margins expanded this quarter, even we've had some slowing on home purchase and some additional slowing, it sounds like, for October. So how can we think, but you got the benefits of short-term rates going higher and commercial still pretty solid. So I mean, can we expect margins to still expand, especially since it sounds like there's some expense rationalization to come?

Well, I'll tell you that we go back into the fourth quarter and into the fourth quarter with expense management, like we've done so many times, we go back to our metrics. And a big part of that is the labor expense. So we had to eliminate 300 positions, so ballpark, in Q3. We're probably 3 weeks into October with another 60 people out. And we've got to continue that play as we go through the fourth quarter. We've set some target numbers, a little bit different in different parts of the country based on the way work is done and what the mix is. But, so we're going to protect margins as we go through the fourth quarter. As you know, our target is always 15%. We did 14.7% last fourth quarter. Commercial is strong. We're optimistic about a strong fourth quarter finish in the commercial world. So we just have to weather this, pretty much this seasonal issue that we come through. And again, like I said, we rely on our fundamentals and our metrics and just push through, like we have done so many times.

Okay. And then the last one, just remind us what's all in the real estate tech businesses right now. And what's the strategy for growth there?

Well, we have 3 companies, Commissions, Inc., which is a lead-generating platform for elite teams of realtors. We have Real Geeks, which is a lead-generating platform for elite individual agents. We have SkySlope, that is really a transaction management and digital transaction management solution for real estate brokers. We've had some good growth in all 3 of those. Combined, we're up 25% in terms of revenue year-over-year. They're holding at 20% margin. We'll be able to improve on that. And the strategy has to keep integrating those 3 companies with our SoftPro, our title and escrow system; and smartVIEW, our record storage system; and ultimately, have a lead to an ultimate close, single platform for top agents around the country. And as I believe you know, we have our qualified sales reps out referring business into these 3 companies. They've been very well received, and it kind of puts us at a different level with the relationship with the real estate brokers. So we're going to keep growing. There's integration still underway. It's not going to be overnight, but it's significant growth, and it's going to be sustained and sustainable growth.

Thank you. We have a question from Mark Hughes of SunTrust.

Thank you. Good afternoon. I just wanted to make sure I was clear on the daily order count, the year-over-year change through October. If I remember correctly, was that down 3.5%?

Correct. In October, just October over October, not year-to-date.

Right. And then the up 2% on the open side, was that year-to-date?

That was year-to-date on purchase.

Okay. Got you. All right. Thank you very much.

Thank you. [Operator Instructions] We have a question from John Campbell with Stephens, Inc. Please go ahead.

Hey guys, good morning. Back to Pacific union, I caught the initial cash payout. But what's the total possible consideration, including the contingents?

John, it's Tony. So we had $28 million in proceeds from the sale as well as another $15 million of an intercompany debt paydown. So we received $43 million. And then we booked another $9.5 million in earnout receivable, which is actually 35% of the total potential. So the total potential is actually another $27 million. But conservatively, we booked about $9.5 million as what our conservative expectation is on that.

Okay, and remind me again what was the ownership stake for you guys percent-wise?

62%.

Okay. And then just curious, why sell that now? What drove that decision? Was it just a good offer? Or any kind of color there?

Well, I think at the, what we really had, we had a manager at Pacific Union, who was ready to move on. And we didn't have the resources internally to run that company, and he developed this sale process with Compass. And frankly, we were booking a lot of revenue and getting very little pretax or after-tax earnings out of the transaction. We still have good relationships with Pacific Union. So our title reps, our escrow officers have good relationships. We'll still get other referral business, which is really kind of the reason we initially invested. And it just was a kind of a gross up revenue situation with very little net earnings back to the company. So we just thought it distorted our balance -- our income statement balance sheet.

That makes sense. And just Bill, maybe just a higher-level question. I know the real estate channel was important in the past as kind of a customer acquisition channel for you guys, and there's lots of synergy there. Do you still feel that's the case? Or is there other ways, other channels that you're looking at maybe getting a little bit bigger in?

We have a lot of different ideas. We're a little bit distracted by Stewart Title. We want to make sure that when we bring Stewart Title in, that we maintain the revenue base, and we can still get their margins up to our margin. So that's really our focus. We have some other ideas. I'd rather not go into them. We really want to build out this end-to-end platform in terms of dealing with our real estate and our consumer customers, so we become a consumer-driven company. And at the end of the day, we sell many other products and services out of our escrow closing transaction when someone buys a house. But it's a long process. We've got our own document prep company that's underway, that's being developed. It's going to be fully integrated from front to back. So we have a big vision. But big visions require big work. So, that's what we're doing.

Absolutely. Okay. Thanks, guys.

We have a question from Mackenzie Aron with Zelman & Associates. Please go ahead.

Just a quick one for me. I just wanted to clarify on the corporate segment, the go-forward run rate for the pretax income, what that should be for Pacific Union.

Yes, sure. This is Tony. We had $18 million in adjusted pretax loss in the current quarter, pretty consistent with Q2 at $17 million. If you look at the prior year and adjust for the -- an elimination that's down in disc ops, it was actually a $23 million loss. So we're improved by about $5 million there. I think that $18 million to $20 million is probably a good run rate, maybe even a little lower than that. Interest expense is $9 million or $10 million of that. And then we have the real estate technology, which is probably positive $4 million or $5 million, and then corporate makes up the balance. But I think anywhere from, I don't know, call it $15 million to $20 million loss is a good run rate for you.

Okay, perfect. And then apologies if I missed it earlier. But on the commercial, the average fee per file, how sustainable is that strong growth that we're seeing? And any color in terms of what's driving that?

Well, yes. It's interesting. In the quarter, we had, obviously, very strong growth. But we saw them, both the local and the national side. So it wasn't just lumpiness from a couple of large national deals. It was really very broad based. The other thing I would point out, if you're referring to the quarter-over-quarter, we had a fairly soft national average fee per file last year. That was the weakest quarter of the year. So the comp stands out a little bit more. But I would look at really the yearly numbers, where we're up more like 5%. Yes, I don't know that we'd see 16% quarter-over-quarter growth going forward.

Okay. Good to know. Thank you.

Thank you. We have no further questions at this time. Please continue.

Thank you. The third quarter was another solid performance for our title business. We also continue working through the regulatory process for the Stewart Title acquisition and believe this transaction will create meaningful long-term value for our shareholders. Thanks for being with 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.