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spk01: Hello, and thank you for joining the Steward Information Services first quarter 2024 earnings call. At this time, all participants are in a listen-only mode. Later, you will have an opportunity to ask questions during the question and answer session, and instructions will be given at that time. Please note today's call is being recorded. Last brief, you should require operator assistance. You may press star zero. It is now my pleasure to turn today's conference over to Kat Bass, Director of Investor Relations. Please go ahead.
spk00: Kat Bass Thank you for joining us today for Stewart's first quarter 2024 earnings conference call. We will be discussing results that were released yesterday after the close. Joining me today are CEO Fred Eppinger and CFO David Heise. To listen online, please go to the Stewart.com website to access the link for this conference call. This conference call may contain forward-looking statements that involve a number of risks and uncertainties. Please refer to the company's press release and other filings with the SEC for a discussion of the risks and uncertainties that could cause our actual results to differ materially. During our call, we will discuss some non-GAAP measures. For reconciliation of these non-GAAP measures, please refer to the appendix in today's earnings release, which is available on our website at stewart.com. Let me now turn the call over to Fred.
spk06: Thanks, Kat, and thank you for joining us today for Stewart's first quarter 2024 earnings conference call. Yesterday we released financial results for the quarter, which David will review with you. Before doing so, I'd like to share our thoughts on the current housing environment. I'll also provide updates on our core business lines and our continued progress on important initiatives that we believe will set Stewart up for long-term success. As I've noted previously, the housing market is bouncing along the bottom. From a macro perspective, this quarter was a continuation of what we had seen in the past several quarters. Mortgage rates remained elevated, hovering just below 7% during the quarter, which has prolonged the low transaction volumes our industry is facing. The combination of these factors, along with low sales inventory, yields an overall weak housing market. On previous calls, we shared our expectation that 2024 would be a transitional year for the industry, with 2025 seeing more normal volumes of approximately 5 million units for existing home sales. Following activity this quarter, we now believe the transition has been slowed, with much of the improvement pushed into 2025 and a more normal market returning in 26. I am pleased with our progress and our strategic priorities, and we continue to see share gains in most of our businesses. We remain focused on building an improved competitive position by being more efficient and having a more disciplined operating model that functions well throughout all real estate cycles. We are dedicated to grow and scale in attractive markets across all lines of our business, and we have made great strides in improving the customer experience in all our channels through upgrades in our technology capabilities and operations. Attracting and retaining key talent is always important. and we have been even more focused on retaining talent through this market so that we have the right team in place as the cycle improves. In the anticipation of our growth and return to normal home sales volumes, we have also implemented technology to enhance our title production processes and are also working on utilization of technology to improve our data management and data access. This progress at more normal production levels will result in considerable improvement in our delivery costs. Our direct operations segment is focusing their growth efforts on expansion in targeted MSAs, and we expect to utilize acquisitions to our advantage to gain share. We've been prudent with our acquisition-related investments in the current environment and routinely evaluate markets in our direct operations where we have the opportunity to increase share and enhance our leadership capabilities. This has ensured that our deployment of capital provides acceptable long-term returns. While we remain cautious from an acquisition perspective, our long-term goals for our direct operations remain the same, to grow, share, and scale in attractive MSAs. Positioning our commercial operations for growth across all commercial sectors remains a critical business priority for us. We are making investments in talent across the commercial operations so that we have the leadership and sales teams in place to achieve our goals. We are also investing in technology to support the commercial operations to allow us to better serve our customers and manage our business more efficiently. Considering the challenging market in the first quarter, our commercial operations performed very well due in large part to our energy sector mix. In the near term, we expect energy to continue to experience solid volumes as compared to sectors like retail and office, which remains sluggish given the current financial market. Our agency team is focused on driving share gains in attractive agency markets in Florida, Pennsylvania. And it is also focused on growing our support of agents in the commercial space. We are delivering on our technology roadmap, which will allow us to offer better solutions to our agents and are leveraging our technology efforts to drive market share gains by delivering greater connectivity, ease of use, and risk reduction for our agent partners. I am proud that we can offer an enhanced experience to our agents through our upgraded platform. Our agency business finished the first quarter solidly considering current market conditions, and we are beginning to see some solid share shift in most of our critical markets. The real estate solutions team is focused on gaining share with the top lenders through cross-selling our products as we leverage our improved portfolio of services to better and more deeply service our lender clients. Our real estate solutions business maintained solid financial results in the first quarter, particularly given market headwinds. We experienced higher revenues as compared to the first quarter in 23, largely due to our credit data business and former research, which we acquired in 2021. We are not immune to the market downturn in these businesses, but we are able to offset some of these challenges with share gains. We are thoughtfully managing all lines of business and remain prudent with both our expense management and our allocation of investment funds. We have been careful not to take expense actions that we feel would threaten our competitive position or take away from the critical initiatives that will help us meet our long-term goals. We feel that this financial discipline paired with our investment in customer technologies and focus on growth resulted in a stronger first quarter as compared to the first quarter in 23. Even given the difficult market conditions we are now experiencing, I am very pleased that our efforts are yielding results to increase market share gains in our core business line. We believe that our focus on growth across all business and investments and our capabilities should allow us to achieve low double-digit pre-tax margins as we return to more normal 5 million unit purchase market. We maintain our growth as a positive long-term outlook for the real estate market and are confident that Stewart is on a journey to become the premier title services company. We believe in the strength of the company and are committed to investing in ourselves, to further fortify Stewart's long-term growth and performance. Our solid financial footing should best position us to take advantage of the opportunities that we believe this cycle will provide. Thank you to our customer and agency partners for your continued trust. We are committed to doing our best to serve you with excellence. Finally, I'd like to express my gratitude to our employees. I'm grateful for your hard work and dedication to Stewart as we work together to create a more resilient company that continually delivers for our customers. David, I will now turn over to you to provide the update on the results.
spk05: Good morning, everyone, and thank you, Fred. I'm thankful for our associates and their outstanding service and our customers for their steadfast support through this difficult market. As Fred mentioned earlier, residential mortgage rates continue to be high in the 7% area, which is affecting residential transaction volumes. while the economy and work habits are impacting broader commercial activity. Solid performances, however, from our real estate solutions, energy commercial, title operations, and investment operations result in an improved first quarter compared to last year. Yesterday, Stewart reported first quarter 2024 net income of $3 million or 11 cents per diluted share on total revenues of $554 million. After adjustments for net realized and unrealized gains and losses acquired in tangible amortization and other expenses, detailed in Appendix A of our press release, first quarter adjusted net income was $5 million, or 17 cents per diluted share, compared to breakeven results for the first quarter, 2023. In the title segment, total operating revenues were slightly lower, decreasing by $6 million, while first quarter pre-tax income million higher, primarily due to improved investment income and expense management. After adjustments for purchase and tangible amortization and other items, the title segment's pre-tax income was $2 million, or 41% higher compared to the prior year quarter, while adjusted pre-tax margin for both quarters was in the low 1% range. On our direct final operations, total open and closed orders in the first quarter increased 7% and 5% respectively compared to the prior year quarter, primarily due to the ramp up of acquisitions completed in late 2022. Domestic commercial revenues increased by 17 million or 52%, primarily due to energy sector activity, which offset lower commercial transaction volume. Average commercial fee per file was approximately $13,900 compared to $8,300 from the prior year quarter. Domestic residential revenues declined $15 million or 10% as a result of 5% lower purchase and refinancing volumes and a lower average fee profile. Average residential fee profile was $2,900 compared to $3,400 from the prior year quarter, primarily as a result of lower purchase transaction mix. Total international operating revenues were stable. Consistent with lower residential activity, our agency revenues in the first quarter decreased by $8 million or 3%, while the average agency remittance rate was slightly lower due to geographic mix. Total title loss expense in the quarter was comparable. As a percentage of title revenues, title loss expense was 4% for both the first quarters 2024 and 2023, and we expect title losses to average in the low to mid-4% range for full year 2024. Regarding the real estate solution segment, pre-tax income improved $5 million compared to last year, primarily resulting from increased revenues from our credit-related data and valuation services businesses. Pre-tax margin was 8% compared to 2% last year. Excluding acquisition and tangible amortization, adjusted pre-tax margin was approximately 15% compared to 11.5% last year. On our consolidated operating expenses, our employee cost ratio was 32.3%, slightly better compared to 32.8% in the prior year quarter, primarily due to lower average employee counts. Other operating expenses as a percent of operating revenues were 25.6%, percent in the first quarter of 2024 compared to 23.2 in the prior year quarter, primarily driven by increased expenses related to higher revenues on our real estate solutions and commercial services operations. On other matters, despite the current challenging environment, our financial position continues to be solid for supporting our customers, employees, and the real estate market. Our total cash and investments at the end of the first quarter, 2024, were approximately $325 million in excess of statutory premium reserve requirements, while we also have a fully available $200 million line of credit. Total Stewart stockholders' equity was approximately $1.36 billion with a book value of approximately $49 per share. Net cash used in operations improved to $30 million compared to $51 during the prior year quarter. primarily as a result of improved first quarter results and lower liability payments. Lastly, we greatly appreciate our customers and associates, and we remain confident in our service to the real estate markets. I'll now turn the call back over to the operator for questions.
spk01: Thank you. At this time, if you would like to ask a question, please press star 1 on your telephone keypad. You may remove yourself from the queue at any time by pressing star 2. Once again, that is star 1 to ask a question and star 2 to remove yourself. We will pause for just a moment to assemble the questions to queue. We'll go first to Bose George with KBW. Morning, Bose.
spk02: segment. Can you just talk about the sustainability of, you know, the run rate that you guys did this quarter?
spk06: Okay. I'm sorry about that. I missed the beginning. So, yeah, I think our services business is very much sustainable. We have, again, as you know, we built out our portfolio of products and we've had it together probably for about three or so quarters, four quarters. and it's now getting some nice traction in our ability to kind of cross-sell that portfolio. We also have some really interesting solutions in our data operation, IR, something called a verification waterfall that has gotten a lot of traction. So I think you could always lose an account or so, but I feel like we repositioned ourselves in that market pretty nicely, and we should be able to sustain that kind of run rate.
spk02: Okay, great. Thanks. And then just given the moving rates and then your commentary, Fred, just on the cadence of the housing recovery, how do you see your margins trending over the next sort of 12 to 18 months?
spk06: Yeah, that's a great question. So, you know, I believe that we're going to be better. I think we're going to bounce off the bottom a little bit, and I think we'll be better. And I think our margins will kind of improve, if you will, as the market gives us a little bit more growth. I don't think that the target we talked about, you know, that 11 and a half, 12 area that I'm pretty confident that we could get to in a $5 million purchase market is probably not going to occur until we get to that 26 timeframe, if we get up to that level. So it kind of, it depends, you know, on the speed and the movement in that direction. And as I mentioned before, we, As you know, Bose, we took some expense actions and some reallocation of resources at the end of the last year. What I did is I looked at some geographies and offices and shut them down because we couldn't see, given this more prolonged period of this kind of volume, I didn't have transparency to those being what we wanted them to be. We have the benefit of some of those actions, but I don't think there's a need to or I don't think we should take any additional expense actions now. Essentially, we have what I would consider a little bit of excess capacity in our system. As volume comes, our margins will improve with that increase. You know, somebody asked me at the last call, which I thought was a great question, if this year was flat to last year, would we do a little bit better? And the answer is yes. So if you think about the margins we ended up with last year and the little bit better performance we have, I think even in a kind of flat or marginally up market, we will do better from a margin perspective than we did last year by a point or two.
spk02: Okay, great. That's helpful. Thanks a lot.
spk01: We'll go next to John Campbell with Stevens Inc. Hey, guys. Good morning.
spk06: Good morning, John. How are you, man?
spk04: Doing well, doing well. I want to follow back up on Boze's question on the real estate solution segment. I mean, I think the strength there probably isn't getting the airtime it probably deserves with investors. I mean, this quarter it was up, it looks like, 35% sequentially versus 4Q. Obviously, the mortgage market didn't see that type of lift. So maybe if you could – First, talk to why or how you're able to buck the typical mortgage market seasonal trend. And then, Fred, if you could maybe double-click on the business mix, maybe where you're seeing the most share gains. And I don't know if you have it on hand, but if you could maybe talk to maybe the mix of revenues, what your largest businesses are, what your fastest-growing businesses are, just any incremental call out of there.
spk06: Yeah. So, John, to me, what's interesting is we created this business, right? So, as you know, when we started in 2019, 2020, we only had about $30 million in the services business. And unlike the big Fs, we didn't have a portfolio of of services, and we bought motorization capability, we bought appraisal capability, and we bought this kind of credit data capability, okay? And those are the big pieces of what we're talking about. And what's interesting is when you assemble that, and what happens is you have a single product with some of these partners, but now that we have it, all together, and we're a good counterparty, and you know how vendors care about having a good counterparty. We're now the third alternative to these guys that's a legit, significant company. And so our ability to cross-sell those three kind of service categories with lenders is all fair game, right? And I would also say because of the little cyber events last year, it made lenders think about making sure that their shelf space you know, was spread properly to protect themselves. And so all of that is kind of coming together for us to keep focused on trying to grow the business. Informative research is a big chunk of what we're talking about. It is both kind of the traditional tri-merge credit business, but it's also, we've created some, they've created some wonderful solutions to save the lender's money during the mortgage process. And we've had really good luck with adoption. So as I look forward, I see continued growth in that business, which is, say, it's half of that business. But I also see the others following suit, coming along with it as we cross out. Now, again, to your point, it's a tough mark. I mean, we all know what the what the mortgage market and the refi market is. So it is down, but we're in a position of repositioning ourselves, if you will. So I'm very confident. The other thing you see, I think I've said this in a couple calls, it's sensitive. We needed to get more volume into the platform to help our margins, and you've seen that too, right? We're in a pretty good place both cash margins and gap margins there now because we've kind of got to the critical mass, if you will, in some of those businesses. So I think we're in a good spot. And I like it just because, you know, again, our really well-respected competitors all have that position, and we were the only one of the three that kind of didn't have this portfolio. And now I think we're becoming highly respected in that area, and it's important for us overall to have it.
spk04: Yeah, that's great, Keller. I appreciate that, Fred. And the big F, I don't know if I've heard that term yet. That's solid. So just kind of staying on that subject, you just mentioned that the cyber incidents did make some lenders kind of rethink that vendor diversification process. So I'm curious, are you seeing that also in the core title agency channel, or are you hearing that from agents?
spk06: So that's a great question. So people ask that a lot. traditionally in our business, not in the lender, always think about risk management and they have multiple places. I just think in the lender space, we're just more legit now. So it just gave us a reason to share a little bit. And I don't think it's, you know, we're not talking about overwhelming volumes or anything, but to your point in agency, what's interesting about our space is that it is, was less sensitive to risk management at the agent level than it should be. And it was way too many agents that gave most of their business to one of the underwriters, much more than you would see in PNC. And we had been talking about agents for three straight years because it doesn't make sense to me. And it's not everybody. A lot of them do, but a lot of them don't. And what's happened, in my view, is the amount of dialogue we're having with agents now about giving what I would say is our fair share of their business to the better agents in the country. because they want to just be a little bit safer, you know, whether it's a third, a third, a third, or 50-50. But, again, you'd be surprised how many agents were 80-20 or 100-0, given it's just good business practice to be more balanced. And so we are, you know, we are unfairly advantaged in that shift because we're the smallest of the group, right? So, you know, that shift is going to benefit us as long as we deliver and we focus on good execution, we should be able to do it. And what I'm seeing is that dialogue has started. It takes time. It takes time. And by the way, because the market's so low, you know, it's hard to share with a new partner when you don't have a lot of, you know, you have a lot of mouths to feed and you don't have a lot of business. So as the business grows, I think our momentum and share shift will increase, actually, because they'll have more business and feel more comfortable with sharing. So, I just think that trend has got people thinking a tad more strategically. I think people overstate the impact in the short term. I don't think the impact in the short term is that much at all, but the impact over the long term could be somewhat material.
spk04: Okay. Thanks for taking our questions, and congrats on the continued success, guys.
spk06: Thanks.
spk01: As a reminder, that is Star 1. If you would like to ask a question again, Star 1. We'll go next to Jeffrey Dunn with Dowling Partners.
spk03: Good morning, Jeff. Good morning. I was wondering if you could provide an update on your geographic targets right now for potential M&A. I know you've been focused on the Midwest, some south-southwest and west coast. Um, where are the, where's that next tier of MSAs that you're looking to build up scale and, and in particular, can you talk a little bit more about California and the effort to become more direct?
spk06: Yeah. So, so again, I don't think about, think about, um, target markets a little different from direct and agency. So in agency, there's a number of, we like to grow in a lot of states. Most states have good, relatively good economics. Um, but there are 14 states in particular. that have attractive economics that we're subscale or undershare represented. They tend to be in the southeast because we're pretty big in the northeast. There's some in the Midwest. Pennsylvania is one of those. And so the 14, Texas is one of those. Florida is one of those. So in agency, it has a lot to do with the economic profile of the splits and other fees and services, et cetera. That's kind of what we got to get done. And Florida is the poster child of that for us. On the direct side, it's a little different, right? So, I talked about the 150 MSAs. We did a lot with about 40 of them. As the market gets better and there'll be more transaction opportunity, there's 35 or so that I'm particularly interested in that are kind of core markets. Places like a Nashville would be one of those places. And so that's one category. The second category is once you've got a good established position in a city, You can do satellite opportunities. So, San Antonio is a great example of that for us. Dallas is a great example for us. We have a very good position, but there are parts of the suburbs that are real opportunities, and so you could do smaller fill-ins. And so, I would say there's kind of, as I say, 30, 40 core markets that I think we could make a significant move on, and then there's a bunch more that there are fill-ins. that we would focus on. Your point on California, I just want to be clear, I don't see us growing California much. We are kind of a niche player, if you will. We're targeted in certain places. We'll be there forever. We'll be good where we are. But we're quite a ways behind, and you've got the two leaders are well entrenched. It's almost exclusively a direct market, as you know, because the economics are so skewed toward that direction. And I don't want to burn ourselves. We're not going to burn our way into California. So I don't think of that as a high priority for the company going forward as far as growth. We'll run it well. We'll solidify the positions we have. We'll invest in our people there. But I don't see that as a big part of the growth.
spk03: Okay. All right. Thank you. Yep.
spk01: And at this time, as there are no further questions in the queue, I'd like to turn the conference back over to the presenters for any additional or closing comments.
spk06: I just want to thank everybody for joining us and having the interest in Stuart. Thank you.
spk01: Thank you. Again, that concludes today's Stuart Information Services first quarter conference call. At this time, you may disconnect. Thank you for your participation and
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