Stewart Information Services Corporation (NYSE:STC) Q1 2024 Earnings Conference Call April 25, 2024 8:30 AM ET
Company Participants
Kathryn Bass – Director of Investor Relations
Frederick Eppinger – Chief Executive Officer
David Hisey – Chief Financial Officer
Conference Call Participants
Bose George – KBW
John Campbell – Stephens Inc.
Geoffrey Dunn – Dowling Partners
Operator
Hello and thank you for joining the Stewart 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. [Operator Instructions]
It is now my pleasure to turn today’s conference over to Kath Bass, Director of Investor Relations. Please go ahead.
Kathryn 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 Hisey. 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 a 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.
Frederick Eppinger
Thanks, Kath, 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 continued — 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 have seen in the past several quarters. Mortgage rates remain 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 will 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’m pleased with our progress on 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 growing 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 on 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 a 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 office, which remains sluggish given the current financial market. Our agency team is focused on driving share gains in attractive agency markets with 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 for 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, Informative 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 with our efforts are yielding results to increase market share gains in our core business lines.
We believe that our focus on growth across all business and investments in 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 for our customer — 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.
David Hisey
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 in the — 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 resulted in an improved first quarter compared to last year.
Yesterday, Stewart reported first quarter 2024 net income of $3 million or $0.11 per diluted share on total revenues of $554 million. After adjustments for net realized and unrealized gains and losses, acquired intangible amortization and other expenses detailed in the Appendix A of our press release, first quarter adjusted net income was $5 million or $0.17 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 was $11 million higher primarily due to improved investment income and expense management.
After adjustments for purchase intangible 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 by 7% and 5%, respectively, compared to the prior year quarter, primarily due to the ramp-up of the 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 per file.
Average residential fee per file 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 solutions 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 intangible 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% in the first quarter 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 in 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 million 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.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions] We’ll go first to Bose George with KBW.
Frederick Eppinger
Good morning, Bose.
Bose George
[Technical Difficulty] Segment. Can you just talk about the sustainability of the run rate that you guys did this quarter?
Frederick Eppinger
Okay. I’m sorry, Bose, I missed the beginning. So, yes. 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 sell the fourth — 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 can 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.
Bose George
Okay. Great. Thanks. And then just given the move in 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?
Frederick Eppinger
Yeah, that’s a great question. So I believe that we’re going to be better. I think we’re going to bounce off the bottom a little bit, but I think we will 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 that $11.5 million, $12 million area, that I’m pretty confident that we could get to in a $5 million purchase market, it is probably not going to occur until we get to that ’26 time frame, if we get up to that level. So it kind of — it depends on the speed and the movement in that direction. And as I’ve mentioned before, we’ve — as you know, Bose, we’ve taken — we took some expense actions and some reallocation of resources at the end of the last year. What I did is I — we looked at some geographies and offices and shut them down, because we couldn’t see — given this kind of more prolonged period of this kind of volume, I couldn’t see — I didn’t have transparency to those being what we wanted them to be. And we have the benefit of some of those actions. But I don’t think we’re going to be taking. I don’t think there’s a need to or I don’t think we should take any additional expense actions now. So essentially, we have what I would consider a little bit of excess capacity in our system. So as volume comes, our margins will improve with that increase. So 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 a 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 so.
Bose George
Okay, great. That’s helpful. Thanks a lot.
Frederick Eppinger
Yes.
Operator
We’ll go next to John Campbell with Stephens Inc.
John Campbell
Hey, guy, good morning.
Frederick Eppinger
Good morning, John. How are you, man?
John Campbell
Doing well. Doing well. I want to follow back up on Bose’s question on the Real Estate Solutions segment. I mean, I think the strength there probably isn’t getting the air time it probably deserves with investors. I mean, this quarter, it was up 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 that, the typical mortgage market seasonal trend? And then, Fred, if we 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 color there.
Frederick Eppinger
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 services. And we bought notarization 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 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 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 a traditional tri-merge credit business, but it’s also, we created some, they’ve created some wonderful solutions to save the lenders 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-sell. Now, again, to your point, it’s a tough market. I mean, we all know what the mortgage market and the refi market is, and so it is down. But we are 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 of calls, it’s sensitive. We needed to get more volume into the platform to help our margins. And you’ve seen that, too, right? It’s — we’re in a pretty good place, both cash margins and GAAP 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, again, our really well respected competitors all have that position, and we were the only one of the three that didn’t 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, so.
John Campbell
Yeah, that’s great color. I appreciate that, Fred. And the Big Fs, I haven’t, I don’t know if I 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?
Frederick Eppinger
So that’s a great question, so people ask that. So traditionally in our business, not in the — lender always think about risk management, and they have multiple places. I just think with 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 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 there 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 this stage — about the agents for three straight years because it doesn’t make sense to me, and it’s not everybody. A lot of them do, 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, the better agents in the country because they want to just be a little bit safer. 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 unfairly advantaged to that shift because we’re the smallest of the group, right? So 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 is thought. It takes time, it takes time. And by the way, because the market’s so low, it’s hard to share with a new partner when you don’t have a lot of — 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 more. 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 of the short-term is that much at all. But the impact over the long-term could be somewhat material.
John Campbell
Okay, thanks for taking our questions and congrats on the continued success, guys.
Frederick Eppinger
Thanks.
Operator
[Operator Instructions] We’ll go next to Geoffrey Dunn with the Dowling Partners.
Frederick Eppinger
Good morning, Geoff.
Geoffrey Dunn
Hey, 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. Where are the — where’s that next tier of MSAs that you’re looking to build up scale? And in particular can you talk a little bit more about California and the effort to become more direct?
Frederick Eppinger
Yeah. So again, I don’t — think about, think about 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 relatively good economics, but there are 14 states in particular that have attractive economics that we’re subscale or under share 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. And so, 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, 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 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.
Geoffrey Dunn
Okay. All right. Thank you.
Frederick Eppinger
Yes.
Operator
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.
Frederick Eppinger
I just want to thank everybody for joining us and having the interest in Stewart. Thank you.
Operator
Thank you. Again, that concludes today’s Stewart Information Services first quarter conference call. At this time, you may disconnect. Thank you for your participation and have a great day.
