Stewart Information Services Corporation (NYSE:STC) Q1 2024 Earnings Call Transcript

Stewart Information Services Corporation (NYSE:STC) Q1 2024 Earnings Call Transcript April 27, 2024

Stewart Information Services Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

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.

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Q&A Session

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.