Q1 2020 Earnings Call

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Sure.

Hello, and thank you for joining that Stuart information services Q1, 2020 earnings call.

This time all participants are in listen only mode. Later, you will have an opportunity to ask a question during the question and answer session.

Please note. This call may be recorded I will be standing by should you need any assistance. It is now my pleasure to turn todays conference over to Nat Otis head of Investor Relations. Please go ahead.

Thank you Brett.

Good morning, Thank you for joining us for today's Stewart for Stuart's first quarter 2020 earnings Conference call. We will be discussing results were released yesterday. After the close joining me today, our CEO, Fred Eppinger and CFO, David Heikki wasn't on line. Please go to Stewart Dot Com website to access the win for this conference call I will remind purchase.

Since the this conference call may contain forward looking statements involve a number of risks and uncertainties because such statements are based on expectation a future financial operating results and are not statements affect actual results may differ materially from those projected the risks and uncertainties with forward looking statements are subject to include but are not limited to the rich.

Another factor detailed in our press release published yesterday evening and in the statement regarding forward looking information risk factors and I'll be sections of the company's form 10-K.

Another filings with the FCC, Let me now turn the call over to Fred.

Thanks, Matt and I. Thank you everybody for joining the call today.

We're very pleased to the progress we made in the first quarter.

But given the unique situation, we find ourselves out what David go through the quarter details in a little bit and I would like to take a step back.

Reflecting a company as we address these challenging times.

First I would like to knowledge all those frontline people would work working tirelessly to keep a safe and healthy communities across the country. Thank you.

Thoughts are also with those who may have lost a family member friend or co worker.

Or who are grappling with the challenges of cold at 19.

Harris Stuart I want to thank our employees for the tremendous effort they have undertaken over the last month and extremely uncertain times. Our terrorists. Our team has worked tirelessly to keep our customers in coworkers safe, while creating creatively finding ways to close transactions using a range of tools at their disposal and variance.

Certain in challenging conditions.

And the second week of March we transition to an operating approach that roughly 70% of our employees working from home with new social dispensing and operating model approaches in place to make our customers and I'm pleased to safer.

5500 people working differently, while meeting record demand in my view at the highest point of uncertainty we came together and got the job.

Obviously all of this requires a new operating approach where the team communicates daily to address the changes as things unfold.

Im extremely proud of our teams teamwork and nibbled this as we addressed changing business conditions.

And the end, we do not know how the situation will ultimately unfold, but our priority remains the health and safety, where employees and customers as remain open and close transactions.

Then just standpoint, we continue to close transactions on a daily basis as we work through the pipeline of business. We built in the first quarter as well as a new business that continues to come in albeit at a reduced falling.

We continue to see remote online normalization or wrong levels grow and currently 95% of our offices are now trained on and are using Ron at some level. In addition, various temporary stayed executive orders have been issued allowing personal appearances to be replaced video verifications exciting known as remote inc. organizations.

Or rins.

And then the and only a handful states are not currently allowing either broad and transactions.

Lastly, the incidence of the name person closing, we're doing everything we can to make the transaction safe.

Glass dividers to drive through closings to help close.

With respect to underwriting given delays in according on closing given county courthouse backlogs were outbreak County courthouse and according office closures.

Stuart is providing policyholders with gas insurance for the delay timeframe between the closing and recording and the overwhelming majority of transactions.

The first quarter was a strong on per store.

We built on a strong market at a new sensor focus in alignment with our new strategic direction to create some real momentum to begin a year.

However, the first quarter is almost irrelevant because we'd look at the remainder of 2020 in 2021.

We need to understand that we're very much unchartered waters and while real estate is it in a much stronger position entering this recession then it was during the last one.

The stresses on our economy going forward, maybe far greater.

Peak unemployment rates in the late two thousands border on 10 top 10% in recent weeks, we have seen multiple economists and data there.

[laughter] indicate that we will be while the SEC except that.

In addition, tightening lending standards in capital constraints for lenders, resulting for an extended forbearance period compound the issue.

I would also like to add.

The prior recession did not include the variable in the globe pandemic.

With the buyer with the virus in which there are no timetable yet for a vaccine.

With that it might we expect the next two quarters to be very challenging for both our residential and commercial businesses.

However, I believe we are well positioned operationally and financially to manage through this difficult time.

Stories in a very strong financial shape with a low 14% debt to equity ratio went over 400 million in cash and liquid assets over regulatory requirements and additional 50 million available on our revolving credit facility.

Let me finish by noting three thick.

We will continue to put the safety of our employees our customers in our communities first.

We will be transparent in our assessment of the challenges we face today Tomorrow next week.

And lastly, when it is over Stuart will be there positioned to be leader in this industry and support the continuity of our real estate.

So with that thank you for your time and David without go through this quarter's financials.

Thank you Fred and good morning, Let me also think health care other front log professionals at our associates for their tireless and inspirational service during these challenging times.

The quarter started strong due to low rates and high real estate demand as a quarter progress rates dropped to the unprecedented government stimulus actually.

Causing an increase in refinance activity, while purchase activity began to decline as national stay at home orders were implemented. These conditions continue at this stage at the second quarter with normally strong spring real estate activity reduced as we await the reopening of our country.

Moving to the Q1 results yesterday Stewart reported total operating revenues of 446 million and net income of 5 million.

The first quarter 2020, which was the strongest first quarter and Stuart history has laid out in the appendix said the press release adjusted net income was 13 million with adjusted diluted earnings per share of 56 cents compared to an adjusted net loss of 7 million, an adjusted diluted loss per share.

<unk> of 28 cents last year's quarter.

The 11 million in Mark to market losses on equity Securities is the <unk> in the first quarter of 2020 accounted for the difference in diluted and adjusted diluted earnings per share.

Our total total revenues for the quarter improved to 440 million or 17% for the last year on solid performance in all areas of our title business.

The total segment generated pretax income of 15 million or 3% report <unk> pre tax margin, excluding the mark to market adjustments the segment's first quarter.

Pretax income would've been 26 million or a 5.8% pre tax margin.

With respect to our direct title business direct residential revenues improved 25 million or 24% on increase daughters residential fee per file was approximately 2000 or approximately 11% lower than last year, primarily due to a higher refinanced the purchase trade.

It's actually a mix.

Domestic commercial revenues also increased 8 million or 23%, resulting from more transactions and an 18% higher commercial fee per file of approximately 11400.

Total international revenues improved 4 million or 20%, primarily driven by increased volumes from Merck <unk>, Canada UK operations.

Total open and closed orders for the quarter grew 49% and 36% respectively.

Compared to the prior year quarter.

Our agency business increased revenue due to market trends and they continue to read the turn of agents post merger termination.

Regarding title losses total title loss expense increased 19% consistent with increased title revenues.

As a percentage of the title revenues are probably the loss expense was 4.2%.

It was comparable to the prior year quarter.

Our ancillary services in corporate segment continued to see lower volumes and or capital markets search business as that business has the mood counter to loan originations.

Turning to operating expenses, which consist of employee and other operating costs total operating expenses were relatively flat to the prior year quarter as employee costs rose modestly with higher revenues and other operating expenses decline.

Due to continued management focus.

The combination of these items cause employee costs as a percentage of revenue to decline.

I'm, 33% to 30% and other operating expenses declined from 20% to 16%.

On other matters as Fred noted earlier, our financial position remained strong our total cash and investments and the balance sheet or 400 million over regulatory requirements, which along with our 50 million available lot of credit provide a solid foundation to support our customers employees and real estate markets.

Stockholders' equity attributable to Stuart was 732 million at the end of the first quarter with a book value per share a $30 that not any sense well now turn the call back over to the operator to take questions.

At this time, if you like ask a question. Please press star and one on your Touchtone phone.

You can improve yourself from the question Q bypassing the pound key.

Again, not as star in one.

And we will go first to Bose George with KBW. Please.

Please go ahead.

Yeah. Good morning, good morning.

Good morning to first he thinks I'm just wants first ask about.

Your ability to control costs, you know as we enter what is likely to be pretty challenging environment. You know just and in all the channels can you just talk about.

How much of your expenses are sort of more variable both on the residential side and then on the commercial as well.

Yeah. Thanks, you know.

The objective we've had been here seven months and obviously.

We've been very focused on improving our margins and we'll continue to be focused on that that position. This company for profitable growth for a long time so.

We've done a lot of targeted actions in the fourth quarter first quarter, we took additional targeted actions and I fully expect as we look forward.

Given the situation that we'll continue to take a targeted actions to improve our position.

This is extraordinary times right and so my job isn't to manage expenses my job is to create shareholder value. So our goal will be to.

What we need to do to manage our place through this while keeping our team together focused and excited about improving and grow and that's what we'll do so I don't know we will do things will manage ourselves appropriately through this.

Position ourselves to be quite strong as we come out of it so [noise].

I think were more nimble company in <unk> and other company ready to adjust.

And that'll be a focus so.

Okay. That's helpful. Thanks, and then actually just switching over to the commercial you know market. He just said it was strong this quarter, but can you just talk about the pipeline you know how what you're seeing there and also just because given your concentration in Texas can you just talk about it commercial for you guys a little.

More concentrated there or is that pretty disbursement shortly.

Well certainly this first we have a strong presence in both coasts as well so the.

As you can imagine commercial as it is going to be a little bit challenge, given the coffee and and kind of the freezing up.

Have a lot of those industries, whether its a.

Hospitality or energy so I.

We believe that commercial will be a challenge segment for a while it for everybody I mean, I think it's just the way the market as David is there something you want to.

Add on that want to make sure.

No I think you covered it pretty well they obviously the commercial markets vary by asset class.

With with retail and.

Energy and hospitality.

Consistent with the declines in those primary businesses are they being a little more challenged but I think in general you covered it you know expected to be.

Maybe a little bit longer turned around in that business just due to the nature of it.

Okay. Thanks, I cannot be just one little on the also on the gap insurance product you mentioned.

He can you just explain how that works and is that going to be a material number or is that just a pretty modest piece it but it's modest but Dave is there anything else you want to add on that one.

No I think just expand on what you said in your and your and your comments Freddie and the gap insurance I think it's the way the market is move generally just because of what's happening with.

With caliber quarters offices, and the like and so I think or practices are pretty consistent with the way. Other underwriters are doing it also working in conjunction with lenders and the gsvs on what they require from fill the title policy.

Okay great. Thanks. Thank you appreciate it.

And we will go next to Mackenzie Aron with Zelman and associates.

Please go ahead.

Good morning.

Thanks. Good morning first question on the investment income can you help us think about sensitivity to that lower rate environment.

Sure. So David why did you take that.

Yeah, because it takes to the question. There I think you know were a little bit different maybe than some of or other competitors either we have been a little more liquid and so you know that piece of the portfolio.

We'll move it pretty significantly with the you know with what we've seen with with short term rates coming down pretty significantly in the last month plus.

But the vast majority, but other than that liquid piece of the portfolio the rest of our portfolios and.

I think the harvest durations for pause on on the bond portfolio side and.

We don't have a lot of near term maturities. So I wouldn't expect the you know the base coupon rate to change that much the variability will be on the shorter term portion.

Okay. That's helpful. Thank you and then is there any color that you can give us on this what you've seen so far in April on the order flows.

Yeah, David why did you take that.

Yeah, I think its <unk> because if you would have looked at what you. What we saw in March there, where you know started to have a little pick up and.

You know the refund as a percentage I think that sort of carried forward.

On a percentage basis, but in general open orders have been trending down with you know with less market activity.

You'll have to see approximately where that ends up but if you think about new home listings and some of the information that's been coming out on that.

You know you could see a 20 plus percent.

Dependent you know depending on how the month ends up Declawed opens quote you know close could could still end up pretty consistent with March because it was a good carryover pipeline, but.

A lot of its really going to depend on what happens with a you know the mix of refinancing because rates are still pretty low although credits tightening as Fred mentioned, and then you know sort of where where we end up with real primary real estate activity picking back up.

Okay, Great and then on the loss provision rate.

Lets stick to think it back and try and hire and maybe what should we be thinking about in terms of the potential buyer for higher <unk> pet.

Yeah, that's great Great question, if they want you run it go take it and I can follow up.

Yeah, I'll just start maybe with some general context on that and they can be I think it and Fred alluded to this a little bit in has you noted in his script. If you think about where the real estate market is today, you know maybe versus so said another way its in a it's in a much better place you have you know just.

Sort of lending standards have been much better going.

You know into this environment first of all and second of all you have a much better supply demand.

Well, it's where there's actually it's still excess demand for real estate and so that'll have the effective.

Price support the big thing that cause losses, you go back during the.

The great recession was the fact that you had significant peak to trough declines in home prices. So I think we go in a much better place.

What the losses will ultimately be you know that anybody can guess on that.

Yeah I would just also note. Another thing is that we we also have much better government programs to deal with the situation and so even though we're on sort of in Nashville Forbearance right. Now you know there's this way so that they just they and outside of the GRC buying.

The loans out early from the pools right that that'll all had the effect of sort of stabilizing you know that part of the market and then how the ultimate losses ultimately come in will depend on you know is there an increase in fraud first of all second of all you know at what pace for closures occur and then to foreclose.

Your element, it's gonna be highly dependent on what happens with the employment picture and how quickly you know most people get back to work and so yeah, it's hard to predict exactly what the numbers are gonna be but I think that maybe some context to think about you know the dimension of losses potential losses. This time, you know back.

Versus during the crisis.

Yeah, I would agree that we gave it and we're at a much better place going in and I think our risk profile, because a lot better going inside I agree with <unk> Davidson.

Okay. That's helpful. Thank you and switching hope you all stay healthy.

Thanks, so much.

Yeah.

Well go next to John Campbell with Stephens, Inc.

Please go ahead.

Morning, guys. Good morning, congratulate and test the quarter very very good results.

Thank you Paul.

Maybe I'll just touch back on the color in the order color a little bit for April mainly curious about commercial I was thinking that maybe that would be somewhat of a standstill I'm kind of wait large. So you guys I think there Oh, you're open orders for commercial or down 8% and March Im just curious about how that kind of stays throughout.

A month and then any kind of color.

Around.

Just commercial orders thus far into April.

Yeah, David watch check that.

Yeah John.

<unk> Yeah. The commentary I was here there was sort of more general with a direction more to the to the residential stuff I think with respect to commercial you know I think it is fair to assume that that activities dropped off.

You know a bit more we still are seeing orders, but for some of the reasons I mentioned in terms of certain of the Mark certainly the segments of commercial being the more stress and others and then also thinking about the parts of the country that have been hit the hardest right with New York.

Being in the lead there where there is a lot of commercial activity yeah. The orders of the definitely that off a little bit more commercial than they have in residential.

Okay. That's helpful and then back on the foreclosure is obviously, the forbearance issues, who knows where we go from here, but it does seem like the wherever we're sitting now is going to be maybe a little bit higher coming out of this but you know you kinda talk to the title reserves and why that might not be I'm. So adversely impacted you know relative to last go around but can you talk about maybe the.

Ancillary services segment I know at one point you guys had I think one large contract with a large lender and that that business at one point during the default period was you know.

Materially higher than where does today. So just curious you know and assuming a step up and foreclosures, how the ancillary services business is impacted and then maybe also on the title side. If you could talk to the default orders and how that could pick up as well.

David.

Oh, Yeah sure no that's.

Great question, you know they just.

So our ancillary services business has to print principal elements. It all well actually a three adults with those others. Some of the default stuff that you've mentioned that that's been sort of negligible of late but it's mainly <unk> capital markets kinda transactions the fault in them.

Valuation services and all of those actually.

That's it from that that type of a market. If you think about the capital markets piece that tends to be sort of bulk transactions. So whether those are delinquent loans that are being package them resold.

No other kinds of loan packages over the non QM market it effectively being shut down right you could see a scenario, where you're gonna have sort of delinquent loan pools and the like being sold there. So so that business would definitely done its oh, we do still have as you as you noted the foreclosure search capability.

And that there should that return you know we've cut the the capability and can also shift resources from some of our centralized search or over the that area.

And then valuations are also needed when loans go into foreclosure. So you know that business does tend to be somewhat counter cyclical to origination and could could definitely be a help if we were to go into that environment.

Okay. That's helpful. And then one other thing you kind of related today.

Did that brought our segment on the corporate side what is.

The run rate now is it five maybe 6 million a quarter is that right.

That's correct.

Okay excellent. Thank you guys.

Thank you.

And as a reminder, that is star and want to ask a question.

We'll go next to Geoffrey Dunn with Dowling and partners. Please go ahead. Thanks My job Warner.

Fred I wanted to start off by following up on your comment that your focus isn't necessarily on expense management by creating shareholder value.

Here is the disruption can also be periods of opportunity so.

With the company in solid financial position.

How are you thinking about.

Disruption as an opportunity to maybe look for additional talent additional product offerings are platforms or weaken agency acquisitions are those considerations over the next couple of months or is it the too uncertain to try to pursue that type of thing.

Yeah, So I think the great question.

Because as you just said to me.

It's interesting when you go through things like this.

Is that if you stay focused and you are strong and well no. Good brand you couldn't take advantage of some situations to build your capabilities and.

And we obviously been focused on that.

In the last few months and we will be focused on it in the future as well I do think right now so little early.

In this current kinda four week window here really getting a picture of what exactly is happening.

But my goal every day is to make us better.

And whether that's managing our resources more appropriately and aligning them better.

Or it's finding ways for us to improve our position and.

And if we're going to continue to do that and one of the reasons you try to be careful and manager resources appropriately to your point is to give yourself that flexibility to act.

When there is an opportunity and again our focus as I said earlier right now is on really the the safety of our employees since closing the business, but as we look forward and this becomes clear and there's a little bit more stability I fully expect you know that we'll continue to focus on doing what they were all about which is creating the.

Premier company in the industry and.

And again I do think.

You know what we showed in the first quarter, which you guys. Just one quarter is that we come together pretty well and were working well together and we're pretty nimble, we're very focused and job.

And we will create some additional opportunities I'd also say, there's more for us to do right. We all know where we are comparatively.

And this couple of quarters, it's got to be a little bit challenging to understand that completely but.

We have won't work to do as well and so we're continuing to be focused on being better and up but ultimately the goal is to profitably grow the company and I think where we've been doing that and that's what we're going to be focused on so it's a good observation visits again [laughter], where we're still in business. We're still focused on trying to build a bear.

Stuart and we've got our eyes wide open to doing that.

Okay.

And then you before the disruption started impacting the business and I.

I guess second week of March for you.

<unk> can you talk about some of them more material actions you took during the first quarter, maybe it's by far the best margin stewards put up in a long time for Q1, obviously you did benefit from an inflated resi rifai market, but yeah. What are some of the more material actually you can point to that have maybe.

He kind of improved your Q1 prospects going forward and margins in general.

Yeah. So if you remember it's a combination kind of the some of the fourth quarter and first quarter actions I mean, one of the biggest issues I mentioned right at the GETCO is that one of our challenges that.

As a company as we weren't very strategic on where we invested our resources. So we were.

Inch deep at a mile wide.

And so when you had fluctuations and volume or whatever.

We were susceptible more than others, because it's harder to adjust when you don't have scale and places.

And so what you saw us begin to do is consolidate locations shift capital from one business to another.

And double down in some markets as far as investment.

And.

Okay and be a little bit more disciplined if you will about some.

Investments that we made it make sure we're investing those kind of not just in that short term, but in the future. That's a lot of technology initiatives that I think are starting to play out so I.

It was about.

Lot of reallocation of resources.

And again, we mentioned I think at the last quarter. You know we ended up there was about 25 places Oh locations, we closed and of wrote off the the leases to get ourselves focus. So there's no. This is about investing in strength and building scale in a number of businesses and we.

Made some progress and it shows up right I mean, it kind of when you get a little bit of momentum with growth.

Better utilization of those resources to show up so yeah, we got all the way there.

Hey, we're going to continue to get better as a company and a as we grow its got a show, but you know where on a bit path and forget. Besides the next two quarters would be a little challenging to I said I think when I first started.

Journeys to kind of be where we want to be is always a straight line [laughter] and.

I think an extra course, they show that it isn't a straight line in some ways.

But I think a lot of things to your observation that we did positions us to have flexibility they continue to accrue.

And we'll continue to take the right actions to get us to make us better so.

I feel like when a good position to be strong coming out of this so we're going to keep focused.

And then I'll ask questions on commercial highest margin product typically.

Slide on ready side, but I'm, assuming the talent there tends to be more specialized and valuable. So can you talk about the ability to manage expenses on the commercial business I assume there's more of our variable component not commission, but maybe not as much flexibility on head count.

How do you think about managing the expense base of that business specifically.

Yeah.

Again, I think you know we do have a wonderful set of talented people have commercial business and the most important thing for us is making sure we keep that.

Core of talented people focused and together.

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That that organization to obviously give them all gone through we need to make sure that we're targeting our investment and those resources.

That matter.

And so it's more about.

You know with its targeted everywhere, it's kind of you want to be laser like in commercial and make sure you're supporting your talent at a certain way but.

For us that's a business we want to double over time, but we need to make sure. We're managing it carefully because it is gonna be under duress for a while I think as far as Uh huh.

But I got I think it's a good observation as a place that.

Yeah, we have to be very thoughtful and a lot of faith like leadership, there and we will make sure we're focused on the future.

As we kind of.

You know take actions that are appropriate to make sure that our resources are the right level.

Okay. Thank you.

And there appear to be no further questions at this time I'll turn it back to the speakers for any closing remarks.

Oh. Thank you Brian that concludes this quarter's conference call. One appreciate what you appreciate everyone for joining us today and your interest in Stewart Goodbye.

This does conclude today's program. We appreciate your participation you may now disconnect.

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