Q2 2020 Stewart Information Services Corp Earnings Call

Hello, and thank you for joining the student information services second quarter 2020 earnings call.

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It's now my pleasure to turn todays conference over to notice head of Investor Relations. Please go ahead.

Good morning, Thank you for joining the paper Stewart second quarter 2020 earnings Conference call, we'll be discussing results released yesterday after the <unk> joining me today, our CEO, Fred Eppinger and CFO David.

It wasn't online we go to the Dot com website to access the linked to this conference call I will remind participants. This conference call may contain forward looking statements involve a number of risks and uncertainties.

Oh, such statements are based on an expectation of future financial operating results and are not statements affect actual results may differ materially from those projected the risks and uncertainties are forward looking statements are subject to include but are not limited to the risks and other factors detailed in our press, we published yesterday evening and then the statement regarding for.

We're looking information risk factor and other sections of the company's form 10-K, and other filings with the FTC, Let me now turn the call over to Frac.

The next that and thank you for joining us today and your interest in Stewart before discussing this quarter's results in greater detail I'd like to once again take the opportunity to thank our employees.

They have continued to prioritize health and safety work customers in peers, while tirelessly conducting business under challenging conditions.

I would also think like to thank our customers who have remained well to Stewart, we're gratified to see more agents returning their underwriting business, it's Stuart as they value the apparel Dope service that defines our brand in our company.

David will go through this quarter's financials in more detail in a minute, but first I'd like to make a couple of observations.

On our performance.

First I am pleased with the results and more importantly, with the progress on our journey.

We're continuing to see the emergence of the team's effort to create the news story, one that is focused on becoming the premier title services company.

While it is clear that the residential market has been strong and has helped us.

Much of our improvement comes from a more focused approach to investment in our businesses and improving operating discipline.

Although future conditions are very much an unknown I believe Stuart is more prepared than ever to handle any uncertainty and when possible take advantage of opportunities that arise given our financial strength in appeal and improving operational performance.

Second the cornerstone of stewards evolution is the belief that the company needs to invest in grow to maximize its operation potential.

For too long Stewart has been a mile wide and in each deep.

We need to invest in a few significant categories first attractive businesses in geographies, where we can have sustained success, where additional scale can more efficiently and effectively improve profitability.

Second we will further leverage our strengths by increasing investment in areas that are already in a strong competitive position.

And lastly, we will continue to look for adjacent businesses and technologies that can help us further leverage our place in the ever evolving real estate closing experience.

For example, we closed on our purchase of U.S. appraisals at the end of May I was just one month of input in our quarter. This acquisition help to markedly improve our ancillary services results.

In the N.U.S. appraisals brought us closer to our customers added technology that will be critical and driving future business and added scale and improved profitability.

All of this at what we would view as a reasonable price.

Exactly the type of transaction when you're looking for and we'll continue to look for.

The strong acquisition pipeline at each of these categories and expect to be Optum opportunistic in our capital deployment, well understanding the near term and see it uncertainty in the market conditions.

Let me finish by noting that we are an extraordinary times with uncertainty dominating or daily lives for the foreseeable future.

Well the possibility exists that a full recovery may not take place until after the vaccine is bound.

Major part of it will as always I, but we'd be grounded in the health instability about real estate market.

As I said last quarter Stuart will continue to put the safety of our employees our customers in our communities burst and weather during or after the spin Dennis Stuart will be they're ready to help we this industry and support our real estate market.

Thank you for the time and David will now go through the corresponding inches.

Thank you Fred and good morning, Let me also think our associates for their basic in its regional service that our customers for their support during these challenging times.

The quarter started with slower sprint real estate activity is that still stay at home orders were in effect.

However, unprecedented set a reserve actions to lower rates, causing a significant increase in refinance activity.

Real estate sales activity increased throughout the quarter today, we are seeing strong purchase of the refinancing activity with 30 year mortgage interest rates into 3% area.

Commercial husband negatively impacted by economic conditions, and we are mindful of the potential negative negative economic impact across our business due to recent increases in virus cases.

Moving to Q2 results yesterday Stewart reported total operating revenues of 507 million and then come with 34 million for the second quarter.

It's just another strong performance for Stuart.

Detailed in the appendix say the press release adjusted net income was 33 million with adjusted diluted earnings per share. The dollar 37 compared to adjusted net income of 22 million that adjusted diluted earnings per share body, what sets for the second quarter 2019.

Mark to market gains, partially offset by severance costs in the quarter accounted for the difference in diluted adjusted earnings per share.

Our title revenues for the quarter improved 296 million or 8% from last year, driven by strong reformate from domestic residential in agency operations, which were partially offset by lower revenues from commercial and international title operations.

Pretax income for the title segment was 55 million at 40% improvement for last year's quarter.

Pretax title margin of 11% was helped by revenue growth and cost management focus.

With respect to our direct title business direct residential revenues increased 14 billion or 9%, primarily due to a significant improvement in refinancing transactions residential for your profile for the second quarter was approximately 1800.

Lower than last year also due to a higher refinance mix domestic commercial revenues declined 20 million as result of fewer commercial transactions and a lower FICO file of 9800.

Total open and close orders improved 28% in 32%, respectively compared to the prior year quarter, primarily attributed to strong refinancing and improving purchased in that.

We're currently see order trends above the June levels as we sit at this point in July.

Our agency business increased revenue 47 million, an increased business activity at the agency remittance improved modestly to 17.5%.

Regarding title losses total title loss expense increased 15% primarily on increased title revenues.

As a percentage of tighter revenues are title loss expense was 4.3% versus 4.1 of the prior year quarter.

As Fred noted we acquired U.S. appraisals at the end of May the business generated 7 million of revenues in June.

Yes, appraisals added key valuation capabilities, which allow our ancillary business performed throughout the residential cycle as valuation work is strong during origination and delinquency periods and capital markets search picks up later in the cycle. That's various types of loan pools are sold.

Turning to operating expenses, which consists of employee and other.

Operating costs operating expenses declined as both employee costs no other severance and other operating costs.

Declined due to continued management focus employee costs as a percent of revenue declined from 30% to 27% and other operating expenses declined from eight to 10% to 15%.

One other matters, our financial position remained strong our total cash and investments in the balance sheet or over 400 million above regulatory requirements, which along with 100 million available at our newly expanded credit line remained solid foundations to support our customers employees and real.

The state markets.

<unk> equity attributable to Stuart was 781 million at the end of the second quarter with book value per share of approximately $33.

Lastly, net cash provided by operations during the quarter improved to 61 million from 31 million in the prior year.

I'll now turn the call back over to the operator to take questions.

And that there's time, if you would like to ask your question. Please press the star in the wind on your Touchtone phone at Star and one on your Touchtone phone now we can pause a moment to allow questions to Q.

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[laughter].

Yeah, we can take our first question from Bose George with KBW. Please go ahead.

Good morning, both.

Good morning, good corridor.

Actually let me first question is just on the strength in the agent channel.

Can you talk about what's happening there have you recovered a lot of the shared that you saw some <unk> during the <unk> merger period.

Yeah. Good observation, both that's exactly right. So obviously.

The agency channel how some of the same good trends and revise that together the direct us but for us.

We also have the benefit of a number of agents that left us after the announcement of the fidelity transaction are now coming back I feel pretty good about that our team has done a great job kind of the kind of a laser focus on people than we've had relations with the path and I think the agents are thrilled that were were back and they're getting that business.

Back so that's why you see a little bit of greater growth.

Perhaps than.

Some other folks so.

Okay, great. Thanks, and then just given your comments about order trends being better in July versus June do you think your Threeq you margins and earnings could look fairly similar to Q, if nothing else changes in the market.

Gave you want to take that.

Oh, yeah effects, rather Bose.

Yeah, I think as it as we see today, we're still seeing good demand I think as I mentioned in my script. You know, we're very mindful of of what's happening with you know with the Corona virus and the spikes and so you know I think when things are looking good on the order front now I will just have to see how the rest of the quarterly.

Your plays out.

Okay. Thanks, and let me just last one on longer term expectation do you guys intend to put out any sort of longer term margin expectation and <unk> are there other ways for us to going to think about assessing your progress towards yeah towards sort of.

What were you heading in terms of more efficiencies et cetera.

Yeah. So great question so.

I think you've heard me say some of this before.

When you look at Stewart like food for a decade, we underperformed the industry pretty materially probably made between four and 5% margin.

My view is an over this next three years were structurally changing things. So we're going to materially change that margin and it's not one or two points, it's materially going to be better than that it's going to be approaching our competitors. Although I've said, our competitors had a different business mix. So it's not going to reach all the way there, but it's going to be.

A material change and it's gonna be structural it's gonna be it's going to be consistent so I feel like we're making good progress on that.

We're not all the way there and obviously this quarter was particularly good given a bunch of things coming together, but.

We're doing the right things to kind of set ourselves up so that we can have.

A better consistent improved margin and and that's what you're going to be able to expect from US I think we'll have value creation well next over the next three years will go a little bit more than everybody else and will also increase in March.

And so I think that's where the value creation would come from the company.

Okay, Okay, great. Thanks, a lot cats.

Yep.

Our next question from Geoffrey Dunn with Dowling and partners. Please go ahead.

Thanks, Good morning.

Born first question is with the.

Savings initiative, you announced in May.

How much of that was streets annualized savings to the bottom line versus funds to be reinvested in the ongoing initiatives turned the company around.

Yeah again, I think a number of <unk> you know if you look at what we did do is kinda three categories. One is some you know a small portion was kind of temporary.

Things that you know things like travel and things like that discipline because of the new environment.

A number of it was kind of structural things it really had nothing to do its targeted actions you took as we're trying to get better.

As far as positioning the offices to be more successful et cetera.

And then a up some of it was because of a volume changes in various locations and exiting of office is because of their <unk> not strategic to the portfolio. So I would say that you know some portion of that I'll be reinvesting into the business. So I'll give you. An example, so.

You know since we started the journey, we probably have.

Closed or exited say [noise].

30 40 locations.

And those proceeds in those resources are being redeployed into areas of the company, where we can grow and investing in folks into <unk>.

And and again you know so a lot of what we're doing it right now is reinvesting, but I've said to you and I I reiterate that they were not going to you know do all these things make all these investments and wait for three years to improve right every day, we're going to get a little bit better and so all of these actions helped.

Let's get better so we can be stronger and demonstrate that getting stronger but I'll tell you. This is some significant portion of that that we are reinvesting.

Back into the business and again I think that the return is right on that and we will show improvement, but there will be reinvested I mean, I can tell you exactly leprosy precise percents.

Okay and then.

I think both commercial and residential seemed to bottom in terms of sooner than I was guessing two three months ago.

But obviously, there's a lot of macro challenges still out there and particularly consideration for the commercial markets. So can you give some color on what's been going on a commercial what's the pipeline in commercial look like and what's the feel just looking out over the next.

Whatever timeframe you have visibility into.

But even just the activity in the back half of it yeah.

Yeah, David why don't you start and I can I could finish.

Yeah sure Jeff So I think the you know commercial market, we're expecting to be.

Slower slower for longer I think it's because you know come over time and commercial upsides to track.

At all like activity I'm much more closely than necessarily rates, just because of the structure that financing there.

So you know a lot of what what what's going to drive that as you know how to places reopened how do we go back to work you know as companies re thing you know space needs and the like what what does that ultimately play out that and you know in a lot of those questions are still are they.

Answer and then you've also got the various differences by property class right. So.

Some of the bigger cities like New York, Yeah, there are activity significantly curtailed some of the smaller markets maybe not as much of it then you've got different things happening in different sectors right like the leisure and hospitality is quite slow Ah. That's so where do you sort of put all that together it's just.

Calls for a much much longer recovery.

And that sort of what we're thinking about right now so Brett I love you have anything else that too.

Really the only point I would say is that.

We're still bullish on commercial long term for the company.

And that I think that you're going to see perhaps the lower end of the covered a different case, then kind of the higher end to commercial and I think we're well positioned both in our direct offices in kind of our secondary city approach and our commercial services group and I feel like we wind up our resources pretty well I think the same is true.

Canada.

We've been building out our capabilities and so were being obviously crude and I agree with David that there's some time.

You know before this [noise].

Got it corrects itself, but I think we're pretty well positioned across the board.

As this involves and again I think we've taken some discipline steps so that our resources are appropriately aligned right now too so but it'll be a long you know it's gonna be along recovery.

Okay, and just last question in terms of the trends.

Was was April the commercial bottom and you saw strength thing like you didn't residential.

In July versus June as well.

David you got that.

Yeah, No I don't know so if a bottom.

You know, we're gonna be town down for a bed I don't know that bottoms up then called at this stage.

Yeah, I'd expect to slow recovery as we said.

Okay.

Right. Thank you.

Thank you.

As a reminder, it is star and one for questions. We'll go next or John Campbell with Stephens Inc. Please go ahead.

Hey, good morning, guys Congrats on a great corridor.

Thank you. Thank you yeah. So I mean really really good results you had it looks like kind of margin expansion over 200 <unk> versus last year. You know obviously commercials are pretty high margin business for you guys. It's down 40% you also had a little bit higher reserves. So just trying to unpack. The outperformance just as best you guys can I mean, there was obviously a little bit stream from purchase and refi.

Hi.

But anything kind of unique or one time in there and then if you guys maybe talk to how much awesome the office closures and maybe reinvesting in some of the a better margin potential offices help.

Go ahead, David why did you.

Yeah, maybe I'll just cost speak first to the quarter, Fred and then if you want to maybe talk a little bit about the.

Hi, I see the off as close as you know I would say the personal about it that wasn't significant to the quarter a lot of what Fred talked about where we were at a number of smaller areas and you know just trying to get refocus the.

And you know that up what sort of sort of driving that I think with respect to the quarter. You know the two things that really drove the.

Performance were the was the strength of the domestic residential business and then the strength of agency.

And when do you sort of on the revenue side and then when you sort a couple those with the costs <unk> management and focus initiatives you just had a much higher about dropping to the pre tax margin wise you talked about it so that that really drove the quarter and not by far offset weakness that we spotted commercial and.

That's it to a lesser degree in international so out of that Fred If you had anything else to say, but I got sort of I think that really answer I.

Yeah, I think that's right David I mean again.

Since we started this journey you know weve been trying to make sure that we are every place. We are we're committed to winning there.

And that we're going to have the right resources to be having to scale to manage it appropriately through the cycle.

And what we saw is you know an inch peak in a mile wide and a lot of places and so you know we're not all the way they're everywhere.

But we picked our spots and we said here's the places, we're really going to be able to winning and commit to our people and deliver and we exited the you know other places that works logically underperforming and we were never going to win and had we allocated those resources to the better places and get the market. Then has helped us with the volume in our.

People have delivered extraordinarily well.

We have a lot of offices that are at probably their keepers.

And so people did that in a very effective way. So it's you know things are coming together again, it's a it's a strange time with everything that's going on in the uncertainty, but again I think our company is getting better and more focused.

And it's allocating resources, a little bit more precisely about where the opportunities are and we're doing a heck of a job in my view, reaching back out to our customers that we kind of where distracted from over the last few months quarters and we're now we connecting and get you know starting to win back that business. So I think we're in a good play.

Nice and you know we have more to go in and we need to continue to get better, but but I think we're making really good strides and you know improving the performance and frankly the growth prospects for the company.

Okay. That's helpful. And then you know obviously you guys don't provide guidance is way too many moving parts here, but I mean, we're assuming that commercial no maybe picks up a little bit in the next quarter. You know I think purchase is gonna be stronger re fi, probably maybe down a little bit, but I know that's kind of a lower margin business, but no. This quarter was a record EPS type quarter for you guys is there any reason why.

You know assuming does assumptions are correct why you wouldn't put up a higher EPS number next quarter.

David I will let you take that [laughter], Yeah, I think I think we've covered by responses I think you know we <unk>, we stand fine as we are today, but mindful of you know spikes and other things happening election coming up in the fall I mean, there's a lot of moving pieces as you said so.

A big things look fine now and we just managing through it every day.

Okay, how did take a shot there last one for me on the U.S. appraisal business that seems like a really good acquisition. If you guys I just a little bit more details there I guess I'm, assuming that almost all that's transactional revenue, but any sense for kind of next 12 months type revenue potential and then if you could maybe talk to the margin profile is that is that accretive to the underlying title more.

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Yes, let me just talk with and we are thrilled about it and ER and foster and his team or it's just a great add and for a lot of reasons not just the business I think theyre going to bring a lot to this institution.

So David you want to you want to run with the impact.

Yeah, I mean is I think were one month in right. So let's sort of see see how it plays out I guess the way we looked at it in a you know I mentioned some stuck in my remarks. It did about 7 million revenue in June. It is it is a transactional business its appraisal orders and so their business has got about.

So why the trends that we've been saying overall in terms of overall order count increase and what's happened in the origination market generally I think again the way we sort of think about that as we didn't really have a first mortgage product in our services business now we have one.

I think it'll it'll allow us to sort of drive revenue in that sector ball, while the market's going well as it is today on originations I think one if delinquencies were to pick up either later this year next year with all the forbearance activity rolling.

There's a lot of valuation work there its.

So if you have any numbers, probably a you know a little high because of what's going on in terms of an annual run rate and I think the margin you know with it we will see over time should be consistent with our with our overall bargains.

Okay. That's very helpful. I need I don't know if you guys just close this but how much did you pay for it.

Ah we didn't disclose it.

But but if you look at the changes in the balance sheet, you might be able to figure it out.

Got it.

Got it.

Thank you.

It does appear we have no further questions I'll return the floor to our presenters for closing remarks.

I just want to say, thank you for everybody to join Janine call.

And this will conclude todays program. Thank for your participation you may now disconnect have a great day.

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