Q3 2020 Stewart Information Services Corp Earnings Call

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Hello, and thank you for joining the Stewart information services third quarter 2020 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 instructions will be given at that time. Please note. This call may be recorded lastly, if you should require.

Operator assistance. Please press Star Zero. It is now my pleasure to turn today's conference over to Nat Otis head of Investor Relations. Please go ahead.

Thank you Catherine good morning, Thank you for joining <unk> third quarter 2020 earnings conference call, we will be discussing results.

Yesterday after the close joining me today are CEO, Fred Eppinger and CFO David.

To listen online. Please go to the store Dot com website to access the link for this conference call.

Participants that this conference call, making forward looking statements that involve a number of risks and.

Because such statements are based on an expectation of future financial operating results and are not statements of fraud.

Actual results may differ materially those projected the risk and uncertainties with forward looking statements are subject to include but are not limited to the risks and other factors detailed in our press release published yesterday evening and in the statement regarding forward looking information risk factors and other sections of the company's form 10-K, and other other problems with yet.

Let me now turn call over to Fred.

Thanks, Dan and thank you all for joining us today and for your interest in Stuart.

Steve will go through this quarters financial results in more detail before I would like to what touch on a few order things about our performance this quarter.

Well it feels like much longer given everything that has happened in 2020. This quarter represents the completion of a full year financial results for Stewart since I took over as CEO in September 2019.

That reason I'd like to take a moment to reflect on a few things.

First and foremost I am proud of how this company and its employees have handled that change and turbulence over the past year. The terminated merger with fidelity National last September it feels like a minor speed up when compared to the upheaval experienced by our country or communities, our customers employees and their families because of COVID-19 as.

Well it is very real and active real estate work through it all our employees maintaining their focus on delivering superior service in challenging conditions, while mobile ensuring the safety of their customers and coworkers.

Constantly refer to what is taking place here at Stuart as a journey because it highlights that the work to achieve our mission will take time.

That said our results this quarter and year to date show that real progress has been made on the journey to become the Premier title services company.

Growth is not simply the result of macro tailwinds of low rates and positive real estate market, but it's equally about those former customers being reintroduced to the value of the store brand new <unk>, new hires joining forces with our existing <unk> existing employees actively market share and everyone here at Stewart going the extra mile to do it.

<unk> added value and a better experience for our customers.

Along with a focus on targeted growth is the foundation of greater operating discipline with this quarter's record operational profitability reflection of our hard work in this area. This fall.

I believe that much more progress can be and will be made as we move into 2021 and beyond in many ways.

In many ways, we remain structurally disadvantaged versus our peers with respect to business mix scale, what geography that.

That said I am pleased with our first steps in addressing these differences.

Acquisition core title and ancillary services have brought vishal skilled mix to Stewart with more to come on the horizon and new hires have reminded us that Stuart is now an attractive destination for talent, both from our industry and adjacent industries.

We have made good progress so far but there's much more to be done.

Maybe we'll go we'll now go through our financials for this quarter in more detail.

Thank you Fred Good morning, Let me also thank our associates for their revenue and inspirational service and our customers for their support during these unique charts.

Third quarter saw a continuation of the trends unfolding in the second quarter.

It's real activity was strong purchase and refinance the man with a 30 year mortgage rates and that's really the sales area.

Considering these to be accommodative.

Oh sure remains challenged by economic events, we continue to be mindful of the economic stress caused by the virus as well as mortgage for goods, which will walk that will result in increased four closures and may elevate title losses.

Our Q3 results yesterday stool reported total operating revenues of five.

Net income of 56 million diluted earnings per share of $2 or 21 cents.

A significant improvement from last year's quarter, which had an adjusted net income was 30 million.

And adjusted diluted earnings per share of your daughter 28.

Isn't it like say the press release.

No no no last years quarterly results included a 50 million dollar after the merger termination see a wall and their charges and those are expenses.

Our total revenues for the quarter improved to 563 million or 13% from last year driven by another strong performance or was it answer that agency operations, partially offset by lower revenues from commercial services.

Pretax income for the title segment was 82 million, 66% improvement from the third quarter of last year.

The tax title margin also improved to 14.5% as though it was revenue growth and the continued discipline in managing our business, but that should roll here.

With respect to our direct there was the potential direct title business dresses and ultra revenues increased 40 billion or 30 or so.

On due to increased purchase and refinancing driving transactions from existing and newly acquired title offices.

People thought was approximately 19 partner, which was lower than last year. If you will I believe it is yes.

Domestic commercial revenues decreased 13 million or 26% as a result of fewer promotional transactions.

Average people fall at 97.

So open and closed orders improved 48, and 44% respectively.

Paired with a prior year quarter, primarily due to the affirmation refinancing and.

All purchases.

Our recent acquisitions contributed about 7% to both open and closed orders.

Our agency business increased revenue and 29 million or a lot of her so that increased business activity, while agency remittance improved to 18.2% versus 17.8% from last year.

Regarding title losses total title expenses increased 7 million or 35%, primarily due to increased title revenues as well as increased provisions on our domestic business due to the current economic environment and favorable loss development and certain coverages within our Canadian.

Operations.

Percentage of title revenues, our title loss expense was 5.1% versus 4.2% in the prior year quarter.

As previously announced we acquired since all losses in early September Walkaways. They said she adds to the Stuart family and our view.

Very excited about the early results, which generated 10 million of revenue in the month.

These acquisitions are consistent with our strategy of improving their scale and competitive position in priority markets and a proven industry talent to strengthen our customer and business relationships.

In regard to operating expenses, which consist of employee and other operating costs.

Total operating expenses increased primarily due to higher employee incentive compensation consistent with our improved operating results partially offset.

By lower operating costs as we continued our management focus as well as reduced marketing and travel spend with the current covertly cheated bar.

Employee costs as a percent of operating revenues improved to 26% and 28% last year, although their operating expenses declined to 16.7%.

So to all 3% last year.

The other matters, our financial position remains very strong our total cash and investments on the balance sheet or approximately 500 million over regulatory requirements, which along with 100 million available water rather remain.

Remained a solid foundations to support our customers and employees.

The state markets Stockholders' equity attributable still it was 944 wall with a low value of approximately $35 a share.

September 30 of 2014.

Lastly, excluding the 50 million after that merger she and the prior year quarter net cash provided by operations improved from 66 mall sales.

Oh no.

Third quarter of this year.

I'll now turn it back over to the operator for questions.

And at this time, if he would like to ask a question. Please press star and one on your Touchtone phone again that is star and one if he would like to ask a question you can remove yourself from the queue at any time by pressing the pound key.

And again that is star and one for your question well go.

Well go first to John Campbell with Stephens, Inc. Your line is open.

Hi, Good morning, John Congrats.

Morning, Congrats on Great results I think from my from my math here from an adjusted standpoint looks like you guys almost put up or not yes. The match.

This quarter it almost match what you didn't do anything so really really nice results congrats.

Yeah. So.

I I want to ask a little bit about the newly acquired the Western State offices. David I think you said that helps looked orders last 7% was up for the full quarter or just for the September orders.

Yes for the for the full quarter John.

I also noted a 10 million for the month in revenue and keeping in mind that we close around that first and then there was a smaller one a little later.

Right. That's helpful and then on the acquired offices.

To what extent are how many of those were actually driving it gets your revenue in the past is there going to be somewhat of a negative impact. The agency has the kind of mix shifts over to correct.

Oh, Yeah, I would say we were not well the bigger participants in Ah so there shouldn't be a big negative.

Okay, and then on the reserves.

Don't know if you can unpack, that's maybe a little better but as far as the strength and he can you can you kind of suss out you know what what is what's going to Canada developments that was made in developments versus just kind of conservatism around.

Got it puts more towards him chefs and maybe what happened what closures next year.

Yeah, I would say the bulk of it was too little water point to you know just to be mindful worldwide be happening in the car makers.

Over the last several quarters, we continue to look at product differences and then make adjustments as appropriate, but I would say the majority was to be mindful of but whats the though but yeah. I just I think it's a good position to be a kind of conservative right now given the trends to your point, so it's really about ideas.

And then I guess last one here on just to tack on to that.

Well I guess, how much higher you guys at this stage on the actuary estimates.

Oh I would imagine.

Oh, we're over the mid point it out as we typically bad.

Okay, great. Thanks, guys.

I do appreciate it.

Our next question comes from Bose, George with KBW. Your line is open.

Hey, guys, good morning, and strong quarter I'm actually a couple of questions first you know in your comments Fred you noted.

Alluded to more to come on the acquisition side. There can you just sort of lay out how you're thinking about that and also just touch on <unk> on the balance sheet. Your debt to capital is sub 10% you clearly have a lot of cash.

How about just how should we think of sort of cash available for you have to support growth.

Dave you want to take that.

Balance sheet, then I'll come back to it yes. It was I think weve touched on the other capital thought process in the past I think obviously the money a lot of credit is available and there's probably a good couple of hundred million on top of that you know like to leave a little bit above regulatory could or should I just.

Operating buffers and the like but I think that sort of how we think about capital for investment Yeah. I think we've talked about what we are working to use that for a variety of it right or title.

Ancillary and things of that nature, and you've seen that activity really for the last few months now and on the the other question was I. If you look at US right as I said a couple of times we.

We really got stuck where we were in stupid a mile wide and what what we're really trying to do is invest in strength and really be thoughtful and every local market. What our strategy is and what you see is you could make a big difference on your <unk>.

Living in margins.

I get to a certain share well, they've kinda stabilizes and and obviously were being more operational discipline and our operation and we're being thoughtful expenses and all that but you really can actually be much more resilient earnings and margins. If I can get more revenue in places, where we have strong leadership positions.

And so we do and were going have to MSC by M.S.J. <unk> and.

And we've had an opportunity to do some things to date, we've got some more in the pipeline to do I would also say on the ancillary side, we have some opportunity to build some scale some targeted areas and we're tracking that pretty effectively so again I feel like we're doing the basics really well, we're trying to be more.

Focusing on our ability to manage our business in a thoughtful and kind of you know a more disciplined way, but we're also being smart about structurally shifting our investment in play.

In places, where we have strength. So one of the interesting things that I'm happy with is our ability to grow the business, while weve, probably shed 30, 40 plus million dollars as we've redirected some more profitable areas and shit places, where we had chronic issues that we didnt think we could change so.

You know it's been progress we got more to do there's no question, we have more work to do but I really I'm happy with the quarter and I'm happy with the progress so.

Okay, great that makes sense. Thanks, and then actually just wanted to ask the premiums in the quarter on the direct side. It was up very meaningfully on the agent side. It was up a little more modestly can you just talk about the differential and also just remind me is there any lag on the agent revenue.

There is.

A little bit to lag behind where it's reported and so many trends in the market we'd be down back you know 40 to 60 days I would say.

But I'm very interesting I'm very pleased because we have a very targeted way both to get back some of the folks that left us because of the transaction, which we made great progress where kind of where I think we want it to be but we also.

But we also had some investments we need to do on our value proposition connectivity ease of use et cetera, and though we're knocking those things off and were seeing really nice progress and again.

That business would be a very thoughtful geography or location.

Location by location, obviously splits defer profitability differs in the agency business and we're very very targeted about growth. So I like the progress a lot, but that's the place you'll see continued progress I believe over the next 234 quarters and so it really kind of getting going and up and you know is that.

Number, but you know.

Yes, if that we've made that are going to hit the market recently I've got to be hitting the market between now and the end of the year that are just going to enhance those relationships. So I feel good about that.

Okay, Great actually let me just ask one more it's a question that I think I've asked another so that's before as well, but just you know you get good wanted updated thoughts and where you think the margin.

Can end up I mean this is this is the quarter, where your title margin yeah that was getting a lot closer to the peers. You know just any updated thoughts on how we should think about where that got you know many of you again I [laughter] unusual year with all the things going on for sure right. When we started it I I I set forth to say, okay. We ran between afford.

To happen a five to three years previous margin and I felt very strongly that we could do the right things over the next three years to get to high single digits I I would tell you that I have more confidence today and that than I've ever had before but I still believe that's kind of right I think we could have accelerated some of our progress.

Here, it's hard to complete we see but I think that's kind of is still where I am.

Could that change short you know, we're trying to get better every day and as we kind of get our structure and our portfolio together, we'll see but it's that's what we're shooting for that's what we believe will happen. So that allows our shareholders to get I believe above average growth for the next few years as well as you know a two for on the margin.

Forward over the next three years so.

Yep.

It's mark Yeah, Yeah, yeah.

Oh, I'm sorry about that.

Okay, Yeah, just because that's what they are looking at that.

<unk>.

Yes, because it yeah, so that the other pretax title margin, but so okay, great. Thanks, a lot nice quarter.

Thank you appreciate it.

Again that is star and one for your questions today, well go now to Geoffrey Dunn with Dowling and partners. Your line is open.

Yeah good morning.

Great can you talk a bit about the commercial market the recovery you've seen today and I thought the local level and the national type accounts, but also your outlook honestly through year round, but into 2021, you know obviously, we all see the same reports about idle office space et cetera.

What type market look like to you.

Great question, David why don't you start with that I went out and then I'll go jump on it.

Yeah, I mean, I guess, we'll probably as we as we have been for that for this year and last year. We said last quarter. We made up is optimistic and so some of our competition. There I think were you know planning for a longer recovery I think we could see some pickup in activity.

Going into next year with workouts and move into special servicing in that and that kind of thing and maybe in selected markets, but in general it doesn't seem like there's a there's a big pickup in activity and we're planning for a longer recovery there, yeah, and I would say if we see activity there are some of the smaller.

Deals or start happening in some of the secondary cities, but I would.

I would also just say because I think this is a longer term for us. This is an important opera.

And important opportunities. So we are right now very focused again on some targeted markets and we're looking at what the opportunity is and go to try to be selective in how we really invest and position ourselves. As this thing comes out I would also say that in Canada. We think this is a mature.

A material opportunity for us long term so.

For me, we're you know we're cautious about what we see but it's also an important part of where we're going to go and our growth. So we're trying to position ourselves and worked pretty hard at being thoughtful about where weve put investment and we think about the future. So you know if you use I think you'll see everybody in the same ballpark.

[laughter] there, it's all because it's got to the markets driving this reduction, but I do think its get the long term important part of what you are but we're going to be so.

Do you in your caution worried that sort of anything kind of secular disruption to the commercial market.

And then I guess, it's probably too early to tell I mean, you can flip a coin on whether people are going back to work or not I mean, there's equal studies say, that's all work from her own live that everybody wants to get back to the office. So I'd say, it's too early to cool Yeah. I, just think I think there's a mix.

Question two by the Oh, we're going to see it a dramatically different mix as we get as we come out of it you know.

Hmm.

So to your point, we didnt.

Permanent or whatever it is.

[noise] [noise], Okay. When you bet on two calls all day long at some point you want to go back.

[laughter] all right. Thank you guys. Thanks.

Actually I appreciate it.

And we do have a follow up question from John Campbell with Stephens, Inc. Your line is open.

Hey, guys, thanks for having to squeeze one more in that.

You know, though of working from home and wanting to get back to the office I'm just curious about on the other operating expense line.

David I don't know if you can suss out how much or what maybe the run rate savings are from less TV and that's kinda travelling activity.

Yes. It is.

Good question, there's a lot and line you know I'd say, we're probably down.

A good 10 billion for the year run rate there yeah, I would say that I would say that if you think about all discretionary kind of stuff.

Profit tied to it.

It was hard about it is we also have an extra cost of setting people up remotely too. So this is but its Matt I would say.

But I would say, but the past, but probably that's the right ballpark of discretion.

The scenario that we got out but because of the situation.

Okay. That's helpful. And then the 60 million of color you guys called out how much.

How much of that was impacting corporate in it I know at one point you guys are running corporate about 5 million a quarter is that still kind of the same run rate.

Yes, it's in that and bought five yeah. It's in the press release isn't it like six or so yeah.

Yeah.

Yeah.

Okay. Thank you guys.

Yeah. Thank you.

And this will conclude our question and answer session I would now like to hand, the call back to our speakers for any closing remarks.

That concludes this quarter's conference call. Thank you for joining us today and your interest it's Stuart.

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