Q3 2022 Stewart Information Services Corp Earnings Call
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Hello, and thank you for joining the Stewart information services third quarter 2022 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.
Today's call is being recorded and lastly, if you should require operator assistance. Please press star zero.
It is now my pleasure to turn the conference over to Mr. Brian Glaze Chief Accounting Officer. Please go ahead Sir.
Thank you for joining us today for sure its third quarter 2022 earnings conference call. We will be discussing results that were released yesterday after the close joining.
Joining me today are CEO , Fred Eppinger, and CFO , David Hisey to listen online. Please go to the Stewart Dot com website to access.
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 sandbox in todays earnings release, which is available on our website at Stewart Dot Com, Let me now turn the call over to Phil.
Thank you for joining us today for storage third quarter 2022 earnings Conference call. David will go over the quarterly financial results in a minute.
Before that I'd like to cover our overall view of Stuart and the current market.
Discussions for much of the assets over the last theme that half years. He has focused on fundamentally restructuring the companys operating approach to better position ourselves on our journey from there.
Here's how it services company for long term holders and to create a stronger and more resilient business.
Second performed better through all real estate cycles, and economic conditions, we are focused on improving margins growth and resiliency by improving our scale, our operating capabilities and our financial discipline, while the third quarter was very challenging I'm pleased with how we are managing in this rapidly changing environment.
Economic headwinds kind of early in the year and it is now here in the back half of 'twenty, two and likely the first half of 'twenty three will be very difficult environment for our industry, while we will be taking additional actions as needed to improve our structure and resource allocation.
They focused on the long term goals of building improved competitive position in a more efficient and effective operating model that functions well throughout the real estate cycles.
Significant progress, including retail technology customer experience and financial model, but more work needs to be done.
The market has transitioned as you go into a higher interest rate environment rates rising at an unprecedented speed.
Currently over 7% compared to three or four early in the year, putting significant pressure during the third quarter of housing affordability driving significant reduction in purchase.
Inventories remained low and our home prices, what we can see.
It varies in Florida and continue to adjust to these market changes consolidated adjusted margins came in just under 8% for the quarter and adjusted Tayo margins decline to just above 10%.
I'm pleased with the improvements we have made to our operating structure that allows us to repay relatively strong.
Mortgage margins in our real estate services businesses remained in the mid single digits with our adjusted largely thanks to the organization is profitably above 10%.
Comparison, stewarts pre tax operating margins prior to beginning our restructuring jewelry was in the low to mid single digits in a normal market with low volume quarters difficult skus like the <unk>.
Last quarter, we consistently lost money.
To improve scale in our direct operations improved portfolio acquisitions, and real estate services and improvement to our operating model is all allowed us to strengthen their margins, particularly in challenging markets.
Obviously, there will be continued pressure for this market, but we are better positioned to manage this channels, while maintaining strong customer service I would like to reiterate the EBITDA as the market has transitioned our journey continues we remain focused on investing to make structural improvements the catering critical scale in private markets and investing in operating long improvements.
To improve customer service as long as we do see the cost of delivery.
Our efforts to enhance the customer experience through technology investments that meaningfully change the ease of use and expand our product offerings of our agencies led their direct businesses made significant progress this quarter and our efforts will continue we're also balancing financial discipline, maintaining a higher level of customer service, which Stuart is recognize.
As for the industry to.
To achieve our goal will be turning to Premier class services company, we recognize that we must be thoughtful investments.
The water.
We continue to evaluate opportunities to improve scale and targeted direct markets and add additional services that peripheral but our existing with the services. We currently have available significant capital resources to deploy as these opportunities arise our recently announced acquisition of FMC Tower services, a nationally recognized provider of title services.
For the group for the reverse mortgage transaction. The most recent example of our commitment to investing in the long term growth of Stuart I would like to welcome the employees of FMC to Ah Stewart.
Regarding the direct operations share growth targeted with deepwater should be a key strategic objectives.
Rich before we closed on more than 20 regional title companies. During the past few years and continue to evaluate opportunities to deploy available capital with a significant progress this quarter integrating these acquisitions into our production and other systems, which improves the customer experience as well as the overall operating efficiency that we have the ability to work through.
Past several years.
Fortunately, we are viewed as either a businesses disciplined leader for both the current environment and the long term story.
But as we believe our opportunities to scale, our growth markets and to prove our share with the highest quality independent agents was as strong as it's ever been.
Im pleased with the continued significant progress.
<unk> services that provide greater connectivity ease of use and risk reduction for our agent partners.
Industry accelerates implementation of ongoing paperless transactions, where it gets but at least to better support our agents as they undergo this critical transition tens of patients.
We have been investing in our commercial operations to set them up for growth as they are an important component of our overall strategy. We are optimistic regarding the commercial markets overall, although we recognize there may be some headwinds in the short term given.
With the changing financial markets.
Overall, we will manage our expenses and investments very carefully in this challenging market to ensure we are financially strong. So that we can opportunistically take advantage of any opportunities that arise dazzle, whereas we return to the more normal real estate broker.
I'll conclude by reiterating my positive long term outlook on the real estate market because of our ability of Stewart to become the Premier title services company.
I would also like to thank our associates for their hard work and our customers for their continued support.
David will now update you with the results.
Everybody. Good morning, Let me also thank our associates for their amazing service and a pessimist Charleston supporter.
Here in the home line season, the residential market has been negatively impacted by a 30 year mortgage rates now are associated with that.
Consumer sentiment has forwarded an inflation affordability recession consoles commercial real estate begin to see the impact of rates and volatile capital markets yesterday, We reported net income of 21 million and diluted earnings per share that all of it as.
While total revenues of $716 million after adjustments, primarily for net unrealized gains and losses on equity Securities and office closure and severance expenses adjusted net income for the third quarter was $37 million or $1 37 per diluted share compared to 86 million.
A $3.17 per diluted share in last year's quarter.
Compared to last year's quarter total title revenues for the third quarter decreased $120 million or 16%, primarily due to lower market activity driven by higher interest rates the.
The title segment pretax income for the third quarter was $52 million compared to $119 million in the third quarter.
21, while on an adjusted basis, the segment's pretax income was $63 million compared to $119 million in the prior year quarter adjusted pre tax margin for the third quarter was.
6% compared to <unk>.
We said last year.
With regard to our direct part available domestic commercial revenues were down $4 million or 5%, primarily as a result of reduced transaction size average fee profile was 13.
<unk> ended compared to 15400.
Domestic residential revenues decreased 40 bottom oil or 18% due to lower purchase and refinance transactions. So the residential fee per file increased 12% to approximately retarded compared with 2900 last year due to higher purchase mix.
Total international revenues decreased $11 million or 20% compared to last year, primarily due to lower transaction volumes at our Canadian operations.
Foreign currency exchange rates against the us dollar.
Total opened and closed orders declined 40%, 39%, respectively, primarily as a result will be elevated interest rate environment.
Consistent with the software market third quarter revenues from our agency operations decreased 61, or 15% compared to last year. The average agency remittance rate was slightly decreased to 17, 6% compared to $17 million.
Last year due to geographic mix.
Title losses totaled firewalls expense in the quarter decreased $5 million or <unk> 16 per se.
Due to lower total revenues.
As a percent of titles evidenced the title loss expense was three 9% compared with what we saw last year for the full year 2022, we anticipate our fire losses will be approximately 4% of revenues.
Regarding our real estate solutions.
Pre tax income increased 12% over same periods of last year due to the effect of our acquisitions pre tax margin for the third quarter.
This 4000 acres.
13, boardwalk or slightly accretive purchase intangible amortization.
Paired with four 3% in April .
Respectively in last year's quarter.
In regard to operating expenses, which consist of employee and other operating costs total operating expenses for the quarter decreased primarily due to lower revenue related costs, partially offset by higher salaries.
Employee.
Due to the acquisitions.
We incurred approximately $4 million of office closure costs and severance as we evaluate the resources needed to serve the market.
Employee products to the other operating expenses as a percentage of operating revenues was 27% versus 21% last year.
Sorry.
For the third quarter.
Employee costs, we play so with another operator in 'twenty two.
'twenty, one compared to last year's 24, and 18, respectively, primarily because of lower revenues in the third quarter 2022.
All other matters, our financial position continues to provide strong support for our customers employee of the real estate market in the current economic environment. Our total cash at a wall since as of September 32000 to approximately 457, there than the regulatory requirements.
Also have a fully available $200 million credit facility.
At the end of the third quarter total stockholders' equity attributable to <unk> was approximately three 4 billion that our book value per share was approximately $50, which is 4% higher.
Lastly, net cash provided by operations for the third quarter was $49 million compared to 100, and so from last years quarter, primarily due to lower net income in the quarter.
We are always grateful for and inspired by our customers and associates, we advocate for everybody's improves safety and prosperity.
Our support and real estate markets I will now turn it back so the operator for questions.
Thank you Sir at this time, if you would like to ask a question. Please press star one on your Touchtone phone you may remove yourself from the queue at any time by pressing star tail.
Once again that is star one to ask a question.
Our first question comes from John Campbell with Stephens. Your line is open Sir. Please go ahead.
Morning, John .
Good morning.
On the FMC title acquisition.
David is that or the reverse mortgage orders are they running through other or retire.
Well, we're going after we'll get that John that was actually on October one so that's reflected in any of our numbers.
But they are.
<unk> like purchase.
I think what's the liberalized presentation going forward.
Okay.
So I guess picking up a level could you maybe size the expected earnings contributions in any kind of early thoughts on the accretion potential.
Yes.
Any model actually quoted earlier now.
<unk>.
The way to think about that as much like some of the other title acquisitions, we do are the risk levels.
And the 40 million revenue.
And we are probably north of 10 million and pre tax contribution.
Okay, I think a pretty healthy business and then some of your competitors.
Provide an adjusted EPS metric, where you guys, where theyre backing out the purchase amortization you guys have obviously been very acquisitive, you'll probably continue to be acquisitive. So.
You've seen a pretty big step up so I wanted to check on the purchase amortization what that was in the quarter and then how much do you expect that to step up next quarter with what's happened with the acquisition.
Yes.
The purchase of the carrier what FNC.
On the title type items, we typically have may with goodwill.
So you don't see as much amortization that because this would have some sort of customers you could see a little bit more out of traditional title.
I think as a general matter, we're running at about 30, plus more than the purchase amortization.
We are aware of your trauma and that several ever taken a hard look at it probably in 'twenty three in terms of how we might disclose that.
Kevin It makes a lot of thats, particularly in the real estate services business.
We think about it that way because it's a material part of those deals.
That's why I referred to the margin here.
Amortization in those businesses.
Certainly market 10, right, so that's where it affects it for us.
We really need to consider more.
I suppose it.
Brito distortion.
Yes, that'd be very helpful and then one.
A final question on the office closures and severance cost I saw the $4 2 million charge any way to size up kind of what that estimated annual run rate savings is going to be and then it sounds like you guys. There's further actions probably on the comps. So I just wanted to get additional commentary on that as well.
Yes.
<unk>.
Some multiples of that obviously I mean, I think we continue to reevaluate.
Where we need to serve the markets both for the fourth with respect of all offices.
From a people perspective.
Yes, let me go ahead.
Obviously.
Customer.
A couple of years.
Because of our scale for the company because we were.
Pretty spread out and sub scale and talk about <unk>. So we've been sprinting at DAP, you've made tremendous progress for yourself on the numbers of how much money, we make in the first quarter now and stuff like that we're much better and stronger company.
Certain offices that that I think are attractive markets and attractive locations that we've been giving it a shot to try to to build scale.
It looked at the outlook for the last for the next couple of years, we made the decision to say there's a few of these.
Cut back on.
And so I think we've got most of the office work.
A couple of places that we're considering because we have potential transactions.
Change the profile.
But I don't see a lot of office closures ahead of us.
Unless again, we did some kind of transaction that have redundancy.
Et cetera. So.
But again.
<unk> got a whole premise is that if we can get our scale at the MSA level.
And we can get the scale of the real estate services business, we can manage through the cycle more effectively. So that's that's why we kind of beat the call on a couple of those I didn't see where we can get there as good as we wanted to be.
Okay. All very helpful. Thank you guys.
Yeah.
Once again, our queue I'd like to ask a question. Please press star one on your Touchtone count.
Go next to Jeffrey Dunn with Dowling <unk> partners. Your line is open. Please go ahead.
Good morning, Jeff.
Morning.
I have a few questions first I wanted to dig into the title expenses.
Whether it's sequential or year over year your personnel costs came down, but obviously lagged the revenue decline, which is typical as you adjust to the market, but was a little more surprising was operating expenses, even trying to back out the charge looked like they might have been flat sequentially.
So are you is there something going on in that line that maybe theres a lag effect there.
The acquisition is a bit of a challenge.
And or are you, maybe thinking about the longer run.
And maybe not cutting as expenses as aggressively as you might normally.
You were in that structural position you wanted to be so can you just maybe elaborate what's going on in those lines a little bit more.
Hey, Jeff it's David so on the <unk>.
On the personnel side I think your latter comment is probably accurate I think.
We're trying to balance all service capabilities with.
A rapidly changing market.
There probably is a little bit of a lag.
That is going to be and all the other actions I think with respect to other operating.
Most of that as well.
So we're going to take a hard look at all it looks like the visibility to the pandemic and related.
They've got a travel and promotional stuff like that and there may be some opportunities there, but the vast majority of that number as a third priority for us where were buying data and level of service for our real estate services business and so.
With some of the acquisitions, whether it is coming on stream.
It's not really stepping down as much because you've actually got increases year over year and some of those revenues.
But I think we're going to definitely take a hard look at all of those assets.
Thanks again.
Really good question actually.
Think about it twofold.
Just to your point the lag we're chasing some of it a little bit and it's very purposeful.
Purposeful so in the lender space, particularly in our centralized title space.
A lot of what happens with the market shrinks is that the lenders decrease their panel.
And I want to be very careful about our service metrics. So that we have and what we believe is going to have a winning side of that with every one of our major customers, which is going to be important to us both now and into the future as things come back and so we purposely have lag some of the actions and the same is true with some of the offices were.
It can be one of those unique things about this quarter was that.
In August we had a little bit down in rates and prior quarters.
Okay and then it did the splits from five to seven.
And that's a very rapid.
Decrease in.
The decrease in orders pretty rapidly and the other thing it did as our close rate of orders to key pretty materially in that same period. So in an office that you thought the losses go from 70 to 50, and so that that shrinkage of work that was very quick right is something that you're chasing.
You're lagging a little bit and we have to be thoughtful and get it.
About how we do that and how we service that all the other stuff I would tell you that I've mentioned is that a couple of calls we still have.
This year, we spent incrementally about $20 billion.
Our significant data management I've got some stuff going on lots of integrations that we have.
We have some centralization that is going to help us on our delivery costs.
We bought the company.
India as you kind of rebalance kind of our service product and so we've got a number of investments that are good flight.
<unk>.
Companies that are in there that we're continuing that are going to help us tremendously in the long run.
But they are sort of a peak.
Central to what you would normally see because we were little bit behind in some of those areas. So.
Comfortable about how we're managing costs I would say we are lagging we've taken lots of actions.
I can take a lot more.
And again I think they.
I would say about kind of margins in general.
Period.
This is <unk>.
That's like a 20 year right and so what you see is we've already kind of dropped pretty dramatically and we just got to be thoughtful as we take actions that were not affecting our capabilities to be prepared for when the market comes back and the extra week.
What's a reasonable flow experience, we don't just manage yourselves through it we will and again I guess Neal Purcell historically.
I can look at the P&L office by office I can look at the way, we manage our cost categories and we're following we just have to manage ourselves through what it's going to be a little bit more challenging.
And again here as part of the cycle.
Margins could be a little less so.
Comfortable with where we are but to your point, we have to manage it all we have to really be focused on it and make sure we're on top of it.
Okay, and then to follow up on.
I wanted to ask about commercial.
Note that youre, starting to see some impact from the increase in rates.
I think we saw average deal size come down year over year can you elaborate a little bit more on what youre seeing today in the commercial market implications for the pipeline not only into Q4, but into 'twenty. Three I think we're still on track for essentially a record year, but it's more about what's what's coming down the pike here. So can you talk about what youre seeing today and what the.
<unk> do you think at this point are for next year.
Yes, we are.
We're bullish on commercial in general.
It is true that whats.
Happy to finance of our existence.
The pause that we trade at a value of it obviously it changes the economics of a lot of commercial projects.
Would you see this kind of a change so it.
It might be a little bit of.
I'll call it re traded or.
We're pausing or delaying certain projects, but we see orders be strong right. We.
We were lucky.
We think the commercial segment is going to be a general strong over the next couple of years here.
It's just it's a little bit choppy as people are kind of restructuring.
Resetting, but it but we like the other interesting thing for us.
We have been pretty aggressive and thoughtful about investments you just picked up a team.
Northwest.
Within the class occasionally there is some disruption for broker competitors that are having a challenging time it creates some opportunities given our surplus strength of our position of strength.
It could be this to be as an opportunity for us.
If we stay focused so we generally open market David you talked about the factors I mean, obviously different by sector.
But we are still holding up much better and to your point the flooding.
Right.
Overall years that'll look better.
But it's still.
A relatively solid position for us.
Just to drill into that a little bit more Jeff.
It's performing obviously relatively better than.
Residential is that of all of the.
That's the first.
<unk> commented on it being strong I think we're seeing activity in the energy space and industrial apartments are also classified and.
Marshall So theres a lot of activity in those different segments less so in the office.
And then there's the retail deal things like that so those are still good activity across the asset classes, we will focus on a few than others.
Yes, some of these deals from in the capital markets right and because of that volatility.
It's better a little choppy.
Yes.
So maybe it verifies paraphrase softening nearer term, but no red flag downturn sites.
And again, I would say exactly and I would say for us it's still a major focus for growth right I mean for us.
Place, where we are investing in capability because again people will run strength during this kind of cycle.
Bigger players that have the skills, we're going to have some advantages here.
Okay.
Thank you.
And with no other questions holding I'd like to turn the conference back to management for any additional or closing comments.
I just want to thank everybody for their attention today, and giving us your exercise as we went through the quarter. So thank you so much I appreciate it.
And that will conclude today's program. We thank you for your participation you may disconnect at this time.
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