Stewart Information Services Corp (STC) 2023 Q4 法說會逐字稿

Hello, and thank you for joining the Stewart Information Services fourth quarter 2023 earnings call. (Operator Instructions) Please note, today's call is being recorded (Operator Instructions)

It is now my pleasure to turn the conference over to Brian Glaze, Chief Accounting Officer. Please go ahead.

Thank you for joining us today for Stewart's Fourth Quarter 2023 earnings conference call. We will be discussing results that were released yesterday after the close. Joining me today are CEO, Fred Eppinger, and CFO, David Hisey. To listen online please go to the stewart.com website to access the link for this conference call.

This conference call may contain forward-looking statements that involve a number of risks and uncertainties. Please refer to the company's press release and other filings with the SEC for a discussion of the risks and uncertainties that could cause our actual results to differ materially during our call we will discuss some non-GAAP measures. For a reconciliation of these non-GAAP measures, please refer to the appendix in today's earnings release, which is available on our website at Stewart.com. Let me now turn the call over to Fred.

Thanks, Brain, and thank you for joining us today for Stewart's fourth quarter 2023 earnings conference call. Yesterday, we released financial results for the quarter, and Dave will review these in a minute. Before doing so though, I'd like to update you on my view of the market and our continued progress on important initiatives that we believe will set Steward up for long-term success. While we have largely managed through this very difficult economic environment and its expenses and invested carefully, we have continued to invest in a number of critical areas to materially improve our business.

Our focus has been on creating a stronger and more resilient enterprise that will thrive over a full real estate cycle. As we close to 2023, we are operating in an environment that our mortgage interest rates reach a high of 8% during the fourth quarter before falling to around mid 6% near the end of the year. Mortgage rates and rate volatility continued to impact transaction volumes, and we find ourselves at historic lows for sale of existing homes and at industry levels. The historically low purchase volumes combined with low existing home listing inventory has kept home prices elevated.

As I have said before, we see 2024 as a transition year towards a more normal market for existing home sales during to 2025 and believe the next six months will likely be very challenging given the macroeconomics played on top of a typical seasonal impact. While the current environment has been difficult, I am very pleased with up with the progress our teams have made in improving the underlying financial and operating performance of the company during 2023, there is more work to be done and it is critical. We remain focused on improving margins, growth and resiliency through improved scale in attractive markets and enhancing our operational capabilities. But I want to thank our teams for their dedication to making significant progress on these enterprise initiatives.

During the last 12 months during the year and continuing this quarter, we've successfully strengthened our financial position, giving us the flexibility to continue investing in the long-term success of Stewart and to take advantages of opportunities as they arise during the fourth quarter. We continue to manage cost thoughtfully taken targeted actions where appropriate. We continually evaluate our cost structure to ensure that we are making sound long-term decisions on expenses. We have also been very careful not to take actions that we felt would threaten our competitive position and long-term value-creating opportunities. It was prudent path forward for Stewart as the market begins to normalize in late 2024 and into '25 is to continue investing in our people and remaining focused on our long-term improvement plan.

I believe we have a good we've done a good job of balancing strong financial discipline with targeted investments, and we will continue to be very diligent with our expense management during this difficult moment in the cycle. We remain focused on enhancing our operating model, investments in technology to enhance our customer experience and improve efficiency of our operations and building scale in targeted areas.

Some of the investments in technology have focused on improving our total production processes as well as our data management and access. These strategic investments are resulting in cost ratios that are somewhat elevated given we are in a market with the historically low transaction costs. However, we are setting Steward up for better overall performance in the future. We believe that these long-term investments, coupled with thoughtful near-term expense management, will improve our structure and financial performance in the long term.

During the current environment, we have been prudent with our acquisition related investments and have been routinely reevaluating markets in our direct operations where we have the opportunity to increase share and enhance our leadership capabilities. This has ensured that our deployment of capital provides acceptable long-term returns. We will maintain this cautious approach to investments through the first half of 2024.

During the fourth quarter and throughout 2023. Our commercial operations have performed well in a challenging market while certain sectors are and will be challenged in the near term due to challenging financial markets. Sectors such as energy remain extremely strong for us and we see ongoing challenges in sectors like office growth in all sectors of our commercial operations remains an important component of our overall strategy and positioning our commercial operations for growth across all our business lines has been a key focus of our journey. We are making investments in talent so that we have the leadership in place to achieve these objectives.

We are also investing in technology to support the commercial operations to allow us to better serve our customers and more efficiently manage our business. We believe our strategies will create long-term growth in the commercial markets for us. Our agency business finished the fourth quarter with another solid performance as we have been leveraging our agency technology to drive market share gains during the fourth quarter and throughout the year, we have made excellent progress on our deployment of technology and services that provide a significantly improved customer experience for our edge.

It enhance experience includes greater connectivity, ease of use and risk reduction for our agent partners. We are pleased that our platform of services for agents is as strong as it has ever been, and we will continue to focus on growing share in our targeted markets such as Florida, Pennsylvania and the overall commercial market.

Our Real Estate Solutions maintain solid financial results in the fourth quarter and throughout 23, particularly given the market headwinds, we are focusing on driving share gains as we leverage our improved portfolio of services to better and more deeply serve our lender clients. While we are not immune to the market during a downturn in these businesses, we've been able to offset some of the challenges with share gains, an important achievement during two, 2023 was our focus on improving our technology for the title production process, automation and centralization to improve operational efficiency and capabilities.

Our investments have already resulted in significant progress toward improving the customer experience across all the channels and another area of priority work we have as we work to improve our operating efficiency is the centralization and digitization of our title data. We are pleased with the significant progress that we made on that this year.

This progress at more normal production levels will result in considerable improvement in our delivery costs, improving our financial strength by growing margin has been a significant focus of our journey. We have made good progress in our effort, and we are aware that the returns remain depressed during this phase of the cycle. Our investments should allow us to achieve low double-digit pre-tax margins as we turn to a more normal 5-million-unit purchase mark. While we are encouraged by our improvements in talent, technology, customer experience and our financial model. We know that the journey is not complete.

We remain focused on our strategic plan of building an improved competitive position by being more efficient and having a disciplined offering, though it functions well throughout all the real estate cycles, we have emphasized growing scale in attractive markets across all lines of business, and we have made great strides, improving the customer experience in all our channels, attracting and retaining key talent is always important, and we've been even more focused on retaining talent to this market so that we have the right team in place as the cycle improves by.

I'm pleased with our efforts so that our efforts are yielding results through increased year-over-year market share gains in each of our direct agency, commercial and real estate service business.

Let me conclude by really reiterating that we have been managing the balance of our expenses and investments throughout thought we should be mindful of necessary operating discipline for the current market challenges while also dedicated to strengthening Stuart for a long-term growth and performance, a solid financial footing should best position us to take advantage of the opportunities that this cycle will provide.

Finally, I remain positive on the long-term view of the real estate market and the ability of Stewart to become the premier title services company. Our associates have worked diligently throughout these challenging times, and I appreciate all they have accomplished. I also want to thank our customers and our agency partners for their continued loyalty and support by David will now update everyone on the results.

Good morning, everyone, and thank you, Fred. As always, I'm thankful of our associates for their outstanding service and our customers for their continued support for solar during the challenging current market. Although mortgage rates dropped after the Fed's December meeting comments in the January meeting cause rates to rise through today could causing a continuation of a choppy market. 2023 had the lowest existing single-family home sales in over 15 years and commercial real estate activity was also challenged. As a result, operating results were lower than the prior year.

Yesterday, Stewart reported fourth quarter 2023 net income of $9 million or $0.32 per diluted share on total revenues of $582 million. After adjustments for net realized and unrealized gains and losses, acquired intangible asset amortization and other expenses detailed expenses of our press release, fourth quarter adjusted net income was $17 million or $0.6 per diluted share, compared to adjusted net income of $23 million or $0.84 per diluted share in the fourth quarter of 2022.

In the Title segment, total operating revenues in the fourth quarter decreased $79 million or 14% while fourth quarter pre-tax income slightly improved, primarily due to higher investment income and expense management. After adjustments for purchase intangible amortization and other items, the title segment's pretax income was $31 million compared to $35 million for the fourth quarter 2022. Adjusted pretax margin was about 6% for both quarters.

On our direct title business, total open orders in the fourth quarter increased by 10%, primarily due to acquisitions in 2023, while closed orders decreased by 3% compared to the prior year. Domestic commercial revenues decreased by $11 million or 16%, primarily due to lower commercial transactions, Average commercial fee per file was approximately $14,800 compared to $15,100 for the prior year quarter. Domestic residential revenues decreased $18 million or 10% as a result of 5% lower purchase and refinancing volumes and lower fee per file. Average residential fee per file in the fourth quarter was $3,200 compared to $3,500 last year, primarily due to transaction mix.

Total international operating revenues declined $1 million or 4%, primarily due to overall lower transaction volumes. Similar to the lower commercial and residential activity in the market, agency revenues in the fourth quarter decreased by $49 million or 16% compared to the prior year, while the remittance rate was roughly comparable.

On title losses, total title loss expense in the fourth quarter was 5% lower compared to prior year, primarily from lower title revenue. As a percentage of title revenues, the fourth quarter title loss expense was 4.1% compared to 3.7% in the fourth quarter of 2022, which benefited from 2020 two's favorable claims experience. For the year, title loss expense average 4.1% compared to 3.8% last year, we expect higher losses to be in the low to mid 4% range in 2024.

Regarding the real estate solutions segment, fourth quarter pretax income improved $1 million compared to last year, primarily due to increased revenues from our credit related data business, which more than offset declines from our transactional businesses. Pre-tax margin was 2.3% compared to 0.7% last year. On an adjusted basis, pretax income and margin was comparable to the prior year quarter of roughly 12%.

On our consolidated expenses, our employee cost ratio was 32% compared to 30% last year, primarily driven by lower operating revenues. Other operating expenses were 23%, which was comparable to last year. Regarding income taxes, the effective tax rate for the fourth quarter was 39%, which was higher than our historical tax rate, primarily due to the effect of bond 1,000 some expenses on lower domestic pretax income. We expect our attachment rate to return to historical levels of domestic operations.

On other matters, our financial position remains solid that support our customers, employees and the real estate market. Our total cash and investments at the same reporting in 2023 was approximately $415 million in excess of statutory amendments or the forwards, but we also have a fully available $200 million credit facility. Total stockholders' equity at December 31, 2023 of approximately $1.38 billion for the book value of approximately $50 per share similar to last year. Net cash provided by operations in the fourth quarter improved to $41 million compared to $25 million last quarter last year quarter, primarily as a result of lower payments on claims and accounts payable, partially offset by lower net income in this year's quarter.

Lastly, we greatly appreciate our customers and associates and remain confident in our service to the real estate markets.

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

(Operator Instructions) Soham Bhonsle, BTIG.

Hey, guys. Good morning, hope you're all well.

Good morning.

Wanted to maybe just start with, you know, January and February orders were there was a trending for the first few weeks here you know, are you sort of seeing comps turn positive year over year on or anything on a month-over-month basis on the resi and commercial side would be great.

Yes, the way we think about the market, as I said before, is it's a little bit of a tale of two cities likely fee, and this will be the transition year towards a more normal market and 25, and I think the first six months are going to be quite challenging. So the way I think about the first quarter is kind of bouncing off the bottom. So the first quarter is getting closer of not being worse than last year. But I think we're in the first quarter, we're going to still be worse than the previous year in orders, but closer together.

And that trend you can see and what we disclosed here in purchase order trends from October, November, December, right? So again, it was I think you were going to see is things coming together a little bit in the first quarter, but still the first quarter being worse than the previous year. And then hopefully bouncing from there and starting to improve that seasonality helps you as well, obviously going towards the second quarter.

But I think that's where we are and the one of the challenges, by the way to answer your question, just so the volatility that shot up to 8%, and that has really made habit kind of with some of the order results because what you've seen is more cancellations. When you see that kind of rapid change, you'll see it uptick for us, the more greater cancellations of orders, which affects the closed orders and so that volatility has affected it kind of trends a little bit right now, but there's nothing again, I and I feel like that transition that notion of a transition next year is still a relatively good bet that hopefully the second half of the year, we're going to see some light.

It's Tom here at standard report, and we also have to look at it in the context of low rates have been doing. So if you think about the first quarter of 23, they were in the 6 to six three area they came down to six, six at the end of this year, and then they've come back up as a result of those and comments in the last meeting. And so you sort of start this year with a little bit of a choppier environment.

Yes.Okay. Understood on I guess a second one, I wanted to get a sense for where margins could potentially land to CMB, but maybe attack it a little differently versus what I think most forecasts are calling for originations up 15% to 20%. We'll see where rates go and everything, but you know, 15% to 20% in that sort of scenario.

Can you just give us a sense for how you're thinking about managing the core employee and other OpEx lines, right? Like should we expect you to sort of stay at this current Q4 run rate, right for them at least the first half? And then maybe visitors increase in the back half, but now how would you sort of expect that to ramp up with volumes?

Yes. So I think I mentioned this a couple of times. It's the interesting thing right? Because if I have a while the last two or three years, the way I think about our margins is that, you know, well, 21, if all things being equal, we took a company that was averaging about 2% over the decade before the journey. We got it up to about 9.5 and 10. And my view is in 21, we have better margins at. Obviously that was because of so much excess volume. I had a lot of offices that over 100% capacity. So it wasn't a sustainable thing at the top of the margin in what we've done, the work we've done.

And over the last year in particular, we broke the camel's back a little bit on a couple of things. I believe we picked up a couple of hundred basis points sort of a normal market that we think about it, about 5 million purchase homes. I think where instead of 9.5 10, we're probably 11 to 11.5, something like that now. So we're so that so that's kind of the general way to think about our economics. The problem is we're in the worst market in 15 years and at a very low level.

So if I look at the numbers that improvement, I just talked about doesn't show up in the numbers. But what I would what we've done is created what I call excess capacity, right? So as volume comes back, we won't be adding a lot of resources because of the way we've now with the operating model that we created, which part of the savings that you don't see is the fact that we have excess capacity in our search and clear areas and some of the data management or so. So I feel like as things improve, our margins will as well. Now again, the seasonality and the challenge of the first quarters.It's tough in my view, is going to be worse than last year.

But but but again, I see as we come out of the year, we should have improving margins will not be anywhere close to a normal market probably next year. But I think we're in a pretty good shape. And again, I look at this fourth quarter and this skill, it was one of the worst quarters in 17, 18 years. And we are able to make buying right, which was not historically true. So I feel like we're in a really good position to improve margins as the market improves its vessel.

So David, I guess for you, should we just think about sort of the employee and OpEx lines are run rate that wherever it is today and take that forward for the rest of the year, how should we think about that?

Well, I think what Frank was saying is that the so we wouldn't really be adding a lot of headcount, right? But what's going to add to what will end up happening is just because the first period is it is the seasonally slowest period, Ryan, you're not going to have as much revenue. And so you're probably on a percentage basis, you might have a little bit of a spike, and that's going to be the toughest quarter like the first.

Yes.And that as volume starts to come back, right, you'll you'll be getting the benefit of not adding people. And there will be always be some variable costs because their sales expenses and things like that, right? But it won't go up at the same rate as it's gone up historically, right? So you're you'll see a margin improvement over the period as the volume comes in.

Okay. Yes, that makes sense. And just last one, just your peers had cyber attacks. And I guess, have you seen any sort of discernible change in just customer behavior or anything out there?

No, I don't think in the short term, there isn't any material impact the long term? I think it's quite helpful in that. You know, we're one of the big four. We have one of the strong balance sheets. I think if you talk to agents today, they're more kind of thoughtful about boy, I got a spread by risk a little bit. And so and that's true going to be true in commercial to good ones.

I've always thought about that way, but but disproportionally, that should help us just because of our share position and how many we don't have a ton of agents that are fully dedicated to us or anything like that. So I think that people are going to be thoughtful about spreading the risk. I just think it's a normal thing to think about particularly in a in a business that's such an oligopoly around four strong players.

Yes. All right. Thanks a lot, guys.

Bose George, KBW.

Morning, Bose.

Hey, good morning. And actually wanted to ask just in terms of your margin expectations for the back half of this year, is that. Is that sort of looking at the year-over-year sort of improvement?

Or is that thinking sort of incorporating some potential pickup in macros is how you're thinking about later this year is it the macros, but it's also both from leveraging some of the work we've done this excess capacity I talked about, it's kind of sitting on the sidelines and down and so it is both leveraging the volume increase but also the kind of new profile of the business.

And so it's a little bit of both, but it's driven by well, I mean the issue is we just have. So we'll purchase volume in the system right now versus a normal year. It's we're kind of at the bottom as far as what we can do with expenses and managing our resources, very proud of what we've done. But if you think you would want to cut, it's much more out of system and that's why this first quarter is challenging because we're going to be bouncing on the bottom of this first quarter.

So sometimes that makes sense and then fishing. But the other orders number again, had a pretty good jump. Is there and sort of bulk activity? And can you just remind us what's in the diagnostic sort of purchase?

Sure. I think this is the last quarter where the BCH acquisition comparison, it helps us right, because we bought them at the beginning.

At the end of 2022. So they weren't in last year, much of last year, right?

So that's what it's driven by that business, which is doing very well.

Okay. And that's so that order count for the quarter is kind of a reasonable run rate? And is there seasonality there? Is that or just sort of transaction base?

Yes, the is transaction based business, both as we think about that as sort of the bar, the red Build to Rent business and then more securitizations and the like. And so it's there's property aggregation and then there's disposition and securitization. So it's a it's a lumpy, lumpy business and tends to move in chunks.

Okay, great. Thanks.

John Campbell, Stephens Inc.

Good morning, John.

Morning, Fed. So you guys in the past you've talked to and Fred, I think you've talked specifically to that maybe $20 million of ongoing investment. What kind of discretionary spend around the long-term strategic initiatives. But Fred, in your prepared remarks, you talked about kind of a cautious approach for the first half kind of from a macro standpoint. And then the prior question, you talked to not really needing to add many heads from here because you've kind of built that excess capacity.

So I think you might have somewhat answered this question, but the question here is do you feel like that $20 million spend from last year or is going to kind of hold steady this year? And will that be the case if the market recovers as much as I forecasted a peg? Or might you kind of like lean into that possible market strength?

No, it's a great question is roughly by radically. It's roughly about the same, probably recovering part of 19 and 20. But it's some it is some more some really important data initiatives we've got going on, particularly kind of a kind of access to data that would make us more efficient. And then I have some operating technologies, just like in commercial, we have updated operating kind of system. And so we're upgrading that so it's roughly the same amount of money this year. There's also some additional cyber investment in there as well.

So again, one of the things we did do, which is to your question is we went through each of those investments, though and thought about the sequence of it giving the challenge of the first six months of the year and what gives a quicker payback, et cetera, and tried to be thoughtful about the timing and the starting of those as well. But it's really important that we do invest in those things because we just if the company got a little bit behind on its invest capital investments in some areas before this journey started.And we're trying to sequence in and make those investments and catch up on in some of those base areas.

And then some of these are just and things we think can create a better kind of whether it's an experience for our people, our experience for the customer on how we access data and kind of make decisions. And so it's good. I guess I feel like the teams we've made good progress this year on the months coming up are are equally important. They are less they're a little bit less transparent to the customer than the ones we've been doing in the past.

They're a little bit more back office and operating model stuff, but it's sub it all moves us forward in a pretty good way now.

Okay. That's helpful. And then kind of sticking with the growth initiatives, I mean on the rollout of the agency tech platform, Fred, I think you mentioned that was actually you pointed to that as a driver of share growth. I was hoping if we could maybe get a little bit more color on the platform itself, if you could maybe walk through what's differentiated about it and maybe from a bigger picture standpoint, the goals you're that tend to achieve an agency and how that tech platform fits into that strategy.

So again, one of the things that we got behind on a little bit is kind of what you do with the agents, right? It's combined economics. And so it's really about the efficiency of the end to end process. So it has a lot to do with you integrating kind of seamlessly into their T PSS and provided the kind of information they need to kind of do their business.

And the other part of it. So we've done a lot of investments on both the integrations and with the kind of information we pass back and forth and the decisions that we can make instantly back and forth. And but on top of that, we created when we started, we only had three states where we could provide services search services, and we now have the full touch the equivalent of the full country, just like the big guys services. And that's important to agents because they want to variabilize their costs a little bit in a down market so they're using more of our services to supplement the work they're doing.

So what's happening now is we have a legitimate when we go into an agent in Florida, whatever we have a platform that is as efficient if not a little bit more efficient than their other players. And we have the services provide on top of that, what we've done, he's providing for select agents, a concierge service to access to commercial of which makes it really efficient for an agent to be able to get access to commercial. That's probably broader geographically perhaps than where he is. And so that's the other part of the sorts of efficient way to work with them and then provide these additional services.

One other point I would make is one of the investments we're currently making with 13 states that are returning banks and they have a different TPS. type thing. We are we are working on so we're launching kind of as we speak in the next few weeks about a new TPS offering for those attorney agents that make their workflows, it kind of efficient and easier to work with, which is a unique thing. They just that's different than a regular agent and it requires different things.

And so we constantly are thinking about Jive how we kind of can be efficient in our integrations and interface with them. And we believe what then happens is agents we went back to the cyber point agents and most agents are going to say, hey, it's safer for me to split my business a little bit and give a fair share to Stuart. They now provide as good if not better than the others and so that's why we're encouraged. We've had, I think, six or seven quarters of share increase in the in agency and we had one we were double-digit over the second quarter but other than that, it's pretty constant. We've had steady share growth.

It's a really good state.

And as gentlemen these improve, it really gets solidified geography-by-geography.

That should continue.

I feel pretty good about that and Okay, that's very helpful. Thanks for the color.

(Operator Instructions) Geoffrey Dunn, Dowling & Partners.

Hey, Guys.

Good morning.

So I wanted to go back to the expense side here from a year ago, you had a chunk of expense for office closures and you in that you weren't going to cut too deep into expenses. You're investing for the future. Here we come this quarter, there's another chunk of office closures. How do you identify these opportunities? And kind of leads into my second question. I think there's an emerging debate here on what 24 actually ends up being if we are if we don't get rate cuts towards the end of the year and mortgage rates stay higher than what Fannie and certainly the MBA are forecasting.

I'm trying to wonder what the risk is of maybe only a 5% type of market rather than a 20% growth market. So I know you said you have kind of bounced off the bottom. There's not much more you can do with expenses. But year over year, obviously, we saw that you could find more. It doesn't sound like the Company is positioned for a flat or 5% type of growth market at 24. So can you talk a little bit more about how you go about identifying expense saves? And what are your actions if we are looking at a 5% market?

Yes, you can get a really good question. So look, there's a couple ways to think about it. So we look at this kind of MSA by MSA and within the MSA, kind of it is geographic pockets. And we've made a lot of improvement in say 30 markets or something in the last couple of years to get share. And so our margins are good, but we still have part of what I would call these sub geographies where we were trying to get them to the scale and that we felt we needed to get into.

And at some point, you just feel that you can't given the market and to your point, the slowness of the comeback that it was going to be kind of really hard to get there in some kind of time frame that was fair and also we have some consolidation opportunities from the acquisitions we've done, where you have duplicate kinds of locations that close together that you can kind of do some things geographically with real estate to kind of have to manage the business.

The other thing that has happened is some of these operational initiatives obviously have freed up our ability to not have to hire folks that people need, et cetera, because of the efficiency that we've been gaining through our investments. So we're trying to be really thoughtful. My point is that we've done a lot and I think there isn't a lot left to do. And so I do believe seasonality is going to help us even if the market isn't as robust as some of the scenarios are. So so the first quarter to be quite challenging, but I think the Seasonal is going to help us in the second quarter.

So and this is why when I talked about the first six months. We're being really prudent and sequencing investments and stuff because I think we do have to manage our shelves like it could be what you just described. That's the way we're going to have to manage ourselves really thoughtful and careful. I just don't we just there isn't a lot more. We don't have a lower access here it doesn't mean that we are thoughtful about managing our business and looking at it under every rock and be thoughtful about sequencing timing and stuff.

But I don't I don't see it costs and I don't plan about planning a lot.

If I said the market was going to look exactly like it did in '23, Is your '24 result better?

Yes.

Yes.

So not the first quarter, but it would be a tad better because we're at a better spot rate.

We've got again. So we've done a better job on investment income on escrow right through the whole year. We've got our operating model is a little bit more efficient. So all things being equal to be a tad better.

It's just going to be clouded by the first QUARTER.

Got it. Okay. Thank you.

We have no further questions on the line. I will turn the program back over to our presenters for any additional or closing remarks.

Again, I want to thank everybody for joining us for this quarter's call, and I really appreciate the interest in Stewart. Thank you so much.

This does conclude today's program. Thank you for your participation, and you may disconnect.