Hello and thank you all for joining the Stewart Information Services Second Quarter 2024 Earnings Call. At this time, all participants are in a listen-only mode, but later you will have an opportunity to ask questions during the question-and-answer session. Instructions will be given at that time. Please note today's call is being recorded. It is now my pleasure to turn today's conference over to Kath Bass, Director of Investor Relations. Please go ahead.

Thank you for joining us today for Stewart's second quarter 2024 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.

Thank you for joining us today for Stewart's second quarter 2024 earnings conference call. Yesterday, we released financial results for the quarter, which David will review shortly. I want to start by sharing our outlook on the current housing market, followed by updates on our business progress. I'm pleased with our results this quarter. We have continued to advance our strategic initiatives and are gaining market share across multiple areas. Achieving these results is challenging in any market, let alone the current environment. The housing market has remained subdued longer than expected, but Stewart has maintained a competitive edge through improvements in our financial and operational positions. We believe we are well positioned to benefit from any market improvements. Our perspective on the housing market has not significantly changed this quarter. We are still facing a very subdued housing market due to several factors, including high mortgage rates, rising home prices, and low but slowly increasing housing inventory. The market has remained flat, with existing home sales in the past year being worse than the prior year, except for one month. The only month that showed stability was January. Recent data indicates that most of the top 25 metropolitan statistical areas are seeing increased inventory year-over-year, yet pending sales are declining. In June, the seasonally adjusted rate for existing homes for sale was about 3.98 million, down 5% from the previous year. While there's been a slight improvement in sentiment regarding interest rates and more inventory is coming to market, buyers are remaining cautious. There are transactions occurring due to various life events, but many consumers are still hesitant because of current challenges. We believe 2025 will be a transitional year, moving us back towards a more standard market, which we estimate at around 5 million existing homes annually. We are ready to leverage the improving market but are managing our expectations as if this year will be flat or down. The next three quarters will be pivotal as we observe factors like CPI reports, rate cuts, and the upcoming election. We are prepared to take advantage of improvements. On the operational side, we are focused on strengthening our competitive position by following a disciplined operating model while identifying efficiencies in anticipation of market recovery. We aim to grow in attractive markets across all our business lines and have made significant strides in enhancing customer experience through upgrades in technology and operations. We are enhancing our title production processes and improving our data management capabilities using technology. We continue to prioritize attracting and retaining key talent, recognizing that Stewart is the ideal environment for industry-leading professionals to thrive as the market improves. Our direct operations segment is concentrating on expanding in targeted metropolitan areas, utilizing both acquisitions and organic growth to increase market share. We regularly assess market conditions to identify the most promising areas for growth and leadership, and while we are limiting acquisition-related investments in the current climate, we maintain a strong pipeline for the improving market. Despite our cautious approach to acquisitions, we remain optimistic about future opportunities as the market stabilizes, and we have not wavered from our long-term objectives to grow market share in desirable regions. In commercial operations, our results from the past two quarters demonstrate our commitment to increasing market share. This quarter, we launched a dedicated hospitality team and a new national affordable housing team through the acquisition of a New York title agency. We are investing in talent across our commercial operations to ensure we have the necessary leadership and sales teams to meet our objectives. We are also upgrading our technology to better support our commercial operations and enhance customer service and business management. We anticipate continued momentum in commercial transactions, but we recognize that near-term challenges may arise based on market outcomes. Our agency team is focused on increasing share in key agency markets. We are concentrating on our 14 target states and have observed positive progress in several states despite current market conditions. Specifically, we have gained from improved support services and our enhanced capability to assist commercial agents. Success relies on diligent efforts, and we see ongoing opportunities for growth. The real estate solutions team is committed to expanding market share with leading lenders through innovative solutions and the cross-selling of our products, leveraging our improved service portfolio to better serve clients. Our real estate solution businesses showed solid financial performance and growth in the second quarter, particularly given market conditions. We have seen a notable increase in new clients compared to the same period last year, largely due to innovative solutions in our credit information evaluation services. Our pre-tax income results indicate an increase in customer acquisition expenses as we have brought on a significant number of new clients, although we expect these expenses to normalize by the year's end. The current market has made cross-selling more challenging, but we have managed to offset some difficulties by gaining share from existing clients and acquiring new ones. We anticipate ongoing momentum as we have significant cross-sell opportunities to develop in the coming years as the market improves. We are thoughtfully managing our business lines and being intentional with our investments in expense management. We have been careful to avoid expense cuts that could jeopardize our competitive position or detract from critical initiatives needed to meet our long-term goals. We are confident in our growth focus across all businesses and are working to invest in capabilities that will enable us to achieve low double-digit pre-tax margins as we return to a more stable market of approximately 5 million units sold. We maintain a positive long-term outlook for the real estate market and are committed to establishing Stewart as the premier title services company. We believe in the company's strength and are dedicated to preparing Stewart for sustained growth and performance. Our robust financial foundation positions us to capitalize on the opportunities this cycle is likely to present. Thank you to our customers and agent partners for your continued trust. We are dedicated to serving you with excellence. Lastly, I want to extend my heartfelt thanks to our employees for their commitment to Stewart as we collaboratively build a more resilient company that consistently delivers for our customers. I am especially grateful to our Houston area team for maintaining our service excellence during difficult times and recent weather challenges. David, I will now turn it over to you for an update on our results.

Good morning, everyone and thank you Fred. I appreciate the outstanding service of our associates and continued support of our customers through this difficult period. As Fred noted, historically low residential and commercial real estate activity persisted during the quarter, causing our results to be similar to last year's quarter. Yesterday, Stewart reported second quarter net income of $17 million or $0.62 per diluted share on total revenues of $602 million, adjusted for net realized and unrealized gains and losses acquired intangible amortization and other expenses as presented in Appendix A of our press release, second quarter adjusted net income was $25 million or $0.91 per diluted share, compared to $26 million or $0.94 per diluted share in last year's quarter. In the title segment, total operating revenues improved $29 million or 6%, driven by higher revenues from our agency operations, while direct title revenues were similar to the prior year quarter. The segments pre-tax income decreased $2 million or 6%, primarily due to the lower agency remittance rate caused by geographic mix. After adjustments for purchase, amortization and other items, the title segment's pre-tax income was $38 million, which was 2% higher compared to the prior year quarter with adjusted pre-tax margins comparable. On our direct title business, total open orders in the second quarter were 2% better while total closed orders were comparable. Our domestic commercial operations continued to produce solid results with higher revenues of approximately $10 million or 23%, primarily driven by improved transaction size and volume in energy, industrial and multifamily asset classes. Average commercial fee profile improved 17% to 13,500 compared to 11,600 last year. Domestic residential revenues decreased $15 million or 8%, primarily driven from lower fee profile with a lower purchase transaction mix. Total international operating revenues improved $3 million or 10%, primarily due to increased volumes in our Canada operations. On title losses, total title loss expense in the second quarter increased 7%, consistent with the increase in title revenues. As a percent of title revenues, title loss expense was 4% for both second quarters of '24 and '23. We expect title losses to average in the low to mid 4% range for the full year '24. Regarding the real estate solutions segment, pre-tax income improved $2 million compared to last year, primarily resulting from increased revenues from our credit related data and valuation services business. Pre-tax margin was 5.5% in the second quarter compared to 4.6% last year. Excluding acquisition, intangible expense and sales tax assessment charge, adjusted pre-tax margin was 11.5% compared to 14.5% in the prior year quarter. The onboarding of new customers and scaling the business had an impact on margin as Fred noted in his comments. On our consolidated operating expenses, our employee cost ratio in the second quarter improved to 30.5% from 33.9% last year, primarily driven by lower incentive compensation and average employee counts. On our other operating expense ratio increased to 25.9% compared to 24% in the prior year quarter, primarily driven by increased credit information and services expenses in our real estate solutions business. On income taxes, our second quarter effective tax rate was approximately 31% higher than our historical tax rate, primarily as a result of income sourced from international operations, which have a higher average income tax rate relative to domestic operations. On other matters, our financial position remained solid to support our customers, employees and the real estate market during this difficult environment. Our total cash and investments at the end of the second quarter was approximately $310 million in excess of statutory premium requirements. And we also have a fully available $200 million line of credit facility. Total Stewart Stockholders' equity at June 30, 2024 was approximately $1.36 billion with a book value of approximately $49 per share. Net cash provided by operations in the second quarter was $21 million, compared to $35 million last year, primarily as a result in trade accounts receivable consistent with revenue growth. Lastly, thank you again to our customers and associates. We remain confident in our service to the real estate markets. I'll now turn the call back over to the operator for questions.

We'll hear first from the line of Soham Bhonsle at BTIG.

Fred, could you provide some insights on market share? When I look at the non-commercial line, it seems like the purchase side was a bit lighter than our estimate. Can you discuss what you observed in that area? Is there anything specific to the market or any actions from competitors this quarter that you would like to highlight?

So, yes, there's a couple of things I feel good about it as I look at kind of our share in that area, the residential area across the board kind of holding our own. But there's a couple of exceptions that happened, particularly this quarter. So if you remember at the end of the year, as well as I did it again this quarter, I've shut some offices down in some micro markets. So our outlook was that we're going to stay down longer. And I have some subscale markets where I felt it was appropriate to manage our kind of margin in our approach that we took some action. So you saw it at the fourth quarter I took, what was it, $1.5 million plus, so take $2 million. I did the same thing this quarter. So there's some surgical stuff that we've done in some of the micro markets that is working its way through. The other thing I would say if you look at the NAR stuff by MSA and the top 10 kind of decreases in pending home sales, a number of those markets are our biggest markets. So places like Houston was the number one in that, San Antonio was in the top four. So there's some things we share, but I feel good. We're kind of holding our own in those markets but we did take some actions, in my view to ensure the margin. We have a lot of great growth initiatives in our residential business and kind of what we call our direct kind of residential business where we're doing things like growing kind of main street commercial and bending that in our offices. We've got some really interesting things going on micro markets with organic hiring and teams. So I'm not really worried about it. And I feel it's pretty secure that over the next couple of years we're going to have more share in the residential market than we do today. But there are some tweaks that we're doing because I want to make sure that we're managing ourselves in a market that continues to be down a little.

And then on the M&A comment, I was a little curious on the cautious approach here. Is that more of a function of where the bid-ask spread is today or something else? Because I would have thought that the current environment is probably right for acquisitions, just given that we're sort of at the trough, right, versus waiting for sort of an improvement in the market?

It's exactly what you mentioned regarding the trading price. We have managed to reach a fair price through earn outs, allowing sellers to benefit if they believe the value could increase. However, if they don't believe it, they miss out. All transactions we've completed have been beneficial, and it's an effective setup. The challenge at the moment is that most agents are earning very little, making it difficult to align their value expectations with earn outs. This creates a lack of confidence for both parties. In my opinion, we need some normalization in our performance and greater transparency about future outlooks, and everything will be okay. Currently, the real transactions are mainly driven by circumstances like retirement or unique insights into specific niches. We anticipate a return to normalcy as we engage in numerous productive discussions. Many have reconsidered their positions due to the current downturn and associated stress. While I believe many new opportunities will arise, they may be somewhat limited in the next few quarters as we navigate through the challenges. Just as you've noted, it's really just getting back to normal. After 2021, there was a brief phase where expectations were misaligned, and it took time to adjust to appropriate valuations. We can certainly do that again, so I'm not overly concerned.

And then just last one on your long-term margins. I know that you said you can get to the low double-digits in a normalized market, but maybe just talk to us about how much of that lift is in sort of your control versus just the overall market normalizing right? And I'm asking because I think while the low double-digit margin doesn't seem that far-fetched, I think it'd be helpful for your thoughts here for investors to hear delineate between STC being sort of a show me story versus sort of a set it in for the edit story.

I talk about this because I have strong confidence in our efforts. We have what I consider excess capacity in our direct operations, which is where most of our fixed costs and revenue come from. Due to the work we've done, any growth back to a normal market significantly improves our bottom line. While discussing margins, I mentioned that in 2021, our reported margin of 13.5% included contributions from a robust market driven by overtime, which was not sustainable. I believe we were closer to a 10% margin in 2021. Our recent efforts, especially in search and centralization, have likely increased that margin to between 11.5% and 12% in a 5 million purchase market. This increase arises from better utilization of our created capacity, which will show when the market stabilizes. Our operational structure, including how our direct operations and offices function, greatly influences this. Also, we have effectively managed the downturn; during the past decade, our highest margin was 5%, and in one of the most challenging markets in 35 years, we sustained a margin of 5%, despite being at 3.89% before. I am confident in our margin management and believe we are on the right path. What we control has been handled well, focusing on operating model variability and cost management. The progression to the target numbers will benefit from our current strategies. We are gaining market share in other areas, such as our services business, which has grown from $30 million to $350 million and has the potential to double again. While we don’t need the market to recover fully to 5%, even modest improvements will bring us advantages from the growth we're experiencing in various sectors. Ultimately, we need the market to stabilize a bit, but our main challenge currently is managing a decline of 3% to 5% while covering lost volume against a fixed cost base in direct operations. I’m optimistic and confident about our trajectory, but I would appreciate some support, particularly from the market.

Next, we'll hear from Bose George at KBW.

Just wanted to follow-up on the margin again, just given the trends right now. And I think you sort of alluded to this in your outlook comments as well. But does it look like this year, if all things trends continue, the margin is going to look kind of similar to what you guys did last year?

Yes, that's what I think about it. So, if the market stays kind of where we are today, we're tad better, but the market's down a little bit. We'll be about where we were last year. It is what it is. We just got to tread water on the decrease. We still stay at this kind of decreasing a little bit. It's kind of going to be relatively similar to what we made last year. Now, the comparisons are a little odd because if you remember last year, the third quarter, there were a couple of very robust quarters and then the world came to an end, right? So the comparison is a little bit month to month are kind of interesting, but I think the way you articulated it is similar from last year's kind of the way we think about it a little bit.

And then just is there much to do now on the cost cutting side or is it, as you kind of, I guess said in your earlier comments, need a little help from the market and you're kind of positioned for that?

I keep saying we're kind of running out of things that make sense. We've done some surgical things, as I said, this quarter and a little bit in the end of the year on some micro markets where I couldn't see the long-term view of getting where we needed to. But for the most part, we're actually kind of, we're there. We are trying to offset by being smart about prioritization the investments we're making, because we are making kind of a number of investments in some of the businesses that we talked about, whether it's commercial, whether it's what we're trying to do in some of the services businesses, particularly since we're ramping up clients, but we're trying to make sure we're making the trade-offs on other places to manage it. But to your point, I think that is description there isn't like, there's no magical place left after whatever we're talking 20 months of decreasing market to find a lot of expense opportunity.

We'll hear next from John Campbell at Stephens Inc.

So I wanted to touch on real estate solutions. Obviously, really good results here. Congrats on the progress. Fred, you rattled off a few of the standouts. You talked about broader market share. I'm hoping you guys can help maybe a little bit with the modelling. So first, maybe help on the transactional mix, transactional versus contractual. And then secondly, maybe for David, if you can double-click on the commentary around onboarding costs, I want to see to what extent that normalizes this year? It sounds like maybe just a mismatch of revenues versus costs as you onboard. So maybe you could help as well.

So if you look at our portfolio, it's a place where there's a little bit of a standout right now is kind of art, some of the data solutions, we call one of the projects we call verification waterfall. And so we have a really nice uptick in new clients that we're onboarding and it's quite a few. And so it's transactional by its nature, but it is kind of selling data and insight too. And so what you see is because of that, there is a big ramp up. We had a ramp up of onboarding costs. You've got to integrate the new clients into your systems. There's a bunch of data you have to get access to buy and transition into the solution. You've got kind of a ramp up of servicing personnel. And so there's a little pressure on margin as we have kind of the significant growth, right? And I would also say our first quarter solutions margin was probably a little higher. We had some one-time things that happened that made it a tad high. So, but I do think as we get to the end of the year and things normalize a little bit, the margins will go up a little bit, right? And so I think we went from mid-teens to low double-digit. And I can see it getting into that 12, 13 again at the end of the year, depending on the mix of all those solutions that we sell. Now it's hard to particularly predict that because if the market comes back a little bit, some of our other services will grow a little bit more too. But it is very much explicit. We know exactly what we're doing. We know the returns of those clients. We know what the ramp-up expenses are. There is a little bit of like there's been some data input cost increases in that world that we're now passing on to our clients that had some time delay. That's also in that mix a little bit. But I'm really quite excited about our services business because what we're doing is we're getting really good traction in a market that's still quite anemic and down, particularly for lenders. I mentioned in my transcript and I believe is too that business, we had a $30 million business. We now have a $300 million business with multiple products in debt. Typically, lenders like to manage a counterparty risk. So they like to have people in that business with a balance sheet and we weren't participating. It was really the big boys that were participating and then some private companies. Over time, as the market gets just a tad better, our ability to cross-sell is even going to get better because their markets, their availability will get bigger and they tend to use multiple players on their shelf space. So we're living on a new period of new client growth, which will transition to kind of cross-sell growth as we go forward here over the next few quarters. And so I'm pretty bullish on that business. That's why I talked about it, I believe it's going to continue some of the trends we're seeing there, now get seasonal. So there's some seasonal nature to that space. But I like where we are and I do think the margins will normalize and get a little bit better going forward. So I think we're in a pretty good spot there.

And John, just to add a couple things there, I mean, I think you were trying to get a sense on transactional versus more like subscription, and the subscription is probably only around the 15% or so of revenue range. Most of that business is transactional and also just to give a little more color on the cost. So if you think about bringing on a big bank or lender, you have to set up a service team, right? So you need account reps to give them what they need to run their business. And so you're ramping a decent amount of people in particular if you're bringing on a big account.

But again, I like the margins today, frankly, and I think they'll normalize and get a little bit better going forward. So I think we're in a pretty good spot there.

So David, the 85% transactional, it does sound like maybe that's recurring, I guess, where you're setting up a team around these guidance, it's going to be seasonal, it's going to move with the housing market, but generally when you lock in that lender, it's pretty secure revenue, right?

Correct. I mean, it varies by service. So like on the credit side, you tend to get the lion's share of the business. On the appraisal side, it's spread around more. But yes, once you sign an account, you're getting their business, and their business then varies by the market.

And then last one for me, just total other OpEx that's grown at a much faster rate than revenues last two quarters. It sounds like that the real estate solution onboarding cost is part of that. Obviously, you took the actions on the office closure, so I'm guessing maybe there was a little bit of excess, obviously, excess office or facility cost. So maybe if you could help talk through the extent of the savings from those office closures. And it does sound like that you expect mismatched them to normalize in a real estate solution segment? So just any kind of high-level thoughts on overall total OpEx versus revenue this year.

Yes, again, the office closings were only about $1.5 million and then seventh, I think was $500,000. So that's about two. So it's not a huge amount. One of the interesting things, John, just to clarify, what else is in there, which is relatively significant. We've had a tremendous growth of commercial and a lot of that commercial is big energy. And in big energy, you do a lot of outside search and data work. And we've had a pretty severe ramp up in our commercial operations. And so we've upsized our purchase of data and some of the outside third-party search because a lot of this energy stuff is in rural places where we don't have our own feet on the street or it's remote locations where you're using a third party to make sure we're accessing data. So a lot of the ramp up is also in that. So it's in services and it's in commercial. And on the commercial side, one of the interesting things is there's a little bit of a mismatch, right? So if you ramp up, you provide all those services, you pay for all those services because they're period expenses, but the revenue from those don't come to those transactions close. So we have a really nice pipeline of business and commercial that's going to continue through the year that we've ramped up our search and outside third-party costs. So it's really that and it's the real estate service that are by far the two places where those businesses are growing pretty materially. And they both have input costs that are in that category. So the margins are good. When you look at it, you break it down by those businesses. The margins are good. But in both cases, there's also a tad bit of timing because our ramp-up was so fast, right? So there's a little bit of a delay in some of the revenue generation and earnings generation for both those things. So I'm very comfortable with the line of sight to the margins of those businesses and the reason for those. But it is really, if I think about our model, if you look at the beginning of the year, you think about our model and your guy's model versus where we are. What's different? Well, I think what's different is we felt that the market was going to grow 5% or so percent, right? Not a lot, but a lot. So our core business was going to expand where we have excess capacity that has shrunk 5% over through the year and continues flat. But what we've done is we've grown significant share in these other businesses, and so we've offset the shrinkage of the market by growth of these other businesses. But those other businesses have different profiles in their economics, right? And so part of that profile is this other expense category, which is the inputs of these businesses that have grown nicely for us. They just changed the profile of the expense base. But again, I'm very comfortable with the margins in both places. And the fact that we're going to have, over time enhancing margins because of the time, if that helps any. I don't know if it does.

That's perfect.

I’ll turn the floor back to Mr. Eppinger for any additional or closing remarks.

I'd just like to thank everybody for your interest in Stewart during our call. Thank you so much.

Ladies and gentlemen, this does conclude today's teleconference and we do thank you all for your participation. You may now disconnect your lines.