Nat Otis - Director of Investor Relations Matt Morris - CEO Allen Berryman - CFO.

Bose George - KBW Hayden Blair - Stephens, Inc. Geoffry Dunn - Dowling & Partners Kevin Kaczmarek - Zelman & Associates *.

Good day and welcome to the Stewart Information Services First Quarter 2017 Earnings Conference Call and Webcast. Today's call is being recorded. At this time, all participants have been placed on listen-only mode and the floor will be open for your questions following the presentation.

I’d like now to turn the call over to Nat Otis, Director of Investor Regulations (sic) [Investor Relations]. Please go ahead..

Good morning. Thank you for joining us for our first quarter 2017 earnings conference call. We will be discussing results that were released earlier this morning. Joining me today are CEO, Matt Morris; and CFO, Allen Berryman. To listen online, please go to the stewart.com Web site to access the link for this conference call.

I'll remind participants that this conference call may contain forward-looking statements that involve a number of risks and uncertainties. Because such statements are based on an expectation of future financial operating results and are not statements of facts, actual results may differ materially from those projected.

The risk and uncertainties with forward-looking statements are subject to include, but not limited to the risks and other factors detailed in our press release published this morning and in the statement regarding forward-looking information, risk factors and other sections of the Company's Form 10-K and other filings with the SEC.

Let me now turn the call over to Matt..

Thank you, Nat. Good morning, everyone. We appreciate you joining us today. This morning we reported pre-tax income of $6 million a quarter, which is a meaningful improvement of $22 million compared to the first quarter of 2016.

Stewart generated net income of $4 million or $0.17 per diluted share compared to a net loss of $11 million or $0.48 per diluted share with the prior year quarter.

The comparison does include certain realized losses and other charges during the first quarter of 2016, as well as an atypical effective income tax rate for the first quarter of 2017, which Allen will speak to you in a moment.

We saw total first quarter 2017 revenues increase 1% to $443 million, with operating revenues improving to $438 million from $433 million. Growth in core non-title revenues was offset by expected declines in Ancillary Services revenue.

Our focus around ongoing cost discipline efforts as well as the divestitures in the fourth quarter enabled employee and other operating costs to decline almost $20 million or 8% relative to that 1% increase in revenues.

As shown in the appendix A of our earnings release, our adjusted EBITDA improved to $13 million from a loss of $1 million in the prior year quarter on a 1% adjusted revenue increase, demonstrating the leverage inherent in our transformed operating model.

First quarters are traditionally weakest of the year for the title industry, so we’re encouraged to see the results of our initiatives and to start the year off strong.

Gains in operational efficiency were achieved in both the title segment and the ancillary services and corporate segment, with pre-tax margins improving solidly from prior year's first quarter.

With the revision to our corporate governance structure fully in place, our attention and focus going forward is maintaining cost discipline, while generating core title revenue growth in specific markets through internal investment and targeted acquisitions.

Smart revenue growth coupled with continuation of our previously announced production cost efficiency project, we hope sustainable margin improvement in both the mid and long-term. From the macro environment perspective, we currently anticipate a slight decline in 2017 overall title industry revenue due to much lower refinancing activities.

We do anticipate transaction volume increases in existing new home sales driven largely by demographics in the emerging millennial home buyer. This increase in purchase transaction coupled with the continued increase in home prices will largely offset the impact of lower refinancing transactions on industry premium revenue.

We are mindful, however, that rising interest rates and an increasingly low inventory opponents available for purchase may impact affordability and available transaction volume this upcoming summer season.

We are closely following the evolving forecast of commercial purchase activity as well as we anticipate an expected decline in commercial refinance volume later this year. So I’ll now turn it over to Allen for more detail on our financial results..

Thank you, Matt, and good morning, everyone. The title segment generated pre-tax income of $12 million or 3% margin compared to the first quarter of 2016 breakeven results. Our title segment revenues were $426 million for first quarter of 2017, which was an increase of 3% from last year's quarter.

With respect to our direct title operations, the overall revenues increased 1% from first quarter of 2016 with revenue increases in our commercial and international operations offset by a decrease in centralized title ops, which experience expected decline in both refinancing and default title revenues.

Total commercial revenues for the quarter were up 8% over the prior year quarter as domestic commercial revenues increased to $42 million from $39 million in the first quarter of 2016.

Total title orders closed to decrease 6% from the first quarter of 2016, driven by a 22% decrease in refinancing transactions closed partially offset by a 4% increase in purchase transactions closed. Of note, we did see a jump in other orders opened which primary -- primarily represented increased HELOC activity to start the year.

Revenues from independent agency operations increased 4% or $9 million in the first quarter of 2017. Net retention revenues increased by 3% or 1 million. The independent agency remittance rate was 18.1% in the first quarter of 2017 as compared to 18.2% in the prior year quarter.

We continue to expect our ongoing average annual remittance ratio to be in the low to mid 18% range. Title losses as a percentage of title revenues were 4.9% in the first quarter of 2017 as compared to 5.6% in the prior year quarter. We anticipate maintaining a loss accrual ratio of approximately 5% during 2017.

Our total balance sheet policy loss reserves were $460 million at quarter end. Looking at our Ancillary Services and Corporate segment, which now consist almost exclusively of search and valuation services.

Operating revenues for the segment decreased 22% to $17 million compared to the year-ago quarter primarily due to exiting our delinquent loan servicing operations, a process completed in first quarter 2016, and our divestitures of the loan file review quality-control services and government services lines of business at the end of 2016.

The segment reported a pre-tax loss of $6 million in the first quarter of 2017 compared to a pre-tax loss of $10 million in the prior year quarter excluding the non-operating and nonrecurring charges described in the earnings release.

The segments results include approximately $6 million of expenses attributable to parent company and corporate operations compared to $9 million in the first quarter of 2016, which included $2 million of charges. Excluding the $6 million of corporate expenses per quarter our 2017 goal is for the search and valuation business to be profitable.

And our longer term objective is to achieve mid to high single-digit annual margins. With respect to operating expenses, my review excludes the first quarter 2016 charges of $7 million in the Ancillary Services and Corporate segment that was detailed in the earnings release.

So the employee costs for the first quarter of 2017 decreased 7% from first quarter of 2016, while average annual -- our average employee count decreased almost 10% from the prior year quarter.

The decline is attributable to reductions in employee count tied to volume declines, primarily in Ancillary Services and ongoing operational efficiency gains in title and the Corporate operations. We also incurred considerably lower contract labor costs compared to first quarter of 2016.

As a percentage of total operating revenues, employee costs for the first quarter of 2017 were 31.9%, an improvement of 280 basis points compared to 34.7% in the prior year quarter.

Other operating expenses for the first quarter 2017 decreased 4% from first quarter 2016 with professional fees and third-party service provider cost being the primary driver of the decline.

As a percentage of total operating revenues, other operating expenses decreased by 100 basis points to 18% in the first quarter of 2017 compared to 19% in the first quarter 2016.

Depreciation and amortization expenses decreased 12% from the first quarter of 2016 primarily as a result of the disposal of certain amortizable intangible assets at the end of 2016 in connection with the Ancillary Services divestitures I mentioned earlier. Lastly, a couple of comments on other matters.

The effective tax rate for the first quarter of 2017 was lower than normal due to the tax benefits from previously unrecognized research and development tax credits. Cash flows from operations improved in the first quarter of 2017 to net cash used of $19 million compared to $32 million cash used in the first quarter of 2016.

The improvement was primarily due to the large increase in net income generated, offset by higher payment supplies. As of the quarter end, approximately $4 million of cash was held at the parent holding company.

As we've discussed on these calls, we've seen the results of not only specific programs to lower costs in targeted areas, but also in the vigilance we exercise everyday in seeking opportunities to be more efficient. Our total employee and other operating costs have declined in each of the last six quarters when compared to the year-ago quarter.

We will, of course, continue to exercise this vigilance and minding the details, while continuing to pursue large-scale longer-term initiatives, including the new title and escrow production technology we described on our last earnings call.

We continue to roll this new technology out during the first quarter and based on current transaction volume and mix our total expected $10 million of annualized savings by the end of 2017 with an additional $10 million realized by the end of 2018 remain unchanged.

While we were pleased with the first quarter performance that flowed in part from our cost discipline, we’ve seen some management and staff departures within certain offices as we focus on achieving margin gains. We are managing through any related revenue disruptions as we move forward in 2017.

And with that, I will turn the call back over to the operator to take questions..

[Operator Instructions] We will take our first question from Bose George with KBW. Please go ahead..

Yes, good morning.

Just starting with the expenses, when we think about the expenses going forward, should we look at the run rate benefit you had year-over-year this year kind of run that going forward and then add in the $10 million of total benefit kicking in at the end of this year and $10 million next year, or are there other sort of investment expenses we should think about as well that could reduce the benefits?.

So, just to make sure I understand the question, from a run rate perspective, if you think about first quarter and running forward in the second, third, fourth quarters, employee costs are going to have some natural seasonal fluctuations as you go into the higher volume transaction lines.

But fundamentally there's no structural change other than the title production and technology that we talked about that will kind of lower those employee cost structurally. So, I think what I said was we’re really trying to just mind our details and in doing so, we find opportunities to lower cost whether it's an employee cost or elsewhere.

So that’s kind of how I will think of the run rate going forward..

Okay. I guess, I was thinking of the run rate, the employee costs were down 7% year-over-year..

Right..

So just thinking of it in that -- in those terms that that’s kind of a sustainable run rate, is that fair..

Going forward, sure, I will think that's fair just, you know, being mindful kind of the seasonal variations you may get as your demand picks up..

Okay, sure.

And then, in terms of the $10 million that kicks in at the end of this year and next year, are there any offsets to that or should we just kind of think that to there is this benefit and that will drop to the bottom line as well, over that time period that you mentioned?.

I mean there -- as we are rolling it out, of course we are going to incur some expenses, but our expectation is those expenses are largely offset by ongoing savings. So it's really you have a rollout period that you’re incurring some duplicative cost while you're saving money.

And then once you're done with the rollout, those duplicative costs go away..

Okay.

So say by the back of '18 whatever that full $20 million benefit is something we should be able to see?.

'18, kind of going forward..

Okay. And then, just a couple of other little things, on the purchase order -- the purchase order count was up, I guess, north of 4%, but the purchase revenue was down a little over 2%.

Can you just talk about the drivers in that market?.

Well, our premium revenue was up roughly concurrent with the purchase order close. There were some other categories of revenue that offset that a little in terms of declines. So it's the premium revenue which you will see when the Form 9 comes out, was up more consistent with the purchase orders closed..

Okay, thanks. And then, actually one other unrelated question. Couple of months ago a company called OneTitle, they filed for a 25% price reduction in New York.

I was just curious if you have any thoughts about them? Is that a company that you ever run into?.

No, I mean, we’re obviously aware of what’s in the market, but no I don’t think it has an impact. .

Okay, great. Thanks..

Yes..

We will take our next question from John Campbell with Stephens Incorporated. Please go ahead..

Hey, guys. Its Hayden stepping in for John here. Congrats on the great quarter. Just a quick piggyback on Bose's question here.

I guess, another way to ask it would be how much if any of the $10 million cost savings goal for 2017 is being reflected in these 1Q results?.

None..

Okay..

I mean, because we're rolling it out now. So we [technical difficulty]. The savings occur as we're sort of rolling it out, so that by the end of 2017 you’re starting to incur the meaningful saving..

Got you. And ….

Right. I think there is some related to again some employee reductions that we’re enabled to take place, right when we talk about the announcement we made, end of last year we are looking at things rolling out through '17 and '18. But really its intended to be back ended..

And the bulk of those savings are to come on the other operating expense line?.

No..

No, it's really [multiple speakers]..

It would be combined [multiple speakers] about..

Yes, some of both..

Got you. And then, I guess, year-over-year open orders on the refis were down a little bit on the quarter relative to what we were expecting, but it looks they reaccelerated a little bit into margin, I think rates have now finally ticked down a little bit closer to their lowest point of the year.

So can you talk a little bit about trends to date here both purchase and refi, if you can, and whether or not that reacceleration in refis is kind of pick back up here in the 2Q or that’s something that we should kind of expect moving forward?.

Yes, I mean, I think we’re cautious. Obviously, you see -- consumer confidence were rates are what the general activity is, refinance just obviously bounces around significantly is that volume changes.

So there was a little uptick I think mortgage [indiscernible] for refi were up a little bit beginning of the year, but it's hard to say that’s sustainable going forward..

Thanks, guys. Congrats on the quarter..

Thanks..

We will take our next question from but we'll take our next question from Geoffry Dunn with Dowling & Partners. Please go ahead..

Thank you. Good morning. Just to get on the expense bandwagon, outside looking in it's very difficult to determine if you achieve your expense savings or not, just because of the volatile nature of title expenses.

So are there any other metrics or goals or margin range you can provide to try to give us more of a framework for judging whether or not the expense saving come through or how to try to incorporate that into our outlook? I know it’s a tough question, it’s the reality of the business..

Yes, yes. I mean, I think internally we sort of set some objectives for spend ratios, if you will, which is employee cost and other operating costs. And we do that through our budgeting process and so embedded in the budgeting process we target some spend ratio that has become our internal metrics that we don't really talk about externally..

Okay.

So really there is not much we can really do other than that?.

I think it’s a little easier, obviously we’re -- the primary focus is just driving that improvement on the margin. And so our measure of success is how well are we doing kind of driving that margin through ….

Right..

… not only cost savings, but generating some more top line revenue growth, which is going to have a more -- pretty powerful impact on the bottom line..

Okay. On the commercial business, there has been a general trend here of the fee per file climbing which I assume is traction in larger deals.

Can you talk a little bit about the success you've had there in terms of Stewart's improving profile are in the larger transactions, and what is driven that and there is obviously a lot of room to move as you look at other competitors.

So what are the factors that have been moving you up the deal size?.

I think we’ve talked several years, I think just going -- the ongoing stability in financial strength is aided our representation in the market as we continue to invest there. We did benefit in the first quarter from several deals that got pushed from the fourth quarter. There were some larger deals including a portfolio transaction.

We also benefit from some energy related transactions. So going forward, we remain cautiously optimistic on our ability to continue to outperform the market, although we’re certainly aware of some uncertainty to remain in the macro environment..

Okay. Last question I have is, the focus from a lot of the noise around your stock is that on whether you're not here for sale. I’m curious how you’ve been looking at M&A? I mean you have a kind of an unusually strong P/E multiple on your stock right now. Obviously you’re doing a better job with expenses and scale can only help that.

Rather than talk about if you’re ready for sale, I’m interested in whether or not you're looking at any meaningful acquisitions, particularly on the -- to bump up your direct operation? And then, if you would ever consider a deal that could even require equity?.

Yes, I mean, I would say that that is a ongoing Board discussion obviously we have, new Board members, but that's definitely a conversation that we are undertaking and again as you look at the positive benefit of additional revenue and incremental margins we gain, there are some things that can't be meaningful and I don’t think right now the Board with be opposed to using equity if the right opportunity came about.

.

Okay, great. Thank you..

Yes..

[Operator Instructions] We will go next to Kevin Kaczmarek with Zelman & Associates. Please go ahead..

Hey, guys. Thanks for taking my questions.

Back of the purchase premiums and order accounts, you mentioned that premiums were up similar to the transactions, but does that mean maybe some escrow revenue wasn't coming in that you were getting before? Is that due to a mix shift, I guess, went away and should we expect it to come back or is that kind of go on?.

Well, I can't say that. I think it's gone. I mean it -- the escrow revenue was off from the prior year first quarter, but it was more the geographic specific.

So, I don't want to declare that it's gone forever, because it does -- I’ve seen quarters like this quarter where the escrow revenue doesn't necessarily move in concert with the premium revenue, but then I’ve seen it come back in the following quarter. So hard to say that it's gone forever..

Okay.

And, I guess, one, approaching the expense issues on the new production system a different way, you guys break out fixed versus variable cost in your Qs and Ks, and I guess if I’m thinking about the expenses, would that fall more under the variable category or maybe you're saving certain amount of hours per file or something like that per person or would it be more under the fixed category?.

Honestly I think it will influence both to some degree.

I mean, from a variable perspective than the new production technology would mean you use the less, you need fewer heads to accomplish the same production volume, but you would also have less of the underlying systems and sales, if you will, that need maintaining and so you’re cutting your fixed cost save to some degree because you’re not maintaining to the same degree, a technology platform that you are today.

So I think there's going to be some influence on both fixed and variable..

The other piece I would point out is that part of what this exercise does is shift what is more highly fixed cost right now to variable.

So, that’s why it's definitely going to be both, because we’re -- in the efforts of consolidation and some centralization you’re actually moving certain fixed expenses we have now to be more variable, which although are thus more controllable and we can effect that cost per file more..

It gives us a lot more flexibility in other words and how an order is processed..

And with the offices that have the new system, do you have a sense of how much less time it takes each order to get done or how many fewer people are needed to process a given order or with a number of orders?.

No. Not right now. I mean, I think we do have that. We obviously year-over-year time to close its coming back down, there is still some [indiscernible] if we look at closing forms and just the closing timeline, but we are seeing efficiencies, but not ready to put specific employee counts around that..

Okay. And then one question on competition.

I know it seems like some outsiders have been looking at the space and I know there was quicken loans to start running volumes to an underwriter in Texas where you guys have a lot of share, I guess, maybe you can comment on things like that specifically, but in general in big states like this, can you give us a sense of the competitive environment in which you can do to maybe counteract some of the new entrants in some of the bigger states?.

Yes, I mean, it's always highly competitive. I think what you're seeing is probably increased competition at the lower end of the market.

So, I think for our take, we’ve had the stability of being here since 1993 and maintaining integrity in the process and I think having people care about the process and the customer experience and the value of the policy is what we’re focused on.

And so, we always see new entrants and -- but I think we’re well positioned to play a meaningful role in the market not only do we have the global reach that we can handle any transaction anywhere in the world, but we think we’re well poised with more local touch to understand the communities that were involved in..

Okay. That’s all I had. Thanks a lot..

Okay. Thank you..

It does appear we have no further questions. I will return the floor to our presenters for any additional or closing remarks..

I just want to say thank you again for joining us today. We appreciate your interest in Stewart and good day. Thank you..

And this will conclude today's program. Thanks for your participation. You may now disconnect..