Crawford & Co (CRD.A) 2007 Q2 法說會逐字稿

Good afternoon. My name is Kristin, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Crawford & Company second quarter 2007 earnings release conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. Instructions will follow at that time. (OPERATOR INSTRUCTIONS) As a reminder, ladies and gentlemen, this conference is being recorded today, Monday, July 30th, 2007.

Some of the matters to be discussed in this conference call may include forward-looking statements that involve risks and uncertainties, including statements regarding our acquisition of Broadspire Services, Inc., the integration of Broadspire, and our ability to pay dividends in the future. Crawford & Company faces risks associated with the acquisition, including but not limited to risks as the integration of Broadspire Services Inc. into the Company's operations may not be successful or may be more expensive than anticipated, and that the anticipated results of the combined Company following the acquisition may not meet expectations. The Company's actual results achieved in future quarters could differ materially from results that may be implied by such forward-looking statements. The Company undertakes no obligation to publicly release revisions to any forward-looking statements made in this conference call to reflect events or circumstances occurring after the date of the call, or to reflect the occurrence of unanticipated events.

For a complete discussion regarding factors which could affect the Company's financial performance, please refer to Company's Form 10-K for the year ended December 31st, 2006, filed with the Securities and Exchange Commission, particularly the information under the headings Business, Legal Proceedings and Management's Discussion and Analysis of Financial Conditions and Results of Operations. The Company undertakes no obligation to publicly release revisions to any forward-looking statements made in this conference call to reflect events or circumstances occurring after the date of the call or to reflect the occurrence of unanticipated events.

This presentation also includes certain non-GAAP financial measures as defined under SEC rules. As required, a reconciliation is provided for those measures to the most directly comparable GAAP measures, which is available on our website at www.crawfordandcompany.com/quarterlyreleases. I would now like to introduce Mr. Tom Crawford, Chief Executive Officer of Crawford & Company. Mr. Crawford, you may begin your conference.

Well, good afternoon, everyone, and thanks for joining us today for our second quarter earnings conference call. I'm Tom Crawford, Chief Executive Officer of Crawford & Company. And joining me today is Bruce Swain, our Chief Financial Officer, and Jeff Bowman, our Chief Operating Officer. Today we'll be discussing the Company's performance for the second quarter ended June 30th, 2007. And later, as always, we'll be happy to respond to any questions you may have. Hopefully, all of you received the press release we issued this morning. Again, I want to thank all of you for joining us. We are, in fact, broadcasting today from our new corporate headquarters, a facility that I believe will add to the efficiencies of our organization, and as importantly, expand our abilities in Crawford University, which we've talked about before. It will play an important role as we go forward.

Now, let's talk about the results. I am pleased to report improved performance for Crawford & Company's operations for the 2007 first quarter. Revenues increased approximately 25% on the strength of Broadspire's acquisition this fall. It's important to note that all four of our operating segments reported a profit for the quarter. This is the first time this has been the case in a number of years. I would recall another thing that we talked about the last quarter call was the fact that we reported profits in all four of our segments in the month of March. And we're saying we have a quarter's worth of results that are profitable, another step forward. The quarter's performance came in spite of a very low level of catastrophe claims as compared to last year into our historic norms, which proved to be a significant contributor to lower performance in our U.S. Property and Casualty segment. Now I've said this over before, that we're not building the organization for catastrophes. But clearly, when you hear the numbers later on, you'll know that it's far below the norms for an annual catastrophe [on that] of claims. I'll talk about this a little bit later.

Overall, however, the results confirm that we're on track in reshaping this Company. We have made substantial progress in integrating the operations of Broadspire Management Services, and are extremely pleased with the results of this operation thus far. We've improved our competitive positioning from number eight to number two in U.S. self-insured industry. The key today is the fact that business is now profitable. Revenues from the combined Broadspire operations were up significantly for the quarter to $83 million, driven by the acquisition. Realized cost savings year-to-date within the combined Broadspire segment have reached an annual rate of more than $32 million, well beyond our expectations. This is an important contributor to our quarterly operating results in this segment, which improved from a loss of $5.2 million in the second quarter of 2006 to an operating profit of $3 million in the quarter.

This -- the performance of our International operations was very strong. Revenues grew by 20% to a record $88.6 million in the quarter, as we gained business in all of our operating regions. Operating earnings in the International segment improved $4.6 million from $2.8 million, as margins expanded 5.2%. An item of note is the fact that seasonally, the second half of the year is normally stronger on the International scene. In addition to incremental CAT revenue related to natural events in the UK and Europe that occurred this past winter, I am encouraged that we are seeing an emerging demonstration of the potential in Crawford's unique ability to service global multinational corporations with major new business revenue wins. In addition, we are currently dealing with two significant flooding events in the UK that took place in June and early July, and severe weather that took place in Australia during the second quarter. In both events, we have deployed U.S. catastrophe adjustors to supplement our in-country adjustors. This is a further demonstration to our clients of our global capabilities to meet surge situations when required. We just remind you that the floods in the -- the most recent floods in the UK have been judged to be the worst in over 60 years. These events will possibly impact third and fourth quarter operating results in our International segment, and carry over into the first half of 2008. In talking to Mr. Bowman, we think this will last from nine to 12 months, as far as an impact on the Company, which should be positive.

Our Legal Settlement and Administration results are below last year through the first half of 2007, as case volumes pulled back from historic levels. However, there [awarded] backlog has increased to $41 million. You might recall that in the first quarter when we talked about it last month -- or last call, we were at a backlog of $31 million at the end of the first quarter. So as we said then, we expected this to improve, and in fact, it has. The segment revenues were $25 million versus $30.9 million in last year's second quarter, and operating earnings were $3.4 million versus $6.3 million. The operating margin of 13.4% reflects an improvement over the first quarter, and should show slight improvement in the second half.

U.S. Property and Casualty revenues declined 15% on the quarter, primarily due to slower claims, as I mentioned earlier. Nine CAT claims increased - and this is the important piece - the nine CAT claims increased slightly as we saw improved performance in the areas of property claims and vehicle inspections. Based on an increasing number of RFPs and new accounts, we anticipate that this area will stabilize and improve its profitability over the remainder of the year. Our U.S. Property and Casualty business has successfully deployed our CMS2 system that will continue to provide further efficiencies to the business going forward. We are continuing to add functionality to the system, which is now used by over 3,000 associates globally, and is a basis of continued deployment throughout the U.S. Property and Casualty and International divisions.

As I said before, for the quarter, consolidated revenues grew approximately 25% due to the Broadspire acquisition. Operating income was positive at all four segments, and grew 43% over the prior year's quarter. Net income increased 44%, reflecting improved performance and a gain from the sale of our former corporate offices, as announced last year. These results give me confidence that we are gaining traction as the first and best truly global business in our industry, and the number of current global projects and prospective RFPs remain encouraging for the rest of the year.

Now looking ahead, our outlook for the rest of 2007 reflects our expectations for continued strong and improving performance in the International, Legal Settlement Administration and Broadspire, and improvement in our Property and Casualty business. So in summary, we expect accelerated progress at Crawford over the year, as our acquisition of Broadspire is integrated, and our programs mature. Our quality, as measured by ourselves, our clients and the regulators, is better than ever, and improving on a daily basis. We have, and will continue to build a world-class business. I am encouraged that the work of the past year has positioned our Company ahead of our expectation for the first half, and I am confident that Crawford is in a much better position to deliver balanced, profitable and sustainable growth going forward than it has in many years.

Before I close, let me reiterate an important goal of our Company. Our team fully expects to reestablish the payment of a dividend by the end of fiscal year 2007, payable in the first quarter of 2008. I look forward to the questions a little bit later, but now I'll turn it over to Bruce to go a little more specifically into the numbers.

Thanks, Tom. Company-wide revenues before reimbursements increased by 24.9% in the 2007 second quarter, to $240.5 million from $192.6 million in the prior year's second quarter. This increase is attributable to $50 million in revenues from the acquired Broadspire Management Services, Inc. business and double-digit organic growth from our international operations. These gains offset declines in revenues generated in our U.S. Property and Casualty and Legal Settlement Administration segments. Our pre-tax income totaled $9.5 million, as compared to pre-tax income of $6.6 million we reported in last year's second quarter. We recognized earnings per share of $0.12 for the current quarter as compared to earnings per share of $0.09 in last year's second quarter. Pre-tax income in the 2007 second quarter included the recognition of the gains related to the second quarter 2006 sale of the Company's former corporate headquarters of $4.8 million. This gain had previously been deferred pending the expiration of a 12-month leaseback agreement on the sold facilities. After reflecting income taxes, this gain increased earnings per share by $0.06 per share for the current quarter.

International revenue surged 11.8% in the 2007 second quarter on a local currency basis, and by 20% in U.S. dollars, to a new quarterly record of $88.7 million. This was on a 29.7% increase in claim referrals. This growth reflects increased case referrals in each of our operating regions, resulting from new business wins during 2006 and 2007, and the completion of claims resulting from the severe weather that occurred in this past winter. The acquisition of Specialty Liability Services Limited in the UK during the 2006 fourth quarter contributed revenues of $2 million in the 2007 second quarter. International operating earnings also improved to $4.6 million in the current quarter, increasing 62% over last year's second quarter operating earnings of $2.8 million. This improvement reflects an increase in the operating margin from 3.8% in the 2006 second quarter, to 5.2% in the current quarter.

Revenues from our Broadspire segment more than doubled in the quarter to $83 million, due to the incremental revenues of $50 million from the Broadspire acquisition completed in last year's fourth quarter. Excluding the impact of the acquisition, the Company's former Crawford Integrated Services unit revenues declined by 8.7% during the 2007 second quarter, to $33 million on a 17.3% decline in claims volume. This decline is primarily due to a reduction in claim referrals from our existing clients, only partially offset by net new business gains during the period. The combined Broadspire segment operating performance improved substantially in the 2007 second quarter to a profit of $3 million or 3.6% of revenues, from an operating loss of $5.2 million or 14.5% of revenues in the 2006 second quarter. These results were driven by the incremental profits generated by the acquired Broadspire entity, and the results of the cost reduction initiatives carried out in 2006 and 2007.

Legal Settlement Administration revenues, including both administration and inspection services, declined 19.2% in the 2007 second quarter to $25 million. This segment generated record revenues and operating earnings for us in 2006, making comparisons against the prior year difficult. However, the Company continues to have a strong backlog of projects awarded totaling approximately $41 million at June 30th, 2007, which, as Tom mentioned, were up $10 million from the backlog at the end of the 2007 first quarter. Operating earnings in this segment totaled $3.4 million in the 2007 second quarter or 13.4% of revenues, as compared to $6.3 million or 20.5% of revenues in the prior-year period.

Revenues from the U.S. Property and Casualty segment totaled $43.9 million in the 2007 second quarter, down 15% from the $51.7 million reported in last year's second quarter. Revenues generated by our catastrophe adjustors totaled just $1.3 million of the 2007 second quarter compared to $5.6 million in the 2006 second quarter, when we were responding to severe storms in the Midwestern and Northeastern United States. Second quarter 2006 revenues also included $2.1 million produced by the Company's Investigation Services business which was sold in the 2006 third quarter. The prior-year quarter also included $599,000 in revenues generated by the Company's Subrogation Services unit which was sold February 28th, 2007. There were no such revenues in the 2007 second quarter. Excluding the impact of claims referred to our Catastrophe Services group, claim referrals in our U.S. Property and Casualty segment were up 4.1% in the 2007 second quarter. This increase was primarily due to an increase in vehicle services claims referred under a major contract entered into during 2006, and an increase in property claims, partially offset by a decline in casualty claims during the quarter. Operating earnings in our U.S. Property and Casualty segment totaled $510,000 or an operating margin of 1.2% of revenues in the 2007 second quarter, as compared to an operating profit of $3 million or 5.8% of revenues in the prior-year quarter. This decline is primarily due to the decline in catastrophe revenues during the 2007 second quarter.

Our cash and short-term investment position at June 30, 2007 totaled $45.7 million as compared to $65 million at the end of last year's second quarter, and $66.7 million at the end of 2006. Cash used in operations totaled $6.4 million for the first six months of 2007, compared to $19.2 million provided by operations in the prior-year period. This change is primarily due to growth in unbilled revenues during the 2007 period, the payment of retirement plan contributions, accrued liabilities assumed in the Broadspire acquisition and other recurring annual payments. The Company's cash needs typically peak during the first quarter and decline during the balance of the year. During the 2007 second quarter, the Company made a discretionary $5 million prepayment on its outstanding long-term debt.

We are reaffirming the following guidance for fiscal 2007: Consolidated revenues before reimbursements between $962 million and $1.01 billion, consolidated earnings -- operating earnings between $49.3 million and $54.5 million. After reflecting stock-based compensation expense, net corporate interest expense, intangible amortization expense, special credits and charges, and income taxes, consolidated net income between $20.5 million and $23.7 million, or $0.42 to $0.48 per share. This wraps up my comments. Now I'd like to give our callers a chance to ask questions they might have about our second quarter release. Kristin, would you please explain the procedures for handling questions to our audience?

(OPERATOR INSTRUCTIONS) Ron Bobman, Capital Returns.

I didn't want to leave you with no questions.

Thanks, Ron.

I was surprised. You discussed in your prepared remarks the implications of the UK flooding, the June event and the July, I guess events that are somewhat still occurring or ongoing. [Out of] curiosity, the length of time sort surprised me. You sort of indicated that it could actually take us into the first quarter, I think you said, of next year. I guess you mean the first quarter of calendar '08. Is there something unique to flood claims that are longer? Or is that typical, that sort of tail? Thanks a lot.

Yes, there is something unique in the fact a flood is covered under the homeowners' policy in the UK., It is not, as you know, here. It's a federal program. So it's quite an event for the insurers in the UK. Jeff Bowman is sitting here, runs the operation. I'll pass it on to him. But clearly, we think this is going to be at least a nine-month to 12-month event as far as the settlement of these claims. Jeff?

Yes, Ron, the claims that we're receiving are really broken down into two parts, both residential and commercial claims. The UK reporting agencies, excuse me, have said that probably the gross reserves on this could cost the insurance industry somewhere around about $7 billion. And as Tom mentioned in his opening statement, this is one of the largest events in about 60, 70 years in flood. We, as a corporation, work for many of the large insurance companies in the UK. We have set up on both the Northeast of the UK (inaudible) June 25th and on the July 25th [sensors] to work with our corporations that are involved. There were over 1,000 affected post codes, the equivalent of a ZIP code, that were affected. And at this moment, the waters are receding, which is good news. That would allow our claims adjustors to get in and start assessing the damages. We have made contact with 100% of the claims that we have been assigned as of yesterday evening. So we are very much working hand in hand with our clients on this. It is an event that, because there's business interruption, will take it through to the middle of next year to ensure the right calculations.

And just because I think the claims handling, the claims sort of services industry has suffered quality complaints in events in the past, when you mentioned that point that you made contact with 100%, could you more slowly make that point? Because I think you were sort of in some respects touching on a service standard.

Well, yes, absolutely. We work with all of our clients, both here in the U.S. Property and Casualty division, and in the International groups with service level agreements with our clients. And one of those key performance indicators or benchmarks that we work with will be to make contact with the insured once we are aware of the notification of a loss, and then to ensure that we have adequate personnel to then go out and investigate, quantify and settle for our clients where necessary, those individual claims. The standard -- so we agree on most of our clients the service standards we're going to work for, whether it's a catastrophe or just normal work -- claims happening in a normal period of time.

And could you provide any more description about the, if I call them two different events, the June floods and the July floods? I saw, I think a business insurance email today that they were passing on a report that somebody in the UK estimated that the June events from an insured loss to be greater than the July ones. From what you've seen or heard, would you -- ?

I'm reading the same report on that, Ron, which is the July flood is likely to be -- well, actually, the figures I've got from the press today are between GBP1 billion or GBP1.5 billion for the July floods, and the 25th of June flood ranging from GBP1.25 billion to GBP1.75 billion. The fact I would say against that is we are still receiving a significant amount of claim assignments today in our call centers in the United Kingdom. So we've got a little bit more time. I think the waters have only just receded.

Do you have a meaningful market share there?

Sorry?

Do you have a meaningful market share?

Yes, we're probably the second largest in the United Kingdom, on size.

And what's the name of the biggest company?

That would be Cunningham Lindsey.

Okay. All right, thanks a lot. I don't want to turn this into sort of a UK flood primer. I appreciate it.

I think one of the key things here that we talked about earlier is that one of the very few companies that can respond to this with adjustors coming from around the world to that site.

How many adjustors do you have over there now when you include the U.S. transplants and the base UK guys you have?

We have total associates in the UK somewhere around about 1,300.

Wow. And that includes the U.S. transplants?

Well, yes, transplants would be selected teams going to the CAT 1 area and the CAT 2 area. And they're expanding on a weekly basis. We've got more people on stand-by at this moment. But it's a significant number.

Okay, thanks a lot, I appreciate it. And best of luck, everybody.

(OPERATOR INSTRUCTIONS) Okay, you have no further questions at this time, Mr. Crawford. Do you have any closing remarks?

I do. I appreciate people joining us, and look forward to chatting with you next quarter. So thanks for being with us.

Thank you for participating in today's Crawford & Company conference call. This call will be available for replay beginning at 6:00 p.m. today through 11: 59 p.m. on August 6th, 2007. The conference ID number for the replay is 10271205. The number to dial for the replay is 1(800)642-1687 or (706)645-9291. Thank you. You may now disconnect.