Crawford & Co (CRD.A) 2007 Q3 法說會逐字稿

Good afternoon. My name is Cattina, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Crawford &Company third quarter 2007 earnings release conference call. (OPERATOR INSTRUCTIONS) As a reminder, ladies and gentlemen, this conference is being recorded today, Thursday, November 1, 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 the ability to pay dividends in the future. Crawford & Company faces risks associated with the acquisition, including but not limited to, risks that the integration of Broadspire into the company's operation 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 the company's form 10-K for the year ended 2007, December 31st, filed with the Securities and Exchange Commission, particularly the information under the heading "Business Risk Factors", "Legal Proceedings", and "Management Discussions of Analysis of Financial Conditions and Results of Operation. " 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 Web site at www.crawford&company.com/quarterly releases. I would now like to introduce Mr. Tom Crawford, Chief Executive Officer of Crawford & Company. Mr. Crawford, you may begin your conference.

Good afternoon, everyone, and thanks for joining us today for our third quarter earnings conference call. I'm Tom Crawford, Chief Executive Officer of Crawford & Company. Joining me today is Bruce Swain, our Chief Financial Officer and Jeff Bowman, the Chief Operating Officer of Global Property and Casualty.

Today, we'll be discussing the company's performance for the third quarter, ended September 30, 2007. Later,we'll be happy to respond to any questions you may have and hopefully, all of you have received the press release we issued this morning. I'll get to the results in a moment, but first, I want to make a note of a very important management change announced recently, on January 1, Jeff Bowman will become President and CEO of Crawford & Company.

Many of you know Jeff, who has been with us since 1990, is currently the Chief Operating Officer of Crawford's Global Property, and Casualty business, which makes up more than half of our revenue. Jeff's here with me today and I'll ask him in a moment to give a brief statement, and I mean brief. And at the same time as Jeff takes on his new role, I will assume the role of Chairman. Jesse Crawford, whose family founded the business, will move to the role of Chairman of the Executive Committee.

Now, just a moment about Jeff. I've worked side-by-side with Jeff over the last three years and I have immense confidence in his abilities. I think Mr. Bowman clearly has been a major asset to me coming into the company. He, in my opinion, has been one of the best business people I have seen in the industry and that accounts for about 43 years. I am proud and excited about Jeff moving into the President and CEO role. Despite the fact I just gave him a swelled head, I'm going to ask him to say a word or two.

Thanks, Tom, and good afternoon to everyone on the call. I'm delighted to take a minute to talk to you today. As Tom said, on January 1, 2008, he will take the Chairman's position and I will become President and CEO of Crawford & Company. This is a role that I am excited to take on, and one that has been planned very carefully to ensure an orderly handover within the organization. Crawford & Company is now developing into a global company.

My role has been the management of the international aspects of our growth, both in revenue and earnings terms. I have also been developing new markets and integrating new services around the globe. As CEO, I intend to expand the work done over the past few years in quality, client relationships, and business solutions to ensure Crawford is a stronger partner to our client in a global aspect. I look forward to building on the solid foundations the current management team has put in place, which will translate into both revenue and earnings growth.

Prior to January 1, I am involved with Tom on reviewing the 2008 budget and strategy for the corporation and meeting with the senior management of the Crawford business units so I am able to outline the plan effective in 2008. At the conclusion of Tom's remarks, I would be happy to answer any questions you may have. Now I'll pass it back to Tom to address the performance of the organization.

Okay. Let's talk about the earnings results for the quarter. We're reporting results for the company as a whole that are below our expectations. However, consolidated revenues increased approximately 27% on the strength of our acquisition of Broadspire last fall and 29% growth in our international operations. It's also encouraging that all four Crawford segments were profitable for the second consecutive quarter.

We're also encouraged by the recognition we are receiving in the marketplace. The biggest being the recognition by the industry as the best third party claims administrator in the USA. This was a result of "Business Insurance Magazine"'s survey taken for the year 2007. The management team and I believe that Crawford has the best quality in the industry today and that will bode well for us going forward.

Now, let me talk a few moments about the segment trends. Our international business delivered strong performance across the board, with a 20% sales growth and margins of 6.5%, provided an 83% improvement over prior year's quarter. Results reflect the impact of new business wins in '06 and '07, as well as significant flooding events in the U.K. that took place in June and early July. Globally, I'm encouraged that we are seeing recognition of Crawford's ability to service multinational corporations as we expect this revenue growth to continue through the remaining quarter and into 2008.

Now turning to Broadspire, we have substantially completed the first phase of the integration to the operations of Broadspire's management services, and we continue to be pleased with the results of this operation thus far. We expect further cost efficiencies in '08 and '09, as we now move to consolidate the IT back offices of the combined entity. Revenues from the combined Broadspire operation 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 run rate of more than $32 million, well beyond our expectations. This is an important contributor to our quarterly operating results in this segment, which in proof made loss of $7 million in the third quarter of '06 to an operating profit of $1.6 million in this quarter.

Now our U.S. Property and Casualty business improved margins quarter-over-quarter in '07, 5.9 to 1.2 prior quarter. This is with a slight increase in claim counts and again, despite the fact that catastrophe claims, I'll talk about in a few moments, are down over 50% on a historical run rate basis. We have deployed our CMS2 system, which promises to increase claims management efficiency across the segment. In addition, we have seen strong growth in our contractor connection and property claims area. We can talk about that later, if you have a question about it. U.S.

P&C revenues contracted 15%, leading to a decline in operating margins -- earnings, I'm sorry, operating earnings. Lower revenues generated by the company's catastrophe adjustor group were a contributing factor, down from $5.3 million in the third quarter of '06 to $3.4 million in '07. Non-CAT claims increased 2.5% as we saw improved performance in the area of property and vehicle claims. That, to me,tells us about market share, again, we can talk about later. When I say historical on CAT claim, I'm talking -- and I think you've heard me say before that we plan about $20 million of revenue year-in and year-out and we hit that. This year it's half of that, less than half, so a very unusual year in view of the fact that we said we're not building our company for catastrophes. We still feel the performance of P&C has been reasonable in that aspect. Right now, with the 5.9% margin segment for the quarter.

Lastly, let me talk about our legal settlement and administrative segment. As you know, '06 was a record-setting year, with several large cases settled. This year, there are fewer large cases in the marketplace and as a result, the revenue is down from last year. However, the management team maintained solid margins in the quarter of 10.7%. The continuing good news here is the large backlog of $40 million, with the expectation that this segment will continue to lead in margin results throughout '07 and into '08. And I'm personally proud of the fact that they remained a leader in the marketplace.

So in summary, looking ahead, our outlook for the remainder of 2007 reflects our expectations of a strong performance in international and solid performances from our other segments. With this information, we expect a solid fourth quarter and we continue to move aggressively to build a world-class business. We're confident that Crawford is in the position to deliver balanced, profitable, and sustainable growth going forward, and that's with some information I'm going to talk about the fourth quarter, some of it we have in hand. So we're very confident about it. Now I'll turn it over to Bruce.

Thanks, Tom. Company-wide revenues before reimbursements increased by 24.7% in the 2007 third quarter to $245.8 million from $197.1 million in the prior year's third quarter. This increase is attributable to $47 million in revenues from the acquired Broadspire Management Services, Inc. business and double-digit organic growth from our international operation, which offset declines in revenues generated on our legal settlement administration and U.S. Property and Casualty segment. Our pretax income totaled $10.5 million as compared to pretax income of $9.7 million we reported in last year's third quarter. We recognized earnings per share of $0.07 for the current quarter as compared to earnings per share of $0.13 in last year's third quarter. Third quarter 2007 earnings per share included $0.03 related to the recognition of certain tax benefits during the third quarter, which had previously been unrecognized in accordance with the rules for accounting for uncertain tax positions. Pretax income in the 2006 third quarter included a gain on the sale of the company's investigative services unit of $3.1 million, which after related income taxes provided $0.04 per share for the prior year's quarter.

The company's selling, general, and administrative expenses, or SG&A, totaled $53.2 million, or 21.6% of revenues in the 2007 third quarter, increasing 19.2 million from $34 million or 17.3% of revenues in the prior-year quarter. The acquisition of Broadspire added $13.4 million of SG&A during the current quarter. Excluding the effect of the Broadspire acquisition, our SG&A cost as a percentage of revenues were 20.2% in the 2007 third quarter. This increase is primarily due to higher self-insurance expense in the U.S. and higher costs within our international operating segment. Turning to the segment operations, international revenues surged 20.3% in the 2007 third quarter on a local currency basis, and by 29.2% in U.S. dollars to a new quarterly record of $96.7 million, on a 32.3% increase in claim referrals. This growth reflects increased case referrals in each of our international operating regions resulting from new business wins during 2006 and 2007 and the impact of claims generated by the U.K. flooding, which occurred during June and July of this year.

The acquisition of Specialty Liability Services, Limited in the U.K. during the 2006 fourth quarter contributed revenues of $2 million in the 2007 third quarter. International operating earnings improved to $6.3 million in the current quarter, increasing 83% over last year's third quarter operating earnings of $3.4 million. This improvement reflects an increase in the operating margin from 4.6% in the 2006 third quarter to 6.5% in the 2007 quarter. Revenues from our Broadspire segment more than doubled in the quarter to $78.2 million due to the incremental revenues of $47 million from the Broadspire acquisition completed in last year's fourth quarter. The combined Broadspire segment's operating performance improved substantially in the 2007 third quarter to a profit of $1.6 million or 2% of revenues from an operating loss of $7.2 million or -20.5% of revenues in the 2006 third 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 28.7% in the 2007 third quarter to $24.8 million on a comparison with record revenues and operating earnings in 2006. Operating earnings totaled $2.7 million in the 2007 third quarter or 10.7% of revenues as compared to $6 million or 17.3% of revenues in the prior-year period. Legal settlement administration continues to have a backlog of projects awarded, totaling approximately $40 million at September 30, 2007. Revenues from the U.S. Property and Casualty segment totaled $46 million in the 2007 third quarter, down 12.3% from the $52.5 million reported in last year's third quarter. Revenues generated by our catastrophe adjustors totaled $3.4 million in the 2007 third quarter compared t$5.3 million in the 2006 period. Third quarter 2006 revenues also include $1.9 million produced by the company's investigation services business, which was sold in the 2006 third quarter and the prior-year quarter also included approximately $540,000 in revenues generated by the company's segregation services unit, which was sold in February of this year. Excluding the impact of claims referred to our catastrophe services group, claims referrals in our U.S.

Property and Casualty segment were up 2.5% in the 2007 third quarter. This increase was primarily due to an increase in vehicle services claims. Operating earnings in our U.S. Property and Casualty segment totaled $2.7 million for an operating margin of 5.9% of revenue for the 2007 third quarter as compared to an operating profit of $3.8 million or 7.3% of revenues in last year's quarter. This decline is due to a decline in catastrophe revenues during the 2007 third quarter and an industry-wide decline in property and casualty claims frequencies. Turning to the balance sheet, our cash and short-term investment position at September 30, 2007, totaled $45.3 million as compared to $68.8 million at the end of last year's third quarter and $67.6 million at the end of 2006. Cash provided by operations totaled $3.9 million for the first nine months of 2007 compared to $31 million provided in the prior-year period. This change is primarily due to growth in unbilled revenues during the 2007 period and a reduction of deferred revenues associated with the completion of claims assumed in the Broadspire acquisition.

During the 2007 third quarter, the company made a discretionary $5 million prepayment on its outstanding long-term debt. We are adjusting our guidance for fiscal 2007 as follows: consolidated revenues before reimbursements between $955 million and $985 million; consolidated operating earnings between 440 $42.7 million. Net corporate interest expense, intangible amortization expense, special credits, and income taxes, we are expecting consolidated net income between $17.2 million and $18.8 million or $0.34 to $0.37 per share. This wraps up my comments. Now I would like to give our callers a chance to ask any questions they may have about our third quarter release. Cattina, would you please explain the procedure for handling questions to our audience?

(OPERATOR INSTRUCTIONS) Mr. Crawford, at this time there are no questions.

All right. Well, I would just like to thank everybody for being on the phone and listening to us. We remain excited about our company and look forward to talking to you in the next quarter. Take care.

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 November 8, 2007. The conference ID number for the replay is 25161469. The number to dial for the replay is 1-800-642-1687 or 706-645-9291. Thank you. You may now disconnect.