Crawford & Co (CRD.A) 2008 Q1 法說會逐字稿

Good afternoon. At this time I'd like to welcome everyone to the Crawford and Company First Quarter 2008 Earnings Release conference call. In conjunction with this call, a supplementary financial presentation is available on our website at www.crawfordandcompany.com under the Investor Relations section. Some of the matters to be discussed in this conference call and in a supplementary financial presentation, may include forward-looking statements that involve risks and uncertainties including statements regarding our availability to pay dividends in the future. The company's actual results achieved in future quarters could differ materially from their 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 10K for the year-ended December 31st, 2007 filed with the Securities and Exchange Commission, particularly the information under the headings, Business, Risk Factors, Legal Proceedings and Management's Division and Analysis of Financial Condition and Results of Operation.

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. Jeffrey Bowman, President and Chief Executive Officer of Crawford and Company. Mr. Bowman, you may begin your conference.

Thank you. A very warm welcome to our investors, clients and employees this afternoon for a discussion of our first quarter results and expectations for 2008. I'm Jeffrey Bowman, President and CEO of Crawford and Company.

Joining me from the global executive management team this afternoon are Bruce Swain, our CFO and Allen Nelson, our General Counsel and Chief Administrative Officer.

We have today reported on the first quarter results for 2008. You will have received the press release this morning. We released it earlier than normal to give our shareholders more time to review our performance. In addition, we are providing a financial presentation which is downloadable from our website.

I am continually encouraged by the global potential that we have in front of us. In all our business units I am pleased with the progress we have made in the first quarter. We still have a great deal of work to do in order to execute on the potential we see. So let me first overview the strategies and performance of the first quarter.

On my call with you in the last quarter, I began with the fact that globally, insurance is a growth business and providing an independent, quality-driven local, regional or global claims service is crucial to our client's business proposition. Crawford and Company is well positioned to take advantage of the business opportunities and revenue growth potential associated with those propositions.

Internally we are acting with a sense of urgency within the organization that aligns us from the bottom up allowing us to connect all our units with the company and the clients and enable us to build our organization. During the first quarter, the management team has worked hard to initiate and execute the plans we outlined 90 days ago.

I'm pleased to say we have produced positive results. Our goal has been to drive our operations to continue to deliver quality to our clients, by investing in training, and maintaining very strong client relationships at all levels. All this, with the outcome of positioning Crawford and Company as a target-driven corporation that achieves our financial goals and meets our commitments to our clients, employees, and shareholders. Let me briefly review some of our activities.

We have implemented a communication plan to derive a common understanding of the strategy and direction of our corporation for our employees, clients, and investors. This will take shape through a program we are calling 'The Strength of Working Together'.

This theme is based on Crawford and Company's vision and mission values that is translated in the way we behave and is fully documented on our website. I've made a point in the first hundred days to set the course for this company during my tenure as CEO. We are building credibility and momentum, ultimately defining the direction for the whole organization through those plans.

The global executive management team and our operational managers which consist of regional and country managers, have a fantastic blend of experience together with a commitment to a fresh and energetic management approach. They're already demonstrating readiness and ability to adapt quickly to rapidly changing market conditions both locally and globally, which is visible this quarter in the aggressive management of our internal cost base and progress on implementing better sales processes and information to grow the top line.

Our entire leadership team is working together to execute the 2008 strategic plan. We have expanded our global account management plans to improve an increased marketing and selling effort across all of our business units. One theme of 'The Strength of Working Together' is to drive revenue growth overtime.

Doing this properly, I'm confident the revenue growth and leverage we can create through this initiative will be significant. We have identified opportunities among our largest global clients for the key account management program. By engaging more deeply with these clients and pursuing cross-selling opportunities, we should be able to grow revenue in all segments over the next 2 to 3 years.

We are continuing to expand the business proposition to our clients around the brands we operate, both globally and locally in Crawford, Broadspire, and the Garden City Group (GCG). Our management team at Crawford and Company is committing to delivering on our promised technology. Just to touch on that statement, the global insurance industry continues to face competitive and regulatory changes that require innovative technology solutions to the claims process. Giving our client access to timely and accurate data is critical to the business proposition we offer.

As examples, we expect the new RiskTech product, a self insured market technology system, to be deployed on plan and ready for clients during the fourth quarter 2008. We have just announced that we integrated Xactware, our key business partner and property estimating solution company, assignment networks and estimation tools into CMS2, producing an enhanced consistent quality-driven work product that will benefit our client.

Another success is in the U.K. where we have enhanced our personal lines claims business with new tablet, handheld technology together with software that integrates claims data, calendars, post codes and skill levels of adjustors. Turning to the 9,000 Crawford and Company employees globally, our emphasis on the strengths of working together is resonating through the company. The improved quality that they are delivering every day is visible in our results and is the foundation for our future growth in success.

We are very pleased with the start of the year as we build on Crawford's reputation as an industry leader. We will continue to deliver quality outcomes for our clients and expect to deliver improved financial performance for our investors. Now to the group results. Crawford delivered strong overall results in a difficult economic environment. Our group revenue improved by 4.9% over the previous quarter in 2007. We are also pleased to report net income is up 174%. In the quarter, strong revenue growth internationally offset the declines in the U.S. business.

Operating margins improved on a segment by segment basis. We saw our SG&A costs reduced by 8.1% and drop 280 basis points as a percentage of sales. This produced an increase in earnings per share to $0.18 per share over the $0.07 per share in 2007. In our outlook, we continued to see international business offsetting the U.S. weakness.

So let me talk about the reportable segment Broadspire, and U.S. Property and Casualty. Firstly Broadspire, there was decline in revenue of 5% for the Broadspire business Q1, 2007 to Q1, 2008. We did anticipate this decline in our business planning for Broadspire, and our plans to address this decline are well underway.

Firstly in existing business, our retention rates remain high, in the 95% range, based on revenue generated from existing customers. However there, are two underlying facts that limit the growth potential on our existing books of business for the services we currently provide.

As we noted at the end of 2007, the Kemper National insurance business is in runoff and revenues for that business will decline over time. And secondly, frequency rates have declined in the workers compensation line by 5.7%, which is a significant portion of our services, which is great news for our customers but limits any growth from their current business.

To address this area as I mentioned before, we are focusing on cross-selling additional services to additional customers and expanding our liability claims handling services to those customers, picking up new revenue on existing customers. We expect to see results as the year progresses. Secondly, new business. While we've seen additional RFP activity and we have a strong sales pipeline, converting the RFPs to one account has been slower than we would have liked.

We continue to see good activity in the large national account marketplace. However, with the softening insurance rates, the marketplace is looking more to traditional bundled insurance arrangements. Thirdly, we are also expanding into business process out-sourcing for mid-sized carriers and program business. We have seen some good traction in this arena becoming their claims back office on an exclusive basis.

We will continue to expand aggressively in this area. Fourthly, we have ongoing opportunities in medical management services to enhance and regain market share and volume in this area. During Quarter 1 we made changes in the management structure, as well as our analytics of metrics to improve customer service and relationship. So let me now review U.S. property and casualty.

After a poor 2007, operating performance, our goal in 2008, even in a challenging overall claims environment is to improve the U.S. property and casualty revenue growth and to ensure that our cost management provides an acceptable operating margin. Our continued focus on quality and technology has begun to pay a dividend. In respect to our revenue, we're ahead of our plan, although down 2.9% against the prior year.

Future growth will come from the aggressive pursuit of new business and expansion of existing relationships we have implemented. In the meantime, we are positioning U.S. property and casualty to take a bigger share of the market and focus the organization on business growth priorities.

In quarter one we have opened new accounts with potential new revenue of $2 million on an annualized basis. In all, our U.S. property and casualty operation has performed very well in Quarter 1 and we are optimistic about improved performance in the balance of the year.

Now turning to the International division. The International reportable segment represents 41.8% of the corporation's total revenue. In 2007, this was 39.8%. We are reporting revenue growth in the quarter of 27% over 2007 which includes foreign currency benefit of $9.9 million leaving organic growth of 15.8% quarter-over-quarter.

I can report that our Canadian, U.K. and Asia-Pacific, including our Australian operation performed well. Our U.K. and Canadian operations continue to grow their client bases. An example of good sustainable client growth in the past six months is that in Canada we have been awarded significant new business by two leading Canadian companies.

The first is Aviva Canada where we recently signed a new contract for claims as the partner of choice for all of Canada, including Quebec. We are currently one of two partners servicing claims for Aviva Canada nationally. This contract starts June 1. The second new account is the Sole Source program with TD Insurance. These contracts are predominantly Property and Casualty programs. The TD Insurance program commenced in the fourth quarter 2007 and is now ramping up significantly.

Both these accounts are multimillion dollar arrangements in their own right. Turning now to Legal Settlement administration. GCG's first quarter revenue was affected significantly by the timing of case flow. Several large cases that were supposed to begin in the quarter did not, as they were awaiting court approval.

Some cases were awaiting preliminary court approval, some were awaiting documentation of the settlement and others were awaiting appeals to be resolved. While we're never happy about these reasons, we can report the healthy backlog of work that is now over $50 million as compared to $31 million at the end of the same period in 2007. GCG was retained in 40 cases in the first quarter 2008, as compared to 37 in the comparable period la last year.

In the class action marketplace, we're seeing consolidation of competitors, unprecedented pricing pressure from our competition and we expect that certain competitors will exit the market in the coming months. As one would expect, we continue to establish new revenue streams and our Bankruptcy division has seen increased activity. We have recently been retained on several new engagements from clients in this area and this will be a source of growth should the economy continue to weaken.

Despite revenue declining by 21.4%, we improved operating margins to a 13.2% result for quarter one, up from 10.9% in 2007. We were able to accomplish these positive results by managing our overall cost structure.

We are raising the guidance for fiscal 2008 consolidated revenues before reimbursement between $990 million and $1.02 billion, consolidated earnings between $56 million and $61.6 million and after reflecting stock-based compensation expense, net corporate interest expense, intangible asset amortization expense, income taxes, consolidated net income is between $20.2 million and $23.3 million or $0.40 to $0.46 per share. Our first quarter, as reported, was significantly higher than 2007 and we remain positive about our year-end projection.

This outlook includes no increase in Catastrophe revenue over our original plan. Let me finish my initial comments by saying, again, that our company has regained our rightful stature as the leading global claims business over the past several years. Our global executive management team will continue to build on this platform through the programs I have just discussed and deliver better execution, deliver stronger and more consistent financial performance.

As outlined in our strategic plan, we continue to focus on cost reduction, improving operational quality, and delivering sustainable results through expanded sales and marketing lasting activities. That's our collective objective for 2008. I look forward to your questions after Bruce has finished his financial summary.

Over to you Bruce, to review the company's overall financial performance for the first quarter before we take questions.

Okay. Company-wide revenues before reimbursements increased by 4.9% in the 2008 first quarter to $255.5 million from $243.6 million in the prior year's quarter. This increase is attributable to double digit organic growth from our international operations which offset declines in revenues generated in our Legal Settlement administration, Broadspire, and U.S. Property and Casualty segment.

Our pretax income totaled $13.7 million as compared to pretax income of $5.4 million we reported in last year's first quarter. We recognized basic and fully diluted earnings per share of $0.18 for the current quarter, as compared to earnings per share of $0.07 in last year's first quarter. First quarter 2007 earnings per share included $0.05 related to the gain on disposal of assets as a result of the sale of our Subrogation Services unit.

Excluding this special credit, our earnings per share were up $0.16 on a comparable basis, over the $0.02 before special credit in the 2007 first quarter. The company's selling, general and administrative expenses, or SG&A, totaled $50.6 million or 19.8% of revenues in the 2008 first quarter, decreasing $4.5 million from $55.1 million or 22.6% of revenues in the prior year quarter. SG&A costs associated with the Broadspire segment declined $1.6 million reflecting a portion of the positive impact of acquisition related synergies we generated.

Excluding the effect of the Broadspire synergies, the remaining decline is primarily due to lower self-insurance expense in the U.S. and lower bad debt expense in both the U.S. and internationally, driven by the partial recovery of a previously written-off bankrupt account in the U.S. Turning to operations, effective with the 2008 first quarter, the company realigned its internal reporting structure to include the results of its strategic warranty services business within its U.S. Property and Casualty segment. This business was previously a component of the Legal Settlement administration segment.

All prior period segment results have been re-stated to reflect this change. Revenues from the U.S. Property and Casualty segment totaled $49.5 million in the 2008 first quarter, down 2.9% from the $51 million reported in last year's first quarter. Revenues generated by our catastrophe adjustors totaled approximately $1.9 million in both the 2008 and 2007 first quarters. Claim referrals in our U.S. Property and Casualty segment were down 11.3% in the 2008 first quarter.

This decline was driven by the decision of a large client to insource the handling of high-frequency, low severity vehicle claims that were previously outsourced to Crawford. Excluding these low-value vehicle claim referrals, claim referrals were down 5.4% in the 2008 first quarter. Property claims, which tend to have the highest per claim revenue, were up 2.2% in the 2008 first quarter.

Operating earnings in our U.S. Property and Casualty segment totaled $5.9 million or an operating margin of 12% of revenues in the 2008 first quarter. This is compared to operating earnings of $3.4 million or 6.6% of revenues in the prior year quarter. International revenues increased 15.8% in the 2008 first quarter on a local currency basis and by 27.1% in U.S. dollars to $106.7 million on a 3.4% increase in claim referrals.

This revenue growth reflects increased case referrals in our Canadian and Continental Europe operating regions, resulting from new business wins during 2007 and 2008, and the positive impact of claims generated by the U.K. flooding events which occurred during June and July of 2007 which we were completing during the 2008 first quarter. International operating earnings improved to $9 million in the current quarter, increasing 127% over last year's first quarter operating earnings of $4 million.

This improvement reflects an increase in the operating margin from 4.7% in the 2007 first quarter, to 8.4% in the 2008 quarter. Revenues from our Broadspire segment decreased by 5% to $80.3 million due primarily to declines in workers compensation claims referred in the current period.

Overall, claim volumes were down 8.3% during the 2008 first quarter. However, the Broadspire segment's operating performance improved in the 2008 first quarter to a profit of $1.7 million or 2.2% of revenues from an operating loss of $681,000 or 0.8% of revenues in the 2007 first quarter. These results were largely driven by the acquisition related cost reduction initiatives carried out in 2007 and 2008. Legal Settlement administration revenues, comprised of class action and bankruptcy claims administration services declined, 21.4% in the 2008 first quarter to $19 million.

Despite the sharp reduction in revenues, operating earnings totaled $2.5 million in the 2008 first quarter or 13.2% of revenues as compared to $2.6 million or 10.9% of revenues in the prior year period. Our cash and short-term investment position at March 31, 2008 totaled $42.8 million dollars, as compared to $50.9 million at December 31, 2007. Our total accounts receivable balance totaled $322 million increasing $5.7 million for the year-end balance.

Total debt increased $5 million to $220.3 million at March 30, 2008 as we had net borrowings under our revolving credit facility to meet first quarter 2008 cash requirements. Cash used in operations totaled $4.1 million for the 2008 period, compared to a use of $32.2 million in the prior year period. This improvement was primarily due to higher net income, a reduction in the growth and overall receivable balances and lower payments for accounts payable and accrued liabilities.

The company's cash requirements typically peek in the first quarter and improve over the remainder of the year. After reflecting capital expenditures, capitalized software and required debt repayments, our free cash flow in the 2008 first quarter was a negative $11.2 million. This is an improvement of $27.5 million from the prior year first quarter of negative $38.7 million. This wraps up my comments.

Now I'd like to give our callers a chance to ask any questions they might have about our first quarter release.

(OPERATOR INSTRUCTIONS.) Your first question comes from the line of Mark Hughes of SunTrust.

Thank you very much. Nice quarter.

Thanks, Mark.

You talked about, in the Broadspire segment, perhaps some of your customers looking for more traditional, bundled relationships, or I guess within your pipeline, which is pretty robust, that's one of the reasons why you're not closing any? Could you talk about that a little bit?

Yes, sure. Within the overall services we're seeing a lot of activity for, on the RFPs coming in, where they're looking for an all-encompassing service coming out of the Broadspire operation rather than really splitting it out into various other areas of products. And this is a trend that we're seeing at the present moment.

Right. Any strategies for filling out the offering to make it more attractive to those sorts of clients?

Well, I think I might have misunderstood the question at the beginning. One of the downward pressures on Broadspire in terms of the challenges that we face in the market is looking at, given the soft market that exists today, and with insurance companies, they are offering bundled solutions to self-insured entities where the claims administration and the insurance is all wrapped into one product offering and you see that sometimes during a soft market and so that's of the challenges in that market as we're exiting 2007 and entering 2008.

Right, gotcha.

That's not to say all clients that self-administer are going to look to a fully insured program, a lot of companies like to self-administer and they're going to keep doing that, and they can still draft reductions in their overall cost of risk by separating the two but it does create a bit of a headwind in the market in that business.

Gotcha. GCG, nice uptick in the backlog. Is there a normal time period that that translates into revenue?

There's no real time period at all. It depends on the courts taking the action to accredit the class action and you know, we're beholden to them on that.

Gotcha. And then finally the benefit from the recovery of the charged-off receivable, did you quantify that?

That was approximately $1.2 million.

Great, thank you very much.

Okay, thanks, Mark.

(OPERATOR INSTRUCTIONS.) Your next question comes from the line of Carter Newbold of Rutabaga Capital.

Good afternoon.

Good afternoon, Carter.

A couple of questions. One is, your year-over-year rate of capitalized software was up substantially and I couldn't recall how that was running in the last couple of quarters last year, but could you remind me whether there's been any significant change in the way you're spending that's driving that number?

There's not so much a significant change. During 2007, we implemented the CMS2 system within our U.S. Property and Casualty segment and so that software had a capital requirement associated with it.

Within the Broadspire segment, we are in the final stages of our initial implementation of that system that's on schedule for this, the fourth quarter of this year, and that has some increased capital expenditure associated with it. Both for capitalized internal use software but also for some of the back-end investment in servers and hardware.

So as you move towards that fourth quarter RiskTech, I guess, full implementation or rollout, are we sort of seeing a peak in spending that will then back off a bit going into fiscal '09?

Well the rollout of RiskTech is in phases and there's three primary operating systems within Broadspire that we are migrating onto the RiskTech platform. The first platform is one that was used predominantly by the acquired Broadspire entity and it was their main operating platform.

That's the first to go on. Then we have to integrate the legacy Crawford systems and then a smaller platform that Broadspire operated on that was from a legacy acquisition that they had undertaken back in the early 2000's. I think we haven't put the capital expenditure or budget or projection together for 2009, but I suspect that we'll see a comparable amount in 2009 and then dropping off from there.

Okay. There was some reasonably lengthy discussion, I believe last quarter, about the manner in which the total leverage ratio governed your ability to pay a dividend. I think you said you were 3.1 at year-end, you just finished an outstanding quarter. Can you tell us what the LTM number is there, and are you now at least, by the bank's reckoning, able to pay a dividend?

Yes, under our credit facility, we've got a few requirements we have to meet in order to pay a dividend and the leverage ratio is chief among them. At the end of the year, you're right, we ended up at 3.1-to-1 and we have to be under 3.0-to-1 on a trailing 12-month basis. At the end of the first quarter, we were at 2.9-to-1, so we were under the 3.0-to-1 requirement we had under the credit agreement.

Management is supportive of a dividend, paying a dividend in the future, but it's a decision ultimately undertaken by the board, it's one that they evaluate each quarter and --

Just to understand, is the ball now in the board's court, so to speak? There's no bank prohibition on a division at this point?

There's not a bank prohibition on a dividend and it's a matter that's a decision of the board.

Okay, great. Just one more question about the strength of the business. I, too, was hoping for specific disclosure on the size of the receivable recovery and given how fantastic the quarter was, I was expecting, actually that that recovery might have been a fairly large or substantially larger number than it was.

Backing that out and calling what you did in the first quarter less that or run-rate and given the normal seasonal patterns of your business, it looks like you're going to stomp your full year guidance. Is the caution reflected there just related to the macro economy or is there something else at work we should be mindful of?

Could you just repeat the first part of the question, Carter? --

You had a great quarter. I thought maybe a more substantial part of its performance would be related to this kind of one-time AR recovery, but now that you gave us that number at $1.2 million I think, at least from my perspective, I would still say the business is running much more strongly than I thought it would be this time of the year, at the extent to which you moved, your guidance was fairly modest --

Okay. The businesses in all the segments at this moment, we've put in reductions of cost. We are beginning to see the benefits of the implementation of technology play a part in the overall results that are coming in. Obviously the streamlining of those systems has affectively enabled us to take out some of the administration costs. That's one of the reasons we're seeing the SG&A costs reduced within the organization.

We've realized most of those initial SG&A costs and now overall, priority is for key account management, to start to push in and increase the revenue of the organization in each of the business units. I mean, from that perspective, we're not giving really the first quarter. It's my first quarter as CEO and I'm taking a fairly conservative approach as we go through the balance of the year.

I think at the end of the second quarter, we will, if the results continue on the way they are, we will look very seriously at the guidance we're then giving. I feel comfortable with what we've actually put out at this particular moment.

Fair enough, thanks very much.

Thank you, Carter.

(OPERATOR INSTRUCTIONS.) There are no further questions at this time. Gentlemen, do you have any closing remarks?

Yes, thank you. I'd like to thank everyone for joining us this afternoon. I hope to see you, as many of you as possible at the annual meeting, which takes place tomorrow afternoon in the home office in Atlanta.

Thanks very much for participating. It's greatly appreciated and good-bye.