Crawford & Co (CRD.A) 2010 Q1 法說會逐字稿

Good afternoon. I will be your conference facilitator today. At this time, I would like to welcome everyone to the Crawford & Company first quarter 2010 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.

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, May 10, 2009. Some of the matters to be discussed in this conference call and in the supplementary financial presentation may include forward-looking statements that involve risks and uncertainties, including statements regarding liabilities associated with our defined benefits pension plans, and our ability to pay dividends in the future. 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 December 31, 2009, filed with the Securities and Exchange Commission. Particularly, the information under the headings Business, Risk Factors, Legal Proceedings, and Management's Discussion and Analysis of Financial Condition and Results of Operations.

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.

I would now like to introduce Mr. Jeffrey Bowman, President and Chief Executive Officer of Crawford & Company. Mr. Bowman, you may begin your conference.

Thank you. A warm welcome to our investors, clients, and employees this afternoon for a discussion of our 2010 first quarter, together with our current outlook for the rest of 2010. I am Jeffrey Bowman, President and CEO of Crawford & Company. Joining me today from the Global Executive Management Team are Bruce Swain, our CFO, and Allen Nelson, our General Counsel and Chief Administrative Officer.

I will begin with a couple of comments on the economy and a review of the progress on our strategic initiatives, and conclude with comments on Crawford's worldwide focus for 2010. Bruce will then review the first quarter financials in more detail.

Our worldwide team is working hard to produce acceptable results, building on the operational strategies we are implementing. Irrespective of economic conditions and other challenges outside of our control, we continue to execute on our plans to strengthen our corporation for long-term growth and increased shareholder value.

The global economic outlook is improving in many respects, but as it affects our Insurance industry, conditions remain certainly difficult. Financial pressures still exist in businesses large and small, as the challenges in the financial markets led to a broad focus by our clients on containing their near term cost. For third party service providers, this combination of lower employment and tightening belts at the insurance carriers and other major corporations continues to mean fewer claims overall and increased pressure to maintain market share, let alone provide growth.

In our Broadspire business, the most important economic indicator remains the unemployment figures. We saw a glimmer of job growth in March and April, with the Temporary Staffing and Healthcare sectors offsetting reductions in manufacturing. We cannot expect to see workers' compensation frequency grow until the US is increasing jobs in the long term. Growth in the near term, then, comes from winning new accounts, which I will touch on in the business unit report.

Our Property and Casualty clients in the United States and the rest of the world are seeing a softening of P&C premiums. The outsourcing, or right-sourcing of claims by carriers, is made in the interest of reducing cost of delivery by turning fixed costs [in our in house] claims department into a variable cost. This continues to be a positive business proposition for Crawford in discussions with our clients. What is essential in these types of arrangements is delivering world class service by aligning the vision of the clients to the quality of the service, and then being able to validate the process.

The other event affecting quarter one was the lack of adverse weather, affecting both catastrophic and non-catastrophic revenue in the US and Canada. During the first quarter of 2010, weather was unusually benign, and claim counts were well below 2009. Because Canada is in the International Operations segment, this trend also affected our International Operations results. Two other issues I will comment on later relate to GTS, which is Global Technical Services, our global high value complex claims brand, and Contractor Connection, which we have expanded in May to our Canadian operation.

Reviewing our corporate performance, against this industry and economic background, Crawford & Company delivered a stable operating performance in a difficult business environment. Revenue was flat for the quarter, reflecting the industry factors I outlined a moment ago. At the same time, our expense management efforts continued to gain ground, producing increased cost efficiencies in the first quarter, particularly in selling, general, and administrative costs. We have implemented further administrative cost controls and have seen improvement in our self-insured professional indemnity expense, as we have improved our quality.

During the 2010 first quarter, we incurred a $2.7 million pretax charge related to the sublease of Broadspire's Plantation, Florida facility. Once complete, this sublease will provide over $1 million per year in net cost savings through to 2021. We do expect to incur approximately $670,000 in additional cost in 2010, as we complete this sublease transaction.

Turning to the year to year reconciliation, in order to isolate changes in operating performance, it is necessary to break out the impact of a number of factors in the 2010 revenue, net income, and EPS bridge. First, foreign currency. For global businesses, currency shifts are a fact of life, and we report their effect on our business as a routine matter in our quarterly results.

Currently, changes in the first quarter were as a result of a weakened dollar trend. The US dollar lost ground against most foreign currencies through the first quarter of 2010, compared to the 2009 first quarter, and this resulted in a currency exchange benefit to revenue of $13.2 million against the prior year, or $0.01 per share after considering the foreign currency impact on operating expenses. On a constant dollar basis, our revenue is down, due to the decrease in North American claims volume and the previously announced loss of a major Broadspire client.

Secondly, our defined benefit pension plans. Our expense for these plans is lower this year compared to 2009, and this positively affected our reported results against the prior year by $200,000 or $0.01 per share for the 2010 first quarter.

Thirdly, we had a restructuring cost related to the sublease of Broadspire's former Plantation, Florida facility, and the move to the new, more cost effective location. Compared to the 2009 first quarter results, the increase in the 2010 restructuring and other charges impacted the year-over-year comparisons by $0.8 million, or $0.02 per share. Lastly, an increase in corporate net interest expense offset the benefit received from all other operating and non-operating charges in the 2010 first quarter.

Throughout this year, Crawford has demonstrated the value of a diversified business makeup. Across all of these businesses during our conversations globally with our clients over the past year, our priority has been to improve our service level and product offerings, to [maintain] and improve our existing client relationships, and to take advantage of new business opportunities as they emerge.

That includes my initial remarks. Bruce, would you please review the Company's financial performance for the first quarter?

Company-wide revenues before reimbursements were relatively unchanged in the 2010 first quarter at $236.3 million, compared to $236.1 million in the prior year's first quarter. The positive impact of foreign currency changes in international operations and growth in legal settlement administration offset weakness in revenues produced in our Broadspire and US Property and Casualty segments. Our net income attributable to Crawford & Company totaled $3.1 million in both the 2009 and 2010 first quarters. First quarter diluted earnings per share were $0.06 in both the 2009 and 2010 period.

The Company's selling, general, and administrative expenses, or SG&A, totaled $49 million, or 20.7% of revenues, in the 2010 first quarter, decreasing approximately $2.5 million from $51.5 million or 21.8% of revenues in the prior year quarter. This decrease in cost was primarily due to lower professional indemnity self insurance and reduced expenses associated with the previously announced termination of an outsourced computer system hosting contract.

During the 2010 first quarter, the Company incurred relocation and lease termination costs of $2.7 million before taxes associated with the sublease of the Broadspire facility in Plantation, Florida. These costs reduced earnings per share by $0.04 in the 2010 first quarter. In the 2009 first quarter, earnings per share included $0.02 related to the restructuring costs in certain of our international operations.

As Jeff said, compared to the 2009 first quarter, this quarter, the US dollar was weaker against most of the major foreign currencies in which we operate globally. This benefited the Company's consolidated and international operations segment revenues in 2010, compared to 2009. International revenues increased less than 1% in the 2010 first quarter on a local currency basis, and after reflecting the positive impact of exchange rate fluctuations, international revenues increased by 15.2% in US dollars to $104.5 million. Excluding the positive effect of exchange rate fluctuations, our revenue performance in local currencies primarily reflects organic increases in our United Kingdom, European, and Asia-Pacific operating regions, offsetting weather related declines we experienced in our Canadian market.

International operating earnings declined to $6.6 million in US dollars during the current quarter, down 11.5% from last year's first quarter operating earnings of $7.4 million. The operating margin in this segment decreased from 8.2% in the 2009 first quarter to 6.3% in the 2010 quarter. When measured on a constant dollar basis, international operating earnings were $5.8 million in the 2010 period.

Revenues from the US Property and Casualty segment totaled $49.2 million in the 2010 first quarter, decreasing 11% from the $55.3 million reported in last year's first quarter. Revenues generated by our catastrophe adjustors totaled approximately $3.2 million in the 2010 first quarter, declining from $4.9 million in the 2009 quarter, when the Company was completing claims arising from the 2008 hurricane season. Apart from the decline in catastrophe related revenues, the revenue decrease in the 2010 first quarter was driven by a reduction in field operations revenues as a result of the a reduction in overall industry-wide claims frequency driven by fewer weather related events.

Operating earnings in our US Property and Casualty segment totaled $5.1 million, or an operating margin of 10.4% of revenues in the 2010 first quarter. This is compared to operating earnings of $6.2 million or 11.1% of revenues in the prior year quarter. This operating earnings decline primarily reflects the lower revenues generated during current quarter, partially offset by ongoing cost control measures.

Cat revenue was affected by a lack of severe weather in the US, resulting in lower cases. Prior year Cat revenues included the positive impact related to the completion of 2008 hurricane claims.

Revenues from our Broadspire segment decreased to $62 million in the 2010 first quarter, down 16.9% from $74.6 million in the prior year quarter, reflecting the impact of a previously announced non-renewal of a major contract in this segment. Overall, claim volumes in this segment were also down during the 2010 first quarter, reflecting sharply lower industry-wide workers' compensation claim referrals as a result of weak US employment levels.

Broadspire's operating earnings in the 2010 quarter totaled a loss of $2.3 million, or negative 3.8% of revenues, compared to the operating loss of $2 million, or negative 2.6% of revenues, in the 2009 first quarter. We continue to focus on cost efficiency within this segment in light of unfavorable claim trends.

Legal Settlement Administration revenues comprised of Class Action and Bankruptcy Claims Administration Services, rose 32.8% in the 2010 first quarter to $20.7 million, up sharply from the $15.6 million in the prior year quarter. This growth reflects the positive impact of several major bankruptcy and securities class action administration projects awarded to the Company during 2009 and 2010. Operating earnings totaled $3.3 million in the 2010 first quarter, or 15.9% of revenues, as compared to $1.5 million or 9.8% of revenues in the prior year period. Legal Settlement Administration continues to have a strong backlog of projects awarded, totaling approximately $50.7 million at March 31, 2010, as compared to $39 million at March 31, 2009.

Our cash and cash equivalent position at at March 31, 2010 totaled $48.3 million, as compared to $70.4 million at December 31, 2009. Our investment in unbilled and billed receivables has increased by $18.6 million in US dollars during 2010, reflecting a 6.5 day increase in days sales outstanding, or DSO, to 74.6 days at the end of the 2010 first quarter. Our pension liabilities declined in 2010 by $10 million, as a result of the discretionary $10 million contribution to our frozen US defined benefit pension plan that we made in January 2010. Our total debt has increased by $7.4 million from year-end, reflecting seasonal cash requirements we typically face in the first quarter of each year.

Cash used in operations totaled a negative $23.8 million for 2010, compared to negative $12 million used in the prior year period. This $11.8 million increase in cash usage was primarily due to increased defined benefit pension funding during the 2010 period and higher working capital requirements in 2010. The Company's cash requirements typically peak during the first quarter and decline over the balance of the year, with substantial cash in-flows usually occurring in the fourth quarter from some of our major markets.

Our free cash flow stood at a negative $35.9 million for the 2010 period, increasing $17.8 million from the negative $18.1 million in the 2009 first quarter. In addition to the increase in defined benefit pension funding, this decline reflects a principal payment we made against our outstanding debt in the 2010 first quarter. That concludes my comments, Jeff.

Thanks, Bruce. Let me continue by offering an outlook for the Insurance industry for the coming quarters. While some measures of economic activity are improving, as I said earlier, unemployment levels, a key factor driving our US Broadspire business, have not shown meaningful improvement. Consequently, we expect a challenging workers' compensation claims environment for at least the balance of the year for the Broadspire segment.

At the same time, the economic factors that created a challenging claims environment could prove to be beneficial in our Bankruptcy Claims business. Also, the cost management strategies of our Property and Casualty clients are a positive for Crawford, as we continue to focus on our business process outsourcing offerings.

While the economy may remain a headwind, Crawford is not simply waiting for conditions to improve. Over the past two years, we have developed and implemented various strategic planning initiatives to improve our work product, improve our technology, protect our client relationships, and generate new business opportunities. At the same time, we have reduced our fixed costs and improved our technology, enabling us to gain efficiencies. Let me review some of these initiatives with you now as a way of gaining insight into our planned activities during the remainder of 2010.

Our focus on attracting new business and retaining our current customers is linked to the launch last year of the Crawford System of Claims Solution, which is prominently displayed on our website. This process defined our competitive advantage to reinforce our industry leadership and clarify our portfolio of businesses to our clients. Significant attention has been put into key account management and cross-selling initiatives throughout our businesses globally.

One area of engagement with clients that we are concentrating on is business process outsourcing, where we have already won several claims programs from clients to handle the full claims administration process. Also, as a result of [client] discussions, we are seeing our clients challenge us to be more responsive in our claims handling, as they demand sustainable performance improvement through better control of indemnity spend, improved business processes, better automation, and increased data analytics. We are well positioned to handle these challenges going forward.

We are also relentlessly accelerating our overall technology strategy with better analytics for both local and global clients and have introduced new technology that provides effective central oversight for our claims organization, and we are seeing improvements in the quality of our products as a result. We believe an increasing number of global carriers are seeking to gain leverage from their global claims partners. For these clients we have built global key account management plans that deepen our relationships with those partners.

Part of the strategy is to focus on markets where significant opportunities exist, and we are able to offer additional services. Global Technical Services will continue to enhance its global claims matrix to provide even greater claims handling and project management capabilities, no matter the size or scope of the assignment, and we will continue to be diligent on expense control and maintain our long-term goals of improving operating performance and cash generation.

Let me now turn to the outlook for each of our business units, starting with the International operations, which represent 44% of our group revenue. The International segment reflected an increase in claims volume of 1.5% in the first quarter. The single biggest variance in quarter one was the reduced frequency in the personal lines activity in Canada. This has resulted in a significant reduction of personnel in our Canadian operation during the second quarter.

We also undertook a substantial development effort in Canada, which resulted in our Contractor Connection product going live on May the third with a major client. We believe there is a strong market in Canada for this product. Our UK operation is benefiting from two surges in weather events in the first quarter, and our Australian operation has also had major weather events in Melbourne and Perth.

We are also currently in discussions on a number of significant BPO opportunities. One of these deals was closed in the last week of April in the UK, and when fully implemented will result in $4.2 million in new business. This program is expected to commence in the fourth quarter of this year.

In our International operations, we continue to be focused on new client acquisition,and sustainable revenue, which will result from the refinements of our BPO model and the acquisition of new claims programs. We were successful in the first quarter in also winning two other significant BPO programs in the EMEA, which is Europe, Middle East and Africa division, which will result in new revenue. We continue expansion of our EMEA footprint to support new and existing clients and provide market share expansion.

Another bright spot internationally is the growth of our Latin American division, where we have taken on a significant number of Affinity Claims programs. We see growth in these Affinity programs we have been building in Brazil, Peru and Mexico. We are globally supporting our Chilean Company, where we have a minority percentage interest dealing with the very significant claims arising in the wake of the major earthquake that occurred in February 2010.

As mentioned earlier, significant weather claims in Australia, where we had catastrophic events in Melbourne and Perth, have required us to send ten US cat adjustors to support our Australian operation. I'm encouraged by the opportunities in front of us in our International operations over the coming year.

Now turning to the US. Our US Property and Casualty division reported a challenging 2009 fourth quarter due to the lower claims and the absence of cat-related activity, and this has not changed in quarter one, 2010. A decline in claims intake began in September 2009 and continued through the first quarter of 2010. As a result, revenue and earnings declined against the prior year.

Expenses are being effectively managed, enabling revenue increases in future months to yield more positive bottom line improvement. So while the first quarter was difficult in terms of frequency, the operating margin for the US was 10.4%, which shows we are able to manage margins when claims frequency reduces.

It is also important to mention there are some very good bright spots for the US Property and Casualty division that gives us confidence in our 2010 outlook. Casualty, firstly in the US group, we have invested in resources for our Casualty Services business, and this we see as a growth area in 2010. Secondly, in line with our goal of growing the Global Technical Services division, our large complex claims unit in the United States, we continue to aggressively add Executive General Adjustors or EGAs. Thirdly, our Contractor Connection business in the USA continues to build as we add more contractors to the program and more importantly, new clients.

Moving to technology and innovation, we have expanded our command center to introduce multiple client key performance indicators that enable us to manage data and report improved analytics to both our own operations and our clients.

Now moving on to our Broadspire business unit. The high US unemployment rate continues to place pressure on the revenue stream from existing customers and reduce the lift from the new business wins. With the loss of our largest customer in this segment, effective January 1 this year, coupled with the economic picture unfolding, we expect lower overall revenue in 2010 and will be balancing our cost base aggressively.

We continue to emphasize the development of new business opportunities with an enhanced value proposition and target market approach, executed by cross-selling additional services. We believe that this will position us well to weather the economic conditions and put us in a position to take advantage of opportunities as they emerge.

I just returned from a very successful risk management show, the Risk and Insurance Management Society's conference in Boston, where our Risk Sciences group, debuted [Dmitri], their next generation risk management information system. [Dmitri] will enhance the current offerings in three key ways, ease of use, configuration, and capability. It was a huge hit ,and we will begin deployment to clients in the third quarter of 2010.

In the Legal Settlement Administration segment, which is our Garden City Group operation, we saw a slight decrease in bankruptcy cases, received partially offset by an increase in security assignments. We are very pleased with this segment's results compared to last year's quarter one. Revenue and earnings have increased significantly, and this is due to the efforts of our first class management team in Garden City Group.

The challenge that lies ahead for Garden City Group is growing our revenue in a very difficult climate. They are seeing significant pressure on price from our clients and competitors. We were retained in several potentially new significant matters, including a large fund settlement and a significant consumer case, together with a number of legal notices programs.

A word about the bankruptcy market. The pace is definitely slower than last year. However, since we have elevated ourselves as one of the market leaders, we are getting an increased share of the pie. While there appears to a bit of a lull, bankruptcy lawyers are predicting a pickup in filings at the end of this year and early next year, reflecting several factors including an expected interest rate hike and debt renegotiation.

I think given the overall economic climate, this is a pretty significant achievement by Garden City Group. As the economy continues to recover, we expect the pace of class action settlements to then rebound.

We are reaffirming our guidance for fiscal 2010. Consolidated revenue before reimbursements between $970 million and $990 million, consolidated operating earnings between $54.3 million and $60.3 million, consolidated cash provided by operating activities between $30 million and $35 million. After reflecting stock-based compensation expense, net corporate interest expense, customer relationship intangible asset amortization expense, special charges in credits, and income taxes, net income attributable to Crawford & Company on a GAAP basis between $23.5 million and $26.5 million, or $0.44 to $0.50 per share.

Over the past two years, we have created in Crawford a worldwide management team that will not deviate from our strategies as laid out. We have employees worldwide that understand the values that create an environment to produce and execute improved performance. Despite some of the negatives around the economy, and given the market strength of our business segments, and the diversity of earnings for our corporation, we continue to remain optimistic about the potential growth opportunities as we execute on our corporate strategies. Thank you for your time, and we look forward to your questions. Operator, can you explain the instructions, please?

(Operator Instructions) We'll pause for just a moment to compile the Q&A roster. (Operator Instructions) The first question will come from Jack Scherck of SunTrust.

Hi. Thank you very much. Good afternoon.

Hi, Jack.

A couple of quick questions for you. I may have missed it, but on the Broadspire business for the large client you lost, did you specify or break out how much of an impact that had on EBIT in that business?

We have not talked about how much EBIT impact that had. The client for the full year, revenues associated with that client will probably be about $21 million. That's what we disclosed at the end of 2009.

Okay.

Certainly the direct cost associated with that contract, we were able to cut. There are certain stranded fixed overhead costs that we weren't able to cut as a result of that program, and those costs have been stranded. The one thing that we benefited from, though, as a Company in our SG&A this year has been the benefit from the outsourced service contract that we were able to terminate at the end of 2009.

Would it be fair to say that EBIT, instead of being negative would have been closer to flat, had you not lost that client?

Well, no, I mean, EBIT would have improved had we not lost that client. We can't lose clients and have it positively impact our EBIT.

Right, I'm just - -

But what I was getting to on that SG&A comment was that that outsourced data hosting agreement benefited directly the Broadspire business, so that was part of the cost within Broadspire. So even though we stranded some cost within Broadspire as a result of losing that contract, we did get a significant amount of recovery through that outsourced service agreement. So they don't offset each other perfectly, but a substantial amount of the loss that we would have experienced from the client was offset by the recovery we got on the data hosting agreement we were able to terminate.

Okay. So then last quarter we had nice profit in Broadspire after four quarters of losses. So I was trying to get in my mind if we would have been closer to flat or even a little bit of a profit had you not lost that client.

Yes, had we not lost the client we probably would have shown a better result than what we had.

Okay.

That's for sure.

You think it would have been up from the fourth quarter, the $2 million profit you had?

No, it wouldn't have been that.

Okay.

Because I mean, if you look at the frequency drop and the top line drop that we had in the quarter-over-quarter, if you assume that the loss of the large contract was maybe $5 million, our revenues were down in Broadspire.

Right, 17.

Call it $13 million, and so you had quite a bit more that was dropping off as a result of declines in the frequency quarter-over-quarter, that would have been a negative in that business anyway. So put another way, even if we hadn't lost that contract, we would still be looking at a double-digit revenue decline quarter-over-quarter, which would have put a lot of pressure on the bottom line.

Right. Got you. Have you seen any pickup in [order] activity or use of adjustors out there or plan to with either the oil catastrophe down in the Gulf or storms we've had in the south here?

I mean, we suspected we would get this question. Really, we can't comment currently on any business relationships that we have or will have in the future on the oil spill. It's a very fast-moving event and we can't comment on what's happening down there at the moment in regards to any claims activity that's taking place.

Okay. Thank you very much.

(Operator Instructions) We'll pause for just a moment. And at this time I'm showing no further questions. I'll turn it over to Mr. Bowman for any closing remarks.

Thank you. Our strategies remain three-fold. One, most importantly, securing new businesses for all of our business units. Secondly, focusing on improving operational efficiencies and delivering results to our clients. And thirdly, a very disciplined approach to expense management and working capital.

For 2010, we will continue to manage the corporation with integrity and innovation every day, to ensure that we are building sustainability. We intend to fully capitalize on the opportunities presented that will drive current and future growth for our shareholders. I'd like to thank everyone for joining us this afternoon and wish you a great week. Good-bye.

Thank you for participating in today's Crawford & Company conference call. This call will be available for replay beginning at 6:00 PM today, through 11:59 PM on May 17, 2010. The conference ID number for the replay is 71314096, the number to dial for the replay is 800-642-1687, or 706-645-9291. Thank you. You may now disconnect.