Crawford & Co (CRD.A) 2012 Q1 法說會逐字稿

Good afternoon. My name is Ashley, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Crawford & Company first-quarter 2012 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, Tuesday, May 8, 2012. Some of the matters to be discussed in this conference call, and in the supplementary financial presentation, may include forward-looking statements that involve risk and uncertainties. These statements may include but are not limited to, statements regarding the funded status of our defined benefit pension plans, our expectations related to future revenues and expenses, our long-term liquidity requirements, and other ability to pay dividends in the future. The Company's actual results achieved in the 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. In addition, you are reminded that operating results for any historical period are not necessarily indicative of results to be expected for any future period. 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, 2011, 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 conditions and results of operations, as well as subsequent Company filings with the SEC. 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.

A warm welcome to our investors, clients and employees this afternoon. I'm Jeffrey Bowman, President and CEO of Crawford & 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. I will begin with some opening comments on our first quarter results. Bruce will then review the quarterly financials in more detail, which will be followed by a review of our business, comments on our strategic initiatives, and conclude with our corporate focus and an update on our 2012 guidance. Our consolidated results we reported were in line with our initial expectations in the aggregate. On a segment base, we had some events, both positive and negative, that affected our results.

Our first-quarter 2012 operating results reflected a positive performance in our Broadspire operation, which helped offset an expected decline in our Legal Settlement Administration division. Primarily, as a result of the historically mild winter weather this year, we also saw frequency declines in our North American and UK regions from last year's first quarter. As we have discussed, our expectations coming into 2012 were that revenues relating to the special project in our Legal Settlement Administration segment would taper. We began to see volume declines in the fourth quarter of 2011, and again in the 2012 first quarter.

In the first quarter, Crawford's GCG subsidiary was awarded a role to provide administration services in the recently announced class action surrounding the Gulf oil settlement. We are pleased to advise that last week the court confirmed that appointment. And obviously, we are very excited about once again being selected to work on this very important special project.

Second, continuing a trend we saw in the fourth quarter, the weather in the first quarter was the mildest in history in North America and milder than expected on a global basis. US, Canada and UK businesses saw claims intake decline as milder weather affected volumes. On the encouraging side, in Broadspire, we have been focusing on business development and cost control measures for the past several quarters. We have seen continued progress on both fronts during 2012, and we're pleased to generate a positive operating earnings in Broadspire during the 2012 first quarter. We are committed to delivering sequential quarterly operating improvements in our Broadspire operation as we work to return it to the sustained level of profitability. The turnaround of Broadspire is one of the key objectives for our management team and we are encouraged by our progress thus far.

That concludes my initial remarks, and I will discuss the business unit operations after Bruce has reviewed the financials. Bruce, would you please review the Company's overall performance for the first quarter.

Company-wide revenues before reimbursements in the 2012 first quarter were $267.8 million, down 6% from $285 million in the prior year's first quarter. Our net income attributable to Crawford & Company totaled $6.1 million in the 2012 first quarter, decreasing 50% from $12.1 million in the 2011 period. First quarter 2012 diluted earnings per share were $0.12 for CRDA and $0.11 for CRDB, compared to earnings per share for each class of $0.23 in the 2011 period.

During the 2012 first quarter, the Company recorded a pretax charge of $890,000 related to a project to outsource certain aspects of its US technology infrastructure. The Company expects this project to continue through the 2012 third quarter, with additional pretax costs of approximately $2.1 million expected. This special charge decreased earnings per share by $0.01 in the 2012 first quarter. There were no special charges in the 2011 quarter. The Company's selling, general and administrative expenses, or SG&A, totaled $55.7 million, or 20.8% of revenues in the 2012 first quarter, decreasing slightly from $56 million, or 19.6% of revenues, in the prior year quarter.

This decrease in cost is primarily due to lower professional indemnity self insurance expense, partially offset by an increase in travel costs. SG&A expenses increased as a percent of revenues, primarily due to the anticipated drop in quarter-over-quarter revenues associated with the GCCF special project in our Legal Settlement Administration segment. In the 2012 first quarter, the Company paid a higher dividend on its CRDA common stock than on its CRDB shares. This dividend differential can result in different earnings per share for each class of stock, due to the two-class method of computing EPS as required by current accounting guidance. References to EPS in this call will generally be only for CRDB, as that is the more dilutive measure. Revenues, net income attributable to Crawford & Company, and earnings per share in the 2012 first quarter were not significantly impacted by foreign exchange movements. The special charge in the 2012 first quarter reduced earnings per share by $0.01, but lower interest expense in 2012 increased EPS by $0.02.

Compared to the prior year's first quarter, the Company's underlying operations declined in 2012, primarily due to an expected decline in our Legal Settlement Administration segment related to the GCCF special project, and weather related claims declines in our North American and UK operations. Revenues from the Americas segment totaled $77.5 million in the 2012 first quarter, down 9% from the $85.3 million reported in last year's quarter, reflecting weak industry-wide claim volumes in the US and Canada as a result of mild winter weather. The operating loss in our Americas segment was $512,000 in the 2012 first quarter, or negative 1% of revenues. This is compared to operating earnings of $3.1 million, or 4% of revenues, in the prior year quarter. Revenues generated by our catastrophe adjustors in the US totaled $3.7 million in the 2012 first quarter, decreasing from $5.6 million in the 2011 quarter.

The decrease in revenues was primarily due to non-continuing revenues in the 2011 period related to assistance provided to the GCCF special project and Australian catastrophe response. EMEA/AP revenues increased 3% in the 2012 first quarter to $81.8 million, from $79.8 million in the 2011 period. Our revenue increase reflects catastrophe related increases in our Asia-Pacific operating region, partially offset by declines in our UK operations. EMEA/AP operating earnings decreased to $5.6 million during the current quarter, down 22% from last year's first quarter operating earnings of $7.2 million.

The operating margin in this segment was 7% in the 2012 quarter, decreasing from 9% in the 2011 first quarter. Revenues from our Broadspire segment increased to $60.4 million in the 2012 first quarter, up 1% from $59.8 million in the prior year quarter, reflecting an increase in workers' compensation claims and strong medical management revenues. Broadspire's operating earnings in the 2012 quarter totaled $137,000, or less than 1% of revenues, reversing the operating loss of $3.2 million, or minus 5% of revenues, in the 2011 first quarter. We continue to focus on strategies to drive sequential improvement in this segment's operating results.

Legal Settlement Administration revenues, comprised of class action and bankruptcy claims administration services, as well as significant special project revenues, totaled $48.1 million in the 2012 first quarter, decreasing 20% from the $60.2 million in the prior year quarter. This revenue decline was anticipated, as our work in the GCCF special project is transitioning to a new class action settlement agreement related to the Gulf oil spill. Operating earnings totaled $10.7 million in the 2012 first quarter, or 22% of revenues, as compared to $17 million, or 28% of revenues, in the prior year period. Legal Settlement Administration continues to have a strong backlog of projects awarded, totaling $105 million at March 31, 2012, as compared to $110 million at March 31, 2011. Our cash and cash equivalents position at March 31, 2012 totaled $47.4 million, as compared to $77.6 million at December 31, 2011, and $46.7 million at March 31, 2011, reflecting the anticipated usage of cash we experience each first quarter. Our investment in un-billed and billed receivables has increased by $18 million during 2012.

Our pension liabilities declined slightly through the 2012 first quarter, and our total debt has increased by -- in 2012 by $20.9 million, reflecting our seasonal pattern of borrowings that typically occur early in the year. Cash used in operations totaled $38.2 million for year-to-date 2012, compared to $50.2 million used in operations in the prior year period. This $12 million improvement was primarily due to reduced US pension contributions in 2012. Free cash flow improved by $10.4 million, reflecting higher investments in fixed assets and capitalized software. The Company's cash requirements typically peak during the first half of the year, 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.

Back to you, Jeff.

Thanks, Bruce. Our revenue in cases increased sequentially for the group versus the fourth quarter 2011, but decreased against the first quarter 2011, reflecting the mildest winter weather and event environment in the US and Canada in history. For the quarter, group case volume decreased 12% and revenue declined 6%. The difference between the first quarter 2012 and 2011 revenue reflects the industry-wide swings in claims volume driven by high levels of weather and the event losses a year ago, and the unexpected very low levels through the most recent quarter.

Secondly, consolidated revenues reflect the anticipated GCCF reduction in overall volumes, as we have discussed earlier. We have also seen an improvement in the Broadspire segment, where workers' compensation claims increased 9.8% in the quarter. And in the quarter, our client retention rate was extremely high at 98.1%. While the overall claims frequency at Broadspire slowed, primarily due to casualty case volumes, it is important to note that the client relationships remain solid with external validation of quality and performance.

Let me now turn to the outlook for each of our business units, starting with the Americas segment which represents 29% of our consolidated revenues year-to-date. Following a strong claims frequency pattern in early 2011, the US saw claims frequency decrease in the fourth quarter due to a lack of weather events. The first quarter 2012 frequency has increased only slightly from the fourth quarter 2011 levels. In the US, as clients are reporting substantially reduced frequency in the first quarter, we have responded by imposing strict control on expenses. Some bright spots for the US PNC in 2012 are as follows. The US PNC group has invested in resources for our Casualty Services business, and we are growing in this area through new client wins. Our continually stated goal of growing global technical services, or GTS, our large complex claims unit in the United States, is on track as we continue to be nominated on accounts with higher value complex claims. And as a result, we continue to add executive general adjustors, EGAs, aggressively as our GTS claims volume increases.

Our industry-leading Contractor Connection business in the US still continues to build momentum as we add more contractors to the program and, more importantly, several new clients. The ongoing expansion of Contractor Connection in the US is a result of insurance carriers moving high frequency, low severity property claims direct to repair networks. We expect this trend to continue in the future, and we are positioned as the market leader in this important area. A major client, US AA, is now using the Contractor Connection consumer model, which went national beginning in February, following a successful six month pilot in 2011, and is expected to be available to its full membership by the year end. We have another affinity group implementing the same type of program this year. Our operations in Canada have experienced a weather trend similar to the USA, with a decline in case volumes and revenue in the first quarter.

We continue to actively manage costs in this area as well, to reflect the overall claims volume conditions. And in the Latin America/Caribbean operations, first quarter revenue improved 41% over the comparable quarter last year, due to the growth of our GTS division in Brazil. Claims volume decreased in the first quarter versus the prior year, due to the loss of a high volume, low severity affinity program in Brazil, as well. Now turning to our EMEA/AP operations, which represent 30.5% of our consolidated revenue year-to-date. Our focus on sustainable client revenue has been successful in this business unit. In the first quarter, our revenue grew in both Asia-Pacific region and Continental Europe, the Middle East and Africa. However, in the UK, we saw a drop in revenue against the prior year as benign weather and the lack of volume in the market depressed our claims volume. As we have indicated in earlier quarters, the early 2011 surge in small homeowners' claims in the UK declined significantly at the end of the year. And we have been right-sizing the UK post-surge to re-balance our financial performance by reducing SG&A costs and central services.

In addition, we continue to make good progress with our initiatives to grow our Lloyd's market share. And we are also continuing to expand our Broadspire TPA services in Europe, with US multinational clients, supporting our global initiative of cross-selling our services worldwide. We are now providing these services from 21 of our international locations. In the CEMEA region, we are seeing encouraging developments and positive changes. Our revenue increased in the first quarter over 2011 by 3% on a flat claims frequency. Our management team is driving a new performance culture into this region to improve both operational and financial performance.

In Asia-Pacific, the significant weather events that took place during 2011 in Australia, Thailand and New Zealand have increased our revenue for the first quarter by 24% over 2011. We currently have teams working in New Zealand, Thailand and Japan, responding to both local and international instructions on the catastrophic events that affected those countries last year. We expect to see related revenue continue in 2012. We have had a very positive market recognition to our catastrophe services response.

During the first quarter, we have also seen the successful expansion of our forensic accounting division in the Asia-Pacific region. These accountants and claims professionals have backgrounds in insolvency, auditing and management accounting, and this employee group works globally for insurance carriers and underwriting on major claims. I am pleased to report that our Broadspire operation, which represented 22.6% of our consolidated revenues, reported a profit for the first quarter on higher revenues. We believe strongly that Broadspire's solid market position, integrated service model, and quality of service offerings, offer the market a truly competitive product and should continue to be profitable as we move through 2012.

Broadspire's internal ability to fully integrate all of our services; claims management, medical management, and medical bill review; give us market-leading capabilities to provide innovative solutions and improve the bottom line for our customers. This is critical to Crawford's strategic development as we take every opportunity to cross-sell our service and work on improving results in these operations. Broadspire is an important contributor to the Crawford product line and global strategy.

In the first quarter, we saw a revenue increase as our existing customer base produced positive gains in workers' compensation claims frequency. And in addition, we saw increased volume from new customer wins. We continue to be focused on our major improvement strategies, sales force effectiveness, customer retention, which in quarter one the retention rate was 98.1%, technology investments and the global sourcing of non-customer-facing back office operations. In quarter one, casualty claims were down as expected, due to comparison with the large global product recall assignment in the prior year, which produced a small overall decline in claims count.

Our sales run rate improved again in the first quarter, and we continue to receive significant numbers of new RFPs, which confirm that the prospects in our pipeline are very encouraging. We are emphasizing the development of new business opportunities with an enhanced value proposition and a target market approach, executed by the cross-selling of additional services and balancing our cost base over this period. The trend to outsourcing medical management is a positive for Broadspire.

Despite the comparison with the record performance in 2011, we are very pleased with the Legal Settlement Administration, or LSA, segment revenue and operating earnings this year. LSA represented 17.9% of our 2012 revenue. The quarterly results were solid, although overall revenues reflect the tapering of volumes associated with the Gulf Coast Claims Facility. We have indicated for some time that this very important assignment was expected to slow over the next several quarters from their extraordinary levels of 2011. As noted in our press release, GCG has been awarded a role to provide administration services in the recently announced class action surrounding the Gulf oil settlement. We are pleased to advise that last week, the court confirmed that appointment. Turning to our other LSA business areas, the class action market remains challenging overall. However, we have been successful in retaining new class actions, and have seen a significant number of bankruptcy assignments. That concludes my comments on the business segments.

Let me now turn to our guidance and 2012 focus. We have reaffirmed our guidance for 2012 as follows. Consolidated revenue before reimbursements between $990 million and $1.03 billion. Consolidated operating earnings between $63 million and $70 million. Consolidated cash provided by operating activities between $30 million and $35 million. And net income attributable to Crawford & Company on a GAAP basis between $30.5 million and $35.5 million, or $0.52 to $0.62 per diluted earnings per Crawford B share.

As I said, our first quarter performance reflects a number of differing results and trends. We are very encouraged by the performance of Broadspire and the news of the GCG appointment. As always, weather-driven claims volumes can provide both positive and negative swings in our operations, which we saw in the first quarter, US, Canada and the UK. However, our practice has consistently been to react to lower volumes with aggressive cost control, and this weather cycle, while unexpectedly challenging, is no different.

As we look to 2012, we are focused on five areas. First, bringing Broadspire to an acceptable earnings profile, and we are pleased with the progress made in the first quarter. Second, we intend to significantly reduce our debt during the year by managing accounts receivable, and work in progress more efficiently. Thirdly, continuing to grow our core revenue, and improve our operating earnings. Fourthly, capitalizing on global opportunities with clients. And fifthly, enhancing returns to our shareholders. We are very focused on delivering operating improvements in our Broadspire business, both domestically and globally, and we will continue to push performance improvement in our Americas, EMEA/AP and LSA businesses segments for 2012.

Our worldwide management team is aggressively executing on our strategies as laid out, and is creating a culture in which our employees worldwide understand the values that foster improved performance for our clients and our shareholders. Given the market strength and reputation of our business segments, and the balance of our earning power for the corporation, we continue to remain very optimistic and confident about our growth opportunities as we execute on our corporate strategies for our shareholders.

Thank you for your time, and we look forward to your questions. Operator, will you please explain the process for asking questions to our audience?

(Operator Instructions) Mark Hughes, SunTrust.

The US business, how quickly can that get back up to historical levels of profitability? Do we need top line to bounce back sharply, or can we do that on the cost control?

I think it's a mixture of both, but we're actively managing the cost in the operation at this moment. And we're obviously converting a lot of fixed cost to variable cost as we change some of the operational procedures. But I think it's just worth pointing out, Mark, that this weather pattern we're in at the moment is outside of any trend that we've seen before, and whilst it's lasted for a while, it's been outside of where even we saw it when we put in our planning for 2012, based on historical trends. So that's given us, as I said earlier, an unexpected challenge that we didn't quite project, nor could anybody. We have clients who are reporting anything between 20% and 40% lower volumes, and you can see that in some of our clients' first quarter results as they come in. But I think we are working very hard to get that unit where the cost and the revenue match, and they give us a profit to come forward with.

Is that lower claims activity the key point in your comment about certain clients -- I think in the UK in-sourcing, some of their claims? Is it just they didn't have as many claims, and so more of them they handled internally and didn't need to outsource?

I think the UK's a slightly different model to the US. The US -- UK, there's been two changes. One is, obviously, they've had incredibly benign weather. And secondly, there is a slight trend towards in-sourcing in some of the major operations. But we are attacking that market very hard. We've got new client wins that we expect to announce in the next couple of quarters as well to offset that. We've got a very active transformation program ongoing in the UK. But I do think the weather contributed to it this year, especially over the large surge that we had in the business last year.

Right. The Broadspire had a nice result this quarter. Would we anticipate continuing sequential improvement? Is there any seasonality that would influence the progression from Q1 to Q2? And -- was that new contract wins? I know you said the claims frequency had slowed somewhat in the quarter. Just a little more on the Broadspire.

Well, it slowed on the casualty claims.

Oh, the casualty claims, okay.

Increased on the workers' comp claims. I think it's a compendium of a number of events. It's technology. We announced in the fourth quarter that we had consolidated onto the RiskTech platform, 1.2, was released in early part of December. Technology's having an effect. Reputation, I think the Broadspire team have done a fantastic job on getting the reputation with our clients. We've recently just come back from the RIMs conference where we had a very, very good RIMs with meeting a lot of our clients at that particular event. And we're getting a lot of accolades for our technology and our quality that's coming out of it. Thirdly, we've had a sustained cost control program in the Broadspire operation, and that will continue until we get that sustainable revenue-to-profit percentage that we're trying to achieve. And then, the other issue, really, is around effectively winning new business. And I think we're -- our team here is doing a good job on pushing that forward, and that really affected the first quarter, because we've got our costs very much under control. We know that stabilization has come around. So I think it's a compendium of all of those.

Right. The class action suit, sounds like you've been very successful on that front. Is there any way to size those for us? I know it's still early, but if you look at your base of legal settlement business pre-Gulf spill, how does the size of it compare now? How will it compare when these new contracts get up and running?

We're being very successful at winning programs. If you're saying, what is the rebalancing without the GCCF project, we don't report on the individual business units. I think that the -- as we've said before, the bankruptcy and the class action market are challenging. There's a lot of competitive pressure there. But we've -- our team is working very well in terms of producing and bringing in those individual programs that have been certified. I think over the next year or two, there is a pent-up number that should start to get certified from, coming out from, some of the filings that have happened over the past two years. But you know, the actual business is very well run by the team there, and I think we have a market-leading position.

Chris [Lichen], William Blair.

I was just hoping to follow up quickly on the new claims project that you got for the Gulf Coast. Are you expecting revenues to start hitting next quarter, or is there going to be a delay before it starts impacting results?

I'll just take it from historical point of view, and I'll let Bruce get through the revenue. We've gone, very recently, from the GCCF -- historically, from GCCF to a transitional facility, which is then gone into the new facility, which as of last week is really a little bit of an unknown quantity to us. And we've got a lot of people working on that project, but the outcome, whilst we think it is significant, is really difficult to project in terms of revenue at this moment.

Okay. In terms of the interest expense, I know you mentioned it. Is there any color behind that? And should we expect that level, going forward, for the rest of the year?

Yes, Chris. In the fourth quarter of 2011, we refinanced our credit agreement, and we went from a syndicated term loan to an all-revolver facility. And we lowered the cost of our debt significantly in the process. So, this lower interest expense was expected, and based on our current levels of borrowings, we should see a similar result as we go throughout the year.

Okay.

(Operator Instructions) And there are no further questions at this time. I will now turn the call back over to Mr. Bowman for closing remarks.

Thank you very much for your time and questions this afternoon. I'd like to thank everyone for joining us, and wish you all a great rest of the week. Thank you and 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 18, 2012. The conference ID number for the replay is 75202295. The number to dial for the replay is 1-855-859-2056 or 404-537-3406. Thank you. You may now disconnect.