Crawford & Co (CRD.A) 2013 Q1 法說會逐字稿

Good afternoon. My name is Laurie, and I'll be your conference facilitator today. At this time, I would like to welcome everyone to the Crawford & Company first quarter 2013 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 6, 2013. Now, I would like to introduce Allen W. Nelson, Crawford & Company's General Counsel and Chief Administrative Officer.

Thank you, Laurie. 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. 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 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 on or 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, 2012 filed with the Securities and Exchange Commission, particularly the information under the headings Business Risk Factors, Legal Proceedings and Management Discussion and Analysis of Financial Condition 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. Jeff Bowman, President and Chief Executive Officer of Crawford & Company. Jeff, you may begin the conference.

Thanks, Allen. 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 2013 results. Bruce will then review the first quarter financials in more detail, which will be followed by a review of our business performance, comments on our strategic initiatives, and conclude with our corporate focus and our current 2013 guidance.

I'm pleased that our first quarter was an improvement over the 2012 results and generally in line with our initial expectations. As reported this morning, our first quarter 2013 revenues increased 7% over 2012, reflecting continued improved performance in our EMEA/AP and Legal Settlement Administration segment results, and the benefit of handling claims from Superstorm Sandy, which arose in the 2012 fourth quarter in our Americas segment. Consolidated operating earnings grew 25% over 2012, as earnings from our Americas, LSA and EMEA/AP segments improved. On a GAAP basis, our net income increased 61% during the quarter. Within the Americas segment, our US Property and Casualty business benefited from the continued completion of Superstorm Sandy claims.

Together with ongoing cost control measures as well as the implementation of innovative technology, this helped US Property and Casualty generate strong profitable improvement over the 2012 first quarter. We have seen claim assignments increase over the 2012 first quarter in both Canada and the USA. I will get into more detail in the business unit review. Our EMEA/AP segment results saw improvement in our core UK and CEMEA operations during the quarter, as a result of a business transformation project in the UK and initiatives to manage our cost base, both implemented in 2012. We also continue to benefit from the claims handling due to the 2011 catastrophic flood losses in Thailand, which are beginning to wind down.

In the Broadspire segment, we recorded an operating loss for the 2013 first quarter due to lower medical management reserves and reduced workers' compensation claims volumes. While these results are below our expectations, our plans to produce sustainable improved quarterly results are on track, and our expectations are good for the second quarter and the balance of the year. During the 2013 quarter, we implemented a new software system in our medical bill review unit, which we expect to improve our market-leading product offering and provide tangible benefits to our clients. I would also like to point out that Broadspire's new sales closure rate and client retention remain strong this year. We remain focused on delivering stronger operating performance in this business and are optimistic that we will show improvement that is both meaningful and sustainable during the remainder of the year.

During the 2013 first quarter, our Legal Settlement Administration segment continued to be engaged in responding to the Deepwater Horizon class action settlement. This quarter, we secured a number of other meaningful class action and bankruptcy matters and finished the quarter with a very strong backlog of $135 million. That concludes my initial remarks. I will discuss the business unit operations after Bruce has reviewed the financials. Bruce, would you please review the Company's overall financial performance for the first quarter?

Company-wide revenues before reimbursements in the 2013 first quarter were $286.3 million, up 7% from $267.8 million in the prior year's first quarter. Our handling of claims from Superstorm Sandy in the Americas segment and strong results in our Legal Settlement Administration and EMEA/AP segments drove this improvement. Our net income attributable to Crawford & Company totaled $9.7 million in the 2013 first quarter, up 61% over the $6.1 million in the 2012 period. First quarter 2013 diluted earnings per share were $0.18 for CRDA and $0.17 for CRDB compared to diluted earnings per share of $0.12 for CRDA and $0.11 for CRDB in the 2012 period. Consolidated operating earnings, a non-GAAP financial measure, totaled $18 million for the 2013 first quarter, up 25% over the $14.4 million reported in the 2012 first quarter.

During the prior year first quarter, the Company recorded a special charge of $0.9 million related to a project to outsource certain aspects of our US technology infrastructure. There were no special charges during the 2013 first quarter. Included in other income for the 2013 first quarter was a $2.3 million gain from the sale of the rights to a customer contract in Latin America. This amount is included in the Americas segment operating earnings. The Company's selling, general and administrative expenses, or SG&A, totaled $59 million or 20.6% of revenues in the 2013 first quarter, up from $55.7 million or 20.8% of revenues in the prior year quarter, primarily due to an increase in non-continuing professional fees.

Since 2011, the Company has paid a higher dividend on its CRDA common stock than on its CRDB shares. This dividend differential can sometimes 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 from the Americas segment totaled $84.2 million in the 2013 first quarter, up 9% from the $77.5 million reported in last years' quarter. This increase was primarily due to the completion of claims from Superstorm Sandy. Operating earnings in our Americas segment were $3.2 million in the 2013 first quarter, or 4% of revenues. This is compared to an operating loss of $0.5 million in the prior year quarter.

Revenues generated by our catastrophe adjustors in the US totaled $10.8 million in the 2013 first quarter, increasing from $3.7 million in the 2012 quarter. The increase in revenues was due to the carryover of Superstorm Sandy related catastrophe cases into 2013. EMEA/AP revenues increased 7% in the 2013 first quarter to $87.6 million, from $81.8 million in the 2012 period. Our revenue improvement reflects catastrophe related increases in our Asia-Pacific region, primarily in Thailand and Australia, and growth in CEMEA. EMEA/AP operating earnings increased $6.8 million during the 2013 quarter, an increase of 22% over last year's first quarter operating earnings of $5.6 million. The operating margin in this segment was 8% in the 2013 quarter, increasing from 7% in the 2012 first quarter.

Revenues from our Broadspire segment decreased to $57.8 million in the 2013 first quarter, down 4% from $60.4 million in the prior year quarter. The revenue decline reflects lower medical management revenues and a decrease in workers' compensation claims. Broadspire recorded an operating loss of $1.8 million or negative 3% of revenues in the 2013 first quarter, declining from breakeven operating performance in the 2012 first quarter. Legal Settlement Administration revenues, comprised of class action and bankruptcy claims administration services as well as significant special project revenues, totaled $56.7 million in the 2013 first quarter, increasing 18% from $48.1 million in the prior year quarter. While we continue to be heavily engaged in the Deepwater Horizon special project, this revenue increase was largely related to our work on a number of other meaningful class action and bankruptcy matters during the quarter. Operating earnings totaled $12 million in the 2013 first quarter, or 21% of revenues, as compared to $10.7 million or [22%] of revenues in the prior year period. Legal Settlement Administration continues to have a strong backlog of projects awarded totaling $135 million at March 31, 2013 as compared to $105 million at March 31, 2012.

Our cash and cash equivalent position at March 31, 2013 totaled $59.4 million, as compared to $71.2 million at December 31, 2012. Our investment in unbilled and billed receivables has increased by $14.4 million during 2013, primarily as a result of growth in Legal Settlement Administration and EMEA/AP. Our pension liabilities decreased by $4.8 million, reflecting cash contributions during the 2013 first quarter. Our total debt has increased in 2013 by $38.7 million, reflecting our usual heavy cash usage in the first part of the year to fund incentive compensation payments, retirement plan contributions and other costs traditionally incurred at the start of the year. Cash used in operations totaled $41.4 million for the 2013 first quarter, compared to $38.2 million used in operations in the prior year period. The Company's operating cash needs typically peak during the first quarter and decline during the balance of the year. Free cash flow declined in the 2013 first quarter by $1.3 million from the 2012 period. Back to you, Jeff.

Thanks, Bruce. Results for the first quarter improved over the same quarter last year. Our revenue increased by 7%, and we saw improvement in our EMEA/AP business unit through the execution of cost reduction and business transformation programs in the UK. Our operating earnings improvement in the Americas and EMEA/AP are largely related to our response to global catastrophes. Our ability to respond rapidly and efficiently with both highly qualified people and advanced technology affirms our leadership position in our industry and demonstrates our capability to handle major events globally.

An important part of our strategy is investing in technology innovation, to deliver process improvement and increase speed, automation and analytics. These are all factors that our clients demand of us on a global, regional and local basis. We have also recruited teams into the specialty markets business in Marine, aviation, and offshore energy. The recent acquisition of a controlling interest in the Lloyd Warwick International Corporation was a part of that strategy. Our consolidated revenue improvement for the quarter reflected a 6% increase in cases over the first quarter of 2012. We saw case increases in the US, CEMEA and Broadspire's Casualty business, with particular growth in US catastrophe cases primarily as a result of Superstorm Sandy. We continue to be focused on strengthening our balance sheet through disciplined operating processes in our accounts receivable and unbilled revenue.

Let me now turn to the outlook for each of our business units, starting with the Americas segment, which represented 29% of our overall consolidated revenue for the quarter. Overall performance in both revenue and operating earnings improved greatly over the first quarter of 2012, as the Americas business continues to benefit from claims related to Superstorm Sandy. We were pleased with our response to Sandy, which hit on October 29, 2012. Crawford engaged approximately 600 adjustors and staff during the peak period, in managing approximately 3% to 4% of the total property claims related to the storm. We currently have about 2,400 Superstorm Sandy claims open and active. The completion of claims generated by Sandy and a one-time gain from the sale of the customer contract in Latin America drove our operating earnings in the segment, which swung from a small loss in 2012 to a profit of $3.2 million this quarter.

Also of note was that the Contractor Connection grew more than 30% in assignments and revenue over the first quarter of 2012 with both current and new insurer and consumer clients being contracted. Our Contractor Connection network was also very busy from Sandy in the first quarter and took more than 10,000 case referrals. We have had a very good growth in this business in the first quarter and had a number of new consumer commitments go live in the first quarter of 2013. We also introduced a new service offering in accident and health and credit claims -- credit card claims processing with a major insurer. This service is called Crawford Affinity, and I would note it is a non-weather dependent product line.

With respect to our Canadian business, our first quarter improved over the prior year. During the first quarter, we won several large accounts from competitors which are being implemented in the second quarter. In addition, we have executed a number of cost reduction initiatives to achieve better operating margins over the remainder of the year. The EMEA/AP operations represented 31% of our consolidated revenues for the first quarter of 2013. In the first quarter, our revenues grew in the Asia-Pacific region, primarily due to our ongoing response to the Thailand floods and growth in our Australian business. We successfully reported increases in first quarter revenue, operating earnings, and margin over the prior year in this segment.

During 2012, we implemented a UK business transformation project and have started to see the benefits of this in our UK operations during 2013. Our strategy has been to maintain our market share while changing the UK business mix and repositioning our Casualty business to respond to market changes. We have recruited more global technical services adjustors into the United Kingdom, in line with our global strategy to expand specialty markets. In our CEMEA operation in the first quarter, we saw a significant increase in higher frequency, low severity claims volumes in several countries. The CEMEA market is a mature, competitive market, and we focused our revenue efforts on the third party administration activities, including Broadspire and specialty markets business.

We are differentiating our strategy by country and are very focused on continuing to improve the operating earnings and margin in this region. The Asia-Pacific division is developing its business in an attractive emerging market which has relatively buoyant economies. Our third party administration business is beginning to grow with a number of accident and health opportunities where we are working with major insurance carriers and delivering customized claims handling processes. We are also continuing to develop a GTS adjustors in this region as well.

Our Broadspire operation, which represented 20% of our consolidated revenues in the first quarter, reported a loss for the quarter as I mentioned earlier. Although there was a small reduction in workers' compensation claims, we saw overall case volumes increase against the previous year's quarter. Compared to the fourth quarter of 2012, our workers' compensation claims are up 2.8%, and total claims are up over 9%. We believe strongly that Broadspire's solid market position, integrated service model and quality service offer the market a truly competitive product and should be profitable as we move through 2013. We see the increased use of medical management services as an opportunity growing out of increased medical costs in the industry. 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.

I cannot stress enough that our Broadspire strategy is supported by our global footprint. Recently at the annual RIMS conference in Los Angeles, we discussed with our clients our proven ability to provide US multinational corporations a global solution. We now have 24 Broadspire locations in our EMEA/AP segment to support our US global clients, enabling US risk managers to have one point of access for their global claims programs. The ability to handle these complex assignments is an indication of our unique ability to leverage our global footprint and service multinational clients.

Broadspire is an important contributor to the Crawford product line and global strategy. We are emphasizing the development of new business opportunities with an enhanced value proposition and targeted market approach, executed by the cross-selling of additional services and balancing our cost base over this period. During the first quarter, we were pleased with the execution of our sales and marketing plans in this segment. Both new sales wins and client retention were very strong, and we have a growing pipeline of opportunities for the remaining quarters of the year.

We continue to be very pleased with the Legal Settlement Administration segment's, or LSA, revenue and operating earnings performance. LSA represented 20% of our first quarter's revenue. The first quarter results were slightly ahead of our expectations as GCG has been heavily involved in continuing to provide administration services in the Deepwater Horizon class action, resulting from the BP settlement. However, we were pleased that our revenue growth during the quarter was generated from a number of other significant class action and bankruptcy cases, providing more balance to our results. We continue to expect to see a solid performance from LSA for the coming year, although at a reduced level from 2012, as claims activity declines in the Deepwater Horizon class action. Our backlog at the end of the 2013 first quarter was very strong, at $135 million.

That concludes my comments on our business segments. Let me turn to our guidance and 2013 focus. After our first quarter results, we are seeing positive trends in our business and remain optimistic about 2013. We are, therefore, reaffirming our guidance for 2013 as follows. Consolidated revenues before reimbursements between $1.05 billion and $1.08 billion. Consolidated operating earnings between $85 million and $93 million. Consolidated cash provided by operating activities between $65 million and $70 million. And net income attributable to shareholders of Crawford & Company on a GAAP basis between $49 million and $54 million or $0.85 to $0.95 diluted earnings per CRDB share.

Our first quarter performance reflects a number of encouraging results and trends. We continue to be very encouraged by the performance of the EMEA/AP and Legal Settlement and positive on the directional trend of the Americas. We are also encouraged at the number of new clients we are winning in Broadspire. As always, weather driven claims volumes can provide both positive and negative swings in our operations, which we saw in the first quarter in the US and Far East.

Looking forward, our goals in 2013 include the following. Driving operating performance, both EMEA/AP and Legal Settlement Administration reported very strong results in the quarter on the volumes generated by global weather events and significant class action settlements. We expect the volumes provided by these events will continue, but at a lower level than the first quarter, and our 2013 annual guidance reflects that expectation. Offsetting those trends, we have the opportunity for substantial improvement in our two other business segments. Our Americas business reported an improved first quarter as claims relating to Superstorm Sandy flowed through the operation. However, we are focused on generating sustainable, profitable, non-catastrophe related growth in this business. With planned continued cost savings, technology implementations, process improvements and new client wins, we expect to improve Broadspire's operating results over the coming quarters and return this business to a stronger earnings profile while maintaining our reputation for excellent client service.

Strengthening our balance sheet, we remain disciplined in our approach to both our balance sheet and cash management. This is a fundamental strategy from which we will not waver. We look at our conservative leverage as a competitive advantage in the marketplace, especially when compared to many of our privately owned peers who have highly leveraged balance sheets. Our conservative approach to leverage ensures that we have the financial flexibility to invest in market-leading solutions for our clients and respond to opportunities as they emerge. Improving total returns to shareholders, Crawford's stronger balance sheet and improved cash generation capabilities supports both growth of dividends and continued share repurchases, which enhance shareholders' return. Crawford continued its quarterly dividend payments in the quarter, and we will continue to see stock repurchase opportunities under our June 2012 stock repurchase plan. With these actions and improved operating performance, we expect to continue to offer meaningful rewards to our shareholders.

Crawford continues to make progress in 2013. Our worldwide management team is focused on core, strategic and operational goals. Our first quarter results are evidence of the benefit of having diverse operations in a volatile market. We expect to continue to expand market share, invest in technology to deliver operational efficiencies, and capitalize on the client opportunities that present themselves in the remainder of 2013. Reflecting on our strong market position, our ongoing investments in efficiency and innovative support services, and the quality reputation of our business segments, we are optimistic about Crawford's opportunities in the coming year. 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 Broadspire business with developments with case flow contract wins, you think the top line will be back in positive territory when we look at 2Q or later in the year?

Afternoon, Mark. Yes, we see some of the miss in the quarter as a timing issue. We've implemented new software. We had some short-term pressure loading up some new clients in the medical bill review section, and we see that catching up in the second and third quarters. So we're concerned, but we see a very positive situation coming up in medical bill review, which was our largest miss in the quarter. New sales are ramping up. We've actually at the end of April already hit our Quarter two target, and that is good news for the quarters going forward. We have had cost reductions in place as well. We're now beginning to see the benefit of those [bringing] in. If we look at the workers' comp claims, we're down over Q1 '12, but we're up over Q4 '12, and I must admit, the down against the Q1 '12 was -- the analysis we saw is we took on a number of new programs last year in the first quarter, which put that figure up slightly. So we think our -- while our volume's down, that there is a stabilization and a slight of movement upwards, and all the new accounts will really support that.

How about in the US P&C business, if you take out the storm contribution, how are the margins trending in that business? I think the -- maybe the mix of cases has changed, perhaps. How is that influencing the profitability?

Hey, Mark. This is Bruce. We did see, in the quarter, some contribution from Superstorm Sandy, obviously. I think as the trend that we've seen in US Property and Casualty and also our Canadian and UK operations for that matter is a trend towards higher value claims being outsourced to companies like ours and many of the smaller value claims being handled telephonically or through direct repair facilities. So we do see the mix moving more towards more complex claims as compared to where we were several years ago.

In the EMEA/AP segment, with the Thai flood revenue winding down a bit, how should we think about the top line there in coming quarters? Do you have a more difficult year-over-year comps, that it will be hard to be in positive territory? Are new case counts supporting the revenue there? How is that going to shake out?

Yes, one thing, as we think about EMEA/AP this year and within our guidance, we see EMEA/AP as kind of a steady as she goes. We expect operating improvement in the UK, and as Jeff mentioned, we had a really kind of a business transformation project that was occurring last year, in 2012 in the UK. And they had better results in the first quarter this year, and we expect their results to improve as we go through this year. And for CEMEA, our European operations exclusive of the UK, for those operations to continue to provide good year-over-year figures as they did in the first quarter. That's going to help make up for the fact that the contribution from the Thai flooding loss is going to diminish as we go throughout this year. We think that within the segment, the mix of business will substantially offset the loss of the Thai business.

Mark, on the Thailand issue, I mean, we've probably got around about 300 files that we're still working on there, and we see that taking approximately the next two quarters to work its way out of the system.

Yes. Okay. And then Bruce, the $2.3 million gain, was that this quarter?

That was this quarter. That was in the 2013 first quarter.

And that was a pretax within the EMEA/AP; is that right?

No, it was part of the Americas operating earnings.

And then was that -- would we assume that was taxed at the 34%?

Yes.

Okay. Thank you.

(Operator Instructions)

Adam Klauber, William Blair.

The revenue backlog from Legal Settlement has jumped nicely from $105 million to $135 million. Is the percentage from the Gulf claim, is that materially different now than it was a year ago -- of the backlog?

I think it's probably fairly comparable.

Okay. And you alluded to you've had some new wins there. Which area is that coming from?

That's coming from both the class action arena and the bankruptcy area.

Okay. So somewhat well spread out?

Yes, I mean, we're seeing, if you like, a little bit of a rebalancing, where we're not as dependent in that business unit on the one project, but we're seeing some significant projects coming in to the division, which is very good.

Okay. Great. And then in Broadspire, you mentioned that you have had some new client wins.

Yes.

Does the ramp-up from newer clients, does that ramp up incrementally as that relationship gets older, more seasoned?

Yes, it does. I mean, some of these new client wins are quite large. We're bringing them on. There is a period of implementation to get the history loaded up, to get the systems in place, and some of those are one, two, three months. But we are very positive on both the wins we've had this quarter and the pipeline we've got for the future. We obviously don't give names on the clients, but there are some household names within there.

Right. But even once these systems are implemented, say the first quarter versus the fourth quarter it's implemented, does business tend to build up as that relationship matures?

It does, Adam. This is Bruce. It will build up over, say, an 18-month period or so for a comp program and probably over a shorter period of time if you're just looking at a casualty or a liability program.

Okay.

And Adam, just on that, it's also the cross-selling of services that can go into those organizations as we get involved and they see the wide spectrum of services that we have as an organization. And that grows the business as well.

Okay. And then also, you mentioned ANH, I think once or twice, and it sounds like that's newer potential area for you. Could that be significant, and how long will that take us -- take to begin to show?

Okay. I'll try and answer that question in a conservative way. The answer is, yes, it is a new business line for us in both the Americas organization and the global organization, EMEA/AP as well. We're working with a number of major insurers at the moment, putting in place the spoke programs for them, which are dealing with high severity, low value claims, and this is a process driven type of business, and we see this having very good sticky factor into the organization for the future. And we're very excited about it as we get more and more involved with our clients on that.

Okay. But it sounds like it will take a little while to be --

Yes. I mean, this is not a -- it's more of a dimmer switch than it is a light switch.

Right, right. But it could be significant as we look down a couple years?

Hopefully so.

Okay. Okay. That's all I had. Thank you very much.

(Operator Instructions)

Mark Hughes, SunTrust.

Updated estimates for cash flow for the year and then pension, how much you expect to contribute this year and then what the GAAP pension expense ought to be this year compared to last year to update on those measures.

Right. So from operating cash flow, we're guiding $65 million to $70 million for this year. And that's consistent with where we came out last quarter. Our pension contributions in the US, we expect to be $19 million under the requirements of MAP-21. That's compared to $13 million that we had last year. Our UK cash contributions to our defined benefit plans there tend to run in the $6 million to $7 million range each year. When we look at our DB expense -- that's all the cash side. When you look at the DB expense this year, the expense is down slightly on a consolidated basis, compared to last year. I think last year we were at about $3.6 million, and this year we'll be at about $3.3 million, so pretty flat from an expense standpoint, but our cash contributions are going to go up a bit.

Then how about the CapEx, any changes there?

I think about $32 million or so. That's probably a pretty consistent number going forward.

Thank you.

At this time there are no further questions. I will now return the call to Mr. Bowman for any final remarks.

Thank you. Thank you everyone for your time and questions this afternoon, and I'd like to thank everyone for joining us, and have a great day and a good week. Thanks very much.

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 20, 2013. The conference ID number for the replay is 52975389. The number to dial for the replay is 1-855-859-2056 or 404-537-3406. Thank you. You may now disconnect.