Crawford & Co (CRD.A) 2013 Q2 法說會逐字稿

Good afternoon. My name is MacKenzie and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Crawford & Company second 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 session. Instructions will follow at that time.

(Operator Instructions)

As a reminder, ladies and gentlemen, this conference is being recorded today, Monday, August 5, 2013. Now, I would like to introduce Allen W. Nelson, Crawford & Company's General Counsel and Chief Administrative Officer.

Thank you, MacKenzie. 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 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's discussion and analysis of financial condition and results of operations as well as any 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. Jeff, please begin our 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 second quarter 2013 results. Bruce will then review the second quarter financials in more detail which will be followed by our review of our business performance, comments on our strategic initiatives, and conclude with our corporate focus and our increased global 2013 guidance.

We are pleased with our second quarter results as they reflect solid positive results in all segments and a better balance of contribution, among our operations than we have seen for some time. In particular, Broadspire reported profitable results and an operating improvement, even excluding a one-time benefit this quarter. Our American segment reported increased case volume and a rebound in performance. As a result, our second quarter 2013 financial metrics showed very good gains and we have raised our expectations and certain aspects of our guidance for the year.

Overall, revenues increased 2% over the second quarter of 2012. Consolidated operating earnings grew 27%, and our net income increased 63% quarter over quarter. We also announced today an increase in our dividend payment. We increased dividends on both our A and B shares by $0.01 to $0.05 and $0.04 respectively. Within the Americas segment, our US prompt and casualty business benefited from an increase in our contractor connection operations and catastrophe revenues. We also saw an increase in claims in our Canadian market. I will report more details on these areas in the business unit review, but the headline news is that our Canadian business unit lass had its busiest month for claims received in July in history.

In our EMEA/AP segment reported a strong double digit operating margin in the second quarter, but revenues reflected a lower level of activity in the UK, and from handling claims related to flooding in Thailand than we saw a year ago. While the Thailand project should remain meaningful for us during the second half of the year, related business activity has begun to taper as we wind up the handling of those claims.

In the Broadspire business, we saw great progress in the second quarter as operating earnings were positive. While approximately $3 million of this improvement in revenues and operating earnings was a one-time benefit, even excluding this item we saw strong improvement in the operating results sequentially over the first quarter which is an encouraging result. We remain optimistic that this segment will show meaningful operating improvement throughout the remainder of 2013.

During the 2013 second quarter, our legal settlement administration segment remained engaged in responding to the Deepwater Horizon class action settlement. However, in this quarter, we also saw acceleration in securing a number of other meaningful class action and bankruptcy matters. It is encouraging to see our non-Gulf activity increasing and this bodes well for the longer term outlook of this business. We expect operating activity in this segment to continue at a reduced rate as compared to 2012 levels, but remain strong on an historical basis during the remainder of 2013.

I would also like to take this opportunity to mention that we have had a recent retirement of one of our directors and last week made an announcement on the appointment of a new director. After 16 years, [Jenna Woods] has retired from the Crawford & Company board effective July 9, and on July 30 we announced the appointment of Roger Day. Roger most recently served as an executive vice president for Ace overseas general division where he oversaw the multi-line claims operations outside the USA. He is a highly accomplished business executive who has 40 years of global claims experience and will be a great insurance industry-related expert for the corporation. We thank Jenna for her service to Crawford & Company and welcome Roger aboard.

That concludes my initial remarks and I will discuss the business unit operations after Bruce has reviewed the financials. Over to you, Bruce.

Company-wide revenues before reimbursements in the 2013 second quarter were $298.9 million, an increase of 2% from $293.8 million in the prior year second quarter. This growth was driven by improved results in our Americas segment and improvement in Broadspire's operating performance. Our net income attributable to Crawford & Company was $17 million in the 2013 second quarter, up 63% over $10.4 million in the 2012 period. Second quarter 2013 diluted earnings per share were $0.31 for CRDA and $0.30 for CRDB compared to earnings per share of $0.19 for CRDA and $0.18 for CRDB in the 2012 period. Consolidated operating earnings, a non-GAAP financial measure, totaled $30.4 million for the 2013 second quarter, up 27% over $24 million reported in the 2012 second quarter.

During the prior year second quarter, the Company recorded a special charge of $1.6 million related to a project to outsource certain aspects of our US technology infrastructure. There were no special charges during the 2013 second quarter. The Company's selling, general and administrative expenses, or SG&A, totaled $58.4 million, or 19.5% of revenues in the 2013 second quarter, down from $59.1 million, or 20.1% of revenues in the prior year quarter. Since 2011, the Company has paid a higher dividend on its CRDA common stock than 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. 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 $82.6 million in the 2013 second quarter, up 7% over $77.6 million reported in last year's quarter. This increase was primarily due to growth in contract connection, an increase in claims activity in Canada, and improvement in Latin America. Operating earnings in our Americas segment were $4.4 million in the 2012 second quarter, or 5% of revenues. This is compared with operating earnings of $1.4 million or 2% of revenues in the prior year quarter.

Revenues generated by our catastrophe adjustors in the US totaled $6.3 million in the 2013 second quarter, increasing from $5.5 million in the 2012 quarter. The increase in revenues was due to higher case volume during the 2013 second quarter. EMEA/AP revenues decreased 7% in the 2013 second quarter to $87.6 million from $93.8 million in the 2012 period. Our revenue decline reflects the wind-down of catastrophe-related cases in our Asia-Pacific region, primarily in Thailand, and lower case volumes in the UK. EMEA/AP operating earnings decreased to $8.4 million in the 2013 quarter as compared to last year's second quarter operating earnings of $11.7 million. The operating margin in this segment was 10% in the 2013 quarter, decreasing from 13% in the 2012 second quarter.

Revenues from our Broadspire segment increased to $65.8 million in the 2013 second quarter, up 10% from $60 million in the prior year quarter. Broadspire recorded operating earnings of $4.4 million, or 7% of revenues, in the 2013 second quarter, rebounding from an operating loss of $0.4 million in the 2012 second quarter. Included in Broadspire's revenues and operating earnings this quarter is a one-time benefit of $3 million related to the recognition of previously-deferred revenues for certain life-time claim handling obligations that the Company has been relieved of in the future.

Legal settlement administration revenues comprised of class action and bankruptcy claims administration services as well as significant special project revenues totaled $63 million in the 2013 second quarter, increasing slightly from $62.5 million in the prior year quarter. Operating earnings totaled $16.5 million in the 2013 second quarter, or 26% of revenues, as compared to $15.8 million, or 25% of revenues in the prior year period. Legal settlement administration continues to have a strong backlog of projects awarded, totaling $130 million at June 30, 2013, as compared to $73 million at June 30, 2012.

Our cash and cash equivalent position at June 30, 2013, totaled $47.2 million as compared to $71.2 million at December 31, 2012, and 45.7 million at June 30, 2012. Our investment in unbilled and billed receivables has increased by $27.1 million during 2013, primarily as a result of growth in legal settlement administration and EMEA/AP. Our pension liabilities decreased by $10.9 million, reflecting cash contributions during the 2013 year-to-date period. Our total debt has increased to 2013 by $7.5 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 $15.1 million for the 2013 year to date period compared to $26.4 million used in operations in the prior year period. The Company's operating cash needs typically peak during the first half of the year and decline during the balance of the year. Free cash flow improved in the 2013 year to date period by $15.1 million, from the 2012 period.

Back to you, Jeff.

Thanks, Bruce.

At the outset of my comments, I mentioned the overall balance of the results that Crawford has reported today. We are seeing the benefit of our business portfolio both across our business segments and within each segment itself. For example, as EMEA/AP, the legal settlement administration successfully broadened their new business pipelines to replace claims volumes tied to two very large projects, Thailand in the first case and Deepwater Horizon project in the second. I am very encouraged as well by Broadspire's change of direction from the first quarter result and by incremental claims volumes in Canada and Latin America supporting the overall Americas results. Our consolidated revenue improvement for the quarter was driven by a 5% increase in cases over the second quarter of 2012 where we saw case increases in Americas, SEMEA, and Broadspire Casualties business.

Let me now turn to the performance of each of our business units starting with the Americas segment which represented 28% of our consolidated revenue for the overall quarter. Overall performance in both revenue and operating earnings improved over the second quarter of 2012. Our Contractor Connection division grew 18% in assignment and revenue grew 45% over the second quarter of 2012 with both current and new insurers and consumer services clients being contracted. We also hosted our 15th annual conference with more than 2,800 attendees in May. We continue to develop and implement private label consumer website capabilities for all consumer services, and are excited about this product's future.

Our Canadian division also benefited from the startup of the Canadian Contractor Connection service. We successfully implemented a number of new programs in the second quarter. The EMEA/AP operations represented 29% of our consolidated revenues for the second quarter of 2013. In the second quarter, our revenues declined in the Asia-Pacific region primarily due to the tapering of claims related to the Thailand floods which were partially offset by growth in our Australian business. This segment continues to perform solidly with margins approaching double digits even as we transition away from the very high level of claims we have experienced in Thailand.

In our SEMEA operations in the second quarter, we saw a significant increase of 9% in high frequency, low severity claims volumes in several countries. The SEMEA market is a mature, competitive market and we focused our revenue efforts on TPA activities, including our international Broadspire operations and our specialty markets business. We are differentiating our product strategy by country and are very focused on continuing to improve the operating earnings and margins in this region.

In our UK operations we have seen revenue and operating earnings decrease in the quarter due to a volume decrease in low value claims in the general property and casualty sector. This decline is attributed to many factors and, as a result, we have been restructuring our UK operations to compensate for the decrease in volume.

Our Broadspire operation, which represented 22% of our consolidated revenues in the second quarter, reported an increase in revenue and a return to positive operating earnings, as I mentioned earlier. We are ahead of plan, and at present we are seeing very strong client wins and a strong sales pipeline. Our retention rate for the quarter was excellent at 97%. Although there was a small reduction in worker's compensation claims, we saw our overall case volume increase against the previous year's quarter. We believe strongly that Broadspire's solid market position, integrated service model, and quality of 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. During the second quarter, we were pleased with the improved execution of our sales and marketing in this segment. These new sales wins were very strong, and we have a growing pipeline of business opportunities for the remaining quarters of the year.

On the technology front, we introduced a unique industry-leading tool command center to the Broadspire operations in the second quarter. This is a web-based mobile enabled tool that provides management with any time and anywhere access to current data. This product now enables us and allows our managers and adjustors to deliver a superlative high quality service through the monitoring of claims data by adjustor branch, client, and product line.

We continue to be very pleased with the Legal Settlement Administration segment's revenue and operating earnings performance. LSA represented 21% of our second quarter revenue. The second quarter is also strong as LSA has been heavily involved in continuing to provide administration services in the Deepwater Horizon class action 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 2013 second quarter was very strong at $130 million, up from $73 million last year. That concludes my comments on our business segments. Let me now turn to our guidance and 2013 focus.

After our second quarter, we are seeing positive trends in our business and remain optimistic about 2013. We are, therefore, increasing certain elements of our full-year 2013 guidance as follows. Consolidated revenues before reimbursements between $1.12 billion and $1.14 billion. Consolidated operating earnings between $95 million and $99 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 $51.5 million and $54 million, or $0.90 to $0.95 diluted earnings per CRDB share.

Our second quarter performance overall reflects improving results and trends as I have discussed in earlier quarters. Our outlook remains upbeat and the balance of positive results among our segments is encouraging. Our outlook, as always, weather driven, claims volumes can provide both positive and negative swings in our operations and we continue to add to our global abilities to respond to catastrophes. An example is the response we have made in Canada where we have had the busiest month in July in the history of our Canadian operations. Looking forward, our goals in 2013 remain in place, driving operating performance. As stated earlier, our second quarter 2013 results were more balanced, consolidated operating performance as all of our segments produced positive earnings in the quarter. With continued focus on cost savings, technology, and process efficiency improvements as well as significant client wins, we are driving our Company to create long-term shareholder value and our results for the first half of the year are evidence of that strategy.

Strength in 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 waiver. 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 prudent approach to leverage ensures we have the financial flexibility to invest in market-leading solutions for our clients and respond to opportunities as they emerge.

Improving total return to shareholders, Crawford's stronger balance sheet, and improved cash generation capabilities support both growth of dividends and continued share repurchases which enhance shareholder's return. Crawford continued its quarterly dividend payments in the quarter and increased the dividend declared by the board, and announced this morning to $0.05 for Crawford A shares and $0.04 for Crawford B shares. In addition, we continue to seek 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 costs, strategic, and operational goals. Our second 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 and efficiency and innovative support services, and the quality reputation of our business segments, we are optimistic about Crawford's opportunities for the balance of the 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)

Your first question comes from the line of Mark Hughes with SunTrust.

Nice performance across the board. Is there any common threads that run through that -- some change in compensation structure, broader improvement in the economy? Is there any big-picture change here?

I would not say there is a big-picture change. We're adhering to our strategy that we've laid down in each of the operations. The Broadspire operating performance is showing a turn-around, and we expect that to follow on into the second half of the year. But a lot of it is around listening to our clients, improving on our service with our clients, and ensuring that we are executing in a very efficiency way. I think also some of our technology improvements are beginning to really start to take effect as well, Mark.

Right. In the Broadspire business, you talked about some client wins. Are you taking share? Are there more RFPs out on the street?

We are receiving more RFPs, and we are taking market share.

All right. In times past, I think you've talked about having a good pipeline there, but it's been hard to get sustained improvement. Do you think it can be -- you will be able to sustain that this time?

Hi, Mark, this is Bruce. That's certainly what our plan is, and what the Business is driving towards. As Jeff's mentioned before, we are driving sequential improvement in this Business, and that is certainly the plan for this year and looking forward.

Okay. In the EMEA/AP business, how large was the contribution from [cats] in the quarter? And maybe, if not specifically, in historical terms, is this an average contribution from catastrophe revenue now that Thailand is running off? Is there still some to go before it settles out?

Well, the incident happened, as you are aware, back in 2011. We are still working on a number of significant large claims there. We expect this to, as we said, taper off towards the end of this particular year. Over the past few years, we've had incidents occurring in a number of the countries in the Asia-Pacific region. So, I think we're pretty solid for the balance of the year on the EMEA/AP operation in Asia-Pacific.

Okay. In the Contractor Connection, it seems like there was more of a positive impact this quarter. Could you talk about, one, the margin impact of that -- if you can say just directionally how big it is now relative to the Americas operation, and what drove the good performance? More -- wider distribution? More frequency? What's happening?

I'll take the strategic part of that, and then Bruce will talk about the financials. We've been investing in Contractor Connection for a number of years. Over the past two or three years, we've developed private label consumer website capabilities. We've seen consumer growth. We've seen insurance market growth. Service quality is demanded in this particular product, and we, as a corporation, have been investing in our infrastructure, and our sales and marketing.

So, we're very bullish about the programs that we've got, and the potential programs that we can build on to this operation, and we see this as one of our, if you like, hot properties. So, I'm very excited about what is going on with the Contractor Connection operation. And obviously, we've expanded it to Canada in the past two years, and that's going very well as well. We have a form of Contractor Connection in the United Kingdom and in Australia, so this is something that we've got going on a global basis.

In terms of the margin contribution, Mark, we disclosed the revenues that Contractor Connection provides to our US P&C and Americas business in the Q, but as with other aspects of our Business that aren't segments, we've been hesitant to put too much specificity on the margins or the earnings there. I would tell you, though, I mean, just from a directional basis, the margins in that part of our Business tend to be higher because it's providing a network service, a network access model, and we don't have as much fixed cost in that sort of a model. So, the contribution margins tend to be higher.

Right. Any directional thoughts about the growth in the underlying business within the Legal Settlement, excluding the large project? How is that looking?

Yes, just to kind of continue on with that. So, we've really been pleased with Legal Settlement this year, in terms of the balance of where their business is coming from. We've been talking about the Deepwater Horizon project, and the fact that's -- that will be declining over time, and we've seen that. But we've also seen an increase in non-Gulf-related work, that has kind of offset the expected decline that we are seeing in the Gulf-related work. So, it's a good story for us, and one that we're very pleased with.

Any way to characterize the non-Gulf-related work? I know you've talked in times past about the cyclical influences -- after a recession, you might see an uptick in class action work down the road or years later. Is it that or something else?

I think it's a number of things. I mean, obviously, our core operations we've been growing within the Garden City Group in terms of both class action and bankruptcy. I think we're taking a significant amount of market share in both of those areas. And we continue to invest in those areas, and are pleased with the significance that we've got, as the Gulf-related business starts to decline, that our overall business is achieving a better balance.

Okay. Thank you.

Your next question comes from the line of Adam Klauber with William Blair.

A couple different questions. Again, good news on Broadspire. You mentioned that you're seeing increasing success in medical management. Could you give us a ballpark of the revenue growth, excluding the one-timer -- what portion of that was medical management, number one? And number two, would you say your pipeline -- the pipeline is the strongest in medical management going forward?

In the pipeline, we have significant bundled and unbundled opportunities that we're pursuing, and we have one of the strongest pipelines we've had in probably the last few years. So, we're seeing both unbundled medical and bundled medical as being very good opportunities for Broadspire.

Yes. I think, Adam, in terms of the revenue growth in the quarter when you back out the one-time benefit that we saw, the majority of it was coming from the medical side, although we saw improvement in the underlying workers' comp and liability claims business in the quarter, even when you back out the one-time benefit. And I think a lot of that is reflective of the fact that so much more of handling a workers' comp case is dealing with the medical side, and it's just growing in significance and importance of the overall handling of a comp claim.

Right. Okay. That's helpful.

On the pension, you mentioned I think you reduced it by $10 million. I would assume that lower interest rates could help you out next -- I'm sorry, higher interest rates could help you out next year. What's your pension expense running this year, and do you have any sense -- I know it's early, but would you expect it to go down next year given what's happened with rates?

It should. We should see some benefit in expense, and also in future cash contributions going forward. Our pension liability that is on the balance sheet is just a roll forward from where we were at the end of the year -- just taking expense less payments, and we will re-measure at the end of 12/31. But if we were to re-measure today or through the end of the second quarter, we would have seen a pretty decent improvement.

And can you remind us -- how much are you spending this year on pension expenses or what will pension expenses be this year?

Our pension expense this year is about $3.6 million.

Okay. Okay. And then also, I know as we've talked in the past, as rates go up, you could eventually get a lift from the higher interest rates. How long do you tend to hold the money? Is it relatively -- do you need a lift in short-term rates, I take it?

It is short-term rates, that's correct.

Okay. Okay. And then, Legal and Settlement, I know you bought a smaller EPOI or EOC business. Is that getting any traction?

Yes. We've seen a couple of interesting cases that have come into that particular division, and they are working very closely with obviously the GCG organization to integrate and develop the relationships that the owner of that business had when we purchased them. We are quite pleased with the way that business is moving.

Okay. And then also on Legal and Settlement, again, that very nice jump in the backlog, would you say, again, ball parking, more of the jump is class action or more -- is it more bankruptcy?

I think it would probably be more on the class action side. I mean, as we look at the backlog, it's a pretty meaningful backlog. We are moving to where less than 50% of it's related to Gulf-related work, and we're seeing a greater proportion of the backlog related to non-Gulf work, which we think bodes well for the future.

Okay. Okay. And then, as far as the EMEA, did you get much business from floods? I know there were some pretty good floods in Europe. Did you get much business from that?

It wasn't a large volume, but we had some large claims that came out of it. It wasn't to the degree of, say, several years ago when [Prague's] happened. It was less than that, but it had a little bump in our German operations from that perspective.

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

Okay, thanks, Adam.

(Operator Instructions)

There are no further questions at this time. I would now like to turn the call back over to Mr. Bowman for any closing remarks.

Thank you. Thank you, everyone, for your time and questions this afternoon. I would like to thank everyone for joining us, and hopefully you will have 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 PM today through 11.59 PM on August 19, 2013. The conference ID number for the replay is 22871358. The number to dial for the replay is 1-855-859-2056 or 404-537-3406. Thank you. You may now disconnect.