Crawford & Co (CRD.A) 2013 Q3 法說會逐字稿

Good afternoon. My name is Rachel and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Crawford & Company third-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.

(Operator Instructions)

As a reminder, ladies and gentlemen, this conference is being recorded today, Monday, November 4, 2013. Now, I would like to introduce Allen W. Nelson, Crawford & Company's General Counsel and Chief Administrative Officer.

Thank you, Rachel. 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, which is 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 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, you may begin our call.

Thank you, 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 third-quarter 2013 results. Bruce will then review the third-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 affirmed 2013 guidance.

Our third-quarter results met our expectations, reflect profitable results in all segments, and continue the previous quarter's improved balance of contribution among our operations. We have indicated since early in the year that we anticipated the activity level in two large special projects would wind down as the year progressed and that is exactly what we are seeing. We do not expect these declines to continue into the fourth quarter and into 2014. While we have experienced the declines just mentioned, I am pleased to report the impact was partially offset by improvement in two of our other segments. The Americas operation, which reported a 12% revenue increase and Broadspire, which was profitable for the second consecutive quarter and reported 6% growth in revenues. As a result, our third-quarter 2013 financial metrics met our expectations against a very strong quarter last year. We have affirmed our guidance for the remainder of 2013 and are encouraged by the outlook for 2014.

Overall, revenues decreased 3% from the third quarter of 2012 and consolidated operating earnings decreased 20%; however on a year-to-year basis, revenue has increased 2% and consolidated operating earnings has increased 5%. Within the Americas segment, I am pleased that our ongoing investments in our Contractor Connection operations have produced increased revenue for the quarter. We also saw an increase in claims in our key Canadian market as a result of significant flooding. Through the capabilities of our catastrophe division in the US, we were able, in a short time period, to support our Canadian division with 160 US catastrophe adjustors, which met our clients immediate needs and drove revenue increases in both Canada and the US for the quarter.

Segment operating earnings increased 49% on 12% revenue growth and margins reached our target level of 10% for the quarter. Our EMEA/AP segment saw a 12% decline in revenue and a 67% decline in operating earnings, mainly reflecting the anticipated wind-down of the Thailand flooding claims in the Asia Pacific region. We have also seen a significant reduction in UK claims reflecting a number of market factors. Cost control and process improvements in this segment remain a high priority. While the Thailand project should remain meaningful for us during the fourth quarter, this project will effectively close by year-end.

In turning to the Broadspire business, I'm pleased to report we saw continued progress in the third quarter, as operating earnings remained positive for the second consecutive quarter. We are optimistic that this segment will show sustained operating improvements through the remainder of 2013 and into 2014. Given the strong performance of the new sales and marketing team, we believe Broadspire will continue to gain market share in the coming year and I am very pleased to the quality of our work, as evidenced by our retention rate for the quarter. During the 2013 third quarter, our Legal Settlement Administration segment remained engaged in responding to the Deepwater Horizon special project.

We expect operating activity in this segment to continue to taper during the fourth quarter; however, in the quarter we secured a number of other significant class action and bankruptcy matters. It is encouraging to see our non-Gulf activity increasing and we believe this bodes well for the long-term outlook of this business segment. As we continue to focus on an improved shareholder experience, we also announced today the declaration of our quarterly dividends on both our non-voting A shares and our voting B shares of $0.05 and $0.04 respectively. In addition, we continue to seek stock repurchase opportunities under our June 2012 stock repurchase plan.

That concludes my initial remarks on the third quarter and the year-to-date. 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 third quarter?

Company-wide revenues before reimbursements in 2013 third quarter were $293.3 million, a decrease of 3% from $302.1 million in the prior-year's third quarter. Our net income attributable to Crawford & Company was $13.4 million in the 2013 third quarter, decreasing 26% from $18.2 million in the 2012 period. Third-quarter 2013 diluted earnings per share were $0.25 for CRDA and $0.24 for CRDB compared to earnings per share of $0.33 for both CRDA and CRDB in the 2012 period. Consolidated operating earnings, a non-GAAP financial measure, totaled $26.3 million for the 2013 third quarter, decreasing 20% from $33 million reported in the 2012 Third quarter. The Company's selling, general and administrative expenses, or SG&A, totaled $56.7 million or 19.3% of revenues in the 2013 third quarter, down from $59.2 million or 19.6% of revenues in the prior-year quarter.

Revenues from the Americas segment totaled $95.9 million in the 2013 third quarter, up 12% over $85.9 million in last year's quarter. This increase was primarily due to a substantial increase in weather-related claims activity in Canada and continued growth in Contractor Connection. Operating earnings in our Americas segment were $9.7 million in the 2012 third quarter, or 10% of revenues. This is compared with operating earnings of $6.5 million or 8% of revenues in the prior-year quarter. Revenues generated by our catastrophe adjustors in the US totaled $13.9 million in the 2013 third quarter, increasing from $9.6 million in the 2012 quarter. The increase in revenues was the result of assistance our US catastrophe team provided to Canada in response to their recent catastrophic flood losses.

EMEA/AP revenues decreased 12% in the 2013 third quarter to $84 million from $95.9 million in the 2012 period. Our revenue decline reflects the wind-down of catastrophe cases in our Thailand operation and decreases in the UK, partially offset by growth in CEMEA. EMEA/AP operating earnings decreased to $4.3 million during the 2013 quarter as compared to last year's third-quarter operating earnings of $13 million. The operating margin in this segment was 5% in the 2013 quarter, decreasing from 14% in the 2012 third quarter.

Revenues from our Broadspire segment increased to $63.3 million in the 2013 third quarter, up 6% from $59.8 million in the prior-year quarter, primarily due to new business wins. Broadspire recorded operating earnings of $1.9 million, or 3% of revenues in the 2013 third quarter, reversing an operating loss of $0.2 million in the 2012 third quarter. Legal settlement administration revenues totaled $50.1 million in the 2013 third quarter, compared with $60.6 million in the prior-year quarter for the reasons Jeff discussed a moment ago. Operating earnings totaled $10.2 million in the 2013 third quarter, or 20% of revenues, as compared to $15.6 million or 26% of revenues in the prior-year period. Legal settlement administration continues to have a strong backlog of projects awarded totaling $117 million at September 30, 2013, compared to $118 million at September 30, 2012.

Our cash and cash equivalent position at September 30, 2013 totaled $51.1 million, as compared to $71.2 million at December 31, 2012. Our investment in unbilled and billed receivables has increased by $34.6 million during 2013, primarily as a result of increases in Legal Settlement Administration, Canada, and EMEA/AP. Our pension liabilities decreased by $24.1 million, reflecting cash contributions during the 2013 year-to-date period. Our total debt has increased in 2013 by $19.1 million, reflecting incremental borrowings needed to fund our year over year growth in receivables.

Cash used in operations totaled $9.5 million for the 2013 year-to-date period, compared to $10.3 million provided by operations in the prior year period. During 2013, there has been an increase in working capital requirements in our EMEA/AP, Canadian and Legal Settlement Administration operations. Free cash flow declined in the 2000 (sic -- "2013") third quarter by $17 million from the 2012 period. Back to you, Jeff.

Thanks, Bruce. We have seen the benefit of a balanced portfolio across our business segments. And in addition to improved performance in the Americas and Broadspire segments, both EMEA/AP, and Legal Settlement Administration are successfully broadening their new business pipelines to replace claims volume tied to Thailand and the Deepwater Horizon special project. We are seeing good consolidated performance in cases received.

In the majority of our markets, we are gaining new clients and gaining market share. This is reflected in our year-to-date figures, which are showing improvements in 2013 over 2012. In addition, we are taking advantage of the geographical spread and building on our new business initiatives, which we believe will improve our operational performance and results in 2014 and beyond. While our consolidated revenue was down for the quarter, our revenue year-to-date is up 2% over last year. In the third quarter, we have seen a 10% increase in cases received with increases in the Americas, EMEA, Asia Pacific and Broadspire casualty business.

Let me now turn to the performance of each of our business units, starting with the Americas segment, which represented 33% of our total consolidated revenue for the quarter. Overall poor performance in both revenue, operating earnings improved over the third quarter of 2012, which included a number of new business wins in a difficult market. Continued success across broader catastrophe management differentiates Crawford from both competitors and carriers who have limited capacity. We continue to emphasize this unique capability to all of our Americas clients. Our Contractor Connection division continued to grow by 1% in assignments and revenue grew 12% over the third quarter of 2012 with both current and new insured and consumer services clients being contracted.

We continue to develop and implement private label consumer website capabilities for all consumer services and are excited about this product's future. During the third quarter, we enhanced our senior staff and sales leadership in this business. Our Canadian division has also benefited from the Canadian Contractor Connection model during the recent flooding which took place during the third quarter. And in our Global Technical Services division, our large complex claims business unit, we are aggressively developing our offshore oil and energy, marine, aviation, and forensic accounting capabilities through the ongoing recruitment and addition of executive general adjustors.

The EMEA/AP operations represented 29% of our consolidated revenues for the third quarter of 2013. In the third quarter, our revenues declined in the Asia Pacific region primarily due to the completion of claims related to the Thailand floods. This segment is finalizing the claims from the 2011 Thailand floods and we have been actively working to replace this declining revenue with new business from the oil and energy, motor aviation, marine sectors throughout the 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 attributable to manufactures, and as a result we continue to restructure our UK operations to compensate for the decrease in volume.

In our CEMEA operations in the third quarter we saw claims increase 24%, including high frequency, low severity claims volume in several countries. The CEMEA market is a mature, competitive market and we have focused our revenue efforts on TPA activities including our international Broadspire operations. Our Broadspire operation, which represented 21% of our consolidated revenue in the third quarter, reported an increase in revenue and the second consecutive quarter of positive operating earnings, as I mentioned earlier. During the year, we have been very pleased with the improved execution of our sales and marketing plan in this business segment.

Our new sales wins have been very strong and we expect to grow our pipeline of business opportunities for the remainder of the year and into 2014. In addition, our retention rate for the quarter was an excellent 97%. We continue to see overall case volume increase against the previous year's quarter through new client wins and stronger Workers Compensation environment. We believe strongly that Broadspire's solid market position, integrated service model and quality of service offers the market a truly competitive product, and we should improve profitability as we move through 2013 and into 2014. We see the increased use of medical Management services as a growing opportunity, reflecting our ability to help clients manage increasing medical costs.

Despite the expected revenue decline associated with the Deepwater Horizon special project, we continue to be very pleased with the Legal Settlement Administration's revenue and operating earnings performance. LSA represented 17% of our third-quarter revenue. We are pleased to allow revenue during the quarter was also generated from a number of other significant class action and bankruptcy cases, providing more balance to our results. We continue to expect to see solid performance from LSA for the coming quarter, although at a reduced level from 2012, as claims activity declines in the Deepwater horizon class action. Our backlog at the end of 2013 third quarter remains strong at $117 million compared to $118 million last year, which gives us reason to be optimistic about the future of this business segment. That concludes my comments on our business segments. Let me now turn to our guidance and 2013 focus.

Based on the results of the third quarter and year to date, we are affirming and updating certain aspects of our full-year 2013 guidance as follows. Consolidated revenues before reimbursements between $1.13 billion and $1.15 billion. Consolidated operating earnings between $95 million and $99 million. Consolidated cash provided by operating activities between $50 million and $55 million. 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 outlook remains upbeat, and the balance of positive results among our segments is encouraging. Our goals in 2013 remain in place, driving operating performance. As stated earlier, our third-quarter 2000 (sic -- "2013") results were a more balanced consolidated operating performance, as all of our segments produced positive earnings in the quarter. We continued focus on cost savings, technology and process efficiency improvements, as well as significant client wins. And we are driving our Company to create long term-shareholder value and our results for the year-to-date are evidence of that strategy.

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 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 insures we have the financial flexibility to invest in market-leading solutions for our clients and respond to opportunities as they emerge.

So improving total returns to shareholders, Crawford's stronger balance sheet and improved cash generation capabilities support both growth of dividends and continued share repurchases, which enhance shareholder returns. Crawford continued its quarterly dividend payments in the quarter as the Board declared a dividend of $0.05 per non-voting Crawford A share and $0.04 per voting Crawford B share. In addition, we continue to seek stock repurchase opportunities under our 2012 June stock repurchase plan. With these actions, 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 third-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 through the remainder of 2013 and into 2014. Reflecting on our strong market position and our ongoing investments in efficiency and innovative support services and the quality reputation of our business segments, we are optimistic about Crawford's opportunity for the future.

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

(Operator Instructions)

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

Thanks, good afternoon, everyone.

Hi, Adam.

A couple different questions. Start with Broadspire. What level of revenue growth or what do we need to get that margin, say, to the 10% level?

First of all, Broadspire is -- we're looking sequentially, we're improving the organization. We've spent a lot of time on our technology and our efficiencies replacing and improving our sales and marketing, making sure we have the right processes in place for that. And we're beginning to make very good success on that.

We have strong pipeline and new clients. I think you're going to see the margins improving. It's more of a dimmer switch than it is a light switch. And as those accounts come on board, and we have the sustainability of the contracts in place, you'll start to see margin improvement come through on that. I think our goal is 18, 24 months to get to the areas where we will be in excess of 10%.

Another way to think -- hey, Adam, this is Bruce -- another way to think about that is when we look at new business coming in, we try to achieve a 25% to 35% incremental margin on that business by holding our SG&A costs flat and getting a better absorption of our fixed costs. That's really a critical part of the equation.

Okay, and staying with Broadspire for a minute or two, could you talk about the build-up of the medical management business? Have you been hiring some salespeople in that area? Have you been winning some contracts? And what does the pipeline look like in that segment of business?

The answer to that is, yes, we are recruiting sales people in that particular area. It comes into our overall strategy of selling both bundled and unbundled services with medical management. We have won some unbundled services quite recently, which have been significant. It's an area that we are very highly focused on in both the medical bill reviews, the care management of our clients, and then obviously on rehabilitation services moving forward.

The unbundled, are those coming from insurance companies?

No, these would be multi-national and self-insured clients.

Okay, thank you. Could you talk about progress in Contractor Connect? How is that business growing. Maybe talk about some future initiatives for that business also?

Yes, Contractor Connection, obviously we have in excess of 4,500 contractors now in the program. We have really two revenue streams in that business. One is where we have service-level agreements with carriers to triage the claims in to the Contractor Connection network, which is obviously been the core of our business. That's how we've started to grow that business. The second revenue stream we now have is we're white-labeling the contractor network for really large, what I call, affinity programs. That's gaining a lot of ground as well.

We're building up our internal resources both on the sales side and the management of those programs to effectively drive the forward strategy within the Contractor Connection program. Which we're saying, as we said earlier, seeing very large take-up by our clients on.

The white-labeling of that product or services, I know that's a newer effort. Is the traction there running ahead or running ahead of where you would expect it? What is the potential ramp of that white-label as you go into 2014, 2015?

Yes, we had a lot of pilots going on for the last two years, which are now going into full-time widely-spread geographic programs. We're seeing quite a significant increase taking place, but in a very -- I'd say it's conservatively happening in each client. Each client we put on to it has a time period where they go the pilot, and then they go through getting their members comfortable with what's going on. But we do see increases in excess of perhaps 10% in the revenue of that business for the future, going through, really, the next three years.

Okay, and then as far as the pension, I imagine you'll go through that review at year-end, but any expectations as far as your contribution levels going forward?

I think our contribution levels going forward will be roughly comparable to what they were this year as we looked to 2014. Of course we mark everything to market at the end of the year. We'll reevaluate where we stand at that point, certainly with the performance of the equity markets and where discount rates have gone this year. We hope that, that's going to be favorable, but a lot can happen between now and 12-31. So we'll be updating contributions expense and where we stand from a funded basis during the forth-quarter call.

Okay, thanks a lot.

Thanks, Adam.

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

Thank you. Thank you, everyone, for your time and for the questions this afternoon. I'd like to thank you for joining us and wish you a good day.

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 November 18, 2013. The conference ID number for the replay is 87285900. The number to dial for the replay is 855-859-2056 or 404-537-3406. Thank you. You may now disconnect.