Crawford & Co (CRD.A) 2014 Q2 法說會逐字稿

Good afternoon. My name is Brandy, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Crawford & Company second-quarter 2014 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, August 4, 2014. Now I would like to introduce Allen W. Nelson, Crawford & Company's General Counsel and Chief Administrative Officer.

Thank you, Brandy. 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 pension benefit 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-Q for the quarter ended June 30, 2014, 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 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 2014 results. Bruce will then review the 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 2014 guidance.

Our second quarter reflects profitable results in all segments, and an improvement in performance over the first quarter, though they remain below our expectation. Operating earnings in the Americas segment continued to recover, and increased 84% from the second quarter of 2013, as severe weather resulted in increased claims activity for our US and Canadian property and casualty businesses.

Our Contractor Connection operation also continued its very strong growth trajectory in those countries. Revenue was flat in our EMEA-A/P segment, as revenue growth in the UK and specialty markets offset the decline in revenues from the 2011 catastrophic flood losses in Thailand. We also saw margin pressure reflecting our ongoing investment in the development of our global specialty markets operations, which include oil and energy, marine, aviation, and forensic accounting. We remain excited about our prospects in these markets, and are very pleased with our clients' reactions and support.

Year-over-year comparisons in Broadspire reflect a prior year one-time credit of $3 million, which benefited with revenues and operating earnings in 2013 second quarter. Adjusting for this credit, we saw gains in both revenue and operating profitability at Broadspire in the second quarter of 2014. We continue to be encouraged by gains being made in this segment.

Revenue in our legal settlement administration segment during the second quarter of 2014 included continued activity from the Deepwater Horizon class-action settlement, but with revenues that were below last year's level; as well as reduced revenues from other meaningful class actions and bankruptcy matters. As this segment adjusts to lower activity levels, we are encouraged that margins returned to the mid-teens range in the second quarter, improving from the first quarter 2014 levels. In addition, we are quite encouraged by the new business pipeline, which I will discuss later in my remarks.

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

Company-wide revenues before reimbursements in the 2014 second quarter were $288.2 million, compared with $298.9 million in the prior-year second quarter. In the prior-year period, our revenues benefited from stronger results in our legal settlement administration segment, due to a special project we have previously discussed. Our net income attributable to shareholders of Crawford & Company totaled $10.5 million in the 2014 second quarter, down from $17 million in the 2013 period.

Second-quarter 2014 diluted earnings per share were $0.19 for CRDA and $0.18 for CRDB, compared to earnings per share of $0.31 for CRDA and $0.30 for CRDB in the 2013 period. Consolidated operating earnings, a non-GAAP financial measure, totaled $20.9 million for the 2014 second quarter, down from $30.4 million reported in the 2013 second quarter. The Company's Selling, General, & Administrative Expenses, or SG&A, totaled $60.9 million, or 21.1% of revenues in the 2014 second quarter, up 4% from $58.4 million, or 19.5% of revenues in the prior-year quarter.

Revenues from the Americas segment totaled $93.6 million in the 2014 second quarter, up from $82.6 million reported in last year's second quarter. Operating earnings in our Americas segment were $8.1 million in the 2014 second quarter, or 9% of revenues, compared with operating earnings of $4.4 million, or 5% of revenues in the prior-year quarter. Revenues generated by our catastrophe adjusters in the US totaled $11.5 million in the 2014 second quarter, up from $6.3 million in the 2013 second quarter. The increase in revenues was due to the use of catastrophe adjusters to fulfill an outsourcing contract from a major US insurer.

EMEA-A/P revenues decreased slightly in the 2014 second quarter to $87.2 million, from $87.6 million in the 2013 period. EMEA-A/P operating earnings were $4.3 million during the current quarter, declining from last year's second quarter operating earnings of $8.4 million. The operating margin in this segment was 5% in the 2014 quarter, decreasing from 10% in the 2013 second quarter.

Revenues from our Broadspire segment increased to $66.7 million in the 2014 second quarter, up from $65.8 million in the prior-year quarter. Included in Broadspire's revenues and operating earnings in the 2013 second quarter was a one-time benefit of $3 million related to certain lifetime claim handling obligations that the Company was relieved of handling. Operating earnings in Broadspire totaled $2.7 million, or 4% of revenues, in the 2014 second quarter, compared to operating earnings of $4.4 million, or 7% of revenues in the 2013 second quarter; or operating earnings of $1.4 million, or 2% of revenues before reflecting the $3 million special -- the $3 million, one-time credit.

Legal settlement administration revenues totaled $40.7 million in the 2014 second quarter, decreasing from $63 million in the prior-year quarter. Operating earnings totaled $5.7 million in the 2014 second quarter, or 14% of revenues, as compared to $16.5 million, or 26% of revenues in the prior-year period. Legal settlement administration's backlog of projects awarded totaled $97 million at June 30, 2014, as compared to $130 million at June 30, 2013.

The Company's cash and cash-equivalent position at June 30, 2014, totaled $47.7 million, as compared to $76 million at December 31, 2013. Our investment in unbilled and billed receivables has increased by $38.6 million during 2014, primarily as a result of an increase in receivables and legal settlement administration in EMEA-A/P. Pension liabilities decreased by $17.6 million, reflecting cash contributions during the 2014 year-to-date period.

Our total debt has increased in 2014 by $53.7 million, reflecting our usual heavy cash usage in the first half of the year to fund costs traditionally incurred at the start of the year. Cash used in operations totaled $59.6 million for the 2014 year-to-date period, compared to $15.1 million used in operations in the prior-year period. This increase was primarily due to lower net income, the increase in total receivables, and greater working capital requirements during 2014. Free cash flow declined in the 2014 period by $45.4 million, as compared to the 2013 period.

For the 2014 second quarter, the Company repurchased nearly 164,000 shares of CRDA under its share repurchase plan, at an average cost of $8.54 per share. Since the inception of the May 2012 share repurchase plan, the Company has repurchased over 1.5 million shares of CRDA, at an average cost of $6.16; and 7,000 shares of CRDB at an average cost of $3.83. Also during the quarter, the Company paid a regular quarterly dividend of $0.05 on the CRDA shares, and $0.04 on CRDB shares. Back to you, Jeff.

Thanks, Bruce. Before turning to the business segments, I would like to make a few comments. We believe as a group we are in a strong position going forward with our current business wins. Further we are seeing a slight fall-off in commercial claims volume on a global basis. Our commercial clients are confirming the current industry-wide decrease in commercial claims due to the benign weather, and the lack of significant events on a global basis. Our Management team is doing an excellent job in winning new accounts, and our actual wins and future pipeline are strong in all of our business units. One of the other areas we are monitoring is the US unemployment numbers, as this affects our Broadspire business unit. As the unemployment raise rate has fallen over the past year, we have seen an increase in workers' compensation claims referred to us by our clients.

Crawford has continued to experience strong case growth over the past two quarters, which is a leading indicator that underlines several positive trends in the business. First, the continued success of Contractor Connection, which has posted strong results over the past several quarters; and second, growth in the number of high-frequency, low-severity claims we are handling. To some extent, those more frequent claims have offset variances in catastrophe claims for the year-to-date period.

As highlighted by our results for the year to date, our challenge is to drive replacement revenues for large projects like Thailand flooding and Deepwater Horizon as they roll off. As we go through this transition, we are pleased with the revenue gains we are seeing in the Americas and our Broadspire operations. In the immediate period, our focus is on margins and managing costs to these anticipated run rates. I should also note in the past week we have announced the acquisition of Buckley Scott, a UK-based firm specializing in international construction and engineering adjusting. This addition to our global technical services operation should allow us to significantly expand our construction and engineering business in the UK, the London market, and internationally.

We also continue our ongoing focus on an improved shareholder experience. Today, we announced that the Board has approved a new stock repurchase authorization through July of 2017. It allows us to repurchase up to 2 million shares of our class A shares or class B shares, or both. In addition, we announced a declaration of quarterly dividends on our non-voting A shares and our voting B shares of $0.07 and $0.05, respectively, which represents a $0.02 increase on the A shares, and a $0.01 increase on the B shares. At the new payout levels, our indicated annual yield based on Friday's closing price is 3.5% on the A shares and 2.2% on the B shares.

So 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 revenues for the quarter. Overall performance in both revenue and operating earnings was supported by significant improvements in our Canadian operations, and continued strength in our Contractor Connection operations, both in the United States and Canada.

Growth in revenues reflected gains in case volumes in both the US and Canada due to severe winter weather. In the US, there was an improvement in operating margin in the core property and casualty business, and growth in Contractor Connection. Contractor Connection grew 8% in assignments, and 41% in revenue over the second quarter of 2013, with both new insurer and consumer services clients being contracted. As noted before, both our United States and Canadian operations continues to benefit from this business line, which is a strong growth platform and an area of continued strategic focus. Looking forward to the balance of the year, we expect the Americas segment will benefit in the second half from our long-term project to assist the major US insurer.

The EMEA-A/P operations represented 30% of our consolidated revenues for the second quarter. During the quarter, claims volumes increased 8% across the three regions that make up EMEA-A/P. However, revenue declines in the Asia-Pacific area continue to reflect declining revenues in Thailand, as we expected. Both Continental Europe and Australia have experienced the benign weather environment thus far this year. In the UK, our traditional business is improving; however, the EMEA-A/P margin performance reflects the higher investment in the specialty market start-up operation that commenced in the 2013 third quarter. We view Crawford's specialty market as an investment in higher-margin claims, and we expect it to gain traction moving forward.

For an example, we have opened a new Qatar office to serve as construction and engineering claims in the country, in respect of the massive construction projects in the lead up to the 2022 World Cup. However, until these revenue streams begin to be realized, we will be managing costs across this business segment to reflect current revenue levels.

We are pleased with the improved execution of sales and marketing plans in our Broadspire operation, which represented 23% of our consolidated revenues for the quarter. After adjusting for a 2013 second-quarter $3 million credit, Broadspire reported an increase in revenue and improved margins. We are seeing very strong client gains, and a robust sales pipeline. Our retention rate for the quarter was excellent.

We continued to see overall case volumes increase through new client wins and a stronger workers' compensation environment. Opportunities continue to emerge in the area of medical management. We are gaining efficiencies from investments in technology and new clients wins that should continue to support revenue growth and improved profitability as we move through 2014. We expect to see Broadspire's results improve sequentially in the second half of 2014.

Legal settlement administration represented 14% of our 2014 second-quarter revenue. Revenues reflected the run-off of claims associated with the Deepwater Horizon case, which we will continue to expect to flatten out over the remainder of the year. New business wins in GCG will begin to partially offset those reductions in the third, and particularly, in the fourth quarter. As expected, our backlog at the end of the second quarter declined to $97 million, compared to $130 million at the close of the second quarter last year. That concludes my comments on the business segment.

Let me turn to our guidance and 2014 focus. As we look out to the second half of the year we have a high confidence level, based on existing backlogs and new client wins already in hand for US property and casualty, Broadspire, and legal settlement administration. As a result, based on our current projections, we are reaffirming full-year 2014 guidance as follows: Consolidated revenues before reimbursements between $1.08 billion and $1.12 billion; consolidated operating income between $84 million and $98.5 million; consolidated cash provided by operating activities between $50 million and $60 million; net income attributed to shareholders of Crawford & Company on a GAAP basis between $46.5 million and $54 million, or $0.84 to $0.99 diluted earnings per CRDA share, and $0.80 to $0.95 per CRDB share.

Our Management efforts are currently focused on several areas. First we are working actively to deliver new and incremental revenue in all of our business segments. I've touched on some of these opportunities in my comments thus far, and I am very encouraged by the opportunities I am seeing there, and the effect on the second half of the year. Second, we have in place cost management measures that should ensure that overhead's expenses are balanced against revenue performance, and drive margin gains. Thirdly, we are excited about the Buckley Scott acquisition in the UK. We are also pleased with the progress we have made in the specialty market areas around the oil and energy, marine, and aviation products. We are beginning to see the benefit from the investments we are making in these areas.

These initiatives also detail our intent to enhance our data management and analytics capabilities to further improve efficiency and flexibility of our claims management services, to develop new lines of business, and ultimately to further enhance our services to clients. With these actions, we expect to offer meaningful rewards to our shareholders as the year unfolds.

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?

Mark Hughes, SunTrust.

This is Rob Myers on for Mark Hughes.

I was wondering if you could expand a little bit on this new special project in the Americas segment. You referenced it as a long-term project. I was wondering if you could give the trajectory for that, as well as what kind of incremental margins you're seeing on that business?

Well, we can't name the insurer, obviously. It's a large, long-term series of projects that we're working with a major insurer on. We see significant advantages to the organization in being able to deploy a significant number of employees over a six-month, one-year project that they have, and we expect to have a long-term relationship with that client.

I'll let Bruce comment on any margin issues.

Yes. We wouldn't disclose the specific margins for the contract, but in general, as we've talked about in the past, our incremental margins on new revenue dollars can range anyway anywhere from say, 20% up to 35%, depending on the nature of the work. It will be at the lower end of the range for less complex personal-line type work, and at the upper end of the range for more sophisticated commercial losses and special projects.

Thank you. Are you able to categorize how much of the growth in Americas this quarter was standing business, versus this new project?

If you look at the catastrophe revenues quarter over quarter, most of that captures this special project, because we're fulfilling the project with catastrophe adjusters, so those revenues were up in the quarter, as we mentioned on the call. I think they were at -- what'd we say, $11.5 million for the quarter this year compared to $6.3 million last year. Really, all of that increment is going to be driven by this sort of project.

Okay, thank you.

Then in the same vein, in the legal settlement business, as we see that number continue to come down, are you able to speak to the mix of how much these other large class-action settlements are declining, versus just what you're expecting in declines from Deepwater Horizon?

Well, first thing is we're comparing against the prior year. We're still seeing a slight stabilization of the Deepwater Horizon revenues at this particular moment. We are -- we have been appointed on a number of very large projects over the past couple of months, which we're seeing ramp up in Q3 and Q4.

As with that business always, we look to see how strong the revenue coming out of that will be over the next two quarters. It's sometimes a little bit difficult to project entirely, but we're very confident that it's going to make a difference to the business. We won't be, however, obviously getting back to being able to collect back the difference in the Deepwater Horizon shortfall, but we're beginning to make an impact on it.

Okay. Then similar, if you look back to 3Q 2010, before Deepwater Horizon, where you were around $40 million in revenue in that segment with margins in the low 20s, is there a place you see that segment settling out in terms of the top line and margins?

I think on the margins, we expect it to be mid-to-high teens in the current environment we're in. The revenue will be -- as we've always said, that will be a bit lumpy, to say the least. But we do see it improving at this moment.

Okay. Thank you very much.

Adam Klauber, William Blair.

A couple different questions. In Broadspire, sounds like you're relatively positive on the back half. Again, the business has been doing well already, but is that based on revenue from new clients coming on in the second half?

That's part of it.

Okay.

The other part, Adam, is the cost savings that we've been able to put in place over the past 12 months are really starting to kick in now.

Okay. I think you mentioned medical management. Are some of the new wins in the medical management area?

Well, we've got a number of unbundled and bundled programs that we've won over the -- really started in the third quarter of last year. We had very strong pipeline wins. We had very good first- and second-quarter wins, in line with our targets. We're seeing hopefully the third quarter producing even better results for us going forward. With the cost model that we've put in place, the technology investments we've made, that's improving our service to our client, number one; and it's attracting new clients, number two.

Okay, thanks. Contractor Connect, could you give us an idea how much did that grow compared to second quarter last year? How much revenue?

The revenue was up quarter over quarter about 40%.

Okay, that's good growth. How are some of the new initiatives within Contractor Connect doing? I know it's early, but just any anecdotal comments would be helpful?

Well, we've obviously got the traditional model in place. Our white-labeled models are improving. They're still going through the initial stages, and we're looking at the consumer model.

Okay.

That's at present. That hasn't been released yet.

Okay. When we look at legal settlement, you've been very helpful letting us know that Deepwater's been running off, and a lot of that has run off. As we look at the last two quarters, revenues were average roughly $41 million. Should we expect that to be a bottom? Can we expect growth in the second half off that bottom, or is it going to be more stay at that bottom and then grow in 2015?

Adam, I'd rather not get into segment-specific guidance looking at the quarters. We still are doing a fair amount of business with Deepwater Horizon project. By no means has it gone away. It's still an important project for us, albeit one that's a lot less significant than it was. We had a couple of other large cases that we will handling in 2013, as well, that have declined also this year. So it's not just a one-project story, when you're looking at the year-over-year change in legal settlement.

As Jeff mentioned in his comments, that's a lumpy business. You tend to have swings in revenues and profitability based upon large projects that can come down the pike. We have a -- still have a good backlog in that business. Jeff referred to the new business pipeline and projects that they're pursuing right now that are -- could be meaningful to us. You consider that with the other aspects of our Business, and we feel pretty confident about where we're headed for the remainder of the year.

Okay. Then in the international operations, should we assume that margins will stay more in this range until the new products, new teams ramp up, or can they improve from here without those ramping up?

That's a good question. We're obviously managing costs whilst the specialty projects -- say the specialty markets -- operations ramp up. We have bought into the operations. We've been investing in people, and very importantly in the oil and energy arena, in Houston, London, New York, Singapore, Canada, and Australia.

We're creating a very powerful team that has really got the clients and support and attention, which is the basis. As we build up that team, those people, we will definitely see -- and we're beginning to see this already, very worthwhile, high-margin claims coming into the business. I think we've got that moving along. That obviously does not in any way our projections account for any catastrophe events or any named storms. That's just business as usual.

In terms of the margin, I expect the UK to slightly improve in the margin. I think the European arena is tough at the moment. We're obviously managing that through cost initiatives. Then we're picking back up the revenue we lost in Thailand throughout our operations through the Asia and Australian arena. I think overall, I think we'll see the margins improving as we go through the third and fourth quarters.

Okay. Thanks a lot.

(Operator Instructions)

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

I'd like to thank everyone for joining us today. Look forward to talking to you again at the end of the third quarter. Thank you for your time and your questions this afternoon. Have a great rest of the day.

Thank you for participating in today's Crawford & Company conference call. This call will be available for replay beginning at 6:00 p.m. today through 11:59 p.m. on September 4, 2014. The conference ID number for the replay is 77577462. The number to dial for the replay is 1 (855)859-2056 or (404)537-3406. Thank you. You may now disconnect.