Crawford & Co (CRD.A) 2014 Q3 法說會逐字稿

Good afternoon. My name is John, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Crawford & Company's third 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. (Operator Instructions)

As a reminder, ladies and gentlemen, this conference is being recorded today, Thursday, November 6th, 2014.

Now, I would like to introduce Allen W. Nelson, Crawford & Company's General Counsel and Chief Administrative Officer.

Thank you, John.

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 as of 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 September 30th, 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 third quarter 2014. And then, Bruce will review the financials in more detail, which will be followed by a discussion of our business performance, comments on our strategic initiatives; and conclude with an update of 2014 guidance and our corporate focus.

Let me begin with a comment on the global insurance environment, the trends we are seeing there, and their impact on Crawford. In the light of increased competition throughout the global insurance industry, we continue to make progress in the transformation and the expansion of our business in the third quarter.

Our market leading operations are successfully winning new business in all segments. And this is clearly evident in our figures when we take into account the loss of the special project revenues.

However, a significant fact to remember in the quarter and the year to date is that we've had virtually no weather events. The effect of no weather events has our insurance clients experiencing strong growth in their results, as can be seen in the clients' loss ratios that have improved many percentage points from a year ago.

This environment, however, results in a decrease in claims to Crawford. As a cyclical business, we have to accept that that will happen.

Our third quarter 2014 revenues were flat with last year, as new business in specialty markets began to come online in the UK, and Broadspire continued to grow. These new revenues were sufficient to replace declines in claims volume in the Americas. And the runoff was a special project within Legal Settlement Administration.

Consolidated operating earnings for the quarter reflected lower operating earnings in our Legal Settlement Administration and Americas business units as Deepwater Horizon claims run off, and our mix of claims in the Americas shifted from higher-margin catastrophe projects towards lower-margin, higher-volume areas in the current quarter. These declines were partially offset by improvements in Broadspire's results.

Looking at each of our segments -- operating earnings in the Americas segments were down from the same quarter in 2013 because there was less severe weather in the current quarter. However, we did see market share gains in our core Canadian operations. I'm very pleased with the strong growth in contractor connections year to date in both the US and Canada.

Operating results were relatively flat in our EMEA/AP segment due to the benign claims environment and our ongoing strategic investment into our specialty markets operations, which include oil and energy, marine, aviation and forensic accounting. We remain excited about our prospects in these markets and expect to continue to invest in this area into 2015.

We saw gains in both revenue and operating profitability of Broadspire, as the company has outperformed both the third quarter of 2014 and for the year-to-date period. We continue to be encouraged by the strength in Broadspire's operations thus far. And we see opportunities to gain in both revenue and margins going forward into next year.

Revenues declined in our Legal Settlement Administration segment during the third quarter of 2014 as activity continues in the Deepwater Horizon class action settlement but at levels below last year's activity.

We also saw reduced revenues from a few other large projects in the class action and [bankruptcy] market. As this segment adjusts to lower activity levels, I would note that operating margins expanded to their highest levels of the year. (Technical difficulty) we remain encouraged by our market share of the new business pipeline in this segment.

During the third quarter, we had higher administrative costs than the prior year. These costs were mainly related to increased non-employee labor and professional fee expenses. We do have further cost-management initiatives underway as we speak.

And lastly, I would point out that today, we announced our quarterly dividend of $0.07 per share on the A Class and $0.05 per share on the B Class.

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

Companywide revenues before reimbursements in the 2014 third quarter were $293.8 million, compared with $293.3 million in the prior-year quarter. Consolidated operating earnings, a non-GAAP financial measure, totaled $22.9 million for the 2014 third quarter, down from $26.3 million reported in the 2013 quarter. The Company's selling, general and administrative expenses, or SG&A, totaled $59.3 million or 20.2% of revenues in the 2014 third quarter, up 5% from $56.7 million or 19.3% of revenues in the prior-year quarter.

Our net income attributable to shareholders of Crawford & Company totaled $10.2 million in the 2014 third quarter, down from $13.4 million in the 2013 period. Third quarter 2014 diluted earnings per share were $0.19 for CRDA and $0.17 for CRDB, compared to diluted earnings per share of $0.25 for CRDA and $0.24 for CRDB in the prior-year period.

Revenues from the Americas segment totaled $92.2 million in the 2014 third quarter, down from $95.9 million reported in last year's quarter. Operating earnings in our Americas segment were $7 million in the 2014 third quarter, or 8% of revenues; compared with operating earnings of $9.7 million, or 10% of revenues in the prior-year quarter.

Revenues generated by our catastrophe adjusters in the US totaled $12.3 million in the 2014 third quarter, down from $13.9 million in the 2013 quarter. We are benefitting in 2014 from an outsourcing arrangement with a major US insurer.

EMEA/AP revenues increased in the 2014 third quarter to $86.2 million from $84 million in the 2013 period. EMEA/AP operating earnings were $4.2 million during the current quarter, as compared to last year's third quarter operating earnings of $4.3 million. The operating margin in this segment was 5% in both the 2014 and 2013 quarters.

Revenues from our Broadspire segment increased to $68.2 million in the 2014 third quarter, up from $63.3 million in the prior-year quarter. Operating earnings in Broadspire totaled $4.4 million or 6% of revenues in the 2014 third quarter, increasing from operating earnings of $1.9 million or 3% of revenues in the 2013 quarter.

Legal Settlement Administration revenues totaled $47.2 million in the 2014 third quarter, decreasing from $50.1 million in the prior-year quarter. Operating earnings totaled $7.7 million in the 2014 third quarter or 16% of revenues, as compared to $10.2 million or 20 percent of revenues in the prior-year period. Legal Settlement Administration's backlog of projects awarded totaled $89 million at September 30, 2014 as compared to $117 million at September 30, 2013.

The Company's cash and cash equivalent position at September 30, 2014 totaled $44.7 million, as compared to $76 million at December 31, 2013. Our investment in unbilled and billed receivables has increased by $49.3 million during 2014, primarily as a result of an increase in receivables in the Company's EMEA/AP and Legal Settlement Administration operations. Pension liabilities decreased by $26.2 million, reflecting cash contributions during the 2014 year-to-date period.

Our total debt has increased in 2014 by $50.7 million, reflecting our usual heavy cash usage in the first half 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 $44.2 million for the 2014 year-to-date period, compared to $9.5 million used in operations in the prior-year period. Free cash flow declined in the 2014 period by $36.1 million as compared to the 2013 period.

For the 2014 third quarter, the Company repurchased just over 44,000 shares of CRDA under its share repurchase plan at an average cost of $8.27 per share. Since the inception of the May 2012 repurchase program through April 15th, 2014, the Company has repurchased approximately 1,545 shares of CRDA at an average cost of $6.22 per share and 7,000 shares of CRDB at an average cost of $3.83 per share.

Also during the 2014 third quarter, the Company paid a quarterly dividend of $0.05 per share on its CRDB shares and $0.07 per share on its CRDA shares.

Back to you, Jeff.

Thanks, Bruce.

Crawford has experienced steady case volumes over the past several quarters, which underline several encouraging trends in the business. First, growth in the number of high-frequency, low-severity claims we are handling, which to some extent have offset the decreases in weather-related claims for the year-to-date period, although at a lower margin.

And in addition, we have seen a 20% to 30% drop in assignments in commercial claims, consistent with the overall commercial claims environment; second, the continued success of contractor connection, which has posted strong results over the past several quarters; and third, continued improved performance of Broadspire.

As we work to replace revenues for large projects that are winding down or completed, our immediate focus has been investing in new products and creating operational efficiency. Building global standards, managing costs effectively and leveraging resources around the world are opportunities we must address. And therefore, we are working actively to identify an act on global initiatives that meet these criteria.

So let me turn to the performance of each of our business units, starting with the Americas segment, which represented 32% of our total consolidated revenue for the quarter.

Overall performance in both revenue and operating earnings declined in the quarter. The benign weather in the US persisted and negatively affected revenue for the segment. However, we saw continued improvement in our Canadian operation and (inaudible) in our contractor operations, both in the United States and Canada. Looking forward to the balance of the year, we expect the Americas segment will benefit from the new outsourcing project that we are engaged in to assist a major US insurer.

The EMEA/AP operations represented 29% of our consolidated revenue for the third quarter. During the quarter, claims volumes increased 5% across three regions that make up EMEA/AP. However, both continental Europe and Australia have experienced benign weather environment thus far this year.

In the UK, our traditional business is improving. However, the EMEA/AP margin performance reflects higher investments in specialty market startup operations that commenced in the 2013 third quarter. We view Crawford's specialty markets as an investment in higher-margin claims, and we expect it to gain traction moving forward.

We are pleased with the improved execution of sales and marketing plans in Broadspire's operations, which represented 23% of our consolidated revenue for the quarter. For the year to date, Broadspire has reported a steady increase in revenue from both worker's compensation and medical management, as well as improved margins. We are seeing very strong client gains and a robust sales pipeline for the balance of the year and into 2015.

We continued to see overall case volumes increase 8% through new client wins and a stronger worker's compensation environment. We expect to see the worker's compensation market continue to improve as the economy grows and unemployment decreases. Opportunities continue to emerge in the area of medical management, and we are gaining additional efficiencies from investment in technology and new client wins that should continue to support revenue growth and improve profitability as we move through the balance of 2014 into 2015.

In the third quarter, Broadspire also announced that it will add short-term disability, long-term disability and Family and Medical Leave Act management to its existing portfolio of products. This new suite of products, which is collectively known as Integrative Disability and Absence Management Services, or IDAM, will be available in the fourth quarter of 2014.

Expanding into disability and absence management naturally complements our well-established medical management and worker's compensation return-to-work strategies and reflects the underlying trends around an aging workforce and requirements under the Federal Affordable Care Act.

We are seeing strong new business wins in Broadspire. These are comprised of large, self-insured accounts and insurance companies outsourcing their claims work. We continued to make investments in systems as well as service enhancements with one goal in mind -- a better claim outcome for our client.

Legal Settlement Administration represented 16% of our 2014 third quarter revenue. Revenues reflect the runoff of claims associated with Deepwater Horizon case, which we continue to expect to flatten out over the remainder of the year. We are optimistic that we will see new business wins in GCG in the fourth quarter of 2014. Our backlog at the end of 2014 third quarter was $89 million, compared to $117 million at the close of the third quarter last year.

That concludes my initial comments on our business segments. Let me now turn to our guidance and 2014 focus.

We still retain a high confidence level looking forward based on existing backlogs and new client wins already in hand. However, as we look out to the final quarter of the year, based on current benign weather and the general global reduction in claims, we are lowering our full-year 2014 guidance as follows -- consolidated revenue before reimbursements between $1.12 billion and $1.14 billion, consolidated operating earnings between $74.5 million and $82.5 million, consolidated cash provided by operating activities between $35 million and $45 million, net income attributable to shareholders of Crawford & Company, on a GAAP basis, between $38 million and $42.5 million, or $0.71 to $0.81 diluted earnings per CRDA share and $0.65 to $0.75 per diluted earnings per CRDB share.

Let me now reiterate where our management efforts are currently focused. First, we are actively working to deliver new and incremental revenue in all of our business segments. I have touched on some of these opportunities in my earlier comments thus far. And I am very encouraged by the opportunities I'm seeing as we head into 2015 and beyond.

Second, we are evaluating and implementing measures that will emphasize global efficiency and cost effectiveness over the next several years and implementing cost initiatives into our major operations.

Third, we are continuing to invest in specialty markets, extending our reach both in terms of product and geography.

These initiatives also detail our intent to further improve the efficiency and flexibility of our claims management services, to develop new lines of business, and ultimately to further enhance our services to our clients. With these actions, we expect to continue to offer meaningful rewards to our shareholders going forward.

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

(Operator Instructions) Mark Hughes, SunTrust.

On your guidance of the fourth quarter, you described the more benign weather leading to a reduction in claims. Was there anything else that you saw in the quarter, or anything that you anticipated in the fourth quarter, other than the weather impact?

I think that's the main factor. I mean, we're seeing a reduction in commercial claims really in Asia Pacific, in Canada, and SEMEA in a couple of areas -- [ag re], construction and engineering, and telecommunications, which have been very vibrant areas for us from a claims perspective. And I think we have no follow-through on catastrophes that have happened in the second and third quarter, which affects our business pour-through. So that really has been the main consideration.

When you think about that catastrophe revenue, how much of the impact was coming from the large new client that you described that helped you out? But for that client, is there kind of a same-store decrease that you can speculate on?

Yes. I mean, the outsourcing project gave us about $6 million in revenue during the quarter, and that's within our US catastrophe adjust to revenues. So when you pull that back, it was down pretty good bit from where it was in 2013. In the 2013 period, you might remember we were using our US adjusting force to help settle claims in Canada when we had significant flooding events in Canada that really impacted our third quarter results positively.

The Broadspire segment -- you're near kind of the peak profitability, at least in recent years. What is your anticipation, both in terms of top-line trend -- you're kind of in the upper single digits here on top line -- and hitting better profitability? Should we assume continuing improvement from here?

I think the answer to that is yes. I mean, as we've said many times before, Mark, we expect to exit 2015 at approximately a 10% operating margin. We've got a very vibrant pipeline at this moment. Our sales team have a lot of opportunities that we're marketing very hard with our new systems that we're putting in in terms of operational and the medical management side, and new products in the disability management area. We see growth coming from that as well. So I think we look very exciting as a corporation in that area at the moment.

And then, I'll ask you for kind of your latest thoughts on the large project, the Gulf spill business -- what you think the outlook is there. How long will that business continue to endure?

I mean, that's the $64 million question. I mean, we are handling the work orders that we're receiving from the class action administer, who's handling the claims there. We have a team. We see it flattening out, and you can see that quarter over quarter. How long that will last is very dependent on what goes on with the Supreme Court action that's taking place at the moment and the future of the class action itself. We're obviously not a party to those discussions.

The sequential uptick in Legal Settlement -- was that coming from an actual increase in activity on the Gulf spill business? Or is there some seasonality in there?

You're always going to have some lumpiness in that business as projects roll off and new projects come on. I think that overall, the Gulf-related business that we're in is in a declining trend. And it may bounce around a little bit month to month. But overall, it's in a declining trend.

The movement quarter to quarter sequentially is going to be due to movement in their overall book of business, which -- as you know, from a longtime observer -- can be lumpy.

Right.

One final question -- the tax rate we should use for the fourth quarter, and the best guess for next year?

Yes, that's a great question. Our tax rate is up this year. And most of that is due to mix of income. We've got a higher percentage of income in the US, and we have losses in certain internal operations that we're not able to benefit in our rate.

I think as we look to this year, our rate expectation would be 40% for the year, which is pretty consistent with where we were at the end of the third quarter. And as we look forward to next year, let's cover that when we discuss our guidance in the first quarter.

Okay. Very good, thank you.

Yes. Thanks, Mark.

(Operator Instructions) Adam Klauber William Blair & Company.

The pretax margin looked like it was down, for nine months, around 150 basis points. Now, I think we understand that there's some variability and cyclicality, particularly with the weather in this business. So it's going to go up and down. But part of the reason why is while revenues weren't growing, expenses were growing.

So I guess, as we think about -- I guess next year, and also if you can give us an idea -- going forward, do you think you can handle that cyclicality better on the expense side, because it's going to happen on the revenue side? And then, what can we expect expenses to do next year?

Can I take that question first from a sort of a revenue point of view?

Yes, we've got a number of business units -- I mean, Broadspire's improving, GCG. I mean, we expect them to maintain their margin as we go forward. The revenue is going to be slightly dependent on how much the special project runs off.

The areas of action that we've got is specialty markets in the EMEA/AP operation, which we are beginning to see an increase in assignments coming in. And we've assembled a very strong team on that, which has had an effect on that particular business unit's margin in 2014, which we don't expect to be a drag in 2015.

And then, the big area is Canada is performing, contractor connection is performing. And then it comes down to the transformation project that we've got going on within the US P&C operation. And that's the area that is getting a lot of attention at the moment. But we do see improvement in that area taking place.

So I think the weather -- I think from my perspective, in 2014, if you look at the revenue we have replaced to keep the revenue flat after the loss of the special projects, there's been a significant increase in new revenue in the organization. So I think replacing that revenue has been a very good effort by our sales and marketing team in the business units.

What we've now got to do is effectively manage that cost to that revenue. And that's where a lot of our attention is at the moment.

So again, as we think about next year -- again, there's a fair amount of variability in the business. Under the scenario that revenue doesn't grow, do you think expenses will still be up next year? Or can you get expenses if revenue isn't growing more in line with the revenue growth?

If revenue doesn't grow, we will -- I mean, we're already putting cost initiatives in place today that we'll see effects on. The European arena is a little tougher to get the immediate response. But the intent is to improve those margins throughout both the Americas and throughout the EMEA/AP operation.

Okay. Thanks a lot.

David Dusenbury, Dalton Greiner.

On the disability side, the management, claims management side, this is an area you've been in before, right?

Yes, we have. I mean, Broadspire has been in that prior to our acquisition of them. And so this is a reentry into that marketplace.

So as far as your name out there in the marketplace, and your understanding of that business, you guys are pretty well set?

Well, we're developing a new team to deliver that product. And we have put in place systems, technology systems, to be able to do that. It's really -- as Bruce said, it's a reentry into that marketplace after six or seven years.

Right. So when you acquired Broadspire, you did not bring the disability team with you. You're repopulating them?

That's correct.

Okay.

And then, in terms of -- you know this is always a hard question, but you seem to be growing year-over-year revenue in Broadspire, like 6% to 8%. Is that sustainable? It's hard to get a handle on the quote of -- our pipeline's pretty good, and we think we've got good growth going forward, and then put it to numbers.

Well, the big issue there is actually confidentiality around our clients. What is very exciting from our perspective is we're beginning to get larger accounts within the Broadspire operation. As we've rebuilt our systems over the past couple of years, we've bought in some excellent operations and salespeople, and we've improved and continued to improve our quality of our product. That is being noticed by the market and obviously by the clients that we're going after. And we think that growth will continue.

As I said, on an earlier statement, we are very, very focused on exiting 2015 10% operating margin, which is where we see ourselves going and then improving from there.

Within Broadspire, the medical management business -- is that a higher-margin piece of the business?

It does tend to be a higher-margin piece of the business, given the special nature of those services.

And it said something in the Q about referrals for medical management. Is that something that comes from a client -- an existing contract that you sign on the disability side, or worker's comp side? And is that how you get the business on medical management? Or is that --

Yes, you get the business two ways. One, a referral off of the worker's compensation or reliability claim; and then, on an unbundled basis, where we're providing those services without handling an underlying comp or liability claim.

Okay. So you could get -- it doesn't necessarily mean you have to sign up a whole new client to get that kind of referral?

We don't have to sign up a claims client to get that referral. We can get that business from what we call the unbundled market.

Great, okay.

And then, the last question would be on the cost-management side -- any way to scope that out in terms of dollars?

We have initiatives in many operations at the moment. I mean, there's no doubt we have to improve our margins in both the EMEA/AP and the Americas areas and get that to where we need to be. And our target for all of those is 10% operating margins.

Got it, thank you.

There are no additional audio questions at this time. I'd turn the call back over to Mr. Bowman.

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

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 December 6th, 2014. The conference ID number for the replay is 23943881. The number to dial for the replay is 1-855-859-2056, or 404-537-3406.

Thank you. You may now disconnect.