Crawford & Co (CRD.A) 2014 Q4 法說會逐字稿

Good afternoon. My name is Blair and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Crawford & Company fourth-quarter 2014 earnings release conference call.

In conjunction with this call, a supplementary financial earnings release 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, February 23, 2015.

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

Thank you, Blair.

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; expectations regarding the timing, cost, and synergies from our recently announced Global Business Services Center; 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 the 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 from 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, 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.

Thank you, Allen. Good afternoon and welcome to our investors, clients, and employees. I am 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 fourth-quarter and full-year 2014 results, which were below our expectations. Bruce will then 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 our 2015 guidance and corporate focus.

Let me begin with a comment on the global insurance environment and its impact on Crawford. 2014 was noteworthy in that there were virtually no major weather events that led to significant insured losses. The effect of this benign period is evident in the strong results reported by many of our insurance clients, as can be seen in their performance ratios, which were much improved from a year ago.

This environment, however, resulted in a shift in the mix of our claims business, with a decrease in the higher-margin property claims driven by a lack of severe weather offset by increases in high-volume, low-value claims, both in the US and internationally. The outcome of this shift was that while claims counts were up in 2014, the low-value nature of most of the new claims volume weighed on our results for the year.

It is worth mentioning that a significant part of our business relates to weather events, which is part of the DNA of our business.

In 2014, we made significant progress on many fronts. During the year, we made two acquisitions, Buckley Scott and GAB Robins, two UK-based corporations. Buckley Scott has positioned us to meet the needs of our clients in construction and engineering claims. GAB Robins allows us to significantly expand our claims handling business across a wide range of product lines in the UK, as well as assisting in expanding our aviation and marine specialty lines claims businesses.

Both acquisitions have focused on quality and service to ensure our clients are served by the highly experienced professionals.

Due to the timing of the acquisition, GAB Robins' results of operations did not affect this segment's 2014 results. We are awaiting regulatory approval to integrate GAB Robins into our UK operations and anticipate realizing the initial benefits of this acquisition in 2015.

Both acquisitions will assist us in producing a compelling claims adjusting and claims management option for our clients.

In addition, beginning late in 2014 we launched a Global Business Services Center initiative that is expected to continue to strengthen our client service, realize and enhance our operational efficiencies, and enable a consistent response for clients. The center, which is wholly owned by Crawford and staffed by Crawford employees, is expected to employ more than 1,000 people when fully operational. The center reinforces our commitment to grow revenue faster than expenses over the medium term, driving increased cash flow.

Even with these strategic accomplishments, 2014's results were below our expectation, with declines in consolidated revenue, net income, and diluted earnings per share for the year.

Our segment performance was mixed. In the Americas segment, claims volume, revenue, and operating earnings increased for the quarter and year. Despite benign weather conditions, the Americas grew the year due to improvements in our Canadian core operations and gains in our North American Contractor Connection repair network in both the US and Canada.

As mentioned, we were pleased with the improved performance accomplished by Broadspire, which reported steady and significant improvement in both revenue and operating profitability throughout 2014. For the year, Broadspire's operating earnings were up nearly 90% over the prior year. We are on plan in terms of both revenue growth and profitability in Broadspire, and we anticipate both continued organic growth and gains from new products and client wins in the coming year.

At the beginning of 2014, we indicated that our EMEA/AP segment results would show a decline compared to 2013, when we were finalizing claims from the 2011 catastrophic flood losses in Thailand and from claim handling activities with flooding and bushfires in Australia. For 2014, our EMEA/AP segment operating results reflected a lower level of activity, due to both the absence of flood-related claims and the lack of high-value weather-related claims during the year.

In addition, profitability was affected by continued investment in the startup operations of our specialty market service line that commenced in the third quarter of 2013.

Results from our legal settlement administration segment during 2014 included a lower level of activity from the Deepwater Horizon class action settlement and two other large projects, which negatively impacted results during the year. Activity related to Deepwater Horizon is expected to continue to decline in 2015, but as this project runs off, we are striving to replace these revenues with growth in other legal settlement administration product lines.

Lastly, 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 2014 fourth quarter and year, and I will discuss the business units' operations after Bruce has reviewed the financials. Bruce, would you please review the Company's overall performance for the full year?

Sure. Companywide revenues before reimbursements in the 2014 fourth quarter were $285.5 million, compared with $284.9 million in the prior year's fourth quarter. Consolidated operating earnings, a non-GAAP financial measure, totaled $15.3 million for the 2014 fourth quarter, down from $20.2 million reported in the 2013 fourth quarter.

The Company's selling, general, and administrative expenses, or SG&A, totaled $57.9 million or 20.3% of revenues in the 2014 fourth quarter, down from $58.2 million or 20.4% of revenues in the prior-year quarter. The provision for income taxes in the 2014 fourth quarter included additional expenses resulting from changes in the Company's mix of income, losses in certain countries, and other adjustments and changes to estimates.

Our net income attributable to shareholders of Crawford & Company totaled $3.3 million in the 2014 fourth quarter, down from $10.8 million in the 2013 period. Fourth-quarter 2014 diluted earnings per share were $0.07 for CRDA and $0.05 for CRDB, compared to diluted earnings per share of $0.20 for CRDA and $0.19 for CRDB in the 2013 period.

Revenues from the Americas segment totaled $85.6 million in the 2014 fourth quarter, up from $79.5 million reported in last year's quarter. This increase was primarily due to improvements in the US and Canadian operations during the quarter.

Operating earnings in our Americas segment were $1.6 million in the 2014 fourth quarter or 2% of revenues, compared with operating earnings of $1.2 million or 1% of revenues in the prior-year quarter.

Revenues generated by our catastrophe adjusters in the US totaled $14.1 million in the 2014 fourth quarter, up from $5 million in the 2013 quarter. The 2014 revenue levels for the quarter reflect the benefits from an outsourcing contract with a major US insurer that is expected to continue throughout 2015.

EMEA/AP revenues decreased slightly in the 2014 fourth quarter to $90.6 million from $91 million in the 2013 period, as expected declines in Asia-Pacific were substantially offset by growth in the UK. EMEA/AP operating earnings were $9.3 million during the current quarter, as compared to last year's fourth quarter operating earnings of $12.7 million. The operating margin in this segment was 10% in the 2014 quarter and 14% in the 2013 quarter.

Revenues from our Broadspire segment increased to $69.2 million in the 2014 fourth quarter, up from $65.4 million in the prior-year quarter. Operating earnings in Broadspire totaled $6.3 million or 9% of revenues in the 2014 fourth quarter, increasing from operating earnings of $3.8 million or 6% of revenues in the 2013 fourth quarter.

Legal settlement administration revenues totaled $40 million in the 2014 fourth quarter, decreasing from $49.1 million in the prior-year quarter. This revenue decrease was largely related to lower levels of work on the Deepwater Horizon class action settlement project during the 2014 period.

Operating earnings totaled $4.5 million in the 2014 fourth quarter or 11% of revenues, as compared to $8 million or 16% of revenues in the prior-year period.

The Company's cash and cash equivalent position at December 31, 2014, totaled $52.5 million, as compared to $76 million at the 2013 year-end.

Our investment in unbilled and billed receivables has increased by $17.1 million during 2014, primarily as a result of an increase in receivables in our legal settlement administration operations.

Pension liabilities increased by $39.4 million, primarily due to a change to the mortality tables used in the US to determine projected benefit obligations for US pension plans. Our total debt increased in 2014 by $19.2 million, reflecting our need for incremental borrowings to fund our investing and financing activities during the year.

Cash provided by operations totaled $6.6 million for 2014, compared to $77.8 million provided by operations in the prior year. This decrease was primarily due to lower net income, increased accounts receivables, and increases in other working capital components during 2014. There were a number of significant receivable balances that we expected to collect in the 2014 fourth quarter, but many of those collections shifted into the 2015 first quarter.

Free cash flow declined in 2014 by $69.4 million as compared to 2013. For the 2014 fourth quarter, the Company repurchased 27,000 shares of CRDA under its share repurchase plan at an average cost of $8.64 per share. Since the inception of the two share repurchase plans, the Company has repurchased nearly 1.572 million shares of CRDA at an average cost of $6.26 and 7,000 shares of CRDB at an average cost of $3.83.

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

Back to you, Jeff.

Thank you, Bruce.

Our business activities in the fourth quarter were an extension of trends throughout the year. Top-performing contributors, like Contractor Connection and Broadspire, partially offset slow performance driven by both the benign weather environment and by the decline of revenues from large projects that are winding down or completed.

Our immediate focus coming off the fourth quarter and into 2015 is on capitalizing on the investments in new products during 2014 in order to create operational efficiency and improved profitability. In addition, we have initiated cost-management initiatives across the Company.

We have also had many opportunities, which -- to capitalize in 2015, based on the strategic acquisitions we announced and on adding global efficiencies. During the coming year, we will act on opportunities to grow revenue, manage costs effectively, and leverage resources around the world.

Let me touch on the fourth-quarter performance of each of our business units, starting with the Americas segment, which represented 30% of our total consolidated revenue for the quarter. The benign weather in the US persisted and negatively affected revenue for this segment, although this was partially offset by project revenue.

Looking forward to 2015, we expect to see continued expansion of Contractor Connection and improved performance in our core US property and casualty and Canadian claims management operations.

Recently, we announced some significant management changes in the Americas and USA designed at revitalizing this business unit and division. First, Vince Cole has been named Executive Vice President and Chief Executive Officer of Property Casualty Americas. Vince was formerly the Company's Executive Vice President of Global Strategy and Business Performance.

Secondly, Larry Thomas is the new CEO of our US Property and Casualty business. Larry will retain his responsibilities as Chief Executive Officer of Crawford's Contractor Connection unit, a highly successful operation which provides insurers with an efficient, high-quality managed repair network. Larry has an outstanding record of building teams, solving issues, getting results, and driving improved performance.

The EMEA/AP operations represented 32% of our consolidated revenue for the fourth quarter. During the quarter, claims volumes increased 7% across the three regions that make up EMEA/AP, for the reasons mentioned in my earlier remarks.

In the UK, our traditional business is benefiting from the Buckley Scott acquisition, and during 2015 we expect to accomplish full integration of GAB Robins into these operations with neutral to slightly negative impact on 2015 performance after special charges. In 2016 and beyond, Crawford expects GAB Robins acquisition to be strongly accretive.

We continue also to build our global technical services product offering, which now includes Crawford specialty markets. This is a long-term investment in higher-margin claims and we expect to continue to expand going forward.

We are pleased with the improved execution of sales and marketing plans in our Broadspire operations, which represented 24% of our consolidated revenues for the quarter. For the year, Broadspire has reported a steady increase in revenue from both workers' compensation and medical management, as well as improved margins. We are seeing very strong client gains and a robust sales pipeline for 2015.

We saw overall fourth-quarter claim volumes increase 7% over the prior-year quarter through new client wins and a stronger workers' compensation environment. We expect to see the workers' compensation market improve as the economy grows and unemployment decreases.

Opportunities continue to emerge in the area of disability management and unbundled medical management, and we are gaining additional efficiencies from an investment in technologies in all our operations. New client wins should continue to support revenue growth and improve profitability in 2015.

Legal settlement administration represented 14% of our 2014 fourth-quarter revenue. Revenues reflect the runoff of claims associated with the Deepwater Horizon class action settlement project, which we expect to continue to flatten out over 2015. Our backlog at the end of 2014 fourth quarter was $102 million, compared to $108 million at the close of the fourth quarter last year.

That concludes my comments on our business segments. Let me turn to our guidance and 2015 operational initiatives. 2015 will be a year of positive change at Crawford. We will be integrating two important acquisitions into our EMEA/AP operations, which will be accretive in the long run, despite some costs anticipated in the integration process.

In addition, as we announced in January we have launched our Global Business Services Center based in Manila, Philippines. Our establishment of this center provides a venue for global consolidation of certain business functions, shared services, and currently outsourced processes. This will allow Crawford to continue to strengthen our client services, realize additional operational efficiencies, and invest in new capabilities for business growth.

The creation of the center accelerates the Company's long-standing tradition of efficiency in delivering high-quality services to our clients. Consolidating our operations allows us to leverage our collective knowledge and expertise to increase innovation, a strategic priority for Crawford and an essential part of our future success.

From a profit-and-loss perspective, operations in the center are expected to deliver initial cost savings of approximately $2 million over 2015 and cumulative savings of $60 million through 2019, followed by annual cost savings of approximately $20 million per year thereafter. To achieve these savings, the Company expects to record pretax charges totaling approximately $20 million through 2018 as additional operations are phased in.

We have a high confidence level in improved performance in our core operations in 2015, based on existing backlogs and new client wins already in hand. However, 2015 guidance will include the impact of acquisitions and special charges related to the GAB acquisitions and the Global Business Services Center I just discussed. In the aggregate, these 2015 charges will total approximately $16 million.

As a result, therefore, our 2015 guidance is as follows. Consolidated revenue before reimbursements between $1.16 billion and $1.19 billion. Consolidated operating earnings between $85.5 million and $95 million. Consolidated cash provided by operating activities between $40 million and $50 million.

Reflecting the special charges discussed, net income attributable to shareholders of Crawford & Company on a GAAP basis between $29.5 million and $35 million or $0.57 to $0.67 per CRDA share and $0.50 to $0.60 diluted earnings per CRDB share. Before special charges, net income attributable to shareholders of Crawford & Company of between $39 million and $44.5 million or $0.75 to $0.85 per CRDA share and $0.68 to $0.78 diluted earnings per CRDB share.

Let me now just reiterate our management's efforts and current focus on several areas. As laid out in our three-year strategic plan, we're actively working to deliver new and incremental revenue in all our business segments. I have touched on some of these opportunities in my comments thus far and I'm very encouraged by the organic growth opportunities I am seeing in our successful operations in 2015 and beyond.

Second, we will integrate two important acquisitions that we expect to provide us with new product lines and customers and support earnings growth in the future.

Next, we are implementing measures that will emphasize global efficiency and cost effectiveness over the next several years. These include both efficiency initiatives and cost-reduction initiatives to directly reduce overhead in all our major operations. In addition, we will accelerate implementation of the Global Business Services Center, as described earlier.

These initiatives underline our intent to improve the efficiency and flexibility of our claims management services, to develop innovative new lines of business, and to evolve further in terms of service and responsiveness for our clients. With these actions, we expect to improve our operating performance in the coming year.

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

(Operator Instructions). Mark Hughes, SunTrust.

You have broken out -- you have given us some detail on the one-timers in 2015. Relative to the guidance you have provided, when we look at 2016 how much can we expect of those expenses will not recur, and then do have any sort of early thoughts on how much benefit you will get in 2016? Will it be -- 2016 be a normal year back on track for growth or would you expect there to be a little bit more of a pop? I know you can't get in too much detail, but just your thoughts on that.

I guess, Mark, I will start off on that. We have got special charges that are really in two buckets, one related to the Global Business Services Center that we are putting in the Philippines and the other related to the GAB Robins acquisition.

The charge related to the GAB Robins acquisition is about $7 million of that $16 million, and we expect for that to be substantially done within 2015. That's our current plan, such that we wouldn't have that aspect of the charge drifting into 2016, and we hope to enter 2015 with that business fully integrated within ours and realizing all of the benefits of the acquisition.

For the Global Business Services Center, we are going to have a charge of about $9 million this year to implement the first couple of waves, but there are additional charges in future years as well as that project, which is a multiyear project, is implemented.

Okay. On the Broadspire business, can you talk about the competition? I think you said you'd seen a pretty good flow of opportunity. Have you seen the competitive environment change much in the last six months?

Not really, Mark. There is still -- our major competitors are still working and competing with us on RFPs. We look at our performance more that our business is increasing because we have improved our technology. We have got some very, very good processes in place and we are expanding our product lines and ability. I think the competition still exists, as it did before. But I think our game has just been upped significantly.

With the change in leadership in the US business, is that -- is there any low-hanging fruit, any new initiatives that you have sketched out that we should know about that you think will be meaningful over the next 12 months?

We have changed the management team around. Vince and Larry are in place. Larry, as a 32-year corporate individual, has been working with the Contractor Connection model. That model continues to grow. It grows with our major clients and with new clients coming on.

As we've said many times before, the low-value small claims are being commoditized, and as we have seen those claims decrease over the years, the Contractor Connection model picks up on a number of those. We have been putting -- getting into the A&H business as well and we've seen significant increases in contracts coming in that will start to play into the US property and casualty model in 2015.

Right. Then Bruce, I'm sorry. Did you give specific cash flow guidance for 2015? How much of a bounceback do you think we will get this year?

We did. We are guiding to $40 million to $50 million of operating cash flow for 2015, and as I mentioned in my remarks, we were expecting a number of fairly significant collections in the 2014 fourth quarter that didn't happen in the fourth quarter and have in fact drifted into the 2015 first quarter.

So as we look at -- that's certainly incorporated in our guidance for 2015. We would expect our first-quarter operating cash flow to be on better footing than it has been in past years in the first quarter, which is normally a pretty heavy cash outflow period for us.

Can I ask a broader question in the US business outsourcing of claims? Any update in terms of secular trends there? Do you think the market is shifting? Are trends pretty similar to what they have been? Any reason to think that pace might pick up?

I think 2014, as we have repeatedly said, has been a very benign weather environment and that really significantly affected the claims volumes that were being passed out to external claims adjusters, as well as internal.

I think we are seeing a bit of a change in the first two months of this year, where our claim count is significantly up over in the past couple weeks, due to what's going on in the northeast of the US. I think there is a very positive message there from both our Contractor Connection and then our general property and casualty businesses.

I think the insourcing/outsourcing debate continues. It really depends on the product line and the effectiveness of getting the processes in place that really cut the time in process for the client. We have been working very hard with our clients to ensure that we are producing a quality product that is effective in terms of both operational and our own profitability. I think we're making good steps on that and we have some very interesting developments that we think will start to build during this latter part of 2015.

Great, thank you.

(Operator Instructions). Peter van Roden, Spitfire Capital.

First question, are the Manila start-up costs and GAB acquisition costs in your operating earnings guidance?

No, they are not.

Okay. Then on the AR side, have you guys collected the -- can you give a little color around that? Have you collected the payments that were outstanding and you expected to get in the fourth quarter?

We did. We collected the majority of the significant balances.

Okay. (multiple speakers). My final question --

We really look at that as a timing difference that crossed over the year-end into the first quarter.

Got it. Then final question for me, you mentioned in the 10-K that the specialty markets business in the UK continues to impact operating earnings. Can you give a little bit more disclosure on how much that expense was in 2014 and how you expect it to go going forward?

Let me talk about the operational side of that, first of all. We have seen -- we have built up the operation in both the specialty markets in really three areas, which is aviation, it's marine, it's oil and energy. We have built up the team significantly.

We're getting support from our clients. There is -- unfortunately at this moment, there is a benign period on claim handling, but we are receiving claims. We are getting those claims on a global basis and this unit has got a very, very strong high-margin growth future for it.

I will let Bruce touch on the costs on that, but it's something that we have worked very hard developing and putting in place and we see this as a market-leading operation that will pay dividends in the future.

Yes and we're certainly seeing the impact of investment in the people that it takes to get the claims as they enter into the market, and as Jeff said, we expect this to pay dividends for us going into the future, but it is providing a bit of a drag on the results currently.

Got it. Is there any way you can provide some color around what kind of drag that is?

It's a few cents per share.

Okay, that's all I had. Thanks, guys.

[Joe Solomon], [Solamar Capital].

Thanks for taking the call. I appreciate it. I had two quick questions. One, could you just remind us again the accretion you're getting from the GAB Robins deal in 2016?

Yes, for 2016 we think after the integration costs are behind us that this should give us $0.16 a share.

$0.16 a share of accretion, thanks. Then secondly, on the guidance for 2015, just is there any way to give us a sense of what you are assuming in terms of catastrophes, global CATs? I know the last couple of years we have had a very low level, $30 billion to $40 billion, say. Do you use a long-term average, say, over the last five to 10 years or are you assuming what we have had, the low level we have had the last couple years?

Yes, we really assume -- we don't assume any sort of major catastrophic claims activity when we set our budgets or give our guidance. As we have looked in the US, we have got a special project with a major US insurer that is showing up in our US catastrophe revenues, so we have assumed that a certain level for that project and some other things that we have visibility into, and that's about in the mid-$40 million in revenue.

But in terms of other headline-grabbing catastrophic claims activity, we have not assumed any of that in our numbers.

Got it, okay. Thanks so much. Very helpful.

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

Thank you. I would like to thank everyone for their time this afternoon and wish them a good week and we will talk in the next quarter in April, May. Thanks. Have a good day.

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 March 25, 2015. The conference ID number for the replay is 239-43882. The number to dial for the replay is 1-855-859-2056 or 404-537-3406. Thank you. You may now disconnect.