Crawford & Co (CRD.A) 2015 Q1 法說會逐字稿

Good afternoon. My name is Susie and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Crawford & Company first quarter 2015 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, May 7, 2015.

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 acquisition of GAB Robins in the UK, as well as other restructuring activities; 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 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-Q for the quarter ended March 31, 2015, 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 like to introduce Mr. Jeffrey Bowman, President and Chief Executive Officer of Crawford & Company. Jeff, you may begin your conference.

Thank you, Susie. 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 is Bruce Swain, our CFO, and Eric Powell, our Associate General Counsel, who is sitting in for Allen Nelson this quarter.

I will begin with a brief overview of our first quarter 2015 results followed by an update on our strategic initiatives. Bruce will then review the financials in more detail, and I will wrap up with an update of our 2015 guidance.

For our first quarter, we reported Company-wide revenues, before reimbursements, of $287.8 million which compares to the $275.3 million in the year ago period. First quarter 2015 diluted earnings per share were $0.06 for CRDA and $0.04 for CRDB compared to diluted earnings per share of $0.12 for CRDA and $0.11 for CRDB in the first quarter of 2014.

Before the special charge recorded in the 2015 first quarter, our first quarter EPS on a non-GAAP basis were $0.07 for CRDA and $0.05 for CRDB. As I have discussed on prior calls, the claim environment continues to be challenging given the lack of major weather events worldwide. The result of this environment is a continued shift in our claims businesses from higher margin property claims, which typically result from severe weather, to high volume, low-value claims both in the US and internationally. The shift continues to weigh on our results, leading to margin and earnings pressure. Given this backdrop, we have made the strategic decision to further rationalize our cost structure as well as further realign our senior management team.

I am confident that these steps will better position our global claims business for the current challenging environment and expect the impact of our realignment to positively impact results beginning in the second quarter. From a cost perspective, we have made the difficult decision to reduce headcount in the US and Latin America given the poor performance of these operations. We are also reducing headcount in the UK as we integrate the GAB Robins acquisition which I will touch on in a moment. These cost reduction programs will allow our claims businesses to expand margins in the current environment while creating leverage when the higher claims businesses eventually return.

Along with the restructuring, we have made further management changes to insure that we deliver improved execution. Last quarter we promoted Vince Cole to Executive Vice President and CEO of our Americas Property and Casualty Division, and Larry Thomas to CEO of our US Property and Casualty business. Both Vince and Larry have outstanding records of solving issues, driving improved performance, and most importantly, getting results.

Turning to the UK, I'm very pleased to report that in March 2015 we received approval for our acquisition of GAB Robins from the Competition & Markets Authority. Given that Crawford held the number two market position in the UK and GAB held the number three position, the review process was onerous and a strain on our organization. With the approval process now behind us, we have begun the integration of our two businesses and have already made key management decisions. We are excited with the opportunity to put together a strong team of experienced professionals from both our organizations and believe that we now have the strongest team in the UK market.

Kieran Rigby, previously CEO of GAB Robins, has been named CEO of Crawford & Company Europe. Clive Nichols has been appointed CEO of the UK and Ireland. And Mike Jones has been appointed to the role of COO of the UK and Ireland. We are very focused on execution and believe these changes will drive improved results.

Importantly, we have not seen any negative impact on our business or our RFP activity through the review process and the extensive personnel changes. In fact, our RFP activity is very robust and we continue to expect GAB Robins to be strongly accretive in 2016.

Outside of our focus on improving the execution and cost structure in our Americas and EMEA/AP businesses over the near term, we continue to develop our Global Business Service Center which we launched late last year. This center will ultimately employ more than 1,000 Crawford employees and is expected to strengthen our client service, realize and enhance our operational efficiencies, and enable more consistent response to clients. This center reinforces our commitment to grow revenue faster than expenses over the medium term, driving increased profitability and cash flows.

We expect 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 afterwards.

Lastly, I want to briefly touch on our Broadspire segment which continued its strong performance in the quarter as we saw an improvement in both revenue and operating profitability. We continue to take share in the market and are seeing traction with the integrated disability management product that we introduced last year. We are pleased with the trends in Broadspire and continue to have high expectations of strong growth during the balance of 2015.

To close, our immediate focus for the balance of 2015 is to improve the execution and cost structure of our global claims business. While the shift to lower margin claims has been a significant headwind over the last year, I am confident that our new senior management team will drive the efficiencies and execution necessary to expand margins in the current environment.

Additionally, integration of the GAB Robins acquisition is proceeding well and our new senior management team has the expertise and relationships necessary to execute our strategic plan. Longer term, the rollout of our Global Business Service Center will deliver significant cost synergies while improving our efficiency, flexibility, and ultimately our customer service. During the coming year we will act on opportunities to grow revenue, manage costs effectively, and leverage resources around the world with the intent of expanding margins and driving earnings growth.

This concludes my initial comments on our business. I will discuss our updated guidance after Bruce has reviewed our financials and updated you on our business segment results. Bruce, would you please review the Company's overall performance for the first quarter?

Thank you, Jeff. Companywide revenues before reimbursements in the 2015 first quarter were $287.8 million, compared with $275.3 million in the prior year's first quarter. Consolidated operating earnings, a non-GAAP financial measure, totaled $10.7 million for the 2015 first quarter, down from $14.1 million reported in the 2014 first quarter.

The Company's selling, general, and administrative expenses, or SG&A, totaled $60.4 million, up from $59.7 million in the prior year quarter. However, as a percentage of revenues, these costs declined to 21% of revenues in the 2015 first quarter from 21.7% of revenues in the prior-year quarter.

Our net income attributable to shareholders of Crawford & Company totaled $3 million in the 2015 first quarter, down from $6.7 million in the 2014 period. First-quarter diluted earnings per share were $0.06 for CRDA and $0.04 for CRDB, compared to $0.12 for CRDA and $0.11 for CRDB in the 2014 period. On a non-GAAP basis, before special charges, first quarter 2015 diluted earnings per share were $0.07 for CRDA and $0.05 for CRDB.

I will now review the first quarter performance for each of our business units, starting with the Americas segment. As Jeff mentioned, the benign weather in the US persisted into 2015 and negatively affected revenue for the segment. In addition, the stronger US dollar reduced revenues by 5% during the 2015 first quarter. However, these two headwinds were more than offset by higher special project revenues in the US.

Revenues from the Americas segment totaled $89.5 million, up from $87.9 million reported in last year's quarter. This overall increase was due to higher revenues associated with an outsourcing special project with a major US property and casualty insurer. Operating earnings in our Americas segment were $5 million in the 2015 first quarter or 6% of revenues, compared with operating earnings of $6.9 million or 8% of revenues in the prior-year quarter.

Case volumes in the Americas declined by 16% in the 2015 first quarter, reflecting weather related declines in our US field offices and Contractor Connection as well as the transfer of accident and health Affinity claims to our Broadspire segment.

Revenues generated by our catastrophe adjusters in the US totaled $17.4 million in the 2015 first quarter, up from $6.3 million in the 2014 quarter. The revenue increase for the 2015 quarter was driven by the previously mentioned outsourcing contract that is expected to continue throughout 2015.

For 2015, our EMEA/AP segment operating results reflected the challenging operating environment due to the lack of weather related claims in the UK during the quarter partially offset by improvement in our European and specialty markets operations. EMEA/AP revenues increased to $91.3 million from $80.3 million in the 2014 period primarily due to the positive impact from two months of operating results from the newly acquired GAB Robins operation which was partially offset by a stronger US dollar which reduced revenues by 8% during the 2015 first quarter. Absent these two factors, EMEA/AP revenues would have increased 1% in the 2015 first quarter. EMEA/AP operating earnings were $1.5 million during the current quarter, as compared to last year's first quarter operating earnings of $1.9 million. The operating margin in this segment was 2% in both the 2015 and 2014 quarters.

During the quarter, claims volumes increased 11% across the three regions that make up EMEA/AP. Excluding the impact of the GAB Robins acquisition, cases would have increased 2% in the 2015 first quarter as weather related declines in the UK were offset by increases in high frequency, low severity claims in Europe.

Broadspire revenues increased to $69.7 million in the 2015 first quarter, up from $64.8 million in the prior-year quarter primarily as a result of new client wins, increased medical management referrals, and the transfer of accident and health claims from our Americas segment. Operating earnings in Broadspire totaled $3.5 million or 5% of revenues in the 2015 first quarter, increasing from operating earnings of $2 million or 3% of revenues in the 2014 first quarter. During the 2015 first quarter, cases increased 33% over 2014 levels. Included in this increase is the transfer of 16,300 accident and health claims from the Americas. Excluding this transfer, Broadspire cases would have increased by 13% reflecting strong growth in workers' compensation referrals.

Legal settlement administration revenues totaled $37.4 million in the 2015 first quarter, decreasing from $42.4 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 2015 period. Operating earnings totaled $5 million in the 2015 first quarter, or 13% of revenues, unchanged from $5 million or 12% of revenues in the prior year period.

Our backlog at the end of the 2015 first quarter was $103 million compared to $101 million at the close of the first quarter last 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 product lines.

The Company's cash and cash equivalent position at March 31, 2015, totaled $40.8 million, as compared to $52.5 million at the 2014 yearend. Our investment in unbilled and billed receivables has increased by $15 million during 2015, primarily as a result of the GAB Robins acquisition. Goodwill and intangible assets arising from business acquisitions increased by $52.9 million, reflecting the impact of reporting the preliminary balance sheet for the GAB Robins acquisition.

Pension liabilities decreased by $9.1 million, due to cash contributions made in the US and UK during the 2015 first quarter. Our total debt increased in 2015 by $88.8 million as a result of borrowings to fund the GAB Robins acquisition and our usual seasonal cash needs early in the year.

Cash used in operations totaled $15.6 million for the 2015 period, compared to $65.3 million used in operations in the prior year period. This improvement was primarily due to the collections of yearend accounts receivables, increases in deferred revenues, and lower payments for accrued liabilities, including incentive compensation.

For the 2015 first quarter, the Company repurchased 17,700 shares of CRDA under its share repurchase plan at an average cost of $7.79 per share. Since the inception of the two share repurchase plans, the Company has repurchased nearly 1.6 million shares of CRDA at an average cost of $6.28 and 7,000 shares of CRDB at an average cost of $3.83.

Also during the 2015 first 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. We have a high confidence level in improved performance in our core operations in 2015, based on our existing pipeline combined with the strategic actions that we have undertaken. As previously disclosed, 2015 guidance will include both the impacts of acquisitions and special charges related to the GAB acquisition and the Global Business Service Center.

In addition, we expect to incur an additional pretax special charge estimated at $4 million related to restructuring activities in the EMEA/AP and Americas segment. In the aggregate, these 2015 charges are expected to total approximately $20 million pretax or $0.23 in diluted earnings per share.

So as a result, our 2015 guidance is updated as follows. Consolidated revenues before reimbursement remain between $1.16 billion and $1.19 billion. Consolidated operating earnings increased to between $87 million and $97 million. Consolidated cash provided by operating activities unchanged between $40 million and $50 million.

Reflecting the special charges discussed, net income attributable to shareholders of Crawford & Company on a GAAP basis remain 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 the special charges, net income attributable to shareholders of Crawford & Company increased to between $41.5 million and $47 million or $0.80 to $0.90 per CRDA share and $0.73 to $0.83 per diluted earnings per CRDB share.

In closing, thank you very much for your time. We look forward to your questions. Operator, will you please explain the process for asking questions to our audience?

(Operator Instructions). Mark Hughes, SunTrust.

Thank you very much. Good afternoon. A couple of questions. The Contractor Connection was influenced by the better weather this year. How is the underlying growth if you -- I don't know whether you looked at April numbers or, sort of outside of the weather impacted periods, any change in the growth trajectory there?

Good question, Mark. We still see Contractor Connection's growth in the US increasing as we take on new clients. And we see the effectiveness of the Contractor Connection model on some of the middle tier insurance carriers that we're winning. Also in the period we've grown the Contractor Connection business in Canada. We've re-batched it and are growing it in the United Kingdom. GAB had a small Contractor Connection model which we are consolidated into one with ours. We also opened up in Australia. So we are still excited about the opportunities in front of us in the Americas and Canada and we expect to see improvements in the overseas operations.

What do you think the growth rate will be there for the balance of the year? Excluding Q1?

For the full year we expect a double digit growth rate on the top line. And we still believe that this business is in early innings and there is a tremendous amount of growth opportunity that remains here. The one thing about Contractor Connection is that it does tend to have a relatively long sales cycle. And this is a consultative sale and it's -- our clients typically look at it, they'll implement pilots in a few states, we'll look at the results of those operations and recalibrate and expand it. So it can, the new client acquisition can take time and be deliberate but once we bring new clients onboard, the revenues are fairly sticky as I think that you've seen.

Can you talk about Broadspire? It looks like your claims are up pretty sharply but your revenue growth is more modest than that. Still good revenue growth, but not nearly up as much as your claims count. And at the same time, the margin, at least compared to the second half of 2014, is down a little bit.

Yeah, the number of claims, Mark, is slightly distorted in the quarter where we transferred the accident and health business from our Americas division to our Broadspire division. Part of that was to insure that we have synergy within our own operation on a global basis for Broadspire being branded both in the US and in all of the international operations for our clients. So we put all of that business now into the Broadspire operation.

Are they getting revenue associated with those extra claims?

There will be revenues in the quarters coming up associated to those claims. And there is revenue in the first quarter as well.

Right. And then the margin compared to the last half of last year down a little bit. What's driving that?

Yeah, the first quarter is usually a -- probably the weakest quarter in nearly all of our businesses frankly, but including Broadspire, we've got a number of heavier costs that happen in the first quarter of the year compared to the back half. Things around payroll taxes, certain benefits, and then it's just coming off of the fourth quarter which tends to be a period of high activity related to handling workers' compensation claims. There's just a little bit of a pullback in the first quarter. But we still expect to see the Broadspire business show good growth in terms of revenues, operating earnings and profitability this year.

The special project revenue, that seems very nice. I might have asked this before, but what are the prospects for similar type of opportunities? Is this really just truly a one-off or is that -- is there potential to take this and show the effectiveness to other potential clients?

Well this particular special project is linked around one particular client and we see that growing over the balance of this year and we see it going out probably several years as well. This is proving to be a very, very good contract for the corporation. It could lead us into looking at doing something very similar with other customers in a different type of model and that's something that strategically we're looking at for the future.

Okay. How about -- I'll ask my usual question on the Deep Water Horizon. Down a little bit, but legal settlement really was not down too much this quarter. What's the -- what are the prospects there?

We'll say what we say on most calls, Mark. We expect this trend, downward trend to continue in 2015 with just lower levels of activity. Until we are advised otherwise, the revenue will continue to decrease as we go through the balance of this year.

As you think about the margins on that business, 2014 was down pretty meaningfully from 2013. I think historically that had always had a higher margin. Is there something structurally that will keep that margin lower than where it was before? Or is there some potential to bring that back up?

We think that the 2014 margin was impacted by two kind of isolated issues. One was we've designed, built and implemented a new claims handling system in GCG called 20/20 System. So as that was implemented in 2014, there was just some operational drag on introducing a new system to the employees and some inefficiency there. Ultimately we think that system is going to provide improved efficiencies for the GCG employees and we should see that as improving the margin as we go forward.

The other thing, other cost that we have in 2015 that we don't think we have going forward is our investment in the new product line in GCG around mass tort claim handling. So that's an area that we are -- kind of started out last year, we've gotten some traction with a program or two. And as that investment gets behind us and we get some revenues to support the productive capability that we put in place, we think that that will be margin enhancing as well.

So as we talked about in the past, we think in the absence of the Deep Water Horizon project, the GCG operating margin is maintained. We still believe that. And the fact that their operating earnings held up this quarter compared to last quarter on revenue declines is really related to the lack of drag from that 20/20 System and the investment in the mass tort business.

You'll also see, Mark, that the backlog we reported in the business this quarter was up on the last year quarter as well which is a very encouraging sign.

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

Hey, guys. First question, can you give us a little bit of guidance on the GAB deal in terms of revenue contribution and maybe effective synergies from the deal?

Sure. We think the revenues in 2015 will be about $100 million for the year. We think at a bottom line level, as we integrate the business and incur restructuring charges around that, that it won't be accretive to EPS, it may in fact be slightly dilutive. The main synergies that we see in that business are related to removing duplicate layers and management positions and also integrating the back office support functions around finance and technology and human resources and those sort of operations.

Peter, as we came into, entering the second quarter, we've actually taken the decision to exit from both the Americas and the EMEA/AP operations somewhere around 400 positions. We considered about 170 of these in our initial plan of which 100 was the GAB integration. So we are going to be increasing that over our initial actions.

Got it. And then on the cost savings initiative, you just gave us a little bit of guidance, 400 positions. Are you willing to share kind of high level amount of costs that you hope to take out?

Our -- the cost savings and the additional restructuring charge are included in the guidance that we put out today. So we have baked that into the numbers that we shared earlier today.

There are no further questions in the queue. Mr. Bowman, do you have any closing remarks?

Thank you, Susie, yep. Thank you for your time and questions this afternoon. I'd like to thank everybody for taking the time to join with us today. We wish you a good rest of the day and thank you very much. Bye.

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 June 6, 2015. The conference ID number for the replay is 23943883. The number to dial for the replay is 1-855-859-2056 or 404-537-3406. Thank you. You may now disconnect.