Crawford & Co (CRD.A) 2015 Q2 法說會逐字稿

Good afternoon. My name is Patsy and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Crawford & Company second-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, Monday, August 3, 2015. Now, I would like to introduce Allen W. Nelson, Crawford & Company's General Counsel and Chief Administrative Officer.

Thank you, Patsy. 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, expectations regarding the timing, costs and synergies from our recently-announced global business service 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 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, 2015 filed with 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.

For participants of the call, we've also been made aware that there are some issues relating to the filings made via the EDGAR service, such that some of the images in the filings are not appearing in the file documents. There are no images in the release that affect any reported data, and the release, as set out by NASDAQ OMX is correct and complete. Additionally, the slide deck that normally accompanies the release, and which was also filed with the SEC, is available on the Crawford & Company website. Now, I'd like to introduce Mr. Jeffrey Bowman, President and Chief Executive Officer of Crawford and Company. Jeff, you may begin our conference.

Thank you, Allen. Good afternoon, and welcome to our investors, clients, and employees. I'm Jeffrey Bowman, President and CEO of Crawford & Company. Joining me from the Global Executive Management team this afternoon are Bruce Swain, our Chief Financial Officer; and Allen Nelson, our General Counsel and Chief Administrative Officer. I will begin with a brief overview of our second-quarter 2015 results, followed by an update on the progress that we have achieved executing our strategic initiatives. Bruce will then review the financials in more details, and I will wrap up with an update of our 2015 guidance.

For the second quarter, we reported Company-wide revenues before reimbursements of $304.4 million, which compares to $282.2 million in the year-ago period. Our operating earnings were $17.7 million, compared to $20.9 million in the 2014 second quarter. Second-quarter 2015 diluted earnings per share were $0.08 for CRDA and $0.06 for CRDB, compared to diluted earnings per share of $0.19 for CRDA and $0.18 for CRDB for the year-ago quarter. Before special charges recorded in the period, our second-quarter earnings on a non-GAAP basis were $0.14 per share for CRDA, and $0.12 per share for CRDB.

As I have discussed on previous calls, the operating environment has been extremely challenging, given the persistent lack of weather events, resulting in a shift from high-margin property claims to high-volume low-value claims. Through the second quarter, this difficult environment continued and became even more severe in our EMEA/AP operations. Additionally, our legal settlement administration segment saw a decline in revenue and margin contraction, given a lack of assignments. As I will discuss in more detail later in the call, these two issues are causing us to reduce our second-half guidance. While the environment is a headwind to our near-term results, I am confident in our plan to improve our execution and expand our margins.

On the first-quarter call, I outlined a cost reduction program focused on reducing headcount in both the Americas and EMEA/AP regions, along with several senior management changes. We have moved very quickly to take out cost, and the early results are promising, providing optimism for the second half of 2015 and full-year 2016. It is important to point out that our baseline assumption for managing the business over the medium term is for the operating environment to stay steady at current levels. We are focusing on improving our execution and delivering our business unit margin goals in this challenging claim environment. If claim volumes return, then that will provide increased leverage in our model. In the Americas segment, the headcount reduction in the US and Latin America, combined with improved execution from our senior management changes has led to improved performance, as we delivered our operating margin target of 10%.

In the UK, we are integrating our acquisition of GAB Robins, and are very confident in the senior management team that we now have in place. We remain optimistic on the long-term outlook for the combined business, given that we believe we have the strongest team of experienced professionals in the market. Near-term results, however, have been pressured by an unprecedented decline in large value claims in the second quarter, with several of our key clients reporting to us that they have seen reductions in claims as much as 40% in 2015. We continue to align our cost structure in this environment, and have been reducing headcount as a result.

Given the UK labor laws, there is a lag from when headcount reductions are made as to when we can realize the cost benefits in our financials. We are starting to see the benefits now, and are confident that margins will begin to expand through the second quarter of 2015. Again, with no improvement of high-value claims expected. In regards to the UK market, we are confident that we are increasing our market share through the integration process, and believe that claims volumes decline or flatten it.

In addition to our intense focus on execution and cost takeout in our America and EMEA/AP businesses, we continue to move forward through the development of our Global Business Service Center in Manila. We expect the GBSC to strengthen our client service, realize and enhance our operational efficiencies, and enable a consistent response for our clients. This center is a key component to expanding margins and enhancing profitability, which is of the utmost importance in the current environment. We have now moved into our new facility, and currently have more than 200 employees working there today, and expect to have approximately 400 by year-end. Of note, our Broadspire business was the first segment to begin utilizing the GBSC, and is seeing real benefits, as they delivered 8% operating margins in the quarter, up 5% in the first quarter, and 4% in the year-ago period.

Lastly, our legal settlement administration segment continues to be impacted by the run-off of several large projects, pressuring both revenue and margins. While we deal with the eventual wind down of these projects, our pipeline of future opportunities, and the quality of our new business wins should help offset these declines. In closing, while I am disappointed with our results, I am confident that our cost reduction program will allow our claims businesses to expand margins in the current environment, while creating leverage when higher value claims business eventually returns. That said, we are focused on running a lean Company, and not adding back cost as revenues expand, so we can grow through both good and bad markets, generating value to shareholders. This concludes my initial comments on our business. I will discuss our revised guidance after Bruce has reviewed our financials and updated you on business segment results. Bruce, would you please review the Company's overall performance for the second quarter?

Company-wide revenues before reimbursements in the 2015 second quarter were $304.4 million compared with $288.2 million in the prior-year second quarter. The Company's selling, general and administrative expenses, or SG&A, totaled $57.2 million, down from $60.9 million in the prior-year quarter. As a percentage of revenues, these costs declined to 19% of revenues in the 2015 second quarter from 21% of revenues in the prior year quarter. The Company incurred a special charge of $4.2 million related to restructuring activities that are ongoing for the GBSC project and GAB Robins integration. Our net income attributable to shareholders of Crawford & Company totaled $4.1 million in the 2015 second quarter, down from $10.5 million in the 2014 period. Second-quarter 2015 diluted earnings per share were $0.08 for CRDA and $0.06 for CRDB, compared to diluted earnings per share of $0.19 for CRDA and $0.18 for CRDB in the 2014 period. On a non-GAAP basis, before special charges, second-quarter 2015 diluted earnings per share were $0.14 for CRDA and $0.12 for CRDB.

I will now review the second-quarter performance of each of our business units starting with the Americas segment. As Jeff mentioned, the benign weather in the US persisted into the 2015 second quarter, and a stronger US dollar reduced revenues by 5% during the period. However, this was more than offset by higher special project revenues in the US, and the positive impact of the cost reduction activities commenced earlier in the year. Revenues from the Americas segment totaled $99.2 million, up from $93.6 million reported in last year's second 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 $9.9 million in the 2015 second quarter or 10% of revenues, compared with operating earnings of $8.1 million or 9% of revenues in the prior-year quarter.

Case volumes in the Americas declined by 9% in the 2015 second quarter, reflecting weather-related declines in our US field offices, lower volumes in Latin America, as well as the transfer of Affinity claims to our Broadspire segment. Excluding this transfer, Americas cases would have declined by 4%. Revenues generated by our catastrophe adjustors in the US totaled $23.3 million in the 2015 second quarter, up from $11.5 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.

During the 2015 second quarter, our EMEA/AP segment operating results continued to reflect a challenging operating environment, due to the lack of claims in the UK and Asia Pacific during the quarter, partially offset by improvement in our European operations. EMEA/AP revenues increased to $97.2 million from $87.2 million in the 2014 period, primarily due to the positive impact from the acquired GAB Robins operations, which were partially offset by a stronger US dollar, which reduced revenues by 13% during the 2015 second quarter. Absent these two factors, EMEA/AP revenues would have decreased 1% in the 2015 second quarter. EMEA/AP operating earnings were $1.1 million during the current quarter as compared to last year's second-quarter operating earnings of $4.3 million. The operating margin in this segment was 1% in the 2015 period, compared with 5% in the 2014 quarter. During the quarter, claim volumes increased 10% across the three regions that make up EMEA/AP. Excluding the impact of the GAB Robins acquisition, cases would have declined 1% in the 2015 second quarter, as weather-related declines in the UK and Asia Pacific offset increases in high frequency low severity claims in Europe.

Broadspire revenues increased to $73.7 million in the 2015 second quarter, up from $66.7 million in the prior-year quarter, primarily as a result of new client wins and the transfer of accident and health claims from our Americas segment. Operating earnings in Broadspire totaled $6 million or 8% of revenues in the 2015 second quarter, increasing from operating earnings of $2.7 million or 4% of revenues in the 2014. During the 2015 second quarter, cases increased 20% over 2014 levels. Included in this increase is the transfer of 15,500 A&H claims. Excluding this transfer, Broadspire cases would have increased by 3%.

Legal settlement administration revenues totaled $34.3 million in the 2015 second quarter, decreasing from $40.7 million in the prior-year quarter. This revenue decrease was largely related to expected declines on several large projects during the 2015 period. Operating earnings totaled $3.7 million in the 2015 second quarter, or 11% of revenues, declining from $5.7 million or 14% of revenues in the prior-year period. Our backlog at the end of the 2015 second quarter was $88 million compared to $97 million at the close of the second quarter last year. Activity related to Deepwater Horizon is expected to continue to decline in 2015.

The Company's cash and cash equivalent position at June 30, 2015 totaled $62.5 million, as compared to $52.5 million at the 2014 year-end. Our investment in unbilled and billed receivables has increased by 15.3 million during 2015, primarily as a result of the GAB Robins acquisition. Goodwill and intangible assets arising from business acquisitions increased by $44.9 million, reflecting the impact of recording the preliminary balance sheet for the GAB Robins acquisition. Pension liabilities decreased by $15.4 million, reflecting cash contributions made in the US and UK during the 2015 year-to-date period. Our total debt increased in 2015 by $97.8 million as a result of borrowings to fund the GAB Robins acquisition, and our usual seasonal cash needs in the first half of the year. Cash provided by operations totaled $10.2 million for the 2015 period compared to $59.6 million used in operations in the prior-year period. This $69.8 million improvement was primarily due to the collection of year-end accounts receivables and lower payments for accrued liabilities, including incentive compensation. Back to you, Jeff.

Thanks, Bruce. Let me now speak to the guidance for the year. Given the challenges that we are dealing with in our EMEA/AP, and legal settlement administration operations, we are reducing our full-year guidance; however we are optimistic that our margins will begin to expand throughout the balance of the year. As previously disclosed, 2015 guidance will include both the impact of acquisitions and special charges related to the GAB acquisitions, the Global Business Service Center, and restructuring activities in EMEA/AP and Americas segment. In the aggregate, these 2015 charges will total approximately $20 million pre-tax or $0.26 per share in diluted earnings per CRDB share.

As a result, our guidance is as follows. Consolidated revenues before reimbursement between $1.16 billion and $1.18 billion. Consolidated operating earnings between $70 million and $80 million. Consolidated cash provided by operating activities between $30 million and $40 million. Reflecting the special charges discussed, net income attributable to shareholders of Crawford & Company on a GAAP basis between $20 million and $25 million, or $0.37 to $0.47 per CRDA share, and $0.30 to $0.40 diluted earnings per CRDB share. Before the special charges, net income attributable to shareholders of Crawford & Company of between $34.5 million and $39.5 million, or $0.63 to $0.73 per CRDA share, and $0.56 to $0.66 diluted earnings per CRDB share.

To conclude, we are moving with a real sense of urgency to remove costs, in order to deliver our segment margin goals. As evidenced by the benefits that our Americas segment achieved this quarter, as they delivered their margin goal of 10%. While UK labor laws have been an impediment, our EMEA/AP segment will begin to see the financial benefits of our headcount reduction beginning in the third quarter, with margin expansion expected through the second half of this year. Our Broadspire segment is performing well, and already seeing the benefits of their move into the GBSC, as their margins have expanded 400 basis points quarter-over-quarter. Lastly, we are diligently working to offset the wind-down of several large projects in our legal settlement administration business, as we begin to reduce costs and develop new product offerings.

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)

Your first question comes from Mark Hughes with SunTrust.

Thank you and good afternoon.

Mark, how are you?

I'm good, thank you. The margin outlook within the EMEA AP business, I think you'd described the delay related to right-sizing in the UK. Are there any further approvals that are required there, or do you have good visibility for when those expense saves will come on line? And then, is there any additional revenue that is required, in order to get the margins moving back up?

Okay, on March 3, we got all of the approvals that were required from the authorities through the Competitive Markets Authority, so we are past that one. We are in the process. We've laid off a significant amount of personnel in the last few weeks of the second half of the year and those benefits should start falling into place in the third and fourth Quarters in the EMEA AP, so we're pretty confident that with the significant number of people we've already taken out, that we should see the margin improvements start to come in.

What we're very confident about is that on the revenue side, we had complementary clients within both the GAB and the Crawford organizations, and there was very little overlap between the two. We're in the process of renewing some RFPs there, but we're pretty confident that the client attrition is virtually zero. It is the actual claims count that has caused us the problem in the first half of the year. So assuming we've flattened out as an organization, on that basis, we see that starting to move up again in both margin and profitability.

Right, so I'm sorry, your sense is your claim counts have flattened out?

Yes, we're hoping so, that's what the trends are telling us for the July period. We saw that drop down and it flattened out and started to move up a little bit.

The 15,000 claims, accident and health claims that shifted over to Broadspire, what impact on the profitability within Broadspire -- were those, was that more profitable business, or just the incremental revenue, you got some nice operating leverage there?

Yes, Mark, this is Bruce. Those are what we would characterize as pretty light touch, high frequency, low severity claims. So we did get some operating margin from those, but I think that most of the leverage that you saw in the increased margin and Broadspire was due to the increase in their workers comp and medical management business, one. But then also some benefits that they're seeing from the GBSC, as they are early adopters of that strategy. They were first movers, so they're seeing some benefits there, as well.

Right last year, your operating margins in Broadspire improved sequentially into Q3, and then again into Q4. Is there some seasonality that should lead to a repeating pattern this year?

The seasonality we see in Broadspire has traditionally been a weak first quarter and strong second and third quarters, and then it's continued on into the fourth. A lot of it depends upon claims incurred by our customers. But we're continuing to migrate functions into the GBSC. We expect to get further improvements there, and it's a business that we're very excited about, and we've been quite pleased with their performance this year.

I think the other thing, Mark, is that what we're really excited about is the disability management product that we've now got going. We've won two accounts, which is significant for us, and we're going to start seeing that starting to ramp up after all of the investment and planning we put into launching that product. So you're going to get the benefit of some of that in the third and fourth quarter, as well.

And that is trying to limit disability claims costs, get people back to work, that sort of thing?

Absolutely.

The backlog within the legal settlement business, if you take into account the trajectory on the Gulf business, plus the current level of backlog, down a little bit year-over-year, and I would assume that implies maybe a slightly lower run rate on that traditional business in coming quarters. Where do you think legal settlement stabilizes? Are my assumptions correct there, and where does it stabilize?

Well, we're seeing a continual wind down on the special projects, and we see that continuing over the next couple of months towards the year end. So I think it's going to be a downward revision on GCG as they come off the high ends of the projects that they are on.

Are you going to be able to keep ahead of that from a cost perspective?

Absolutely.

The 11% margin is, I think, below where it had been prior to the special project?

Yes, that's correct. We've got price compression that we've had on some of those projects, and we had higher margin business. But we have a variable cost model there, so we're in good shape for ensuring that revenue declines are matched by expense declines at the same time. Also to which we have put a cost reduction plan into place within the organization, within GCG as well.

Final question. The cash flow, $30 million to $40 million, cash from operations, what are going to be the offsets to that CapEx? Any pension expense, or what's the magnitude of the pension expense?

Yes, the pension expense and pension contributions are within that operating cash flow number that we had. We see CapEx this year as being about $37 million for the year, so that will come off, and then our dividends are projected to continue on at their pace. We announced the dividend today, and I think I'd model that out in terms of what your free cash flow is going to be at the end of the year.

What can you say regarding the pension expense for next year, or the cash impact, or I guess both expense and cash related to pension?

Probably a little soon to tell on the P&L side. On the cash side in the US we'll put in $9 million, and that's the same amount that we're putting in this year. And under the -- an act called HATFA, which is a highway bill, our pension contributions through, I believe 2018, will be $9 million a year in the US. That's the cash impact.

Our expense will bounce around a little bit, and that's going to depend upon the discount rates that are in play 12-31 each year, as well as our end investment return assumptions that are there. So it's probably a little too soon to tell. When we get to the 2016 guidance at the end of the year, we'll give some clarity on that.

Thank you.

(Operator Instructions)

Our next question is from Katelyn Young with William Blair.

I'm in for Adam Klauber. Thanks for taking our questions.

I know Mark covered a good bit on what we were looking to speak on, but just to circle back and fill in a few areas, on the international cost profile, I know there's a lot of work being done right now to turn the ship on a margin perspective. But digging a little bit more specifically, what level of expense growth are you looking for in the back half of the year and going into 2016?

Are you talking about what we're taking out of the organization, in terms of cost?

Yes, or just sort of trending from the cost growth, is that going to be completely mitigated?

In total in both the Americas and the EMEA AP organization, we will have taken out 650 staff by the end of the 2015 year, and that really is on an annualized savings basis, as well, $38 million. And that's both Americas and the EMEA AP, and then it's approximately about $12 million for the Americas and about $20 plus million for the EMEA AP organization.

Okay, great, thank you. And then the Broadspire segment, obviously some really great growth last two quarters. Is high single digits growth sustainable going forward for the rest of the year in 2016? Where do you see the growth coming from?

Well, our target is to get to 10%, and we're getting nearer and nearer that, as we're winning more accounts, and we're looking for 2016 to be in the 10% range.

Okay, great, thanks. And I know you already touched on the legal settlement, admin, just the variable cost model embedded in that business structure. Does that mean that the low double-digit margins are run rate and what you'll scale to going forward, or is there some opportunity above and beyond that?

I think low to mid-teens is probably what you should think about in that business, in a normalized ex Deepwater Horizon environment.

Okay, all right. Thank you very much.

There are no further questions. I'd like to turn the call back over to Jeffrey Bowman for closing remarks.

Thank you. Thank you, everyone, for your time and your questions this afternoon. I'd like to thank you all for joining us, and wish you a great rest of the day. Thanks very much.

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 September 2, 2015. The conference ID number for the replay is 23943884. The number to dial for the replay is 1-855-859-2056, or 404-537-3406. Thank you. You may now disconnect.