Crawford & Co (CRD.A) 2015 Q4 法說會逐字稿

Good afternoon. My name is Jennifer, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Crawford & Company fourth 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, March 10, 2016. Now I would like to introduce Allen W. Nelson, Crawford & Company's General Counsel and Chief Administrative Officer.

Thank you, Jennifer. 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, costs and synergies related to our 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 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-K for the year ended December 31, 2015, which is 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. Harsha Agadi, Interim President and Chief Executive Officer of Crawford & Company. Harsha, you may begin our conference.

Good afternoon, and welcome to our fourth-quarter and full-year 2015 earnings call. Joining me today are Bruce Swain, our CFO, and Allen Nelson, our General Counsel and Chief Administrative Officer. After our prepared remarks, we will open the call for your questions.

For the fourth quarter of (technical difficulties) we delivered revenues before reimbursements of $284.9 million, which was flat compared to the $285.5 million that we achieved in the year ago period. Consolidated operating earnings for the fourth quarter grew 24% year-over-year to $19 million. Strength in the US services segment, aided by the cost take-out achieved from our restructuring initiatives, drove the better results. Importantly, our operating earnings were ahead of our stated expectations, and are representative of the new culture of meeting and exceeding targets that we are instilling throughout the Company on a daily basis.

For the full year 2015, revenues before reiumbursements were $1.17 billion, representing a 2% increase over the $1.14 billion in revenues that we recorded in 2014. Full-year consolidated operating earnings were $70.4 million, down from the $73.1 million earned in 2014. In reviewing our results in more detail, what can be seen is the continued strong performance from our higher growth, more predictable businesses such as Broadspire, and our US services segment, largely driven by Contractor Connection.

Broadspire, for instance, delivered 9% revenue growth, along with 200 basis points of margin expansion, leading to operating earnings growth of 55% for the full year 2015. Organic growth, new client wins, higher client retention, and increased medical management services, referrals, all contributed to the robust growth. Our US services segment delivered full-year 2015 revenue growth before reiumbursements of 13%, along with 500 basis points of margin expansion leading to operating earnings growth of approximately 81%.

Growth in Contractor Connection, an outsourcing project with a major insurer, and expense reductions achieved earlier in the year all contributed to the robust results. This strong performance, however, was masked by a reduction in claims activity in our international segment, combined with the continued run-off of several large projects in our GCG segment. As discussed on our third-quarter call, Crawford remains the preeminent independent provider of claims management solutions, with an unparalleled competitive position, and brands that are well-recognized around the globe.

In speaking with our customers since taking my new role in late August, I have been very impressed by the value that our clients place in their relationships with Crawford. Our customers value the complex solutions that we deliver, oftentimes under dire circumstances, when speed of execution matters most. What had been problematic is an expense structure that had grown larger, while the market environment had become more challenging, given the dearth of severe weather events globally. This has led to margin contraction, and disappointing financial results in the past.

I am very pleased to report that we have made significant progress, executing our cost-reduction plan, having lowered expenses by over $25 million in the fourth quarter, which is incremental to the $20 million in restructuring activity taken earlier in the year. Our goal is to position Crawford to deliver more predictable financial results year in and year out, regardless of the market backdrop. Reducing our expense base is a critical step towards achieving this goal.

While a portion of the $45 million of total cost savings achieved will be reinvested back into the business, we expect substantial margin expansion through 2016, and are very encouraged by the early impact of our cost-reduction initiatives. Importantly, our expense reduction initiatives have been specifically focused on driving margin expansion in our more volatile weather-dependent lines, in order to allow the strong growth of our more predictable businesses such as Broadspire and Contractor Connection to shine through.

We will continue to be vigilant on costs, as well as utilize technology to drive further efficiency gains in our business in order to deliver their targeted growth and margin objectives over the medium-term. This will ultimately enable Crawford to deliver more consistent earnings growth against the backdrop of a challenging market. If we do experience a pick up in severe weather, that will drive (technical difficulties) further expansion, as we leverage our fixed cost infrastructure.

Along those lines, we are cautiously optimistic to begin the year, as the market is showing signs of improvement as activity in continental Europe is picking up. The UK, which experienced a severe contraction in volumes through 2015 is beginning to not only see a stabilization, but also the early signs of improvement which has continued into the first quarter.

Beyond our restructuring initiatives, we also see an opportunity to enhance our topline growth. What I have realized through my strategic business review of Crawford is that our business units have become siloed, limiting collaboration and innovation. There is a significant latent growth opportunity through the cross-sell of products to our clients across our businesses. Today there is very little customer overlap among our businesses, which represents considerable low hanging fruit. We have instituted a compensation plan that will incentivize our business segments CEOs to more aggressively work together to mine this vast potential. I look forward to updating you on our progress on future calls.

What I can report today, is that an entrepreneurial excitement has begun to rise up throughout our organization, which I am confident will lead to improved sales and improved operating earnings. Turning to Garden City Group segments, we recently announced the appointment of Kenneth Cutshaw as our Interim Chief Executive Officer. While we have a formal search process in place to identify a permanent CEO, we could not be more excited to have Ken assuming this role, given his extensive leadership experience across both the legal professional, as well as in the C-suite and government services sector. I am confident that Ken is the right person to lead Garden City at this time, as they manage the rapid decline of several large (technical difficulties) and adapt to this new business environment, and put in place a progressive culture, and an aggressive pipeline.

To assist in this transition, we have also announced the promotion of Stephen Cirami to Chief Operating Officer. Steve was formerly GCG's SVP of Operations, and a former class-action attorney who has been with the Company for 12 years. Steve's promotion is an example of the deep management bench that we have, not only at Garden City, but across the entire Company.

Overall, the leadership transition at Garden City Group has gone very well, with a strong positive response from both our clients and employees. Additionally, client turnover has been negligible, and we are receiving many inbound requests from prospective clients to discuss the potential for a new relationship. While business continues to be challenging, given the wind-down of several projects, our backlog is healthy, and we remain confident that the business will hit its targets in 2016, and return to a healthy growth rate in 2017. Over the last 60 days of new leadership at GCG, I have been able to meet with many of our employees and clients. I am very proud of our employees' dedication to our clients through this period of change. I'm also very happy to tell you that I have received very positive feedback from our clients. GCG is stable. Our employees are doing exemplary work, and our clients are in steady hands.

To conclude, we have made significant strides in returning Crawford to a position where we can deliver more consistent and predictable financial results regardless of weather. Our fourth-quarter operating earnings growth is a very important indicator of our early success, and bodes well for progress that we expect in 2016. I would now like to turn the call over to Bruce to review the financial results of the fourth quarter in more detail.

Thank you, Harsha. Company-wide revenues before reimbursements in the 2015 fourth-quarter were $284.9 million, compared with $285.5 million in the prior year's fourth quarter. The Company's selling, general and administrative expenses or SG&A totaled $62.3 million, up from $57.9 million in the prior year quarter. As a percentage of revenues, these costs increased to 22% of revenues in the 2015 fourth-quarter, from 20% of revenues in the prior-year quarter. This increase is primarily due to SG&A costs from the acquired GAB Robins organization, and increased incentive compensation expenses.

During the 2015 fourth-quarter, the Company recorded a non-cash goodwill impairment charge of $49.3 million or $0.86 per share after tax, related to the former EMEA/AP and Americas excluding Contractor Connection reporting units. This charge did not affect the Company's liquidity or operating results in any period, nor will it in the future. Also during the 2015 fourth-quarter, the Company recorded additional restructuring and special charges of $18 million, or $0.25 per share after tax. These charges were associated with the ongoing implementation of the Global Business Services Center, GAB Robins integration, and other restructuring activities in operating and administrative areas around the world.

The Company's effective tax rate is distorted this year, due to our overall pretax loss, driven in part by our goodwill impairment, restructuring costs, and special charges during 2015, and net operating losses in certain international operations with lower tax rates, or where the losses are unable to be benefited from a tax perspective. Our net loss attributable to shareholders of Crawford & Company totaled $51.7 million in the 2015 fourth-quarter, compared to net income of $3.3 million in the 2014 period.

Fourth quarter 2015 diluted loss per share was $0.93 for CRDA and $0.95 for CRDB. On a non-GAAP basis before goodwill impairment, restructuring costs and special charges, fourth quarter 2015 diluted earnings per share were $0.18 for CRDA and $0.16 for CRDB. Diluted earnings per share were $0.07 for CRDA, and $0.05 for CRDB in the 2014 period.

In the fourth quarter of 2015, the Company realigned two of its reportable segments, by moving its Canada and Latin America Caribbean operations from the former Americas segment, to the newly-formed international segment, previously referred to as the EMEA/AP segment. The former Americas segment without Canada and Latin America is now the US services segment. The results of prior periods have been revised to conform to the current presentation of our reportable segments.

I will now review the fourth-quarter performance of each of our business units, starting with the US services segment. Benign weather in the US persisted into the 2015 fourth quarter. However, this was offset by higher special project revenues for a major US insurance carrier, growth in US Contractor Connection, and the positive impact of cost reduction activities commenced earlier in the year. Revenues from the US services segment revenue totaled $56.8 million, up 12% over the $50.7 million reported in last year's quarter. Operating earnings in our US services segment were $7.9 million in the 2015 fourth quarter or 14% of revenues, improving substantially from operating earnings of $1.3 million or 2% of revenues in the prior-year quarter.

Case volumes in US services declined by 3% in the 2015 fourth-quarter, reflecting weather-related declines in our US field operations, as well as the transfer of affinity claims to our Broadspire segment. Excluding this transfer of affinity claims, the segment claim volumes would have increased approximately 13% in the 2015 fourth quarter.

Revenues generated by our catastrophe adjustors in the US totaled $16.3 million in the 2015 fourth-quarter, up from $13.6 million in the 2014 quarter. The revenue increase for the 2015 quarter was driven by the previously mentioned outsourcing contract, and an increase in catastrophe claim assignments.

During the 2015 fourth-quarter, our international segment operating results continue to reflect a reduction in claims activity, and negative foreign exchange impacts. However, this was partially offset by a full quarter of revenues in 2015, from the December 2014 GAB Robins acquisition. We are seeing our UK claim volumes begin to improve from recent weather events, before considering the positive impact from the GAB Robins acquisition.

International revenues decreased to $124.9 million from $125.6 million in the 2014 period, primarily due to a stronger US dollar which reduced revenues by 13% during the 2015 fourth-quarter. This was partially offset by the positive impact from the acquired GAB Robins operations. Absent these two factors, international revenues would have decreased 3% in the 2015 fourth-quarter. International operating earnings were $7.3 million during the current quarter, as compared to last year's fourth-quarter operating earnings of $9.6 million. The operating margin in this segment was 6% in the 2015 period, compared to 8% in the 2014 quarter.

During the quarter, claims volumes decreased 3% in international. Excluding the positive impact from the GAB Robins acquisitions, cases would have decreased 11% in the 2015 fourth-quarter, as weather-related increases in the UK were offset by a decline in high-frequency low-severity claims in Latin America, due to the Company exiting certain unprofitable business lines during 2015.

Broadspire revenues increased to $75.4 million in the 2015 fourth-quarter, up from $69.2 million in the prior-year quarter, primarily as a result of organic growth, new client wins, increased medical management services referrals, and a shift of affinity claims previously handled by our US services segment. Operating earnings in Broadspire totaled $7 million or 9% of revenues in the 2015 fourth-quarter, increasing from operating earnings of $6.3 million or 9% of revenues in the 2014 fourth quarter. During the 2015 fourth-quarter, cases increased 19% over 2014 levels. Included in this increase is the transfer of 16,100 affinity claims. Excluding this shift, Broadspire cases would have been up slightly in the current quarter.

Garden City Group revenues totaled $27.7 million in the 2015 fourth-quarter, decreasing from $40 million in the prior-year quarter. This revenue decrease was largely related to lower levels of work on certain large projects, which were continuing to wind-down during the 2015 period. Operating earnings totaled $1.7 million in the 2015 fourth-quarter or 6% of revenues, declining from $4.5 million or 11% of revenues in the prior-year period. Our backlog at the end of 2015 was $81 million, compared to $102 million at the close of last year. The Company's cash and cash equivalent position at December 31, 2015 totaled $76.1 million, as compared to $52.5 million at the 2014 year-end.

Our investment in unbilled and billed receivables has decreased by $20 million during 2015, as a result of strong collections and the impact of foreign exchange rates, partially offset by increases from the GAB Robins acquisition. Goodwill and intangible assets arising from business acquisitions decreased by a net of $7.3 million, reflecting the impact of recording the preliminary balance sheet for the GAB Robins acquisition, offset by the write-off of a portion of our goodwill balance. Pension liabilities decreased by $20.6 million, reflecting cash contributions made in the US and the UK during 2015, and the conversion of the Netherlands plan from a defined benefit to a defined contribution plan.

Our total debt increased in 2015 by $90.5 million, as a result of borrowings to fund the GAB Robins acquisition, and our 2015 restructuring activities. Cash provided by operations totaled $61.7 million for 2015, compared to $6.6 million provided in the prior year. This improvement was primarily due to the collections of 2014 year-end accounts receivable, and lower payments for accrued liabilities including incentive compensation.

Let me now review the initial guidance for 2016. We are optimistic that our 2015 cost take-out initiatives will drive margin expansion and earnings growth for 2016. 2016 guidance includes the impact of restructuring costs related to the ongoing implementation of the Global Business Service Center, and the completion of the GAB Robins integration. In the aggregate, these 2016 charges are expected to total approximately $15.6 million pretax, or $0.19 in diluted earnings per share after-tax.

Our initial 2016 guidance is as follows. Consolidated revenues before reimbursements between $1.05 billion and $1.1 billion. Consolidated operating earnings between $80 million and $90 million.

Before reflecting the restructuring charges, net income attributable to shareholders of Crawford & Company on a non-GAAP basis, between $36 million and $42 million, or $0.67 to $0.77 per CRDA share, $0.59 to $0.69 diluted earnings per share per CRDB share. After the restructuring charges, net income attributable to shareholders of Crawford & Company, between $24 million and $30 million, or $0.48 to $0.58 per diluted CRDA share, and $0.40 to $0.50 per diluted CRDB share. With that, I would like to turn the call back to Harsha for concluding remarks.

Thank you, Bruce. On our third-quarter call, we updated our full-year guidance which called for operating earnings of $62.5 million at the mid point of the range. We ended the year with operating earnings just above $70 million, in large part due to the aggressive restructuring initiatives that we implemented through the year. Importantly, these results are an affirmation of the culture that we are instilling at Crawford, a culture of meeting and beating our goals both internally and externally.

Looking forward, I am optimistic that [2016] (technical difficulties) will see strong margin expansion, given the significant progress made, combined with incremental opportunities that we see to reduce expenses further. Our continued vigilance on costs, will not only restore Crawford's profitability, but also position the Company to drive organic operating -- earnings growth beginning in 2017. Along those lines, I'm pleased to report that we have started the year ahead of our initial expectations, as our cost reduction efforts have gained traction, our businesses are performing well, and we're heading in the right direction as a Company.

I look forward to updating you on our continued progress on subsequent calls. Operator, please open the call to questions?

(Operator Instructions)

Mark Hughes, SunTrust.

Hello, this is actually [Kevin Aly] on for Mark today. Just to start with, what is the duration of the large outsourcing agreement that you are -- is currently boosting the US segment, and what sort of run rate should we be expecting there?

(multiple speakers) This is Bruce. We anticipate that to run through 2016, based on our current agreement with the client, but that could extend into future years, as well.

Okay. And is that -- ?

I would like to add that the outsourcing contract is not as large as you might imagine. But at the same time, we plan beyond on all of these things on a continuous basis. But go ahead.

So I was going to ask, is that projection included in your 2016 guidance, that it will go through 2016?

Yes.

Okay, great. And then maybe, if you could give a little more detail around the deceleration you're expecting to see in Garden City in 2016? And then, you mentioned I think, maybe stabilization or growth in 2017 there?

Yes. I think what I would tell you is, with the Deepwater Horizon slowing down, as claims are -- volume is coming down, we're going to see a drop, but we can't tell you the precision on the drop, other than we have for -- have not only planned for it, it is baked into our guidance. So in my opinion, it will not have a major material impact. If anything, as you can see with the guidance, we're taking our numbers up from year ago.

Okay, great. Thanks. And then, one more, it looks like you're expecting a little bit lower top line for 2016, for revenue before reimbursement, just wondering why? And then, is it mostly related to the Garden City stuff, or is it coming from some other places as well?

It's probably coming from two main places. One, there's going to be some drag from FX that we're going to see in 2016, compared to 2015, given the relative strength of the US dollar. But then, also we expect for the Garden City revenues to be down year-over-year, as the large projects continue to roll off into 2016.

Okay. Great. That's it for me. Thanks.

Greg Peters, Raymond James.

Good afternoon, Harsha and Bruce.

Hi, Greg.

Thank you for the call.

Harsha, could you just step back -- I know you are operating in an interim capacity as CEO of the Company, but it seems like you're making a lot of decisions, and putting the organization in a lot prospectively better place than it was before. And I'm just curious, does that mean that you're going to be considering removing the interim title?

First of all, Greg, I appreciate all your positive comments. I am not authorized to remove the interim title until the Board makes that decision. But I'd also want to tell you, maybe I should bring this up at this time, that the Board is involved in proceeding forward with a CEO search. The search is on. The search firm has been appointed. And being in the interim role, I really cannot delve into it deeper because we need to, for a governance perspective, the Chairman of the Board has to run the search, as opposed to myself.

And if the Board approaches me with the opportunity, I think I'll have that conversation with the Board. But clearly, the Company is moving forward, not just because of the interim CEO. Frankly, the management team at Crawford is very, very strong. All our lines of businesses are well-run by our business leaders. They're very focused, and our Chief Financial Officer, our CIO, our Chief Administrative Officer, our Chief of Development and Strategy, and our Chief People Officer are fixated on supporting the four businesses. Our execution is only continuing to improve each day, Greg. So I am sitting in an envious position of taking credit when I should not be.

Harsha, just as a follow-up, because you are executing on a lot of changes internally, oftentimes it's hard for us on the outside to gauge whether you are trimming fat, or actually to borrow the expression, cutting into the bone. What kind of metrics are you watching, to make sure that in fact, you are not harming the organizational infrastructure, yet getting rid of the required fat that you've isolated, and are working on?

Yes, what we did do, Greg, just to make sure we were doing this the right way -- you'll always make mistakes, but we did bring in a outside firm that actually has the expertise in these kinds of restructuring activities. And they identified very specific areas, using benchmarks of other similar companies, and where we identified, if you will, excess costs. And we have been very thoughtful in how we have trimmed our costs.

But really our focus was to bring our costs in line, if you will, with today's business environment, one. And then the second really was to make sure our centralized services, or our shared services is as efficient as it can be. And I would tell you, there's always room to improve. But the good news is, I have a strong executive management team that can challenge, as well as keep balance as we try to do this. And I will say this in a very light manner, that being primarily vegetarian, I don't cut to the bone typically.

A funny comment (laughter). Just one final question for you, can you provide us an update on how Contractor Connection is doing? That seemed to be a pretty interesting business that fit within the Crawford family. And have your cuts affected any of their business, and/or the outlook for that segment?

Sure. First of all, I think in the way we've reduced our costs, we have kept our non-weather dependent businesses that are growing quite nicely. We have left them largely untouched and undisturbed, so they can continue to grow. Where Contractor Connection has been doing well, I call it par excellence in execution. They execute extremely well. They're methodical, almost military-like in how they go after increasing their business, and executing projects.

Now the one other piece that in addition to all of that, is Contractor Connection is just starting to embark on a consumer testing program. And this will be the first year, where we're going to do a very, very limited test. And if that is successful, we will continue to expand it. But that will only increase, if you will, the top line, as well as the margin dollars as time continues. And I can tell you, I don't see a slow down at this time on Contractor Connection.

Perfect. Thank you very much for your answers.

Thank you, Greg.

Thanks, Greg.

And we have no other questions in queue at this time, and I would like to turn the conference back over to Mr. Agadi.

Thank you.

If there is no other questions, I thank everybody for being on the call. And we hope to see you at the next quarterly earnings release. And best wishes and regards to all inside and outside the Company.

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 April 10, 2016. The conference ID number for the replay is 90678408. The number to dial for the replay is 1-855-859-2056, or 404-537-3406. Thank you, and you may now disconnect.