Crawford & Co (CRD.A) 2016 Q3 法說會逐字稿

Good afternoon. My name is Victoria and I'll be your conference facilitator today. At this time I'd like to welcome everyone to the Crawford & Company third-quarter 2016 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, November 7, 2016. I would like to introduce Joseph Blanco, Crawford & Company's interim General Counsel.

Thank you. Some of the matters to be discussed in this conference call and in the supplementary financial presentation may include forward-looking statements that involve risk 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 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, 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're reminded that operating results for any historical period are not necessarily indicative of results to be expected for any future period.

For a complete discussion regarding factors which could affect the Company's financial performance, please refer to the Company's form 10-Q for the quarter ended September 30, 2016, filed with the Security and Exchange Commissions, particularly information under the headings business, risk factors, legal proceedings, and management's discussion and analysis of financial conditions and results of operation, 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, President and Chief Executive Officer of Crawford & Company. Harsha, you may begin the conference.

Good afternoon, and welcome to our third-quarter 2016 earnings call. Joining me today are Bruce Swain, our Chief Financial Officer; and Joseph Blanco, our interim General Counsel. After our prepared remarks, we will open the call for your questions.

Our results this quarter continued to reflect the success that we have achieved reducing our cost structure and positioning Crawford to deliver more predictable financial results even in challenging market environments like what we experienced in the third quarter, where revenues before reimbursements declined by 5%. The largest factor impacting revenues this quarter were a headwind that we encountered from the stronger US dollar. On a constant currency basis, our revenues would have declined by 3%.

Beyond the impact of foreign exchange this quarter, we also saw revenues decline due to the ongoing and expected contraction in our Garden City group's segment as we managed through the run-off of two large projects, as well as the anticipated decline of a large outsourced contract in our US services segment. Despite these revenue headwinds, our results for the third quarter were very good as we delivered GAAP net income attributable to shareholders of Crawford & Company of $10.9 million, compared to a net loss of $900,000 in the third quarter of 2015.

Non-GAAP consolidated operating earnings grew 14% to $26.3 million, as compared to the year-ago quarter, driven by strong operating margin expansion of 160 basis points to 9.5%. Our non-GAAP consolidated adjusted EBITDA in the 2016 third quarter totaled $34.7 million, increasing 6% from the $32.8 million that we achieved in the year-ago period.

The restructuring initiatives that we implemented through 2015 were the primary driver of these strong results, which are in fact the best of the year as well as our business segments achieved double-digit operating margins for the first time in recent history. Again, to repeat, all our business segments achieved double-digit margins. This is a great achievement and a testament to our cost discipline as an organization.

Turning to our business segments in more detail, US services delivered 17% operating margins despite revenues contracting by 9% due to a decline in weather-related case volumes, combined with an expected reduction in revenues from a large outsourced service contract. These declines were partially offset by strong results in our US contractor connection business, which experienced revenue growth of 19%.

Contractor connection continues to be an important part of our suite of claims solutions to the property and casualty market and remains a powerful growth engine for Crawford, with significant opportunity for expansion as we pursue new market opportunities in the US, as well as internationally. Our international segment had another strong quarter, driven by 500 basis points of operating margin expansion as a result of the expense reduction put through in 2015 combined with an improved operating environment across all of our major geographic regions. Importantly, we delivered 11% operating margins in the third quarter.

Our Broadspire segment delivered another consistent quarter of revenue growth and margin expansion, driven by increased claims and medical management revenues, as well as higher average case volumes. Specifically, operating margins expanded by 100 basis points year over year to 11% in the quarter.

Additionally, we are pleased with the number of recent client wins including 7-Eleven and Williams-Sonoma on the casualty side and T-Mobile and Robert Half in our disability product line. Looking forward, Broadspire's new business pipeline continues to be significant and we are encouraged with our future growth opportunities.

Turning to Garden City group, the new leadership has done a remarkable job creating a team-oriented culture, instilling cost discipline and winning new business since assuming their role in the beginning of this year. This can be seen in their strong results this quarter as operating margins expanded by 600 basis points year over year to 10%, as GCG delivered $2.4 million of operating earnings, more than double the year-ago period's result.

While GCG continues to face revenue headwinds from the expected decline of two large projects, they are effectively delivering margin and profit growth while building a strong pipeline of new business wins this quarter, such as the Pfizer Securities litigation settlement, as well as two Wells Fargo cases. As a result of our strong competitive position in the market, our backlog remains robust with projected revenues of $94 million, which provides good visibility into the balance of the year and into 2017. We remain very optimistic on the outlook for Garden City Group as we look to next year.

While our results this quarter are very good, I see an opportunity to further streamline our operations, improve service in terms of how we take care of our clients, and rethink our go to market strategy as the industry begins to move towards solution-based selling. What I have found in speaking with our clients around the world is that they deeply value their partnership with Crawford, given the value that we consistently provide for the last 75 years.

In fact, our customers want to grow their relationships with Crawford even more. To capture this opportunity, however, we need to continue to transfer our business, become even more client-centric and deliver the critical solutions that our clients need more effectively. As a result, we have initiated a strategic review to determine the optimal structure for our business. The goal of the review is to determine how we can better serve our clients while further reducing costs.

Importantly, you can only reduce costs so much. You also need to deliver top line growth to truly succeed as a public company that continues to deliver consistent shareholder value. Therefore, a portion of the cost saves will be reinvested back into our business so that we can better deliver our world-class solutions to our clients. Today, we see a large untapped market within our existing client base that we believe represents a significant revenue opportunity.

As we continue to transform our Company, we believe that we will be better-positioned to win that business and deliver top line growth. I look forward to discussing the details of our review in more detail on our fourth-quarter results call next year.

Beyond our business reorganization, we are exploring Greenfield opportunities across the insurance sector which may represent multiple attractive markets for investment and growth. Currently, there are several areas that look promising such as the fulfillment of claims versus just their settlement, as well as the legacy insurance businesses that insurance companies are exploring for divestiture. These are two markets within the insurance sector where Crawford currently does not have a presence and could be solid growth drivers looking forward.

We also continue to evaluate synergistic acquisitions to further enhance our capabilities and scale, given the rapid pace of change that our markets are experiencing. It is critical that we continue to transform our business as we must move faster than our competitors, new market entrants and clients. To that end, strategic acquisitions may play a role as we strive to further enhance our competitive position.

As I have discussed on previous calls, I am consistently impressed with the strength of Crawford's brands, its product, broad product offering, as well as the Crawford claims adjustors. That said, there continues to be a vast potential that exists within Crawford that we continue to unleash. I am very optimistic with the potential that our current strategic review holds as we strive to optimize our business and capitalize on the many opportunities that we see.

Before I turn the call over to Bruce, I would like to highlight our announcement this past Friday that we named Hilton Sturisky to the role of global Chief Information Officer. Hilton joins Crawford from Spirit Airlines, where he successfully transformed their legacy IT environment into a modern technology ecosystem.

Hilton will play an important role here at Crawford as we work to re-engineer how we service our clients around the world. I am truly thrilled that Hilton has joined our team.

I would now like to turn the call over to Bruce to review the financial results of the third quarter in more detail.

Thank you, Harsha.

Companywide revenues before reimbursements in the 2016 third quarter were $277.3 million, down 5% as compared with $293.3 million in the prior year's third quarter.

The Company's selling, general and administrative expenses, or SG&A, totaled $60.3 million, down from $61.7 million in the prior year quarter. As a percentage of revenues, these costs increased to 21.8% of revenues in the 2016 third quarter from 21% of revenues in the prior-year quarter. The decrease in dollar cost is primarily due to lower self-insured expense in the 2016 period.

During the 2016 third quarter, the Company recorded restructuring and special charges of $1.5 million, or $0.02 per share, compared to $11.1 million, or $0.15 per share in the 2015 quarter. These charges were associated with the ongoing implementation of the global business service center, GAB Robin integration and other restructuring activities in operating and administrative areas around the world.

Our net income attributable to shareholders of Crawford & Company totaled $10.9 million in the 2016 third quarter, compared to a net loss of $900,000 in the 2015 period. Third-quarter 2016 diluted earnings per share were $0.20 for CRD-A and $0.18 for CRD-B, compared to a diluted loss per share of $0.01 for CRD-A and $0.03 for CRD-B in the 2015 period. On a non-GAAP basis before restructuring costs and special charges in both the 2016 and 2015 periods, third-quarter 2016 diluted earnings per share were $0.22 for CRD-A, and $0.20 for CRD-B, compared to non-GAAP diluted earnings per share of $0.14 for CRD-A, and $0.12 for CRD-B in the 2015 period.

I will now review the third-quarter performance of each of our business units, starting with the US services segment. Revenues from the US services segment totaled $56.5 million, down 9% from the $62.1 million reported in last year's quarter, primarily as a result of lower catastrophe revenues. Operating earnings in our US services segment were $9.4 million in the 2016 third quarter, or 17% of revenues compared to operating earnings of $10.8 million, or 17% of revenues in the prior-year quarter.

Revenues generated by our catastrophe adjustors in the US totaled $9.2 million in the 2016 third quarter, down from $17.3 million in the 2015 quarter. The revenue decrease for the 2016 quarter was primarily driven by lower revenues from a project-based outsourcing contract with a major US insurance carrier.

International revenues decreased to $121.6 million from $128.2 million in the 2015 period, primarily due to a stronger US dollar, which has reduced revenues by 5% during the 2016 third quarter. On a constant dollar basis, international revenues were substantially unchanged. International operating earnings were $13.2 million during the current quarter, increasing over last year's third quarter operating earnings of $8 million. The operating margin in this segment was 11% in the 2016 period, compared with 6% in the 2015 quarter.

Broadspire revenues increased to $76.7 million in the 2016 third quarter, up from $74.2 million in the prior-year quarter, primarily as a result of organic growth and new client wins. Operating earnings in Broadspire totaled $8.3 million, or 11% of revenues in the 2016 third quarter, increasing from operating earnings of $7.4 million, or 10% of revenues in the 2015 third quarter.

Garden City Group revenues totaled $22.5 million in the 2016 third quarter, decreasing from $28.8 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 2016 period.

Operating earnings totaled $2.4 million in the 2016 third quarter, improving over the $1.1 million in the prior-year period. The operating margin in this segment was 10% in the 2016 period, compared with 4% in the 2015 quarter.

Our backlog at the end of the 2016 third quarter was approximately $94 million, compared to $76 million at the close of last year's third quarter. The company's cash and cash equivalent position at September 30, 2016, totaled $71.7 million, as compared to $76.1 million at the 2015 year end. Our investment in unbilled and billed receivables has increased by $16.5 million during the 2016 period, reflecting receivables growth in international and GCG.

Pension liabilities decreased by $11 million, reflecting cash contributions made in the US and UK during the first nine months of 2016. Our total debt has decreased in the 2016 period by $32.7 million. Cash provided by operations totaled $50.1 million for the 2016 year-to-date period, compared to $21.1 million provided in the prior year.

This improvement was primarily due to an increase in year-to-date net income and a decline in working capital requirements. Free cash flow improved by $36 million over the prior year-to-date period.

Let me now review the increased and updated guidance for 2016. 2016 guidance includes the impact of restructuring costs related to the ongoing implementation of the global business service center, the completion of the GAB Robins integration and other activities. These costs should be less than previously expected and in the aggregate these 2016 charges will total approximately $11 million pre-tax, or $0.14 in diluted earnings per share.

Our updated 2016 guidance is as follows: consolidated revenues before reimbursements between $1.08 billion and $1.1 billion. After the restructuring charges, net income attributable to shareholders of Crawford & Company between $31 million and 34 million, or $0.58 to $0.63 per diluted CRD-A share, and $0.50 to $0.55 per diluted CRD-B share.

Consolidated operating earnings between $85 million and $90 million, consolidated adjusted EBITDA between $125 million and $130 million. Before reflecting the restructuring costs, net income attributable to shareholders of Crawford & Company on a non-GAAP basis between $39 million and $42 million, or $0.73 to $0.78 per CRD-A share, and $0.65 to $0.70 per CRD-B share.

I would highlight that our fourth quarter is typically a seasonally slower quarter for Crawford and the impact of Hurricane Matthew is expected to be modest. As a result, we expect fourth-quarter margins and operating earnings to be sequentially lower, as reflected in our guidance.

With that, I would like to turn the call back to Harsha, for concluding remarks.

Thank you Bruce and thank you all for joining our call this afternoon. To conclude, I'm very pleased with our third-quarter results as the cost initiatives that we have implemented through 2015 delivered strong margin expansion and operating earnings growth. While our results are very good, we have much more to accomplish in order to fully unleash the vast potential that exists within Crawford.

We see further opportunities to reduce our costs, better optimize our business structure, and more effectively deliver our world-class products and services to our customers. This will have the effect of bolstering our margins, accelerating top line growth, and ultimately transforming Crawford into a company that can deliver more predictable financial results and growth, regardless of the market backdrop.

Operator, will you please open the call to questions now?

(Operator Instructions)

Our first question is from the line of Mark Hughes with SunTrust.

Thank you, good afternoon.

Good afternoon, Mark.

Bruce, you touched on this just a moment ago, but when we look at your fourth quarter guidance, given what you've done through the three months it implies if I'm doing the math right for the B, $0.09 to $0.14, and I think last year in the fourth quarter you were higher than that amount. Is there anything in particular or any unusual seasonality this year that would be impacting that number, or are you taking a conservative approach to that guidance? You know, the fourth quarter can typically be a slow quarter for us. We have had some benefits this year in catastrophic activity in our international results in Canada and the UK, and Australia which is trailing off as we enter the fourth quarter. And our expectation for Hurricane Matthew is also modest for the quarter, so I think that those are the primary factors behind it.

Harsha, you've spoken quite a bit about the corporate reorganization, strategic initiatives. Can you maybe give us a little more detail on what you've got in mind? Seems like a lot of pieces potentially in motion? How close, or imminent, or likely are the either some strategic initiative on the M&A front or some more aggressive cost actions?

Sure. I think Mark, we got to operate on multiple cylinders at the same time. So the first is I think any responsible management team should undertake a cost review typically as the year is ending to see, is there are any other efficiencies we can glean from in the way we're doing business on a daily basis.

We did that a year ago as I walked in as the interim CEO and we're going through that again just to make sure we capture what other opportunities there might be. And frankly, doing a white paper approach in how we spend money is always a very positive thing because it always comes out with some surprises that you might not have caught before.

Separately, on the strategic initiatives, we have been scanning, if you will, the insured tech world, and we do believe there can be some potential disruption coming into the claims business, and we are very actively looking at various situations where we might choose to invest that might either partner strategically or be part of our suite of solutions. It is still early and it will take us a few more months to flesh this out, but we're definitely poised and focused.

And it's coming at a good time, because we are significantly financially stronger today than a year ago. As you can see in the call we just had we've paid down a significant amount of debt. We are continuing to grow our EBITDA and taking up guidance a little bit, and frankly we're in a position of strength as we go forward and pretty much all our major clients are standing aligned. And they are giving me in particular a lot of direct input, in terms of where to invest and where to leverage Crawford even more to bring solutions to them.

You'd mentioned about perhaps investing as a Greenfield opportunity, some legacy operations that the insurance companies are considering divesting?

Correct.

What are you referring to there?

Yes, I think in the way claims that are being processed, there is more and more automation, lesser human touch, more algorithm-driven. So carriers are looking for faster, cheaper, quicker, more accurate technologies to be solving some of these claims issues, so that's one area.

On the inverse, the carriers are also divesting, referred commonly in carrier language as run-off businesses, but these are legacy lines that they've chosen not to continue to either operate. So they divest, if you will, to firms either private equity firms and/or firms that buy these legacy businesses.

But with that when it moves it doesn't come with a claims solution, so we are fully intending to play in that market. We've sized the market. We see who the players are and we want to know where we fit in and we're going to make moves here to start going after those businesses.

The third piece, very quickly, is, we focus very heavily, if you will, on the Top 10 carriers, be it within contractor connection, be it within the P&C world. But we're now going to go and look very carefully at tier 2, tier 3 carriers because they are substantial in size and we can offer solutions, particularly if we can reduce their loss adjusting expense.

A typical carrier is spending between 8% and 12% in loss adjusting expense. That's a large number, and if we can reduce that by even 100 basis points that really makes an impact for their bottom line and for how they're delivering the solution. So we're looking at all of these areas, Mark, simultaneously.

So I would say that the next call will be truly exciting, because some of this will start coming out where we are going to share not only our annual results for 2016, which has been a stellar year, but also you'll start seeing some of the go-forward activities that we can share.

Your corporate spending this quarter seems like it was up, I'm not sure whether this is confused perhaps by the -- some of the restructuring spending or integration spending, but the $6.9 million was up $1 million sequentially, up $2.5 million year over year. Is this the new normal, or was that a little elevated in Q3?

It was a little bit elevated. We had some non-recurring costs related to some strategic planning that we've been doing and some professional fees associated with that, so that was the main driver bumping it up.

We did invest in trying to ascertain and outline new areas of growth, so we spent some money in that direction as a company. And then again to the reinvesting a little bit of the savings that we've got.

Right. The tax rate was also a little bit higher. What's a good go-forward number?

I think a good go-forward number is about 38%. And we were a little bit higher than that in the third quarter. But I think as you look forward, 38% should be a decent number.

But the effective tax rate year over year, we're starting to come down quite a bit, correct?

Yes, it's down quite a bit over where it was the prior year. It's up a bit where we were in the first two quarters of this year.

In Broadspire, I think the back drop, the claims environment has been a little more challenging from what I understand, not quite as many workers comp claims out there. Your growth has been kind of a low mid single-digits lately.

How should we think about that going forward? Does the strength of the pipeline give you confidence that last years' kind of high single-digit might be approachable again?

Yes, I think Broadspire, the best way to put it is, what we refer to Broadspire internally is the most predictable business. So, to begin with we have a very strong pipeline. In fact Broadspire might have the most sophisticated sales and marketing machine there is inside the Company, so they are pointed north without question.

The other piece that's coming out of the gates in an even more wholesome way, Mark, is, as you know disability is technically a new business for Broadspire, and we had a non-compete that we could not play in that market until about 18 months ago, and the disability market is about $2 billion. Even a 2% market share, if we gain a foothold, a toehold over the next two years, that's just a $40 million business by itself. So I believe that we're going to see the train leaving the station here quite predictably. And nothing to be concerned at this time.

Thank you.

Thank you.

(Operator Instructions)

There are no further questions at this time. Mr. Agadi, do you have any closing remarks?

I think if we have no other questions, its been a fairly good quarter. We are ahead of expectations, increased guidance. So I'd call Crawford & Company a peaceful and predictable Company. Thank you for joining us today.

We look forward to discussing our year-end results and outlook for 2017 on our next quarterly call. Goodbye.

Thank you for participating in today's Crawford & Company conference call. This call will be available for replay beginning at 6.00 p.m. today through 11.59 p.m. on December 7, 2016. The conference ID number for the replay is 90684611. The number to dial for the replay is 1-855-859-2056 or 404-537-3406. Thank you. You may now disconnect.