Crawford & Co (CRD.A) 2017 Q1 法說會逐字稿

Good afternoon. My name is Jason, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Crawford & Company First Quarter 2017 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, May 8, 2017.

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; our expectations regarding the timing, costs and synergies related to our Global Business Services Center; as well as other restructuring activities; any acquisitions; 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 March 31, 2017, 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 Conditions 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, President and Chief Executive Officer of Crawford & Company. Harsha, you may begin your conference.

Thank you. Good afternoon, and welcome to our first quarter 2017 earnings call. Joining me today are Bruce Swain, our CFO; and Eric Powers, our Corporate Secretary. After our prepared remarks, we will open the call for your questions.

When I assumed the role of Chief Executive Officer, I was motivated by the incredible opportunities that I saw ahead for Crawford. This company had unparalleled global reach, strong client relationships, and a product suite that our customers rely upon. I also saw that Crawford's success was being restrained by a burdensome cost structure, which, combined with the reliance on severe weather events, created volatility in our results.

With that in mind, over the last 18 months, we have executed a strategy to reduce expenses while making targeted investments to return Crawford to top line growth. While we have achieved a number of successes, this transformation is a journey as can be seen in our first quarter results, which were below our expectations.

The primary driver to our results were softer market trends in our Garden City Group segment, which led to their segment loss in the quarter. A strong dollar also proved to be a headwind to revenues in our International segment, and our U.S. Services operating earnings were impacted by $2.4 million in advertising investments made to test the consumer sector market. That said, we remain confident in our business and where we're heading this year. As a result, our guidance remains unchanged.

Turning to our first quarter results in more detail. Revenues before reimbursements declined by 3.6% with the largest factor being the impact of the stronger U.S. dollar. On a constant-currency basis, our revenues would have declined by 1.4%. We delivered GAAP net income to shareholders of Crawford & Company of $7.7 million compared to $8.6 million in the first quarter of 2016. Non-GAAP consolidated operating earnings in the 2017 first quarter were $18.3 million compared to $21.7 million in the year-ago period. The cost of strategic investments made during the quarter combined with headwinds in our Garden City Group segment contributed to the reduction as our operating margins declined to 6.8% from 7.8% in the year-ago quarter. On a non-GAAP basis, consolidated adjusted EBITDA in the 2017 first quarter totaled $26.6 million compared to $30.1 million that we achieved in the year-ago period.

While our results this quarter were below our expectations, we remain confident in our goal of returning Crawford to top line growth as well as delivering our medium-term target of 10% operating margins. That said, our business has longer sales cycles. While investments need to be made, they take time to deliver revenue and growth. As a result, we have moved quickly to further reduce our cost structure in April to ensure that we continue to drive margins in this operating environment as well as deliver the expectations that we set out for the business at the beginning of the year. This expense reduction plan has been executed and will remove at least $20 million in annualized costs from the business. For the remainder of 2017, we expect the benefit to be at least $10 million, which is reflected in the guidance that we have reaffirmed today.

While we discussed further reducing our expenses on our fourth quarter call, this plan is more ambitious and designed to not only position Crawford to deliver higher margins but also to allow for the necessary reinvestment to reposition our sales teams to be more client-centric with a focus on solution-driven selling. To maximize value of our shareholders, we must deliver revenue growth, and our reinvestment into our sales organization is a critical component to achieving this goal.

Our focus needs to be much more narrowly centered on sector concentration, those products and services that are relevant to today's market. And we must maximize the many cross-sell opportunities that exist across our lines of business.

Turning to our business segment results in more detail. Our U.S. Services segment delivered a 3% revenue growth over the prior year quarter with operating margins of 9% versus 15% in the 2016 first quarter. As previously discussed on our fourth quarter call, we consciously launched an advertising campaign in 7 U.S. cities simultaneously in January designed to penetrate the $25 billion insurance direct market for our Contractor Connection business. We remain optimistic that the insurance direct market represents a strong growth opportunity for Contractor Connection but would continue to caution that the sales cycles to win new clients are long. We will continue to evaluate our marketing initiatives and would remind you that revenue growth will lag the investments that we're making in advertising.

Expanding Contractor Connection to attractive international markets as well as U.S. carriers that we do not currently serve are key priorities for us. We are pleased to have just added Citizens insurance and MAPFRE as our new Contractor Connection clients.

Outside of our investments to expand Contractor Connection, we also closed our acquisition of WeGoLook in January. Our expectation remains that WeGoLook will be modestly dilutive in 2017 as we work to expand the business and execute on the many cross-selling opportunities that exist with Crawford's client base globally. While it is early, we continue to be very excited with the opportunity to penetrate the high-volume, low-value claims market with WeGoLook's innovative and disruptive service and see the pipeline of new customer wins growing.

Our International segment had another strong quarter, driven by 200 basis points of operating margin expansion versus the year-ago quarter driven by our major markets in the U.K., Asia-Pacific and Canada, which combined for solid operating earnings growth, while we also benefited from Hurricane Matthew in the Caribbean.

Our Broadspire segment remains a key component to delivering consistent growth and profitability. In the first quarter, Broadspire delivered operating margins of 9%, which were flat with the 2016 fourth quarter but down compared to 11% in the year-ago quarter, which benefited from some onetime deferred revenue credits in 2016. Revenues grew modestly to $77 million during the 2017 quarter with Broadspire seeing strong growth in disability revenues as new clients at the beginning of the year. Additionally, Broadspire had a record-setting Q1 with several notable client wins including Aaron's, Arch Travel, Selective Insurance and Innovative Captive Strategies. Looking to the balance of the year, Broadspire's new business pipeline continues to be robust, which bodes well for a reacceleration of growth.

Looking at Garden City Group's first quarter results. The market environment has proved more difficult than previously anticipated as the volume and size of cases in the class action market has been lower to the start of the year. Additionally, we continue to manage the expected decline in 2 large projects. Taken together, revenues declined more than expected, margins came under pressure, and GCG experienced a $900,000 loss in the quarter. As a result, we have reacted quickly to identify expense-reduction opportunities in this more challenging environment. Returning Garden City Group to profitability and growth is a key strategic priority for the remainder of the year.

Lastly, we have made the decision to repurchase our shares in the open market. Under our new current authorization, we have 1.4 million shares of capacity.

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

Thank you, Harsha. Company-wide revenues before reimbursements in the 2017 first quarter were $267.3 million, down as compared with $277.2 million in the prior year's first quarter. However, after adjusting for $6 million in FX changes, revenues on a constant-currency basis were $273.3 million in the 2017 quarter.

The company's selling, general and administrative expenses totaled $60 million, up from $56.8 million in the prior year quarter. The increase in these costs is primarily due to advertising expenses in our Contractor Connection business and higher compensation and benefit costs in the 2017 period.

During the 2017 first quarter, the company recorded restructuring and special charges of $600,000 or $0.01 per share compared to $2.4 million or $0.03 per share in the 2016 quarter. These charges were associated with the ongoing implementation of the Global Business Service Center and other restructuring activities.

Our net income attributable to shareholders of Crawford & Company totaled $7.7 million in the 2017 first quarter compared to $8.6 million in the 2016 period. First quarter 2017 diluted earnings per share were $0.14 for CRD-A and $0.12 for CRD-B compared to $0.16 for CRD-A and $0.14 for CRD-B in the 2016 period. On a non-GAAP basis before restructuring costs and special charges in both the 2017 and 2016 period, first quarter 2017 diluted earnings per share were $0.15 for CRD-A and $0.13 for CRD-B compared to non-GAAP diluted earnings per share of $0.19 for CRD-A and $0.17 for CRD-B in the 2016 period.

I will now review the first quarter performance of each of our business units, starting with the U.S. Services segment. Revenues from the U.S. Services segment totaled $60.4 million, up from the $58.5 million reported in last year's quarter primarily as a result of acquired revenues from WeGoLook. Operating earnings in our U.S. Services segment were $5.5 million in the 2017 first quarter or 9% of revenues compared to operating earnings of $9.1 million or 15% of revenues in the prior year quarter. Revenues generated by our catastrophe adjusters in the U.S. totaled $13.1 million in the 2017 first quarter compared to $14.5 million in the 2016 quarter. The revenue decline for the 2017 quarter was primarily driven by lower revenues from a project-based outsourcing contract with a major U.S. insurance carrier partially offset by an increase in weather-related claims.

International revenues decreased to $110.6 million from $117.5 million in the 2016 period, primarily due to a stronger U.S. dollar, which reduced revenues by 5% or $6 million during the 2017 first quarter. International operating earnings were $9.3 million during the current quarter, increasing over last year's first quarter operating earnings of $7 million. The operating margin in this segment was 8% in the 2017 period compared with 6% in the 2016 quarter.

Broadspire revenues were $77 million in the 2017 first quarter, up from $76.2 million in the prior year quarter, primarily as a result of continued growth in our disability product. Operating earnings in Broadspire totaled $7.1 million or 9% of revenues in the 2017 first quarter compared to operating earnings of $8.7 million or 11% of revenues in the 2016 first quarter.

Garden City Group revenues totaled $19.2 million in the 2017 first quarter decreasing from $25 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 2017 period.

Operating earnings totaled a loss of $900,000 in the 2017 first quarter compared to earnings of $1.5 million in the prior year period. The operating margin in this segment was negative 5% in the 2017 period, down from 6% in the 2016 quarter. Our backlog at the end of the 2017 first quarter was $74 million, down from the $103 million at the end of the 2016 quarter.

The company's cash and cash equivalent position at March 31, 2017, totaled $68.8 million as compared to $81.6 million at the 2016 year-end. Our investment in unbilled and billed receivables has increased by $17.6 million during 2017 reflecting higher receivables in International and GCG. Goodwill and intangible assets increased by $40.9 million as a result of the preliminary purchase price allocation of the WeGoLook acquisition. Pension liabilities decreased by $4.8 million due to cash contributions made in the U.S. and U.K. during 2017. Our total debt increased in 2017 by $55.9 million as a result of the funding of the WeGoLook acquisition and seasonal working capital needs.

Cash used in operations totaled $20.5 million for the 2017 period compared to $5.2 million used in the prior year period. This increase in cash used was primarily due to an increase in accounts receivable balances and other working capital requirements. Free cash flow declined by $15.4 million year-over-year.

Let me now review the reaffirmed guidance for 2017. 2017 guidance includes the impact of restructuring costs related to the ongoing implementation of the Global Business Services Center and other restructuring activities planned for 2017.

These costs should total approximately $13 million pretax or $0.15 in diluted earnings per share.

Our reaffirmed 2017 guidance is as follows: consolidated revenues before reimbursements between $1.1 billion and $1.3 billion; after the restructuring charges, net income attributable to shareholders of Crawford & Company between $34 million and $39 million or $0.63 to $0.73 per diluted CRD-A share and $0.55 to $0.65 per diluted CRD-B share; consolidated operating earnings between $90 million and $100 million; consolidated adjusted EBITDA between $130 million and $140 million; before reflecting the restructuring costs, net income attributable to shareholders of Crawford & Company on a non-GAAP basis between $43 million and $48 million or $0.78 to $0.88 per diluted CRD-A share and $0.71 to $0.81 per diluted CRD-B share.

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

Thank you, Bruce. While our first quarter results are below our expectations, we have taken decisive action to further reduce our cost structure as well as optimize our operations to improve our customer service offering. Importantly, our cost reduction plan will position Crawford to deliver the financial guidance that we laid out at the start of the year and which we have reiterated today.

That said, reducing costs alone is not sufficient to maximize value for our shareholders. We must deliver top line growth and will reinvest a portion of the savings into our sales organization to successfully achieve this goal. I remain confident that we will eventually deliver revenue growth, but I'm also cognizant that it will take time. However, I firmly believe that we will see earnings growth this year, as indicated in our guidance that we reaffirm today. In conclusion, I want to thank each and every one of the 8,500 Crawford employees, who are extremely engaged at this time in driving the top and the bottom line of Crawford in a very positive spirit.

Operator, please open the call for questions.

(Operator Instructions) And your first question comes from Mark Hughes from SunTrust.

The spending for the consumer initiative within Contractor Connection, the $2.4 million, was there any spending on that in this quarter last year?

No, there was no spending last year in the same quarter, so that is a pure incremental expense. And we deliberately, as with our plans, we deliberately spend that to test and measure the market. So we knew that we're going to take a hit on margin, but we had to do that to assess the market.

And your early thoughts on the opportunity there.

The opportunity, Mark, as I have stated earlier, is about a $25 billion direct insurance market. Initial reads in the 7 cities are positive. And at the same time, there is always a lag from -- in these kinds of -- I call it medium-level losses. It takes time to gain traction, but at this time it looks promising.

The GCG backlog, how did the $74 million compare to year-end? And were there any particular drivers there for the -- if you think about the year-over-year change down (inaudible)?

Yes, sure. I think in terms of the backlog, we did have a client who had not only signed up and had started and had to withdraw for their own reasons. And so that had to -- that had some it impact, if you will, on our numbers. The other is, we're continuing to have a decent record of winning our share of cases, but the cases that have come for RFP are smaller in size. But a recent Cornerstone Research report that came out that reaffirmed the CEO of GCG's market sense, which is that securities class action is actually picking up. And I think we're going to see this thing start going back up. And again, just to remind you, there is lumpiness in this business where a typical case will last for 18 months, so you can have 1 or 2 things that could probably slow it down temporarily. But we have enough confidence in the team. The GCG team is very focused. The Crawford team has enough confidence in GCG. And we have a number of new initiatives, Mark, that are rolling into new product areas: one is cyber, two is data breach, three is product recall. And they are also rolling out, if you will, a common claims platform, a new technology, that's going to make a significant reduction in the per-unit cost on claims as well as they have a state-of-the-art call center that now, we're getting into government business as well. So we're reasonably confident this thing will move up even though we've had a temporary slow down here, if you will.

You think it will be profitable in the second quarter.

I would say the profitability will more appear closer to the Q3, Q4 of '17. And '18 should also be quite good going in. So it might take us a quarter or 2 to adjust. And Ken Cutshaw and team are adjusting rapidly to that as well as going after new areas. So I would say it might take a little longer, but the good news is if you see Bruce's guidance, we are able to digest as a company the slowdown at GCG as we move forward and actually try to be accretive to last year's earnings.

And then in Broadspire, you talked about new business pipeline looking better. You had positive top line this quarter after having been down slightly last quarter.

Yes.

But margins kind of, I guess, were a little bit lower.

Sure. Right. You're asking the 9% versus the 11%.

Yes.

Why don't I have Bruce opine on that?

Sure. So in the first quarter of '16, Mark, we had a deferred -- positive deferred revenue adjustment related to a contract that terminated. And that added about $1.25 million to revenues that really dropped straight to the bottom line in that quarter. We didn't have that same item in 2017. Those tend to be discrete items around certain contract terminations, so that's the primary driver of that variance quarter-over-quarter.

The other piece, Mark, is we have had a discussion with Danielle Lisenbey at Broadspire, and she is doubling up the sales force. We are investing in it this year so we can start growing at a faster clip at Broadspire. The business is there to have, and the business is there to grab away from the competitors.

(Operator Instructions) And your next question comes from Katelyn Young from William Blair.

Going back to the U.S. Services segment and the advertising investments. Understand it's a longer sales cycle. I guess, how long do you expect for that to play out kind of that you began the investments in early January?

Right. So is that the question, or you have more?

That was my first question, yes.

Okay. So very, very quickly, the lag is typically 6 months, so it will take us some time to gain traction. Having said that, I think the brand awareness of Contractor Connection has also increased because of this consumer initiative. So I think that there'll be a lag, but later in the year, you should be able to see some impact. And we're studying it, gauging it, and then only will we go forward with more spending.

Great. And then also your slide on U.S. Services points out mix shift having a negative impact on earnings. I guess, how material was that, if it was material? And is that a trend that will continue going forward?

Yes, that -- Katelyn, this is Bruce Swain. That wasn't as material as the advertising spend, but we did have higher-than-expected revenues from the outsourcing contract that we've been servicing over the past few years. That contract has -- had lower margins than our other normal field operations or catastrophe response business. So a little bit less contribution overall from the revenues, but that was not a significant driver. It was just a part of the story.

Okay, that makes sense. And then for your larger restructuring and expense reduction plans, I know a lot of actions have been taken to date already, and there's more to come. As we sit here today and looking forward, I guess, which parts of the business or segments is there the most opportunity for incremental savings going forward that you see?

I'll answer that. So first of all, the majority of the actions have taken place, Katelyn, in April. And I would say that -- a simple principle: The closer you are to the client, the more productive you are to the top line of the company. So we use that filter very, very carefully. And I would say the opportunities could extend across the globe. And every company needs to have the discipline, and we've instituted that. We did this in '15. At the end of '15, we reviewed and took some cost-saving actions. We again started the review at the end of '16, and we identified a number of cost-saving opportunities. And if you notice in my script, the language I'm using is at least $20 million. So if anything, it will be greater than that. And I think there will now be, going forward, in my opinion, process-related costs more than headcount. And that will come quite heavily in the information technology area. As we're investing in information technology, our new Chief Information Officer, Hilton Sturisky; as well as our Chief Operating Officer, Andrew Robinson, are driving consistently to achieve common claims platforms. Case in point is we're going from 2 platforms at GCG to 1, and all of this will eventually result in a reduction in cost, reduction in duplicative processing as well as deliver to the client, what I will call very simplistically, shamelessly stealing from our founder, delivering top-quality promptly. And to me, I think that is where the essence of all of these processes should lean towards. So our IT processing will be one of our biggest savings, in my opinion, going forward, well beyond the at least $20 million that we've discussed. A lot of that will bear fruit in 2018.

And your next question comes from Carl Doirin of Raymond James.

Yes. I guess my question on U.S. Services has pretty much has been answered. But I guess, I would ask, do you expect the same margin impact from the advertisement in 2Q? Or can we expect the margin to gradually go up throughout 2017? Or should we expect more of a step-up later in the year?

Carl, this is Bruce Swain. We don't like to give quarterly margin guidance. But I can tell you that the first quarter is typically the weakest quarter for the company and then we pick up over the second and third quarters. We would certainly expect for our margins to increase as we go throughout the year. Some of that will be due to just the normal seasonality of our work, where we see more profit contribution in the second, third quarter. And some of that will be from expected lower advertising spend in U.S. Services. So we spent $2.4 million in the first quarter, and our expectation is there's maybe another $2.5 million out there for this year. That can change depending upon the results that we see in the initiative, but that's our current thinking right now.

Yes, and I'd say, Carl, we're not going to spend money that easily until we assess the results. Having come from the consumer industry, I'm very careful because we can understand our results before we jump the next step logically.

Yes, that makes sense. And then I would add one other question in the International segment. Generally, the International segment is -- has lower margins in the first quarter. My question is the improvement this quarter, is it strictly from exiting the unprofitable business? Or is there some benefit from having, I guess, different exposure in your revenue base and then your expense base?

Well, we certainly benefited from exiting some unprofitable entities quarter-over-quarter. That was a meaningful contributor. The other contributor we had was related to Hurricane Matthew, where we had a profit-sharing arrangement with a party that we were handling claims with.

In the Caribbean.

In the Caribbean that aided our margins as well, and we recognized those profits in our first quarter.

And I would also say that our major markets in International, like Australia, Canada as well as the U.K., they're all starting to turn and start pointing north. So this is very positive momentum coming through.

Yes, currently -- I mean. Yes, 2017 so far is proving to be a high cat-loss year.

And your next question comes from Mark Hughes of SunTrust.

The core Contractor Connection business, what was the percentage growth rate this quarter? And you'd mentioned the new client wins. How do you think that'll play out through the balance of the year?

Sure. The core Contractor Connection business, Mark, was up about 3% from Q1 of a year ago to Q1 of this year. And again, generally, it's a little slower in the beginning of the year. Having said that, we have started to benefit from some of the cat activity, and you'll see a lag, but it will come into Q2. Because by the time they sign up, by the time we do the resolution or the mitigation, and by the time we bill and by the time we collect, it'll come out in the future quarters. So to me, I think Contractor Connection is hale and hearty and will actually move forward. The other piece is, just to remind you, last year, Q1 had the Southern California gas leak impact that was fairly substantial in Q1 that is not repeating in Q1 of this year. So that also drove a little bit of that activity. What was the second question you had, I'm sorry, related to this?

I think it was related to the new business wins that you had described, whether those are going to impact the growth rate.

Oh, yes. So have 2 wins in Q1: One is Citizens, and the other is MAPFRE. Now what's very interesting to note and exciting for me, both Citizens and MAPFRE are not in the top 20 carriers. So to me, we play hard and well in the top 20 carriers. We've started to slide into the next set of carriers, where Contractor Connection is actually more critical for them as a solution system-wide for these carriers. And also, the cross-selling is starting to have impact. Because every dialogue we're having -- I'll give you just the most recent example. The RIMS conference, which is a premier conference in our industry, we had about 300 client meetings in the space of 3 days. And almost every conversation we had, WeGoLook came up, Contractor Connection came up, Broadspire came up and our cat services came up, all at the same time. So there's a lot of movement going on and a tremendous amount of energy being spent on trying to rev up the top line. We also internally are starting to track tightly all client wins on a regular basis, and it's going to become part of our culture, where we are becoming a sales-driven organization, which is a key underpinning for the company.

And there are currently no further questions at this time. I would now like to turn the call back over to Mr. Agadi for closing remarks.

Thank you very much, everybody, for listening to the call. Again, to thank all employees, shareholders and clients for their continued support to this wonderful brand that is now going to cross the 76th year on May 27. And we hope to reconnect at the end of Q2 and discuss our results. Thank you.

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 June 8, 2017. The conference ID number for the replay is 6372135. The number to dial for the replay is 1 (855) 859-2056 or (404) 537-3406. Thank you. You may now disconnect.