Crawford & Co (CRD.A) 2017 Q2 法說會逐字稿

Good afternoon. My name is Doris, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Crawford & Company Second 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, Wednesday, August 9, 2017.

Now I would like to introduce Joseph Blanco, Crawford & Company's 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 risks and uncertainties. These statements may relate to, among other things, our expected future operating results and financial condition; our ability to grow our revenues and reduce our operating expenses; expectations regarding our anticipated contributions to our underfunded defined pension benefit plans; collectability of our billed and unbilled accounts receivable; financial results from our recently completed acquisitions; our continued compliance with the financial and other covenants contained in our financing agreements; expectations regarding the timing, cost and synergies from our global business and technology services centers; our other long-term capital resource and 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, 2017, filed with the Securities and Exchange Commission, particularly the information under the headings Business, Risk Factors, Legal Proceedings and Management 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 be 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.

Good afternoon, and welcome to our second quarter 2017 earnings call. Joining me today are Bruce Swain, our Chief Financial Officer; and Joseph Blanco, our General Counsel. After our prepared remarks, we will open the call for your questions.

To start with, I am pleased with our second quarter results as we delivered solid margin expansion and operating profit growth despite softer market trends for our Garden City Group segment. The decisive steps that we took through the second quarter to reduce our expense structure have positioned the company to not only deliver the financial guidance that we outlined at the start of the year, but to also make the necessary investments in our sales and marketing teams as well as in new product development to position Crawford for a future return to revenue growth.

Additionally, we were able to attract several accomplished executives to Crawford as we continue to add experienced leaders to our team, which I will touch upon in a moment.

Turning to our second quarter results in more detail. Revenues from reimbursements declined by 4.6%, with a large factor being the impact of the stronger U.S. dollar. On a constant currency basis, our revenues would have declined by 2.5% versus a year ago. We delivered GAAP net income to shareholders of Crawford & Company of $10.2 million, up 18% as compared to $8.6 million in the second quarter of 2016. Non-GAAP consolidated operating earnings in the 2017 second quarter were $29.2 million, increasing 22% from $23.9 million in the year ago period. Operating margins were 10.8%, an expansion of 230 basis points as compared to the 2016 second quarter.

Our non-GAAP consolidated adjusted EBITDA in the 2017 second quarter totaled $38.2 million, up 18% compared to the $32.3 million that we achieved in the year ago period. Our adjusted EBITDA margin was 14.2% in the 2017 quarter.

Turning to our business segments. U.S. Services delivered 4% revenue growth over the prior year quarter with operating margins of 18%, which compares to 9% in the first quarter of 2017 and 16% in the year ago second quarter. This margin expansion was mainly the result of our decision to reprioritize our advertising spending as we work to penetrate the $25 billion insurance direct market for our Contractor Connection business.

During the second quarter, we evaluated the results of the advertising campaign we launched earlier in the year in order to fine-tune our marketing strategy. We are refocusing our marketing efforts towards more targeted and web-based mediums during the third and fourth quarters, which we believe will not only be more successful in penetrating the market, but will also be more cost-effective. We remain optimistic that the insurance direct market represents a strong growth opportunity for Contractor Connection, and we will continue to optimize our marketing efforts to effectively target this large market.

Our Global Technical Services business is another area that we are investing in as we continue to expand our global product offerings like Forensic Accounting and Cyber as well as opportunistically add experienced staff as we work to grow the business. Along those lines, I am very pleased to formally welcome Terry Hunt back to Crawford as the Head of GTS in the United States. Terry had a very successful track record managing GTS over the years, and we are thrilled that he has rejoined Crawford to lead this very important business again. Terry will report to Geoff Piggot who joined Crawford in January to run GTS on a global basis.

Turning to WeGoLook. We continue to be very excited with the opportunity to take share in the high-volume, low-value claims market with WeGoLook's innovative and disruptive service. Second quarter results were solid as the revenues were up sharply over preacquisition levels, while their pipeline of potential new customers expanded rapidly. Our expectations remain that WeGoLook will be modestly dilutive in 2017 as we invest to grow the business and execute on the many cross-sell opportunities that exist within Crawford's client base. Looking forward, we will continue to evaluate other tuck-in acquisitions like WeGoLook.

Our international segment also grew margins a further 20 basis points in the second quarter to 9.3% as compared to 9.1% in the year ago. This improvement was largely driven by cost-reduction initiatives. Looking forward, we would expect to see our international operations have a strong latter half of the year.

Our Broadspire segment remains a key component to delivering consistent growth and profitability. In the second quarter, Broadspire delivered operating margins over 11%, up 270 basis points from the year ago quarter. Revenues grew 4% to $78 million during the 2017 quarter with Broadspire seeing continued strength in medical management and disability services. Looking to the balance of the year, Broadspire's new business pipeline continues to be robust.

Our Garden City Group segment continued to face a challenging market environment as the volume and size of the cases in the class action market has not rebounded from the first quarter's weaker levels. The environment, combined with the continued decline of the Deepwater Horizon project, drove a contraction in GCG's revenues and margins and contributed to the segment's $1.7 million operating loss for the period. While the near-term environment is difficult, we remain committed to the businesses, given GCG's competitive position and long-term growth and profit potential. We remain focused on returning Garden City Group to profitability, and will continue to work to optimize the business.

Beyond our segment results, I am extremely pleased to welcome Rohit Verma, our new Global Chief Operating Officer, to Crawford & Company. For those of you who do not already know him, Rohit brings more than 20-plus years of experience in the sector and also with Crawford having previously served as Senior Executive for Zurich North America where he was accountable for profitable growth and market execution. Rohit has been a prior client in his Zurich days. Prior to Zurich, Rohit was a management consultant with McKinsey and Deloitte Consulting where he focused on the insurance and financial services sectors. As part of his new role, Rohit will be responsible for Crawford's 4 operating segments and our global IT function, where he will be very focused on optimizing our operations to ensure that we're maximizing the many opportunities that exist today.

I continue to believe that there is a significant untapped revenue potential within our existing clients as we leverage the many cross-sell opportunities that we see today. Where we need to be more effective is in delivering the entire suite of Crawford products to our clients globally, which will require targeted investments in our sales and marketing teams to improve their effectiveness as we strive to deliver revenue growth.

As I have discussed on past calls, we need to reposition our sales teams to be more client-centric with a focus on solution-driven selling, and this will be a key focus of Rohit's along with returning Garden City Group back to profitability. I look forward to the partnership with Rohit Verma for years to come.

Finally, as part of our long-term succession planning for our board, we have appointed Rahul Patel to our Board of Directors. Rahul is a partner at King & Spalding in Atlanta, and brings a deep expertise in advising companies. I am pleased that Rahul has joined our Board and look forward to his insights and counsel as we continue to expand the company's product breadth and reach.

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

Thank you, Harsha. Company-wide revenues before reimbursements in the 2017 second quarter were $269.2 million, down as compared with $282.3 million in the prior year second quarter. However, after adjusting for $5.9 million in FX changes, revenues on a constant currency basis were $275.1 million in the 2017 quarter. The company's selling, general and administrative expenses, or SG&A, totaled $57.3 million, down from $61.1 million in the prior year quarter. As a percentage of revenue, these costs decreased to 20.2% of revenues in the 2017 second quarter from 20.5% of revenues in the prior year quarter. The decrease in the amount of these costs is primarily due to lower self-insurance costs and professional fees in the 2017 period.

During the 2017 second quarter, the company recorded restructuring and special charges of $6.8 million or $0.08 per share compared to $3.5 million or $0.04 per share in the 2016 quarter. These charges were associated with cost-reduction activities in our International operations and U.S.-based administrative functions.

Our net income attributable to shareholders of Crawford & Company totaled $10.2 million in the 2017 second quarter compared to $8.6 million in the 2016 period. Second quarter 2017 diluted earnings per share were $0.19 for CRD-A and $0.17 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 periods, second quarter 2017 diluted earnings per share were $0.27 for CRD-A and $0.25 for CRD-B compared to non-GAAP diluted earnings per share of $0.20 for CRD-A and $0.19 for CRD-B in the 2016 period.

I will now review the second quarter performance of each of our business units, starting with the U.S. Services segment. Revenues from the U.S. Services segment totaled $61.3 million, up from the $58.9 million reported in the last year's quarter, primarily as a result of acquired revenues from WeGoLook. Operating earnings in our U.S. Services segment were $11.1 million in the 2017 second quarter or 18% of revenues, compared to operating earnings of $9.6 million or 16% of revenues in the prior year quarter.

Revenues generated by our catastrophe adjusters in the U.S. totaled $8.6 million in the 2017 second quarter compared to $11.4 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.

International revenues decreased to $110.4 million from $122.6 million in the 2016 period, largely due to a stronger U.S. dollar, which reduced revenues by 5% or $5.9 million during the 2017 second quarter. International operating earnings were $10.3 million during the current quarter, decreasing from last year's second quarter operating earnings of $11.1 million. The operating margin in this segment was 9% in both the 2017 and 2016 second quarters.

Broadspire revenues were $77.9 million in the 2017 second quarter, up from $75.1 million in the prior year quarter, primarily as a result of growth in our medical management and disability service lines. Operating earnings in Broadspire totaled $8.9 million or 11% of revenues in the 2017 second quarter, compared to operating earnings of $6.5 million or 9% of revenues in the 2016 second quarter.

Garden City Group revenues totaled $19.7 million in the 2017 second quarter, decreasing from $25.7 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 $1.7 million in the 2017 second quarter compared to earnings of $2.6 million in the prior year period. The operating margin in this segment was negative 8% in the 2017 period, down from 10% in the 2016 quarter.

Our backlog at the end of the 2017 second quarter was $75.5 million, down from $94.1 million at the end of the 2016 second quarter. The company's cash and cash equivalent position at June 30, 2017, totaled $60 million as compared to $81.6 million at the 2016 year-end. Our investment in unbilled and billed receivables has increased by $27.6 million during 2017, primarily due to higher receivables in international and GCG.

Goodwill and intangible assets increased by $39.7 million reflecting the preliminary purchase price allocation of the WeGoLook acquisition. Pension liabilities decreased by $9.4 million, primarily due to cash contributions made in the U.S. and U.K. during 2017. Our total debt increased in 2017 by $59.1 million as a result of funding of the WeGoLook acquisition and seasonal working capital needs.

Cash used in operations totaled $16.4 million for the 2017 period compared to $11.5 million provided by operations in the prior year period. This decrease was primarily due to higher accounts receivable balances and a difference in the timing of payments for our crude compensation between 2016 and 2017 periods. Free cash flow declined by $30.4 million year-over-year.

During the 2017 second quarter, the company repurchased approximately 356,000 shares of CRD-A and 48,500 shares of CRD-B at an average cost of $8.42 and $8.96, respectively. Our Board of Directors has also approved a new 2 million share repurchase plan to run through July 2020, which replaces our existing plan.

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 implemented in 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 $1.13 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. To conclude, I am pleased with our results this quarter as our restructuring efforts have positioned the company to deliver on the financial commitments that we outlined at the start of the year. While we continue to explore ways to further decrease our cost base, expense reduction alone is never enough. To truly create shareholder value, we must return Crawford to consistent top line growth. As a result, we're making the necessary investments in our sales and marketing teams, expanding our product breadth and executing the many cross-sell opportunities that exists globally. We also continue to build our leadership team and the addition of Rohit Verma as our new Global Chief Operating Officer will help ensure the successful execution of our growth plan. While these initiatives will take time, I remain optimistic that we will deliver our long-term goals.

As I conclude the prepared remarks of our strong second quarter, operator, please open the call for questions.

(Operator Instructions) And we do have a question from the line of Mark Hughes with SunTrust.

The corporate segment, corporate expenses actually were a benefit in the quarter rather than an expense. What was going on there?

Mark, this is Bruce. The primary drivers there are 3 things: One, we had a credit for our self-insured reserves for the quarter versus a cost in the prior year quarter; our defined benefit pension expense is also lower quarter-over-quarter, and we have lower defined benefit expense for the year; and we also had lower professional fees in this year than we did last year. And those are really the 3 primary drivers there.

The share buybacks. What's your appetite at this point for share buybacks? You bought back a bit in the quarter. How do you feel about ramping that up?

Yes. So we've got a 10b5-1 plan in place that covers both the A shares and the B shares. And so we are in the market and buying the shares to the extent they're trading at a price that's below our assessment of intrinsic value. But in those 10b5-1 plans, you are limited to no more than 25% of your average daily trading volume. So there is a limitation there. To the extent that there are larger blocks that would cross, we would be interested in looking at those as well. And we had a few of those that were in the A shares in the quarter and that's why the 356,000 shares were purchased. There were some blocks there.

Harsha, you suggested international, I think, would be strong in the second half of the year. Are you referring to top line, margin, both?

I would say both. And obviously, international has gone through a lot of changes over the last 2 years. It has superb leadership under Kieran Rigby, who came in when we did the GAB acquisition and has done very well in leading the international efforts as of the recent few months. We're also propelled by Cyclone Debbie out of Australia, which is making a difference. In addition, it'll still be early, but we're starting to look at Contractor Connection and its ramp-up and expansion in certain international markets, namely, Canada, Australia, U.K. And eventually here, introducing it to Germany as well. So you have a number of things kind of moving in the same direction that should benefit international.

Yes. The -- Bruce, is there any incremental flow-through to the cost actions in the third quarter? You definitely get a lot of benefit this quarter. Is there an incremental benefit in Q3 as well?

For this year, we expect that we'll get a $12 million benefit total, within 2017. All of that's reflected in the guidance that we gave today. In total, we took about $21 million out of cost out. So there will be another $9 million-or-so that's going to benefit in '18 on a run-rate basis, but our expectations for this year have the benefits of those cost saves baked in.

And here's what I would say, Mark, I mean the cost discipline has clearly become religion inside the company. And all it does is gives you an insurance policy as you're building the sales pipeline and the sales and marketing teams. And as that starts gaining traction, we should see the top line starting to move as well.

How did Contractor Connection do in the quarter domestically? Can you say roughly year-over-year top line?

It was 6% growth in the second quarter versus year ago. And we're going to continue to see that momentum continue to build up. And they do have a new client ramping up and this is in the form of Citizens of Florida that has already started its activity. And there will be a ramp-up time period, but it's starting to climb and will continue throughout the remainder of the year. And Contractor Connection continues to perform so well that retention is close to 100% as it moves forward.

Right. The -- in the quarter, the WeGoLook revenue, you kind of disclosed there. Could you give me the specific number or at least rounded to a million what the WeGoLook contributed?

Yes. They were at -- give me just a second.

Yes, while Bruce is looking that up, just on a macro level, very, very quickly, Mark, WeGoLook's revenue is ramping up just as predicted, but even more importantly, they're in discussions with some large clients. We do have actually a verbal confirmation of one of the large clients, but I'm not ready to disclose at the moment, as we're working through the contract. So I think, WeGoLook will actually come in quite nicely, will end the year with revenue growth very solid and will start being accretive to EPS starting in 2018.

We did $2.2 million of revenue in the second quarter, and we're at about $4.2 million year-to-date through the second quarter.

Right. Okay. And then, on Garden City, anything more impactful in mind here with the top line continuing to drift, margin under pressure. Is there more steps you can take to stem that?

Yes, absolutely. First of all, as large cases, which come and they start receding, there is a ramp-up, ramp-down time in terms of the cost structure. And that's what Garden City is going through. Having said that, they've started to identify some new service lines, such as early-stage data breach as well as partnering with Broadspire on some product recall lines of business. So there's a lot of activity that's starting up in new lines of business that not only will replace lost revenue, but will enhance the product offering, if you will. In addition to that, there are also consolidation internally of multiple systems platforms that are afoot, that it does some upfront costs that will start going away as we get efficiencies in a singular system throughout the GCG business. So all of that is in play as we speak. The sales pipeline continues to remain reasonably strong. There is more ramp-up required on the sales pipeline. We are investing in more and more talent in the sales and marketing teams. And that also will have some impact on the business. I'm not overly concerned about the business other than -- as long as we continue to do all the right things internally, to move forward as this business changes from a dependency of one or two large cases to a plethora of a lot of smaller cases, which is, frankly, the true market reality, that we will continue to move forward in the right direction.

And that is all the questions we have in the queue. Mr. Agadi, I'd like to turn it back over to you for any closing remarks.

Thank you very much. I appreciate all of you spending the time and interest in hearing the earnings release, and I will continue to say strong second quarter, guidance is in its place. And we will continue to march forward, focused on simply 2 things: more and more sales, better and better margins. That's how I would like to end the story today. Thank you very much. Bye-bye.

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 September 9, 2017. The conference ID number for the replay is 6373715. The number to dial for the replay is 1 (855) 859-2056 or (404) 537-3406. Thank you. You may now disconnect.