Crawford & Co (CRD.A) 2017 Q3 法說會逐字稿

Good afternoon. My name is Ian, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Crawford & Company's Third 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, November 6, 2017.

Now I'd 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 benefit and pension 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 service 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 the factors which could affect the company's financial performance, please refer to the company's Form 10-Q for the quarter ended September 30, 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, Joseph. Good afternoon, and welcome to our third 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, the hurricane activity during the quarter was almost unprecedented in terms of the storm severity, proximity to one another over several weeks and damage inflicted. We believe this challenged the capabilities of the entire P&C industry to cope with assessing the claims arising from the storms.

To support our clients in this time of great need, we have reached into our U.S. network to find the best adjusters available. We have used our global reach to mobilize Crawford adjusters from Canada, the United Kingdom and Australia. We have also hired and trained a new generation of adjusters. We view these efforts as a significant investment in our business, which will demonstrate our strong financial commitment to our clients, build brand loyalty and position Crawford as a more valuable partner for the future.

Importantly, we have made this investment to differentiate Crawford in the market and better position the company to take market share, win more day-to-day business and drive growth. The early results of which can be seen in our U.S. Services segment, which delivered strong revenue growth in the third quarter. While our U.S. Services business performed well, our third quarter results were impacted by a decrease in cat activity in our International segment as well as soft market conditions in our Garden City Group segment.

Turning to our third quarter results in more detail. Revenues before reimbursements declined by 2.4% versus the 2016 third quarter. The largest driver to the decline was a change in accounting for our Contractor Connection business in the U.K., which reduced revenues by $5.9 million or 2.1%. As Bruce will describe in more detail, this change has no bottom line impact. After adjusting revenues for this change and $1 million negative foreign exchange impact, our quarter-over-quarter revenues would have been flat.

We delivered GAAP net income to shareholders of Crawford & Company of $11.8 million, up 8.3% as compared to the $10.9 million that we delivered in the third quarter of 2016. Non-GAAP consolidated operating earnings in the 2017 third quarter were $24.1 million, decreasing 8.4% from the $26.3 million that we achieved in the year-ago period.

Operating margins were 8.9%, a contraction of 60 basis points as compared to the 2016 third quarter, clearly reflecting the investments we've made in support of our clients during the multiple cat events. Our non-GAAP consolidated adjusted EBITDA in the 2017 third quarter totaled $32.5 million, down 6.3% compared to the $34.7 million, which we achieved in the year-ago period. Our non-GAAP adjusted EBITDA margin was 12% in the 2017 quarter, which compares to the 12.5% EBITDA margin that we achieved in the 2016 third quarter.

Turning to our business segments in more detail. U.S. Services delivered revenue growth of 12% year-over-year, driven by the extreme hurricane activity that impacted North America during the quarter. To support our clients during their time of great need, we invested heavily to ensure that we had the resources available to meet the heavy claims volume that quickly followed. The investment can be seen in our operating margin, which contracted by 140 basis points in the quarter.

Looking forward, we would expect our margins to expand in the fourth quarter as the investment spend is largely behind us, while the claims created by the hurricanes will continue. I am extremely proud of the commitment and the execution that our employees demonstrated in a very challenging environment, which clearly differentiated Crawford in the market.

The breadth of our platform and services provided our clients with unique solutions when speed of execution mattered most and truly highlighted the vast cross-sell opportunity and potential that exists within Crawford today.

This was a brand-defining moment for Crawford. As an example, our WeGoLook unit proved to be a unique and differentiated solution for carriers, giving the large auto losses that occurred as a result of the widespread damage that occurred from both Harvey and Irma. We were able to quickly receive approval from several carriers, including Tower Hill, who deployed WeGoLook Lookers and drone capabilities to quickly and more cost effectively handle the numerous auto claims that they were receiving.

Additionally, their pipeline of potential new customers continues to rapidly expand as they prove their capabilities in the market. 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 believe carriers are beginning to see the benefits of the service offering.

Another example of our ability to deploy Garden City Group's state-of-the-art contact center in Dublin, Ohio, to handle calls from several large clients on a 24/7 basis, which freed up capacity in our Atlanta call center. In fact, we were able to quickly and seamlessly handle over 48,000 calls, while offering uninterrupted support to our customers. The response from our clients to the breadth of our products and the power of the Crawford platform has been extremely positive, while we believe that our investments in the business and our clients this quarter will differentiate Crawford and lead to greater share and more day-to-day business.

I'm even more confident that significant cross-sell opportunities exist today. To ensure that we fully execute on this vast opportunity, we have created a new chief client officer position and have appointed Ken Fraser to that role. Ken is a long time insurance executive who joined Crawford in 2015 as the company's Chief Strategy Officer. Through Ken over 30 years of experience, we believe that he has the relationships and necessary understanding of the insurance industry to drive this cross-sale opportunity and help reinvigorate our top line growth.

In addition, we have another capable set of hands in Greta Van, who has taken over Ken's former responsibility as Crawford's chief strategy officer. Greta has been with Crawford for over 4 years as the head of our Internal Audit Group and brings more than 20 years of internal audit, financial and M&A experience within both public companies and private equity-backed firms.

Turning to International, the segment delivered third quarter revenues of $110.8 million, representing an 8.4% decline versus the year-ago quarter. As previously mentioned, a change in the accounting for Contractor Connection in the U.K., combined with a lack of severe weather activity in the U.K. and Canada as compared to the year-ago period, were the largest factors in the contraction in the quarter. As a result of the decline in sales, operating margins were 9% in the third quarter, a decline of 190 basis points as compared to the year-ago period.

Our Broadspire segment remains a key component to delivering consistent results. In the third quarter, Broadspire delivered operating margins of 11%, consistent with year-ago quarter. Revenues were $77 million, also consistent with the 2016 third quarter. During the quarter, Broadspire experienced growth in medical management and disability service lines with several notable new client wins, including Red Robin, Intuit, World Bank and Nationwide, to name a few. Looking at the balance of the year, Broadspire's new business pipeline continues to be robust, giving us confidence in the segment's future growth potential.

Our Garden City Group segment continued to face a challenging market environment in the third quarter as volume and size of cases in the class action market has not rebounded from the first and the second quarter's weaker levels. This environment, combined with a more rapid runoff of Deepwater Horizon claims, drove a contraction in GCG's revenues, margins and operating earnings as compared to the year-ago quarter.

Looking forward, the near-term environment remains difficult, and our expectations is for Garden City Group's results to remain under pressure with the fourth quarter likely to see some deterioration from this quarter's results. However, we remain committed to the business, given GCG's competitive position and long-term growth and profit potential, and are very focused on returning Garden City Group to profitability in 2018.

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. Company-wide revenues before reimbursements in the 2017 third quarter were $270.6 million, down compared with $277.3 million in the prior year's third quarter. FX changes were not material in the 2017 quarter. The company's selling, general and administrative expenses, or SG&A, totaled $57.9 million, down from $60.3 million in the prior year quarter. As a percentage of revenues, these costs decreased to 21.4% of revenues in the 2017 third quarter from 21.8% of revenues in the prior year quarter. The decrease in the amount of these costs is primarily due to lower professional fees and administrative cost reductions during 2017.

During the 2017 third quarter, the company recorded restructuring and special charges of $1.4 million or $0.02 per diluted CRD-B share compared to $1.5 million or $0.02 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 $11.8 million in the 2017 third quarter compared to $10.9 million in the 2016 period.

Third quarter 2017 diluted earnings per share were $0.22 for CRD-A and $0.20 for CRD-B compared to $0.20 for CRD-A and $0.18 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, third quarter 2017 diluted earnings per share were $0.23 for CRD-A and $0.22 for CRD-B compared to $0.22 for CRD-A and $0.20 for CRD-B in the 2016 period.

I will now review the third quarter performance of each of our business units, starting with the U.S. Services segment. Revenues from the U.S. Services segment totaled $63.1 million, up from the $56.5 million reported in last year's quarter, primarily as a result of revenues from Hurricanes Harvey and Irma as well as acquired revenues from WeGoLook.

Operating earnings in our U.S. Services segment were $9.5 million in the 2017 third quarter or 15% of revenues compared to operating earnings of $9.4 million or 17% of revenues in the prior year quarter. Revenues generated by our catastrophe adjusters in the U.S. totaled $12 million in the 2017 third quarter compared to $9.2 million in the 2016 quarter. The revenue increase for the 2017 quarter was primarily driven by our response to the recent hurricanes, partially offset by lower revenues from a project-based outsourcing contract with a major U.S. insurance carrier.

International revenues decreased to $110.8 million from $121 million in the 2016 period, largely due to a change in a U.K. customer contract, which changed our accounting presentation from a gross to a net basis and reduced revenues by 5% or $5.9 million during the 2017 third quarter. This change had an offsetting impact to expenses and had no impact on operating earnings.

International operating earnings were $10.2 million during the current quarter, decreasing from last year's third quarter operating earnings of $13.5 million. The operating margin in this segment was 9% in the 2017 quarter compared to 11% in the 2016 third quarter.

Broadspire revenues were $76.7 million in the 2017 third quarter, unchanged from the prior year quarter. Operating earnings in Broadspire totaled $8.2 million or 11% of revenues in the 2017 third quarter compared to operating earnings of $8.3 million or 11% of revenues in the 2016 third quarter.

Garden City Group revenues totaled $20 million in the 2017 third quarter, decreasing from $23.1 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 $0.2 million in the 2017 third quarter compared to earnings of $2.2 million in the prior year period. The operating margin in this segment was 1% in the 2017 period, down from 9% in the 2016 quarter. Our backlog at the end of the 2017 third quarter was $66 million, down from $94 million at the end of the 2016 quarter.

The company's cash and cash equivalent position at September 30, 2017, totaled $73.3 million as compared to $81.6 million at the 2016 year-end. Our investment in unbilled and billed receivables has increased by $33.1 million during 2017, reflecting higher receivables in International, U.S. Services and GCG. Goodwill and intangible assets increased by $38.4 million, reflecting the preliminary purchase price allocation of the WeGoLook acquisition.

Pension liabilities decreased by $13.9 million, reflecting cash contributions made in the U.S. and U.K. during 2017. Our total debt increased in 2017 by $62.1 million as a result of funding of the WeGoLook acquisition and growth in working capital needs.

Cash provided by operations totaled $13.9 million for the 2017 period compared to $50.1 million provided by operations in the prior year period. This decrease was primarily due to higher working capital needs, including the timing of payments for accrued compensation between the periods, higher tax and self-insurance payments and changes in pension costs. Free cash flow declined by $47.1 million year-over-year.

During the 2017 third quarter, the company repurchased 193,527 shares of CRD-A and 127,100 shares of CRD-B at an average cost of $7.77 and $8.87, respectively.

Let me now review the updated guidance for 2017. 2017 guidance includes the impact of restructuring costs related to the ongoing implementation of the Global Business Service Center and other restructuring activities implemented in 2017. These costs should total approximately $13 million pretax or $0.16 in diluted earnings per share. In addition, our guidance includes a one-time tax benefit of $3 million or $0.05 per share in the 2017 fourth quarter as a result of international tax planning activities completed during the quarter.

Our updated 2017 guidance is as follows. Consolidated revenues before reimbursements between $1.09 billion and $1.11 billion. After the restructuring charges, net income attributable to shareholders of Crawford & Company between $37 million and $40 million or $0.69 to $0.74 per diluted CRD-A share and $0.62 to $0.67 per diluted CRD-B share; consolidated operating earnings between $92.5 million and $97.5 million; consolidated adjusted EBITDA between $127.5 million and $132.5 million; before reflecting the restructuring costs, net income attributable to shareholders of Crawford & Company on a non-GAAP basis between $46 million and $49 million, or $0.85 to $0.90 per diluted CRD-A share and $0.78 to $0.83 per diluted CRD-B share.

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

Thank you, Bruce. To conclude, while our U.S. Services segment has performed well and is poised to see improved profitability in the fourth quarter, Garden City Group's challenges continue to be a headwind to our financial results and will partially offset the benefits from the recent cat activity. As a result, we have tightened our operating earnings guidance to reflect the recent activity relative to our original expectations when we first issued our guidance in March. Returning GCG to profitability is a key focus of our management team through 2018.

Overall, I'm very pleased with the strong execution that we delivered to our clients this quarter, and I'm confident that the investments we have made in our business will pay dividends in the future. Importantly, the breadth of Crawford's platform and product offering became increasingly evident to the market this quarter, and I'm optimistic that we can deliver on the many cross-sell opportunities that exist. Appointing Ken Fraser to the role of Chief Client Officer is a critical component to the successful delivery of this opportunity and returning Crawford to growth.

To close, I'm pleased that we are going to deliver our second year in a row of EPS growth in 2017. Operator, please open the call for questions.

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

What kind of visibility do you have in terms of being able to get a payoff from your actions here in the quarter? I think you suggested you were making investments and the focus was more on expanding relationships rather than generating margin from the catastrophe adjusters. How much visibility do you have for that to, as I say, translate into more revenue in coming periods?

Sure. So maybe I'll briefly touch on the investment, Mark, and I'll go to the visibility piece. On the investments, we consciously leveraged our adjuster community across the globe, as I mentioned earlier in my prepared remarks. So we have adjusters from the U.K., from Australia, from Canada, from Spain and South America, all bearing down at this large cat event. Now with that comes an investment in travel, an investment in how we pay them, including there was clearly a tussle here between supply-demand, so we wanted to pay our adjusters better than most others. So all of that kind of went into that one-time investment, if you will, in Q3. At this time, on November 6, I can say with reasonable confidence that our investment that we put in is well placed and we can see daily claims volume. Without going into too much detail, I'm quite bullish that we will get a payback for our investment.

Is that to say, in that tussle, the claims adjusters themselves captured a chunk of the upside or a good chunk of the upside?

They got a piece of the upside. I wouldn't necessarily use a chunk, but they got definitely a piece of the pound of flesh, if you will, which will happen when supply-demand imbalance exists in a cat event and, in particular, a multi-cat event. Having said that, I think we were well-placed. We're playing with 7 out of the 10 largest carriers. In addition, we have WeGoLook, which is really, truly a technology-enabled solution that the carriers have clearly seen its interaction and has made a big difference to speeding up, increasing accuracy, lowering costs, the promptness and the effectiveness of WeGoLook working with our desktop adjusting simultaneously. So all of that playing in, if you will, full orchestra has made a big difference. And we can see that because we're continuing even in November to see the claims volume coming through and of recent the nor'easter as well as Puerto Rico claims continue to come in.

Of the $9.2 million in cat revenue last year, how much of that was from the -- a large outsourcing project?

Mark, this is Bruce. I think that a good piece of that would have been from that contract, about $6.5 million of it.

And Mark, we haven't touched on the GTS claims, the Global Technical Services, the large and complex claims. That's continuing to come in as well on top of all this.

Okay. You had suggested margin expansion in the fourth quarter in the U.S. business as you levered some of this. Is that year-over-year? Or is that sequential?

I think it's actually going to be definitely sequential, but it will also have some positive impact year-over-year. But obviously, we haven't gotten October's results yet, but we're in the midst of closing that month. But I would say that the volume movement is large enough is my expectation that it should have impact on margins and flow-through.

The corporate expenses -- and I'm sorry if you touched on this, but the corporate expenses were pretty lean this quarter compared to, I think, earlier quarters. This year, and generally speaking, it's been low, down from the trend last year. Is this $4 million, is that a good run rate on a go-forward basis?

Mark, this is Bruce. That's a number that can have some volatility for us. The year-over-year decline that we saw this year is largely related to lower defined-benefit pension plan expense in the U.S. and also lower professional fees this year compared to last year. Those 2 items have certainly benefited us as well as we've gone through the full year. The other thing we benefited from this year is lower self-insured expense with our self-insured worker's comp, E&O and medical programs. Those items can be volatile and they can be headwinds for us to -- really depending upon our claims experience. So it's hard to peg a number for what's going to go forward, but that has been a helper for us this year.

On a cultural basis, Mark, we are keeping a pretty good handle on what we call the shared services costs. Because if it's not revenue generating, we need to be very, very careful that our investments are pointed towards revenue-generating activities.

Understood. How about the GCG? It sounds like it's going to be another tough quarter in 4Q. Assuming things go as you might hope, when does that start to turn around?

Sure. So first of all, we have the large declines going on in the large cases like Deepwater Horizon. So as the case volume is coming down, rightsizing the organization is critical and you cannot do it at the same pace as the tailing down of the large cases. So as we're rightsizing it, the other piece that has happened is we're winning -- we're continuing to win a lot of cases, but they're smaller in size. But that is starting to shift as well, but it will take some time to get a foothold. In addition, we have launched data breach administration case services, and that is starting to take some hold. I think it will take a couple more quarters before it kind of comes through and stabilizes. But long-term, we do see a good perspective for GCG and we're very solidly committed to continue to move forward. Not to mention, GCG played an important role even in the cat by let us leveraging off their large contact center and taking a huge intake of calls. That made a very big difference to us being very robust in this particular cat.

(Operator Instructions) Our next question is from the line of Greg Peters from Raymond James.

I wanted to touch base or to have you guys circle back with additional color around the cash flow numbers. I noticed the net cash from operating was down substantially year-over-year. And I know, Bruce, you highlighted some of the variables that were unusual this year relative to last year. But I thought maybe you could give us some additional color because the number is pretty striking.

Right. So we had -- one of the biggest changes that we had was around the timing of bonus payments. So in 2016, in the calendar year 2016, we did not have very much in the way of significant bonus payments that were paid, bonuses that would have been earned during '15, and '15 was a challenging year for us, particularly the back half of that year. During '17, we had much more significant bonus payments that were made based on 2016's results. So there was a -- just a shift in the amount of cash outflow related to incentive compensation. We also had a change in defined contribution payments as well between those 2 years, where they were greater in '17 than they were in '16 because the 401(k) payments was something we had cut back on in '15. So that's the big driver of it.

We also have higher tax payments this year and higher self-insured payments, even though our expenses down to payments on claims is higher this year. And then the other item that we had in '16, which was a benefit that we didn't have in '17, you might recall we had a cross-currency swap on the Canadian dollar to hedge an intercompany loan that we had, and we converted that intercompany loan to a third-party borrowing and unwound that hedge, and it had a $4.9 million benefit to us that was a cash benefit we recognized in '16, it wasn't in '17.

Excellent color, Bruce. I know in one of your answers or maybe it was in the prepared comments. you talked about pension expense. What should we think about that as we look to 2018 in the context of what's happened in 2017 so far?

Yes. I think that we will be updating our guidance around that in the fourth quarter call. We don't have -- we go through an actuarial process in December of each year to determine our pension expense and pension funding for the upcoming year. I will tell you that our performance in our pension plan has been good this year, and we would certainly not expect to see a material movement in our expenses between the years, but that's still subject to ending the year and going through the calculations.

Okay. Two other quick questions. I was curious about the line item within the cash flow statement that also stuck out is the capitalization of computer software cost. What's going behind that?

Yes. So the largest capital expenditure that the company has is the development of software, either software that we develop or software that we buy. We have a number of initiatives on the go here in the company, some related to ledger replacement projects, others related to core business applications and client-facing applications that we're investing in. That I think you'll see continue. The technology demand in our business is continuing to evolve, and that is not going to go away. I think that as compared to our peers, we're in a good position to be able to invest back in our business, given the strong financial foundation that we have. So we feel like we're in a good place to invest and be at the forefront of offering solutions into the marketplace, and I think you'll see us continue in that regard.

Okay. And then the last accounting cleanup question. You mentioned change in accounting as it relates to the Contractor Connection. And I'm wondering if that is a precursor to -- I know there's some new recognition rules coming out at the beginning of next year. I'm wondering if that's a precursor to something we might see beginning 2018 regarding new accounting rules?

No, no, it's not. Within our Contractor Connection business, we operate as an agent, and so our revenue stream is largely a referral fee that we receive for managing the network. And that's the way all of our U.S. contracts work and the way most of our international contracts work. However, there are a few clients in the U.K. where we have acted as a principle, meaning that we're obligated to pay the contractor's cost, and we bill that onto on to the insurance company, and then we collect the fee. We have been successful in migrating those customers to an agency-type relationship. So when you're in a principle relationship, your revenues are higher, your expenses are higher, but it's all just pass-through cost and your operating earnings are the same. As we migrate these customers to the agency model, which is our preferred model, then you'll see revenues and costs come down, but it has no impact to operating earnings since it's -- you're just eliminating that pass-through component. So...

That makes sense. What about -- is there -- should we anticipate changes based on the new revenue recognition rules? Or is that largely a nonevent for your company?

We are still going through the evaluations for that as are every other public company that's out there. I will tell you that based upon what we have done to date, we do not see any material changes to our revenue recognition. The standard for us is largely going to be around disclosure and much more robust disclosures around revenues, and that's where most of our work and preparation is at, but we're still going through the process of evaluating contracts. And if we run across anything that would have an impact to revenues, then we'll be disclosing that at the end of the year. But at this point, we've not found anything that's material.

And our next question is from the line of Adam Klauber from William Blair.

A couple of different questions. So does GCG need to grow revenues to become profitable next year?

They need to grow revenues regardless, but I would say, at the level they're running at and the rightsizing we're going through, they should be able to make a profitable return on their current revenue. So they don't have to grow revenues, but getting it right, and not to mention, investing and leveraging in technology also will make a difference.

Okay. And I'm not sure if you mentioned, how is the backlog looking for next year at this point compared to 6 or 9 months ago, in GCG?

It is a lower backlog because there were some large cases that were about to come through that are held up in the court system. We have not lost the cases. They haven't gone to anybody, but they're just kind of held up until they get released from the court system. Having said that, the other reason that the backlog is a little lower is because the size of cases that we're winning are smaller in size and the class action market in the first 2 quarters of this year have actually been soft and that might pick up here going forward.

So longer term, if the litigation environment does not rebound, how will you get that unit profitable? Just continue to cut cost? Or, I guess, what's the -- what happens if the environment is (multiple speakers)?

The first is the rightsizing is critical, and that -- they're going through and figuring that out. The second is, we have new lines of service that we have introduced that will pick up steam, like data breach is just one example, and both Broadspire and Garden City are joined at the hip on product recall, which is another large segment they're getting into. And product recall might range all the way from food to automobiles depending on what kind of product recall that has. So we have other services that are coming on that should compensate even if the litigation environment slows down.

Okay, okay. But it sounds like you think that business can be profitable next year, bottom line?

Yes.

Okay, okay. Broadspire, you mentioned that the pipeline picked up -- not the pipeline, but new sales picked up. You had some good-sized wins. So should we see that division growing again next quarter?

It should grow into next quarter and next year, and as time goes by, it should pick up even more steam, if you ask me. And because we obviously have the worker's comp business, we're starting to win more and more disability activity as well as the medical management, and they have the product recall piece that they're leading that should also make a difference.

Okay. And I guess, how do you feel about the margins in that business? Can they -- is there near-term upside? Or as you're building out these new businesses, is the margin going to be more stable?

Yes, I would say that currently, on operating margin basis, they're running about 10%. On an EBITDA basis, they're running 12% to 13%. And I think as they're winning more business, we should see it pick up because there will be flow-through that might be greater than the current margin. So we might have a little tick up in margin, but I think we're approaching the benchmark in terms of this business in terms of EBITDA margin. So I feel pretty good. And if anything, as revenues increase, flow-through increases, the margin will pick up because you are leveraging against a fixed cost base.

Okay. And then finally, as far as catastrophe and weather-related claims, will the majority of the revenue from those claims fall more in the third quarter? Or this would be 50-50 ballpark between third quarter and fourth quarter? Again, just some ballpark idea of where that level revenue will fall?

Right. And I would say, and Bruce can correct me if I'm wrong, but I would say that our real impact of cat was really felt in September and we will have continued impact in October, November, December. So we should get a larger piece in Q4 versus September. In addition to that, the GTS, the large and complex claims, will take a lot longer and will drag quite well into Q1. And also Contractor Connection, the manage-repair that comes behind all this. will continue to go through Q1 and maybe even Q2. So we have yet to report a lot more activity would be the bottom line.

And at this time, I'm showing no further questions. Mr. Agadi, I turn it back to you for closing remarks.

Yes. Thank you very, very much. And as I will reiterate my final point, to close, I am pleased that we are going to deliver our second year of EPS growth in succession and this one is for 2017. So I want to thank my team across the globe for bringing in a strong year against a cat backdrop. Thank you. 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 December 6, 2017. The conference ID number for the replay is 6374542. The number to dial for the replay is 1 (855) 859-2056 or (404) 537-3406. Thank you. You may now disconnect.