Crawford & Co (CRD.A) 2020 Q2 法說會逐字稿

Good morning. My name is Natalia, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Crawford & Company Second Quarter 2020 Earnings Release Conference Call.

In conjunction with this call, a supplementary financial presentation is available on our website at www.crawco.com under the Investor Relations section. (Operator Instructions) After the speakers' remarks, there will be a question-and-answer period. (Operator Instructions) As a reminder, ladies and gentlemen, this conference is being recorded today, Tuesday, August 4, 2020.

Some of the matters 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, the impact of COVID-19, our expected future operational 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 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 financial agreements, our 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 the 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 at -- 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, 2020, filed with the Securities and Exchange Commission, particularly the information under the heading Risk Factors and management discussions and analysis of the financial condition and results of operations as well as subsequent company filings with the SEC.

This presentation also includes certain non-GAAP financial measures as defined under the SEC rules. As required, a reconciliation is provided for those measures to be the most directed comparable GAAP measures.

I would now like to introduce Mr. Rohit Verma, Chief Executive Officer of Crawford & Company. Rohit, you may begin your conference.

Thank you, Natalia. Good morning, everyone. I hope you and your families are healthy and well. It is great to join you on my first earnings call as CEO of Crawford & Company. Joining me today is Bruce Swain, our Chief Financial Officer; Tami Stevenson, our new General Counsel; and Joseph Blanco, our President. After our prepared remarks, we will open the call for your questions.

Before I discuss the highlights from the quarter, I would like to touch on Crawford's current business priorities. Over the last several months, our focus has been threefold: first, protect the health and safety of our global workforce; second, navigate the financial turmoil created by COVID-19; and third, continue to deliver on our client commitments. I was gratified to see the resiliency of our business confirmed during the second quarter. I'm impressed, by the way our team has banded together to continue providing the highest level of service to our clients.

At the same time, we have prioritized the health and safety of our employees. Our commitment to Crawford's purpose allowed us to deliver strong results amid this global economic uncertainty. I am proud to lead a nimble company, which demonstrated its ability to adapt to an unprecedented situation. This is the result of a strong and seasoned management team that leverages its knowledge and experience to drive our business.

Crawford was able to deliver a strong quarter. The results exceeded our own expectations, which were tempered by the never before seen challenges to our operations due to the COVID-19 pandemic. We reported better-than-expected GAAP revenues before reimbursements of $234.4 million and net income attributable to shareholders of $5.9 million.

On a non-GAAP basis, we reported revenues before reimbursements of $240.2 million and net income attributable to shareholders of $8.8 million. Operating earnings were $18.7 million in the second quarter, achieving more than a 2x improvement from the $7 million reported in the first quarter. Adjusted EBITDA was $25.9 million in the second quarter, up from $16.7 million in the first quarter.

In short, our financial position remains healthy. We continue to draw on our competitive position in the market and the advantages of our global scale. We have paid down a revolver borrowing of $40 million, which we had initially drawn at the beginning of the pandemic. In the process, we have further bolstered our balance sheet and improved liquidity. Our leverage ratio at the end of the quarter was very strong. 16 of our operating units exceeded 2019 revenue, a testament to our client traction and investment to drive organic growth.

Additionally, we continued our prudent investment in key strategic initiatives to maintain our leadership position and best serve our clients' needs. As we look to the second half of 2020, we are cautiously optimistic of our future performance in light of the current global uncertainty. As part of the insurance services sector, we remain acutely aware of the impact of weather and economic activity on our financial results. The second quarter saw a return to normal weather pattern with severe weather across U.S., U.K. and Australia in the form of convective storms, floods, tropical cyclones and wildfires.

According to the Aon Global Catastrophic Recap, U.S. saw a spike in CAT events during the second quarter, resulting in about $8 billion in economic losses with an estimated $6 billion in insured losses. This enabled us to capitalize on the client wins we have accumulated over the last 18 months.

We also benefited from an increased volume of business interruption claims in U.K. and event cancellation claims in U.K. and Europe. Claims volume in the quarter was also impacted by reduced business activity driven by COVID-19, which continued to cause a slowdown in our TPA business.

Heightened unemployment levels have led to a reduced number of workers' compensation claims. As I mentioned, the decreased economic activity continues to be a challenge for several of our clients particularly those in the hospitality and entertainment space. While we have seen declines, we have seen pockets of increases as well. We observed an increase in trip cancellations in Europe and Canada as well as COVID-19-related workers' compensation claims in U.S. for TPA. The use of telemedicine picked up during the quarter, providing an opportunity for additional revenue. We also advanced our technology solutions in this segment by offering enhancements within the adjuster portal and improving the client ecosystem for access to key information and streamlined third-party integrations.

Our TPA business in Europe and Australia showed solid growth over 2019, but the growth was not sufficient to offset the weaknesses in Canada and U.S. In Crawford Claims Solutions, we saw momentum from our new clients in the second quarter. We continue to see benefits from investments we have made in our client solutions. We earned our first $1 million month in June from our most recent major carrier win. The segment saw increased weather activity in Australia earlier in the year, and we are still working through that inventory.

WeGoLook has been extremely successful in winning remote claims handling business, with the highest number of assignments seen in June than ever before. We are seeing significant interest in remote claims management and are increasingly bringing the solution into our discussions with clients. We have translated our YouGoLook app into Dutch, Mandarin and Spanish to increase accessibility within our global client base.

Additionally, our new facility in Dallas, especially commissioned for our most recent large carrier win, is now operational, and we are in the process of expanding it to fully utilize its capacity before fall. Overall, Crawford Claims Solutions business grew in U.S., U.K., Europe and Australia, but this growth was offset by significant weakness in Canada.

Turning to Crawford Specialty Solutions. We are seeing a return on investment we have made in our Contractor Connection business. We had the highest number of monthly assignments for 2020 in May, driven by weather-related surge events. We onboarded another top-10 carrier in June that we have started receiving assignments from. This recent win increases our penetration to 10 of top 25 U.S. carriers.

This quarter, we implemented our proprietary job tracker tool. Crawford is the first company in this space to offer a digitized repair solution. In response to COVID-19, we expanded our decontamination service to additional countries and launched new commercial property modification service to help reduce the risk of spreading the virus during office reintegration.

We saw significant strength in the GTS side of Crawford Specialty Solutions, which is up over last year's second quarter. We have built an industry-leading data and analytics-based solution to handle a potential surge of business interruption claims.

During the quarter, our casualty team continued to work on recent business interruption claims in U.K. Additionally, the frequency of cyber claims has also increased across Asia and Europe. We also received an increase in event cancellations in Europe and U.K. and claims tied to COVID-19 in Canada, Europe and U.S. These wins led GTS to grow over 2019, with U.K. and Australia seeing double-digit growth.

Although current and potential clients have faced many obstacles due to the pandemic, we continue to see RFP activity and won $23.6 million of new business during the second quarter. With over $250 million in the sales pipeline as well as our recent client wins, we have maintained our new business momentum.

Our TPA business saw several new business wins, totaling $11.2 million in annualized revenue as well as a 97% renewal rate on our existing business. In our Crawford Claims Solutions business, we are continuing to ramp up a new large carrier client. Crawford is gaining traction as the premier choice for large carriers in several supplier categories. We have seen an increase in new business momentum from weather activity. Our sales teams are excited about continuing to drive new business activity, led by our remote service offering. In Contractor Connection, we won another top-25 carrier and completed major renewals in U.S. and Canada. The GTS business saw several new nominations, including our largest programmatic win in U.S.

Providing excellent customer service and delivering high-quality solutions to our clients are core components of Crawford's offerings.

During the second quarter, we collected a record number of NPS scores for a single quarter with an enterprise score of 40. This signifies a high level of customer satisfaction, and we are constantly striving for further improvement. Our management team remains focused on strengthening Crawford's cash generation capability while delivering value to shareholders through a disciplined capital allocation strategy.

Liquidity was better than expected for the second quarter. Operating cash flow increased 40% over last year's levels, aided by solid performance. At the end of second quarter, our leverage ratio was 1.57x EBITDA, which is excellent compared to industry peers. Based on our strong financial position, the Board has decided to increase the quarterly dividend to $0.04 per share for both CRD-A and CRD-B. We are evaluating our capital expenditure and are making prudent investments in the business to attract, acquire and more seamlessly serve clients.

We will continue to reevaluate our share repurchase program as a component of our capital allocation strategy. Now I would like to turn the call over to Joseph, who has led our response to COVID-19 from the front. Joseph?

Thank you, Rohit. We entered the COVID-19 crisis with a focus on navigating the effects of the pandemic on our business while at the same time, keeping the morale of our employees high.

With our people as our greatest asset, we continue to prioritize protecting the safety and well-being of our workforce at all times, allowing them to successfully serve our clients. Encouragingly, the feedback we have received from employees to date has been overwhelmingly positive. We remain active in the field, and we continue to provide PPE and special training from experts to our employees who are operating on the front line.

Our client impact has been another top priority throughout the quarter as we aim to carry out Crawford's mission of restoring and enhancing lives, businesses and communities. We have proved how critical our services can be to our clients' bottom line by allowing them to continue operations and have the opportunity to achieve superior results.

Throughout the last few months, we have followed through on our promise to be there for our clients when they need to lean on us the most. As we continue our journey towards service excellence and involving our culture to become more inclusive, we have formed an employee advisory council, which will become a sounding board for our leadership team with representation from employees globally.

We have also implemented a 5-point plan to guide our diversity and inclusion priorities for the second half of 2020 and 2021. This plan is aligned with our diversity and inclusion mission, which is to foster a safe and inclusive working environment, where employees can bring their authentic selves to work and offer unique experiences and perspectives.

As we look towards the second half of 2020, we will remain focused on the health and safety of our global workforce, navigating the financial turmoil created by COVID-19 and delivering on our client commitments.

With that, let me turn the call over to Bruce to review the financial results of the second quarter in more detail.

Thank you, Joseph. Company-wide revenues before reimbursements in the 2020 second quarter were $234.4 million compared with $256.9 million in the prior year second quarter.

On a non-GAAP basis, the company saw revenues of $240.2 million. Our net income attributable to shareholders of Crawford & Company totaled $5.9 million in the 2020 second quarter compared to net income of $2.6 million in the 2019 period.

Second quarter 2020 diluted earnings per share was $0.11 for both CRD-A and CRD-B compared with diluted EPS of $0.06 for CRD-A and $0.04 for CRD-B in the 2019 period.

On a non-GAAP basis, net income attributable to shareholders was $8.8 million, resulting in second quarter 2020 diluted EPS of $0.16 for both CRD-A and CRD-B as compared to 2019 diluted EPS of $0.21 for CRD-A and $0.19 for CRD-B. The company's non-GAAP operating earnings totaled $18.7 million in the 2020 second quarter or 7.8% of revenues compared with $22.5 million or 8.8% of revenues in the prior year period.

Consolidated adjusted EBITDA was $25.9 million in the 2020 second quarter or 10.8% of revenues compared to $31.2 million or 12.1% of revenues in the 2019 quarter.

I will now review the second quarter performance of each of our segments. Revenues for Crawford TPA Solutions were $86.7 million in the 2020 second quarter decreasing from $99.5 million in the 2019 period. Absent foreign exchange rate fluctuations of $900,000, second quarter 2020 revenues would have been $87.6 million. Crawford TPA Solutions operating earnings were $3.2 million during the current quarter compared to last year's second quarter operating earnings of $5 million. The operating margin in this segment was 3.7% in the 2020 quarter and 5.1% in the 2019 quarter.

Revenues from the Crawford Claims Solutions segment totaled $81.5 million, decreasing from $86 million reported in last year's quarter. Absent foreign exchange rate fluctuations of $2.8 million, second quarter 2020 revenues would have been $84.3 million.

The segment reported operating earnings of $2.8 million in the 2020 second quarter or 3.4% of revenues, increasing over operating earnings of $1.7 million or 2% of revenues in the prior year quarter. Crawford Specialty Solutions revenues were $66.2 million in the 2020 second quarter, down from $71.4 million in the prior year quarter. Absent foreign exchange rate fluctuations of $2.2 million, revenues would have been $68.4 million for the quarter.

Operating earnings in Crawford Specialty Solutions totaled $14 million or 21.1% of revenues in the 2020 second quarter, increasing over operating earnings of $12.6 million or 17.7% of revenues in the 2019 second quarter.

Unallocated corporate costs were $1.7 million in the second quarter of 2020 compared to credits of $3.2 million in the same period of 2019. This increase was driven by CEO transition costs, severance and an increase in self-insurance expense, partially offset by a credit from the Canada Emergency Wage Subsidy and a decrease in defined benefit pension expense.

We estimate that COVID-19 negatively impacted our revenues in the range of $22 million to $26 million during the second quarter of 2020. We expect the ongoing global economic slowdown from COVID-19 could have a material impact to our results of operations, financial condition and cash flows in one or more future quarters.

The 2020 second quarter operating earnings includes a total of $4.3 million in benefits from the Canada Emergency Wage Subsidy. In the first quarter of 2020, we recognized a noncash goodwill impairment charge. Due to the nondiscrete income tax treatment of the goodwill impairment, the income tax benefit initially recognized for the impairment will normalize during the remainder of the year, resulting in a lower full year income tax benefit associated with the impairment.

During the second quarter, the impact of this treatment decreased the net income tax benefit by $2.2 million or $0.04 per share. In June 2020, we sold our 51% stake in Lloyd Warwick International for initial cash proceeds of $23.2 million. While we are finalizing the accounting for this sale, we expect this to result in a net gain of between $10 million and $12 million. Due to the 2-month reporting lag for reporting our international results, this transaction will be recognized in our 2020 third quarter.

The company's cash and cash equivalent position as of June 30, 2020, totaled $60 million compared to $51.8 million at the 2019 year-end. Total receivables were down $4.8 million from year-end as a result of the company's focus on working capital. The increase in unbilled revenues is related to weather-related increases in the U.K. and Australia, which should turn as we move through the year.

Pension liabilities decreased $7.5 million from the 2019 year-end. The company is not required to make additional pension contributions for the remainder of 2020. The company's total debt outstanding as of June 30, 2020, totaled $195.6 million compared with $177 million at the 2019 year-end. Net debt stood at $135.6 million at the end of June. The proceeds from the LWI sale will be used to pay down outstanding borrowings during the third quarter.

We are pleased with our operating cash flow so far this year. Cash provided by operations totaled $12 million in the 2020 period compared to $8.7 million provided by operations in the prior year period. The $3.3 million improvement in operating cash flow was primarily due to improved collections and billed and unbilled receivables, partially offset by an increase in pension contributions and lower operating earnings.

Free cash flow declined by $2.9 million compared with 2019, reflecting higher strategic software development and capital expenditures in 2020. Our free cash flow generation remains a top priority for the company.

As mentioned on last quarter's call, we decided to place a hold on our current share repurchase plan in March and did not repurchase any shares during the 2020 second quarter.

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

Thank you, Bruce. As we look towards the second half 2020, we remain committed to the health and safety of our employees. We will continue our exemplary service to customers and the pursuit of new business, leveraging our brands, relationships and differentiation. We believe this will help us navigate COVID-19 pandemic and deliver superior results for our shareholders.

Thank you again for your time today. Operator, please open the call for questions.

(Operator Instructions) Your first question is from the line of Greg Peters with Raymond James.

I guess the first question would be around revenue, specifically in Broadspire. Could you give us a sense on activity levels as we move through April, May, June and maybe give us a sneak peek on July? Were you starting to see a rebound in activity? Or just give us some sense of where that revenue base might stabilize that, I guess, is what I'm thinking about.

Sure. Greg, first of all, great to hear from you. Hope you and your family are doing well. Look, when you think about our business, really, there are 2 aspects of our business. One is the weather-related business and the other is the economic activity-related business. TPA certainly falls and Broadspire certainly falls in the economic activity-related parts of the business. And within that, you've got a workers' compensation component and a general liability component. The workers' compensation is going to be directly tracked to what's happening with the unemployment rate. And obviously, the business had dipped quite a bit in the last few weeks of March going into April. We have seen a slight uptick, but I think our concern is there is still uncertainty around COVID and how things will develop over the coming months. So we are still very cautiously optimistic about where the volume will be.

Initial results in July seem in line with our expectations of how we expected July to be coming back.

Okay. And also, I think in your comments, you talked about being involved in business interruption and event cancellation claims. And as you know, there's an ongoing debate about virus exclusions and physical damage. And I'm curious how you're seeing that way out with your customers, your clients and how you think that's going to evolve over the next several months.

Yes. And -- look, when we think about the U.S. market, our understanding is that most of the policies exclude the global pandemic. That is what our clients have shared with us as well, with the exception of some limited policies where it's manuscripted into the policy. In the U.K., we're obviously, awaiting where -- what the FCA is going to decide. And we are in active dialogue with several of our clients and how we will support them and help them respond depending on how the FCA is going to land on their decision. Those are the 2 primary markets where I would say we've had most of the discussions. There is some discussion about it in the Australian market as well, but I think it's very early on which way things will go. And Australia, as you know, has seen less of an impact of COVID-19 on a global scale.

Got it. The final question, I guess, is around cash flow. I mean it's actually a nice surprise result. Is the second half of this year looking to be as strong? Or there is going to be some catch-up tax payments that might offset the back half of the year? Just I guess, how do we think about cash flow for the full year given your success for the first half?

Greg, this is Bruce. That's a good question. We were pleased with the operating cash flow for the first 6 months of the year. We -- like our operations, being cautiously optimistic there. We're also cautiously optimistic on the cash flow side. We expect to unwind some of the working capital that we had on the books at the end of 2019 and for that to continue to kind of come in and give us some benefit this year. We're benefiting from a few things in the back half of the year. One is we're not required to make any additional defined benefit pension contributions, and our current planning has us not making any more for the remainder of the year. We're getting the benefit under the CARES Act of a deferral in payroll tax payments for this year, which will help us. It doesn't result in a P&L benefit, but it is a cash flow benefit, and that will have to pay back in 2021 and 2022. So -- and we're also seeing the Canada Emergency Wage Subsidy as a cash benefit to us in the back half of the year. So we anticipate our operating cash flow being strong in the second half of the year as well. And as you know, historically, the back half of the year has traditionally been the highest cash generation period for the company.

Great. And congratulations on your first conference call as CEO. You read the script flawlessly. So if that's any indication of the future, it indeed is going to be better. So good luck to everyone.

Thank you, Greg. I have a good team and good coaches.

(Operator Instructions) Your next question is from the line of Mark Hughes with SunTrust.

I appreciate all the detail in the presentation. When you think about the revenue impact, I think you described $22 million to $26 million. Absent that, presumably, revenue would have been steadied up a little bit. When we think about the second half, just roughly speaking, kind of puts and takes, just some general thoughts about where that ought to trend? And again, in the context of the $22 million to $26 million?

Yes. Mark, first of all, we are, as we said, feeling good confidence in the future. We feel the momentum is good. Frankly, we've raised the dividend because we feel good about how things are moving in the future. I think like most other businesses, where we are concerned about is what happened with COVID and its impact, both from an economic standpoint to the economic activity, but then also our carrier customers. And that is the reason why we are even cautiously optimistic. Our new business momentum is good. We've demonstrated that our pipeline is good. The investments that we've made are bearing fruit. So yes, we feel good about where we are. The one wildcard for us is COVID-19. Bruce, I don't know if you want to add to that.

No. I think that covered it pretty well. It is a period of uncertainty, and I think we'll know more as the next few months unfold with where the pandemic is trending in the U.S.

When you think about the...

And Mark, for the rest of the -- sorry, go ahead. No, no, go ahead, please.

Oh, I was going to shift topic. I'm interested to hear your comment there?

Yes. I was going to say that what we're expecting from a weather perspective is just a normal weather pattern for the rest of the year. And as you know, we're roughly half weather, half economic activity. So that part of the business, we feel very good about and the momentum that we have in that part of the business.

On the TPA business, you say you've seen a slight uptick. Your growth there was, what, down 12%. I think one of your competitors reported a similar type of decline. How much of that is headcount versus it seems like on the comp side, there's maybe some hesitancy to report claims at this point in the cycle? Are we just dependent on the job market coming back? Or do you think there could be some normalization even aside from the...

Yes. When we look at our Broadspire business, there are really 3 parts of the Broadspire business. There is disability, there is general liability and there's workers' compensation. Obviously, there are smaller other parts, but those are probably the 3 biggest parts. I think when we look at disability and workers' compensation, that has a direct correlation to unemployment rate. As the employment rate picks up, we should see the claims activity on that come back. It's hard for me to comment whether the claims activity itself is suppressed by people worried about their jobs or not. It -- again, there could be some impact of that, but it's hard for us to really discern that.

But there's also sectoral play in it, right? If you look at what's happening with hospitality and entertainment, those parts of the unemployment are much harder hit than, say, the health care part. So the good news for us is that our book is generally pretty balanced and we're not overweight on one side. So that's the reason why I believe that in some ways, I would like to say that our reductions are less than what we've heard about what we believe some of our competitors may be facing who have a heavier book in hospitality, entertainment and retail.

So -- and the GL side is purely an economic activity, right? If there are more people traveling, more people walking into hotels, more people walking into restaurants, you expect to see more GL claims activity. So one related purely to unemployment, the other one related more generally to economic activity.

Understood. Of the Canada, the funds, the $4.3 million this quarter. What do you anticipate you -- will that continue into the second half? Is there an amount you can estimate on that?

Yes. Yes. Mark, this is Bruce. It will continue into the second half. We originally thought that it would just be something that moved into the third quarter. But the Canadian government has recently announced an extension through the end of the year, although that extension will be at lower levels than what we've seen thus far in the second quarter. Second quarter, we had $4.3 million. We would anticipate in the third quarter another $3.5 million or so, and then we'll have to see where it goes beyond that. Some of it's going to be dependent upon the rules and regs that the Canadian government puts out related to the remainder of the year, and those still aren't finalized as of yet.

Then a final question. I think you described a $250 million sales pipeline. Has RFP activity returned to normal? Can you give us a sense of where it is relative to kind of pre-COVID?

Sure. Mark, to our surprise, actually, the RFP activity has continued. We did see a brief slowdown, I would say, in the second half of March and April. But since then we've actually seen it pick up. Now is it back all the way to the COVID-19 levels? No, but it's certainly higher than what we would have anticipated as we entered the pandemic.

If there are no further questions. I will turn the call back over to Mr. Verma for closing remarks.

Thank you so much, Natalia. I just wanted to thank all our customers, all our employees for their support and their confidence in us. We feel very good about where the company is headed. We feel very good about the momentum that we have, and we look forward to further success for Crawford & Company. Thank you so much.

Thank you for participating in today's Crawford & Company Conference Call. This call will be available for a replay beginning at 11:30 a.m. today through 11:59 p.m. on September 4, 2020. The conference ID number for the replay is 3915479. The number to dial for the replay is 1(855) 859-2056 or (404) 537-3406. Thank you. You may now disconnect.