CRD.A (CRD.A) Q3 2019 Earnings Report, Transcript and Summary

Good morning. My name is Shelby and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Crawford & Company third quarter 2019's 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. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. Instructions will follow at that time. [Operator Instructions]. As a reminder, ladies and gentlemen, this conference is being recorded today, Tuesday, November 5, 2019. Now I would like to introduce Joseph Blanco, Crawford and Company's General Counsel.

Thank you. Good morning. 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 pension plan, collectability of our build 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, 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 from 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 our operating results for any historical period are not necessarily indicative of results to be expected for any future period. For a complete discussion regarding factors which could affect the company's financial performance, please refer to the company's Form 10-Q for the quarter ended September 30, 2019, filed with the Securities and Exchange Commission, particularly the information under the headings Risk Factors and Management's Discussion and Analysis of 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 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.

Good morning and welcome to our third quarter 2019 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. Turning to our third quarter results. We delivered GAAP revenue before reimbursements of $254.7 million. On a constant currency basis, we delivered non-GAAP revenue before reimbursements of $262 million, representing nearly 3% growth as well as 270 basis points of margin expansion, both positive as compared to the year ago quarter. Adjusted operating earnings on a non-GAAP basis were $24 million, rising over 45% from the prior year quarter and up sequentially, almost 5% from the $22.9 million that we achieved in the 2019 second quarter. Our third quarter results clearly demonstrate an improving trend in our business as we benefit from the investments that we have made in technology and new client solutions which are resonating in the market. While I am extremely excited with our new client wins and pace of business, the more benign weather that we experienced in the third quarter and thus far through the fourth quarter has resulted in our reduced guidance for the full year. In fact, global insured losses from catastrophes are estimated to be less that 50% of the level reported in the year ago third quarter. This benign weather environment is masking the underlying strength in our claims management business. As a result, I remain confident that our goal of delivering the 5% revenue growth and 15% earnings growth annually is achievable in the medium term. This confidence comes from the strong acceleration in our new business development and client acquisition which continued through the third quarter. Our strategic investments in both our global sales teams and in new product development are driving this new business momentum and market share growth. Through the third quarter, we have signed a phenomenal $85 million in annual revenue from new customers which provides solid visibility to future revenue and profit growth. This is across all lines of our business. In regards to a few specifics, our industry vertical solutions focused on the construction, hospitality and transportation sectors continue to gain traction having had a record 324 new and enhanced pipeline opportunities in 2019 with continued new business momentum as we enter the fourth quarter. Our industry solutions provide Crawford with a market-leading position as well as critical differentiation where we can demonstrate our expertise and drive incremental business value for our customers. Our focus is to blend our deep claims experience with disruptive technologies to deliver world-class innovative claims service. This can be seen in our recently introduced Escape of Water solution which received the Innovation Award at InsureTech Connect, the world's largest insurtech event that attracted more than 7,000 attendees from 60 countries. Importantly, our innovation is being recognized by the market as we hosted more than 80 meetings with potential clients and insurtech companies to explore strategic partnerships and other opportunities. Contractor Connection had significant wins in the quarter including major carriers in the U.K. and the U.S. and a pilot with a major Canadian carrier. These significant new client wins demonstrate Contractor Connection's market-leading position and point to an acceleration in growth into next year. Our new top five U.S. [indiscernible] carrier clients that we signed last year continues to ramp up steadily during 2019. In the U.K., GTS had 16 $1 million-plus property claims from eight different insurers over an eight-week period during the quarter that were not weather-driven. These large and special claims demonstrate that our clients continue to trust us with their most complex claims and is a further sign of our gold standard in the market. Lastly, our global TPA segment also experienced strong new client growth across the globe in the third quarter, having added 36 new clients. As you can see, we are executing and positioning Crawford for accelerated growth. That said, our new clients have been slow to ramp their claims volume. As an example, our TPA segment has 176 new clients so far this year with an expected revenue run rate of approximately $32 million annually which is only in the early stages of ramping up. While there has been a delay in claims received from some of these new clients which has been a headwind to our near term results, it provides very good visibility to future growth. Looking forward, a clear focus of our management team is to diversify our revenue streams by augmenting our weather-related businesses with more predictable revenue sources. Our goal is to expand our TPA business and our small and medium carrier outsourcing business, which are more predictable and will help reduce the weather-related headwind that we experienced recently, an example in our strategy to handle small and medium carrier claims on an outsourced basis, which represents a large and untapped market opportunity and will ultimately increase the predictability of our revenues and earnings. Early signs of our success can be seen in our CCS segment where we onboarded multiple U.S. and U.K. carriers during the third quarter. These new client wins build on our success in the second quarter where we signed a top 15 P&C carrier in the United States who outsourced 100% of their small business program to Crawford. Importantly, these new programs are validations of our value proposition and clearly demonstrate the value that we can provide as insurers work to improve their profitability. The outsourced market for internally run claims departments is significant and our ongoing client discussions are very encouraging. We will continue to transition our business model towards more predictable recurring revenue while still maintaining our competitive claims offerings in the weather-driven market segments. While our growth initiatives are firmly taking hold, I am also very pleased with the customer validation that we are receiving. We have surveyed 378 of our customers and our Net Promoter Score for entire business has reached an impressive 45 through the third quarter. Our goal is to receive feedback from at least 70% of all our clients as we continue to focus on client development, execution and retention. Beyond our strategic initiatives designed to drive growth, our management team has also been focused on improving the company's cash generation while delivering value to shareholders through a disciplined capital allocation strategy. Notably, we generated $38.9 million of additional free cash flow through the 2019 third quarter as compared to the 2018 period. We have been using this cash flow to strengthen our balance sheet and our leverage ratio is now below 1.5 times net funded debt to EBITDA. This makes us one of the lowest levered companies in the claims management industry. We have also been using our cash flow to buy back our shares as we continue to see our share price as very attractive. This year, we have bought back over 5% of our outstanding stock through the third quarter. We are also focused on continued expense discipline and operating efficiency. As an example, over the last three years, we have reduced our non-compensation expenses and have reinvested those savings in our people. Looking forward, we remain continuously focused on expense discipline and will be working diligently to further reduce our discretionary spending in the fourth quarter. I would now like to turn the call over to Bruce to review the financial results of the third quarter in more detail.

Thank you Harsha. Companywide revenues before reimbursements in the 2019 third quarter were $254.7 million and on a constant currency basis were $262 million. Revenues in the 2018 third quarter totaled $255 million. On a non-GAAP basis, excluding FX fluctuations, third quarter 2019 revenues were up $7 million or approximately 3% over the 2018 quarter. Our net income attributable to shareholders of Crawford & Company totaled $11 million in the 2019 third quarter compared to $7.9 million in the 2018 period. Third quarter 2019 diluted earnings per share were $0.21 for CRD-A and $0.19 for CRD-B, compared to $0.15 for CRD-A and $0.13 for CRD-B in the 2018 period. During the 2019 third quarter, the company recorded a $1.2 million pre-tax expense related to the settlement of a claim involving the remaining former executive of our disposed of Garden City Group business line. After tax, this non-operating expense equated to $0.02 per share for the quarter. On a non-GAAP basis, third quarter 2019 diluted earnings per share were $0.23 for CRD-A and $0.21 for CRD-B compared to $0.17 for CRD-A and $0.15 for CRD-B in the 2018 third quarter. The company's non-GAAP operating earnings totaled $24 million in the 2019 third quarter or 9.2% of revenues, up 45% as compared with $16.5 million or 6.5% of revenues in the prior year period. Consolidated adjusted EBITDA was $32.5 million in the 2019 third quarter or 12.4% of revenues compared to $25.5 million or 10% of revenues in the 2018 quarter. Our non-GAAP results for the current quarter have been calculated excluding the impact of FX fluctuations and the GCG claim settlement. The prior year quarter excludes an incremental loss on disposal of the GCG business. I will now review the third quarter performance of each of our segments. On a constant currency basis, Crawford claims solutions' third quarter 2019 revenues were $89.8 million, increasing $4.5 million or 5.3% over the prior year quarter. This increase was driven by the U.S., U.K. and Australia. On a non-constant currency basis, our revenues in the 2019 quarter were up 1.1%. Gross profit before the allocation of indirect cost was $19.8 million or 22.9% of revenue in the 2019 quarter, compared to $17.7 million or 20.7% of revenue in the 2018 quarter. Operating earnings in the segment were $2.7 million in the 2019 third quarter or 3.1% of revenues, compared to an operating loss of $135,000 or negative 0.2% of revenues in the prior year quarter. We continue to demonstrate our commitment to driving growth and improving profitability in this segment. On a constant currency basis, TPA solutions' third quarter 2019 revenues were $100.7 million, increasing slightly over the 2018 third quarter revenues of $100.3 million. On a non-constant currency basis, our revenues in the 2019 quarter were down marginally at $99.5 million. Gross profit before the allocation of indirect cost was $26.7 million or 26.8% of revenue in the 2019 quarter, compared to $26.5 million or 26.5% of revenue in the prior year period. Operating earnings were $9.3 million during the current quarter, increasing over last year's third quarter operating earnings of $8.1 million. The operating margin in this segment was 9.4% in the 2019 quarter and 8% in the 2018 quarter. On a constant currency basis, specialty solutions' 2019 third quarter revenues were $71.5 million, increasing $2.1 million or 3% over the 2018 third quarter, reflecting growth in GTS. On a non-constant currency basis, our revenues in the 2019 quarter were down slightly from the prior year period. Gross profit before the allocation of indirect cost was $24.8 million or 36% of revenues in the 2019 quarter, compared to $25.9 million or 37.3% of revenues in the prior year quarter. Operating earnings totaled $13.3 million or 19.3% of revenues in the 2019 third quarter, compared to operating earnings of $14.4 million or 20.7% of revenues in the 2018 quarter. The company's cash and cash equivalent position at September 30, 2019 totaled $46.1 million as compared to $53.1 million at the 2018 year end. Our investment in unbilled and billed receivables has increased by $7.6 million during 2019 reflecting growth in certain international operations from increased business. We continue to focus on better managing our billing and collection process globally. Pension liabilities decreased $3.2 million in the quarter. As previously discussed, the company is not making voluntary contributions to its U.S. and U.K. pension plans during 2019. Our total debt decreased $1 million from the 2018 year end and that is net of $25.7 million in year-to-date share repurchases. Our net debt at the end of the 2019 third quarter was $143.3 million reflecting our ongoing financial strength and flexibility, which is a competitive advantage for us and gives us the ability for continued investment in our business. Cash provided by operations totaled $42.3 million for the 2019 period, compared to $16 million provided by operations in the prior year. This $26.3 million improvement in cash flow was primarily due to a significant decrease in pension contributions during 2019, better accounts receivable management and lower working capital requirements including the positive cash flow impact as a result of the June 2018 Garden City Group disposal. Our free cash flow improved by $38.9 million year-over-year. Looking forward, improving our free cash flow generation remains a top priority for the company. During the 2019 third quarter, the company repurchased approximately 402,000 shares of CRD-A and 231,000 shares of CRD-B at a weighted average price of $9.62 per share. Year-to-date, we have repurchased approximately 1.1 million shares of CRD-A and 1.7 million shares of CRD-B at a weighted average price of $9.23 per share. As a result of benign weather continuing into the fourth quarter and a slower than expected ramp up in some of our new business wins, the company is lowering its guidance for 2019 as follows. Consolidated revenues before reimbursements, between $1 billion and $1.05 billion. Net income attributable to shareholders of Crawford & Company, between $32 million and $35 million or $0.63 to $0.68 per diluted CRD-A share and $0.55 to $0.60 per diluted CRD-B share. Excluding the effect of the arbitration and claim settlements, non-GAAP net income attributable to shareholders of Crawford & Company, between $40 million and $45 million or $0.80 to $0.85 per diluted CRD-A share and $0.72 to $0.77 per diluted CRD-B share. Consolidated operating earnings, between $82.5 million and $87.5 million. Consolidated adjusted EBITDA, between $115 million and $120 million. With that, I would like to turn the call back to Harsha for concluding remarks.

Thank you Bruce. We continue to make progress positioning Crawford for growth and market leadership in the outsourced claims industry. Our innovative solutions are driving continued client engagement, which is leading to strong new business wins across all our businesses, whether in global TPA where we have a significant level of new client wins this year, Contractor Connection which continues to expand globally and importantly with our small and medium carrier offering which is gaining traction with new wins in the U.K. and U.S. This momentum will help us diversify our revenue streams by augmenting our weather-related businesses with more predictable revenue sources and gives us the confidence that our medium term goal of 5% revenue growth and 15% earnings growth annually is in sight. The combination of new client wins and our technology and sales investments leave me with tremendous confidence in delivering our goal. I would like to conclude by thanking our employees who continue to execute on our mission of restoring and enhancing lives, businesses and communities. Our clients and potential clients are taking note. They are seeing Crawford in a renewed light, which provides me with confidence in our future. Thank you again for your time today. Operator, please open the call for questions.

[Operator Instructions]. Your first question comes from Mark Hughes of SunTrust.

Yes. Thank you. Good morning.

Good morning Mark.

Good morning Mark.

The $85 million in new business that you signed up, could you give may be some context or comparison on that so we know the magnitude versus the prior trends?

Significantly higher, Mark. And I would say, at least, almost I put the number almost 50% higher than a year ago. And the other beauty with this is, there is a slew of, a plethora, I would say, of smaller clients. So this is not dependent on a client. Representing that $85 million, we have a whole number of clients, $0.5 million, $1 million. So we are starting to gain market share, if you will, in number of clients within the sector. And it is heavy TPA-related.

Understood. The delay in claims ramping up, I think you talked about the volumes when they get to full run rate will be very healthy, but they are slow in ramping. Is that because these clients don't have the claims? They are not allocating those to you? Do you have firm commitments on volume? How should we think about that?

Yes. Here's what I would say is, when we sign up a client, there is one, always a lag and the lag is estimated, but sometimes it takes longer as you are switching over from one provider to the other. So that delay of a month, two months, three months can add up over time. But once it begins, it begins and it's there to stay. So we have ramp up going on right now. We had some of it happen in Q3 and we have continuously going through Q4, ramp up is on. But the full impact of that will be felt more in the coming year, is my opinion.

Yes. And Mark, maybe further to that. As it relates to TPA, the majority of the new client wins that we had this year have start dates in the back half of the year, whereas in prior years we may have had new clients that started beginning in the first or second quarter. These clients or the vast majority of them starting in the third or the fourth quarter.

And sometimes there is a delay.

Yes.

Understood. The specialty solutions, it looks like the cases received were down 9%. Is that a --? Did you have a robust 3Q of last year? Or what's going on there?

That is a clear case where, as weather gets benign, the number of claims coming in drops and therefore you have fewer cases coming into, in particular in areas like Contractor Connection. We have not lost clients. In fact, in many cases, we are the sole provider and we actually have ramp up going on with a very large P&C carrier. So it's just basically the volume is down because of weather, but it will come back. So we are not terribly concerned other than our relationships are strong, our clients remain in play with us and we are expecting more and more volume. And one of the things some of the clients have started to tell us is, they would like to give us more lines because our execution, as I was pointing out, the net promoter score is very high, that they are so pleased with the execution that they would like to give us new lines in the Crawford specialty segment, if you will.

And then the final question is, you talked about more momentum in the small and medium carrier outsourcing business. What is driving that? Is there a structural theme? Or is that a better execution on the sales front?

Okay. So I think the first is when you look at the U.S. market for insurance carriers, 2,500 carriers are categorized in the small and medium carriers. That is a very large number of carriers that will range between say $2 billion to $5 billion in premium. So that's still a very large chunk. And what we have identified is that space is very good for us because we can provide an all-in solution for complete outsourcing. What it does for the small medium carrier is, they can actually take that savings and redeploy, if you will, in underwriting and sales while we handle the claims for them. So we are starting to gain traction. They are also quite open to the new solutions that we have invested in technology that is making a big difference. So whether it's cycle times or how long it takes for a claim to be processed or the accuracy of the claim, all of that is making a difference. But we also have beefed up our sales force over the last, say, nine months and we do have an entire sales force that is focused on the small and medium carrier segment. And the U.S. is the largest market and the small and medium carriers is a very large segment of that.

Well, I will ask one more, if you don't mind. The workers' comp claims trends, I wonder if you have any observations about that?

Yes. I think the claims volume has come down. It did in Q3. Despite that, on a constant currency basis we were able to show growth, not just for the company, but TPA included. But having said that, we are seeing now a slow spike coming back into workers' comp. So that is, at times, also a reflection of moving parts of the economy whether it's manufacturing, whether it is retail, whether it's services that shifting that goes on, can impact the workers' comp claims volume.

Thank you.

Thank you Mark.

Your next question comes from Greg Peters of Raymond James.

Hello Greg.

Hi. Good morning. This is Marcos, calling in for Greg.

Okay. Good morning.

Good morning.

Hi. I was hoping you guys could break down the new business. You said most of it was TPA. But can you give us a breakdown between the remaining segments?

Sure. I would say in simplicity, it's about 70% in the TPA segment and the remainder would be between CCS and Crawford specialty. And this is as of, I would say November 5. We are continuing to actively sell. We still have almost 55 days left in the year. And that could shift eventually to probably a 50%, 25%, 25%. So today majority is TPA.

Okay. And you mentioned you beefed up the sales count and I am assuming, but there was also a function of a new product solution. What do you think the balance of the new business growth was? And can you give us a refresh on what are the new solutions in the TPA segments are?

Yes. Let's talk about first of all, the sales force and what I wanted to make sure I am clear is, we have beefed up the sales force in all three segments but in particular in TPA. And that is reflected in our numbers because we needed more sales folks, especially if you are going after the small and medium carriers, which is a large number of carriers. In addition to that, what I would tell you is we do have, as we said in the prepared remarks, solutions like the Escape of Water solution. The demand for water sensors, the demand for monitoring that we are doing is making a very big difference where the first notice of loss is immediately registered with us and we also notify the carrier. In addition to that, the triaging of claims, TruLook is making a big difference. So a combination of innovative solutions and the sales force and the melding of the two is starting to gain traction in the marketplace. Despite the benign weather, we seem to be not only very optimistic, but very positive with the number of wins we have had and a number of these have just started and more yet to start. So we are seeing a very robust 2020 as we are moving into the coming year.

Got it. And I guess my final question in the context of your medium term goal, is there a targeted revenue amount for the TPA segment per se where you think earnings will become more predictable and you would be able to comfortably hit that?

Yes. I would say first of all on TPA, it has been actually the last many years, the more predictable of our three businesses. Having said that, our medium term goal of 5% and 15%, we did demonstrate nearly 3% growth in revenue in Q3. And when you see GAAP numbers it negates that due to currency which is happening in a lot of U.S. businesses at the moment with the strong dollar. But I would say that the 5% growth should be attainable particularly with TPA alone having $32 million of wins year-to-date representing 76 clients. So going into 2020, there is a whole slew of new clients that one have either started or will be starting up well before the year begins.

Great. Thank you guys.

Thank you.

Thank you.

There are no other questions in queue. I would now like to turn the call back over to Mr. Agadi for any closing remarks.

Thank you very much for all those listening and continuing to have faith in Crawford & Company. We are set at an inflection point which points to a very robust future and we are very confident as an entire team at Crawford & Company that the needle will continue to move forward. Thank you and God bless.

Thank you for participating in today's Crawford & Company conference call. This call will be available for replay beginning at 11:30 A.M. today through 11:59 P.M. on December 5, 2019. The conference ID number for the replay is 8497263. The number to dial in for the replay is 1-855-859-2056 or 404-537-3406. Thank you. You may now disconnect.