CRD.B (CRD.B) Q4 2014 Earnings Report, Transcript and Summary

Good afternoon. My name is Blair, and I will be your conference facilitator today. At this time, I’d like to welcome everyone to the Crawford & Company Fourth Quarter 2014 Earnings Release Conference Call. In conjunction with this call, a supplementary financial earnings release presentation is available on our website at www.crawfordandcompany.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, Monday, February 23, 2015. Now I’d like to introduce, Allen W. Nelson, Crawford & Company’s General Counsel and Chief Administrative Officer.

Thank you, Blair. Some of the matters to be discussed in this conference call and in the supplementary financial presentation may include forward-looking statements that involve risks and uncertainties. These statements may include, but are not limited to statements regarding the funded status of our defined benefit pension plans, our expectations related to future revenues and expenses, expectations regarding the timing, costs and synergies from our recently announced Global Business Services Center, our long-term liquidity requirements and our ability to pay dividends in the future. The company’s actual results achieved in future quarters could differ materially from the results that maybe implied by such forward-looking statements. The company undertakes no obligation to publicly release revisions to any forward-looking statements made in this conference call to reflect events or circumstances occurring after the date of the call or to reflect the occurrence of unanticipated events. In addition, you are reminded that operating results for any historical period are not necessarily indicative of results to be expected for any future period. For a complete discussion regarding factors which could affect the company’s financial performance, please refer to the company’s Form 10-K for the year ended December 31, 2014 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 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. Jeffrey Bowman, President and Chief Executive Officer of Crawford & Company. Jeff, you may begin our conference.

Thank you, Allen. Good afternoon. And welcome to our investors, clients and employees. I’m Jeffrey Bowman, President and CEO of Crawford & Company. Joining me from the global executive management team this afternoon are Bruce Swain, our CFO; and Allen Nelson, our General Counsel and Chief Administrative Officer. I will begin with some opening comments on our fourth quarter and full year 2014 results, which were below our expectations. Bruce will then review the financials in more detail, which will be followed by a discussion of our business performance, comments on our strategic initiatives and conclude with our 2015 guidance and corporate focus. Let me begin with a comment on the global insurance environment and its impact on Crawford. 2014 was noteworthy in that there were virtually no major weather events that led to significant insured losses. The effect of this benign period is evident in the strong results reported by many of our insurance clients as can be seen in their performance ratios, which were much improved from a year ago. This environment, however, resulted in a shift in the mix of our claims business, with the decrease in a higher margin property claims, driven by a lack of severe weather, offset by increases in high volume low value claims both in the U.S. and internationally. The outcome of this shift was that while claims counts were up in 2014, the low value nature of most of the new claims volume weight on our results for the year. It’s worth mentioning, that the significant part of our business relates to whether events, which is part of the DNA of our business. In 2014, we made significant progress on many fronts. During the year, we made two acquisitions, Buckley Scott and GAB Robins, two U.K.-based corporations. Buckley Scott has positioned us to meet the needs of our clients in construction and engineering claims. And GAB Robins allows us to significantly expand our claims handling business across a wide range of product lines in the U.K., as well as assisting in expanding our Aviation and Marine specialty lines claims business. Both acquisitions have focused on quality and service to ensure our clients are served by the highly experienced professionals. Due to the timing of the acquisition, GAB Robins results of operations did not affect this segment’s 2014 results. We are awaiting regulatory approval to integrate GAB Robins into our U.K. operations and anticipate realizing the initial benefits of this acquisition in 2015. Both acquisitions will assist us in producing a compelling claims adjusting and claims management option for our clients. In addition, beginning late in 2014, we launched the Global Business Services Center initiative that is expected to continue to strengthen our client service, realize and enhance our operational efficiencies, and enable a consistent response for clients. The Center which is wholly-owned by Crawford and staffed by Crawford employees is expected to employ more than 1,000 people when fully operational. The Center reinforces our commitment to grow revenue faster than expenses over the medium term, driving increased cash flow. Even with the strategic accomplishments, 2014 results were below our expectations with declines in consolidated revenue, net income and diluted earnings per share for the year. Our segment performance was mixed. In the Americas segment, claims volume, revenue and operating earnings increased for the quarter and year. Despite the benign weather conditions, the Americas grew the year to improvements in our Canadian core operations and gains in our North American contracted connection repair network in both U.S. and Canada. As mentioned, we were pleased with the improved performance accomplished by Broadspire, which reported steady and significant improvement in both revenue and operating profitability throughout 2014. For the year, Broadspire’s operating earnings were up nearly 90% over the prior year. We are on plan in terms of both revenue growth and profitability in Broadspire. And we anticipate both continued organic growth, and gains from new products and client wins in the coming year. From the beginning of 2014, we indicated that our EMEA/AP segment results would show a decline compared to 2013. When we were finalizing claims from the 2011 catastrophic flood losses in Thailand and from claim handling activities with flooding and bushfires in Australia. The 2014 our EMEA/AP segment operating results reflected a lower level of activity due to both the absence of flood-related claims and the lack of high value weather-related claims during the year. In addition, profitability was affected by continued investment in the start-up operations of our specialty market service line that commenced in the third quarter of 2013. Results from our legal settlement administration segment during 2014 included a lower level of activity from the deepwater horizon class action settlement and two other large projects, which negatively impacted results during the year. Activity related to deepwater horizon is expected to continue to decline in 2015. Although this project runs off, we are striving to replace these revenues with growth in our legal settlement administration product lines. Lastly, we announced a quarterly dividend of $0.07 per share on the A Class and $0.05 per share on the B Class. That concludes my initial comments on the 2014 fourth quarter and year and I will discuss the business unit operations after Bruce has reviewed the financials. Bruce, would you please review the company's overall performance for the fourth year.

Sure. Companywide revenues before reimbursements in 2014 fourth quarter were $285.5 million, compared with $284.9 million in the prior year's fourth quarter. Consolidated operating earnings, a non-GAAP financial measure, totaled $15.3 million for the 2014 fourth quarter, down from $20.2 million reported in the 2013 fourth quarter. The company’s selling, general and administrative expenses or SG&A totaled $57.9 million or 20.3% of revenues in the 2014 fourth quarter, down from $58.2 million or 20.4% of revenues in the prior year quarter. The provision for income taxes in the 2014 fourth quarter included additional expenses resulting from changes in the company's mix of income, losses in certain countries and other adjustments and changes to estimates. Our net income attributable to shareholders of Crawford & Company totaled $3.3 million in the 2014 fourth quarter, down from $10.8 million in the 2013 period. Fourth quarter 2014 diluted earnings per share were $0.07 for CRDA and $0.05 for CRDB, compared to diluted earnings per share of $0.20 for CRDA and $0.19 for CRDB in the 2013 period. Revenues from the Americas segment totaled $85.6 million in the 2014 fourth quarter, up from $79.5 million reported in last year's quarter. This increase was primarily due to improvements in the U.S. and Canadian operations during the quarter. Operating earnings in our Americas segment were $1.6 million in the 2014 fourth quarter, or 2% of revenues compared with operating earnings of $1.2 million or 1% of revenues in the prior year quarter. Revenues generated by our catastrophe adjusters in the U.S. totaled $14.1 million in the 2014 fourth quarter, up from $5 million in the 2013 quarter. The 2014 revenue levels for the quarter reflect the benefits from an outsourcing contract with the major U.S. insurer that is expected to continue throughout 2015. EMEA/AP revenues decreased slightly in the 2014 fourth quarter to $90.6 million from $91 million in the 2013 period. As expected, declines in Asia Pacific were substantially offset by growth in the U.K. And the AP operating earnings were $9.3 million during the current quarter, as compared to last year's fourth quarter operating earnings of $12.7 million. The operating margin in this segment was 10% in the 2014 quarter and 14% in the 2013 quarter. Revenues from our Broadspire segment increased to $69.2 million in the 2014 fourth quarter, up from $65.4 million in the prior year quarter. Operating earnings in Broadspire totaled $6.3 million or 9% of revenues in the 2014 fourth quarter, increasing from operating earnings of $3.8 million or 6% of revenues in the 2013 fourth quarter. Legal Settlement Administration revenues totaled $40 million in the 2014 fourth quarter, decreasing from $49.1 million in the prior year quarter. This revenue decrease was largely related to lower levels of work on the deepwater horizon class action settlement project during the 2014 period. Operating earnings totaled $4.5 million in the 2014 fourth quarter or 11% of revenues, as compared to $8 million or 16% of revenues in the prior year period. The company's cash and cash equivalent position at December 31, 2014 totaled $52.5 million, as compared to $76 million at the 2013 year end. Our investment in unbilled and billed receivables has increased by $17.1 million during 2014, primarily as a result of an increase in receivables and our Legal Settlement Administration operations. Pension liabilities increased by $39.4 million, primarily due to a change to the mortality tables used in the U.S. to determine projected benefit obligations for U.S. pension plans. Our total debt increased in 2014 by $19.2 million, reflecting our need for incremental borrowings to fund our investing and financing activities during the year. Cash provided by operations totaled $6.6 million for 2014, compared to $77.8 million provided by operations in the prior year. This decrease was primarily due to lower net income, increased accounts receivable, and increases in other working capital components during 2014. There were a number of significant receivable balances that we expected to collect in the 2014 fourth quarter, but many of those collections shifted into the 2015 first quarter. Free cash flow declined in 2014 by $69.4 million, as compared to 2013. For the 2014 fourth quarter, the company repurchased 27,000 shares of CRDA under its share repurchase plan at an average cost of $8.64 per share. Since the inception of the two-share repurchase plans, the company has repurchased nearly 1,572,000 shares of CRDA at an average cost of $6.26 and 7000 shares of CRDB at an average cost $3.83. Also during the 2014 fourth quarter, the company paid a regular quarterly dividend of $0.05 per share on its CRDB shares and $0.07 per share on its CRDA shares. Back to you, Jeff.

Thank you, Bruce. Our business activities in the fourth quarter were extension of trends throughout the year, top-performing contributors like Contractor Connection and Broadspire, partially offset slow performance driven by both the benign weather environment and by the decline of revenues from large projects that are winding down or completed. Our immediate focus coming off the fourth quarter and into 2015 is on capitalizing on the investments in new products during 2014, in order to create operational efficiency and improved profitability. In addition, we have initiated cost management initiatives across the company. We have also have many opportunities, which to capitalize in 2015, based on the strategic acquisitions we announced on adding global efficiencies. During the coming year, we will act on opportunities to grow revenue, managed cost-effectively and leverage resources around the world. So let me touch on the fourth quarter performance of each of our business units, starting with the Americas segment, which represented 30% of our total consolidated revenue for the quarter. The benign weather in the U.S. persisted and negatively affected revenues for the segment, although this was partially offset by project revenues. Looking forward to 2015, we expect to see continued expansion of Contractor Connection and improved performance in our core U.S. Property & Casualty and Canadian claims management operations. Recently, we announced some significant management changes in the Americas and USA, designed to revitalizing this business unit and division. First, Vince Cole has been named Executive Vice President and Chief Executive Officer, Property & Casualty, Americas. Vince was formerly the company's Executive Vice President of Global Strategy and Business Performance. Secondly, Larry Thomas is the new CEO of our U.S. Property & Casualty business. Larry will retain his responsibilities as Chief Executive Officer of Crawford Contractor Connection unit, a highly successful operation, which provides insurers with an efficient, high-quality managed repair network. Larry has an outstanding record of building teams, solving issues, getting results and driving improved performance. The EMEA/AP operations represented 32% of our consolidated revenue for the fourth quarter. During the quarter, claims volumes increased 7% across the three regions that make up EMEA/AP for the reasons mentioned in my earlier remarks. In the U.K., our traditional business is benefiting from Buckley Scott acquisition and during 2015, we expect to accomplish full integration of GAB Robins into these operations, with neutral to slightly negative impact on 2015 performance off the special charges. In 2016 and beyond, Crawford expects GAB Robins acquisition to be strongly accretive. We continue also to build our Global Technical Services product offering, which now includes Crawford specialty markets. This is a long-term investment in higher margin claims and we expect to continue to expand going forward. We are pleased with the improved execution of sales and marketing plans in our Broadspire operations, which represented 24% of our consolidated revenues for the quarter. For the year, Broadspire has reported a steady increase in revenue from both, workers compensation and medical management, as well as improved margins. We are seeing very strong client gains and a robust sales pipeline for 2015. We saw overall fourth quarter claim volumes increased 7% over the prior year quarter through new clients wins and a stronger workers compensation environment. We expect to see the workers compensation market improved as the economy grows and unemployment decreases. Opportunities continue to emerge in the area of disability management and unbundled medical management. We are gaining additional efficiencies from investment in technologies in all our operations. New client win should continue to support revenue growth and improve profitability in 2015. Legal Settlement Administration represented 14% of our 2014 fourth quarter revenue. Revenues reflect the lawful claims associated with the Deepwater Horizon class action settlement project, which we expect to continue to flatten out over 2015. Our backlog at the end of 2014 fourth quarter was $102 million compared to $108 million at the close of the fourth quarter last year. That concludes my comments and concludes my comments on our business segments. Let me turn to our guidance and 2015 operational initiatives. 2015 will be a year of positive change at Crawford. We will be integrating two important acquisitions in to our EMEA/AP operations, which will be accretive in the long run despite some cost anticipated in the integration process. In addition, as we announced in January we have launched our Global Business Services Center based in Manila, Philippines. Our establishment of this center provides a venue for global consolidation of certain business functions, shared services, and currently outsourced processes. This will allow Crawford to continue to strengthen our client services, realize additional operational efficiencies and invest in new capabilities for business growth. The creation of the center accelerates the company's long-standing tradition of efficiency in delivering high-quality services to our clients. Consolidating our operations allows us to leverage our collective knowledge and expertise to increase innovation, our strategic priority for Crawford and an essential part of our future success. From a profit and loss perspective, operations in the center are expected to deliver initial cost savings of approximately $2 million over 2015 and cumulative savings of $60 million through 2019 followed by annual cost savings of approximately $20 million per year thereafter. To achieve these savings, the company expects to record pretax charges totaling approximately $20 million through 2018 as additional operations are phased in. We have a high confidence level and improved performance in our core operations in 2015 based on existing backlogs and new client wins already in hand. However, 2015 guidance will include the impact of acquisitions, and special charges related to the GAB acquisitions and the Global Business Service Center I just discussed. In the aggregate these 2015 charges, those were approximately $16 million. As a result, therefore our 2015 guidance is as follows, consolidated revenue before reimbursements between $1.16 billion and $1.19 billion, consolidated operating earnings between $85.5 million to $95 million, consolidated cash provided by operating activities between $40 million and $50 million, reflecting the special charges discussed net income attributable to shareholders of Crawford & Company on a GAAP basis between $29.5 million and $35 million or $0.57to $0.67 per CRD share and $0.50 to $0.60 diluted earnings per CRB share. Before special charges, net income attributable to shareholders of Crawford & Company of between $39 million and $44.5 million or $0.75 to $0.85 per CRDA share and $0.68 to $0.78 diluted earnings per CRDB share. Let me now just reiterate our management’s efforts and currently -- and current focus on several areas. As laid out in our three-year strategic plan, we are actively working to deliver new and incremental revenue in all our business segments. I’ve touched on some of these opportunities in my comments thus far. And I am very encouraged by the organic growth opportunities I'm seeing in our successful operation in 2015 and beyond. Second, we will integrate two important acquisitions that we expect to provide us with new product lines and customers and support earnings growth in the future. Next we are implementing measures that will emphasize global efficiency and cost effectiveness over the next several years. These include both efficiency initiatives and cost reduction initiatives to directly reduce overhead in all our major operations. In addition, we will accelerate implementation of the Global Business Services Center as described earlier. These initiatives underline our intent to improve the efficiency and flexibility of our Claims Management Services to develop innovative new lines of business and to evolve further in terms of service and responsiveness for our clients. With these actions, we expect to improve our operating performance in the coming year. Thank you for your time and we look forward to your questions. Operator, will you please explain the process for asking questions to our audience.

[Operator Instructions] Your first question comes from the line of Mark Hughes from SunTrust. Your line is open

Yeah. Thank you. Good afternoon.

Hi, Mark.

Hi, Mark.

You’ve broken out there, you gave a some detail on the kind of the one-time growth in 2015, relative to the guidance you’ve provided, when we look at 2016, how much can we expect we will -- of those expenses will not recur? And then you have may sort of early thoughts on how much benefit you will get in 2016, will it be -- 2016 be sort of a normal year back on track or growth or would you expect there would be little bit more of pause? Just I know you can’t get in too much detail but just thoughts on that?

Yeah. I guess, Mark, I’ll start-off on that. We have got special charges that are really in two buckets, one related to the Global Business Services Center that we are putting in Philippines and the other related to the GAB Robins acquisition. The charge related to the GAB Robins acquisition is about $7 million of that $16 million and we expect for that to be substantially done within ’15. That’s our current plan such that we wouldn't have that aspect of the charge drifting into ‘16 and we hope to enter ‘15 with that business fully integrated within ours and realizing all of the benefits of the acquisition. For the Global Business Services Center, we are going to have a charge of about $9 million this year to implement the first couple of waves, but there are additional charges in future years, as well as that project, which is a multiyear project is implemented.

Okay. On the Broadspire business, could you talk about the competition, I think, you said you have seen a pretty good flow of opportunities, have you seen the competitive environment change months in the last six months?

No really, Mark, and there is a still major competitors are still working and competing with us on RFPs. We look at our performance more that our business is increasing because we've improved our technology, we’ve got some very, very good processes in place and we are expanding our product lines and ability. And I think, the competition is still exist as it did before, but I think…

Right.

… our game is just spin-off significantly.

With the change in leadership in the U.S. business, is that -- is there any sort of low hanging fruit, any new initiative that you’ve sketched out that that we should know about, that you think would be meaningful next 12 months?

Well, I mean, we’ve changed the management team around, Vince and Larry are in place. Larry -- he is a 32-year corporate individual has been working with the Contractor Connection model. That model continues to grow. It grows in -- with our major clients and with new clients coming on. As we’ve said many times before, the low value small claims have being commoditized and as we've seen those claims decreased over the years. Contractor connection model picks up on a number of those. We’ve been putting -- getting into the A&H business as well we’ve seen significant increases in contracts coming in that will start to play into the U.S. property and casualty model in 2015.

Right. And then Bruce, I’m sorry, did you give specific cash flow guidance for 2015? How much of a bounce back, you think, we’ll get this year?

We did. We’re guiding $40 million to $50 million of operating cash flow for ‘15. And as I mentioned in my remarks, we were expecting a number of fairly significant collections in 2014 fourth quarter that didn’t happen in the fourth quarter and in fact, drifted into the ‘15 first quarter. So as we look at -- that certainly incorporated in our guidance for 2015. We would expect our first quarter operating cash flow to be on better footing than it’s been in past years in the first quarter which is normally a pretty heavy cash outflow period for us.

I’ll ask a broader question in the U.S. business outsourcing of claims, any update in terms of sort of secular trends there. Do you think the market is shifting? Is the -- are trends pretty similar to what they’ve been? Any reason to think that pace might pick up?

I think 2014 as we’ve sort of repeatedly said is it’s been a very benign weather environment. And that really significantly affected the claims volumes that were being passed out to external claims adjusters as well as internal. I think we’re seeing a bit of a change in the first two months of this year, where our claim count is significantly up over than the past couple of weeks due to what’s going on in no taste of the U.S. And I think that’s a very positive message there from both contracted connection and then general property and casualty businesses. I think the in-sourcing and outsourcing debate continues. It really depends on the product line and the effectiveness of getting the processes in place and really cut the time and process for the client. We have been working very hard with our clients to ensure that we’re producing a quality product that is effective in terms of both operational and profitability. I think we are making good steps on that. We have some very interesting development. So we think we’ll start to build during the latter part of 2015.

Great. Thank you.

[Operator Instructions] Your next question comes from the line of Peter van Roden from Spitfire Capital. Your line is open.

Hey guys.

Good afternoon.

Hi Peter.

First question, are the Manila start-up costs and GAB acquisition cost in your operating earnings guidance?

They are not.

Okay. And then on the ARS side, have you guys collected the -- can you give a color around that? Have you collected the payments that were outstanding than you were expected to get in the fourth quarter?

We did. We collected the majority of these significant balances.

Okay. My final question…

We really look at that as a timing difference that crossed over the year end, into the first quarter.

Got it. Then final question from me, you mentioned in the 10-K that in the specialty markets business in the U.K. continues to impact operating earnings. Can you give a little bit more disclosure on how much that expense was in 2014 and sort of how you expect it to go going forward?

Let me talk about the operational side of that. First of all, I mean, we’ve seen -- we've build up the operation, both the specialty markets in really three areas, which is aviation, it’s marine, it’s oil and energy, and we’ve built up the team significantly. We’re getting support from clients. Unfortunately, at this moment, there is a so benign period on claim handling, but we are receiving claims. We are getting those claims on a global basis. And this unit has got a very, very strong high margin growth future for it. I will let Bruce touch on the costs on that. But it’s something that we’ve looked very hard developing and putting in place. And we see this is a market leading operation that will pay dividends in the future.

Yeah. And we are certainly seeing the impact of investment in the people that it takes to get the claims as they enter into the markets. And as Jeff said, we expect this to pay dividends for us going into the future, but it is providing a bit of a drag on the results currently.

Got it. And is there any way you can provide some color around what kind of drag that is?

Its a few cents per share.

Okay. That’s all I have Thanks, guys.

Thank you.

Your next question comes from the line of [Joe Solomon from Solomon Capital] [ph]. Your line is open.

Hey, Jeff. Hey, Bruce. Thanks for the technical. I appreciate it. I had two quick questions. One, could you just remind us again the accretion you're getting from the GAB Robins deal in 2016?

Yeah. For 2016, we think after the integration costs are behind us that this should give us $0.16 a share.

$0.16 a share of accretion. Thanks. And then secondly on the guidance through 2015, just is there any way to give us a sense of what you're assuming in terms of catastrophes, global cats, the last couple of years we've had a very low-level 30 billion to 40 billion, say? Do you use kind of like a long-term average say over the last five to 10 years? Or are you assuming kind of what we’ve had at the low-level we’ve had the last couple years?

Yeah. We really assume -- we don’t assume any sort of major catastrophic claims activity when we set our budgets or give our guidance. As we’ve looked in the U.S., we’ve got a special project. The major US insurer that’s showing up in our U.S. catastrophe revenues that we’ve assumed that certainly level for that project and for some other things that we have visibility into and that's about in the mid $40 millions in revenue. But in terms of other headline grabbing catastrophic claims activity, we've not assumed any of that in our numbers.

Got it. Okay. Thanks so much. Very helpful.

Thanks, Joe.

There are no further questions at this time. I'll turn the call back over to Mr. Bowman for closing remarks.

Thank you. I would like to thank everyone for their time this afternoon and wish them a good week, and we will talk in the next quarter in April-May. Thanks. Have a good day.