CRD.B (CRD.B) Q4 2015 Earnings Report, Transcript and Summary

Good afternoon. My name is Jennifer and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Crawford & Company Fourth Quarter 2015 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. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer period and instructions will follow at that time. [Operator Instructions] As a reminder ladies and gentlemen, this conference is being recorded today, Thursday, March 10, 2016. Now, I would like to introduce Allen W. Nelson, Crawford & Company’s General Counsel and Chief Administrative Officer.

Thank you, Jennifer. 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 related to our Global Business Services Center, our acquisition of GAB Robins in the UK, as well as other restructuring activities, 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 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, 2015, which is 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. Harsha Agadi, Interim President and Chief Executive Officer of Crawford & Company. Harsha, you may begin our conference.

Good afternoon, and welcome to our fourth quarter and full-year 2015 earnings call. Joining me today are Bruce Swain, our CFO; and Allen Nelson, our General Counsel and Chief Administrative Officer. After our prepared remarks, we will open the call for your questions. For the fourth quarter of 2015, we delivered revenues before reimbursements of $284.9 million, which was flat compared to the $285.5 million that we achieved in the year ago period. Consolidated operating earnings for the fourth quarter grew 24% year-over-year to $19 million. Strength in the U.S. Services segment aided by the cost takeout achieved from our restructuring initiatives drove the better results. Importantly, our operating earnings were ahead of our stated expectation and are representative of the new culture of meeting and exceeding target that we are instilling throughout the company on a daily basis. For the full-year 2015, revenues before reimbursements were $1.17 billion, representing a 2% increase over the $1.14 billion in revenues that we recorded in 2014. Full-year consolidated operating earnings were $70.4 million, down from the $73.1 million earned in 2014. In reviewing our results in more detail what can be seen is the continued strong performance from our higher growth more predictable businesses such as Broadspire and our U.S. Services segment, largely driven by Contractor Connection. Broadspire, for instance, delivered 9% revenue growth along with 200 basis points of margin expansion, leading to operating earnings growth of 55% for the full year 2015. Organic growth, new client wins, higher client retention, and increased medical management services referrals all contributed to the robust growth. Our U.S. Services segment delivered full-year 2015 revenue growth before reimbursements of 13% along with 500 basis points of margin expansion leading to operating earnings growth of approximately 81%. Growth in Contractor Connections and outsourcing project with a major insurer and expense reductions achieved earlier in the year all contributed to the robust results. This strong performance, however, was matched by a reduction in claims activity in our International segment combined with the continued run-off of several large projects in our GCG segment. As discussed on our third quarter call, Crawford remains the preeminent independent provider of claims management solutions with an unparallel competitive position and brands that are well-recognized around the globe. In speaking with our customers, since taking my new role in late August, I have been very impressed by the value that our clients play in their relationships with Crawford. Our customers value the complex solutions that we deliver often times under dire circumstances when speed of execution matters most. What had been problematic is an expense structure that had grown larger, while the market environment had become more challenging, given the dearth of severe weather events globally. This had led to margin contractions and disappointing financial results in the past. I’m very pleased to report that we have made significant progress executing our cost reduction plan, having lowered expenses by over $25 million in the fourth quarter, which is incremental to the $20 million in restructuring activities taken earlier in the year. Our goal is to position Crawford to deliver more predictable financial results year in and year out regardless of the market background. Reducing our expense base is a critical step towards achieving this goal. While a portion of the $45 million of total cost savings achieved will be reinvested back into the business. We expect substantial margin expansion through 2016 and are very encouraged by the early impact of our cost reduction initiative. Importantly, our expense reduction initiatives have been specifically focused on driving margin expansion in our more volatile weather dependent lines in order to allow the strong growth of our more predictable businesses such as Broadspire and Contractor Connection to shine through. We will continue to be vigilant on cost as well as utilize technology to drive further efficiency gains in our business in order to deliver their target growth and margin objectives over the medium-term. This will ultimately enable Crawford to deliver more consistent earnings growth against the backdrop of a challenging market. If we do experience a pickup in severe weather that will drive further expansions as we leverage our fixed cost infrastructure. Along those lines, we are cautiously optimistic to begin the year as the market is showing signs of improvement as activity in Continental Europe is picking up. The UK, which experienced a severe contraction in volumes through 2015 is beginning to not only see stabilization, but also the early signs of improvement, which has continued into the first quarter. Beyond our restructuring initiatives, we also see an opportunity to enhance our top line growth. What I have realized through my strategic business review of Crawford is that, our business unit have become [Technical Difficulty] limiting collaboration and innovation. There is a significant latent growth opportunity through the cross-sell of products to our clients across our businesses. Today, there is very little customer overlap among our businesses, which represents considerable low-hanging fruit. We have instituted a compensation plan that will incentivize our business segment CEOs to more aggressively work together to mind this vast potential. I look forward to updating you on our progress on future calls. What I can report today is that an entrepreneurial excitement has begun to rise up throughout our organization, which I’m confident will lead to improved sales and improved operating earnings. Turning to Garden City Group segment, we recently announced the appointment of Kenneth Cutshaw, as our Interim Chief Executive Officer. While we have a form of search process in place to identify a permanent CEO, we could not be more excited to have Ken assuming this role, given his extensive leadership experience across both the legal, professional, as well as in the sweet suite and government services sector. I’m confident that Ken is the right person to lead Garden City at this time, as they manage the rapid decline of several large [Technical Difficulty] adapt to this new business environment and put in place a progressive culture and an aggressive pipeline. To assist in this transition, we have also announced the promotion of Stephen Cirami, the Chief Operating Officer. Steve was formerly GCGs SVP of Operations and a former class action attorney who has been with the company for 12 years. Steve’s promotion is an example of the deep management bench that we have not only at Garden City, but across the entire company. Overall, the leadership transition at Garden City Group has gone very well with a strong positive response from both our clients and employees. Additionally, client turnover has been negligible and we are receiving many inbound requests from prospective clients to discuss the potential for a new relationship. While business continues to be challenging given the wind down of several projects, our backlog is healthy and we remain confident that the business-related target in 2016 and return to a healthy growth rate in 2017. Over the last 60 days of new leadership at GCG, I’ve been able to meet with many of our employees and clients. I’m very proud of our employees dedication to our clients through this period of change. I’m also very happy to tell you that I’ve received very positive feedback from our clients. GCG is stable. Our employees are doing exemplary work and our clients are in steady hands. To conclude, we have made significant strides in returning Crawford to a position, where we can deliver more consistent and predictable financial results regardless of whether, our fourth quarter operating earnings growth is a very important indicator of our early success and bodes well for a progress that we expect in 2016. I would now like to turn the call over to Bruce to review the financial results of the fourth quarter in more detail.

Thank you, Harsha. Companywide revenues before reimbursements in the 2015 fourth quarter were $284.9 million compared with $285.5 million in the prior year’s fourth quarter. The company’s selling, general, and administrative expenses or SG&A totaled $62.3 million, up from $57.9 million in the prior year quarter. As a percentage of revenues, these costs increased to 22% of revenues in the 2015 fourth quarter from 20% of revenues in the prior year quarter. This increase is primarily due to SG&A cost from the acquired GAB Robins organization and increased incentive compensation expenses. During the 2015 fourth quarter, the company recorded a non-cash goodwill impairment charge of $49.3 million, or $0.86 per share after tax related to the former EMEA/AP and Americas, excluding Contractor Connection reporting units. This charge did not affect the company’s liquidity or operating results in any period nor will it in the future. Also during the 2015 fourth quarter, the company recorded additional restructuring and special charges of $18 million, or $0.25 per share after tax. These charges were associated with the ongoing implementation of the Global Business Services Center, GAB Robins integration, and other restructuring activities and operating and administrative areas around the world. The company’s effective tax rate is distortive this year due to our overall pretax loss, driven in part by our goodwill impairment, restructuring costs, and special charges during 2015. And net operating losses in certain international operations with lower tax rates forward the losses are unable to be benefited from a tax perspective. Our net loss attributable to shareholders of Crawford & Company totaled $51.7 million in the 2015 fourth quarter, compared to net income of $3.3 million in the 2014 period. Fourth quarter 2015 diluted loss per share was $0.93 for CRD.A and $0.95 for CRD.B. On a non-GAAP basis before goodwill impairments, restructuring costs, and special charges, fourth quarter 2015 diluted earnings per share were $0.18 for CRD.A and $0.16 for CRD.B. Diluted earnings per share were $0.07 for CRD.A and $0.05 for CRD.B in the 2014 period. In the fourth quarter of 2015, the company realigned two of its reportable segments by moving its Canada and Latin America/Caribbean operations from the former Americas segment to the newly formed International segment, previously referred to as the EMEA/AP segment. The former Americas segment without Canada and Latin America is now the U.S. Services segment. The results of prior periods have been revised to conform to the current presentation of our reportable segments. I will now review the fourth quarter performance of each of our business units, starting with the U.S. Services segment. Benign weather in the U.S. persisted into the 2015 fourth quarter. However, this was offset by higher special project revenues for major U.S. insurance carrier, growth in U.S. Contractor Connection, and the positive impact of cost reduction activities commenced earlier in the year. Revenues from the U.S. Services segment totaled $56.8 million, up 12% over the $50.7 million reported in last year’s quarter. Operating earnings in our U.S. Services segment were $7.9 million in the 2015 fourth quarter, or 14% of revenues, improving substantially from operating earnings of $1.3 million, or 2% of revenues in the prior year quarter. Case volumes in U.S. Services declined by 3% in the 2015 fourth quarter, reflecting weather-related declines in our U.S. field operations, as well as the transfer of affinity claims to our Broadspire segment. Excluding this transfer of affinity claims, the segment claim volumes would have increased approximately 13% in the 2015 fourth quarter. Revenues generated by our catastrophe adjusters in the U.S. totaled $16.3 million in the 2015 fourth quarter, up from $13.6 million in the 2014 quarter. The revenue increase for the 2015 quarter was driven by the previously mentioned outsourcing contract and an increase in catastrophe claim assignments. During the 2015 fourth quarter, our International segment operating results continue to reflect a reduction in claims activity and negative foreign exchange impacts. However, this was partially offset by a full quarter of revenues in 2015 from the December 2014 GAB Robbins acquisition. We are seeing our UK claim volumes began to improve from recent weather events before considering the positive impact from the GAB Robins acquisition. International revenues decreased to $124.9 million from $125.6 million in the 2014 period, primarily due to a stronger U.S. dollar, which reduced revenues by 13% during the 2015 fourth quarter. This was partially offset by the positive impact from the acquired GAB Robins operations. Absent these two factors international revenues would have decreased 3% in the 2015 fourth quarter. International operating earnings were $7.3 million during the current quarter, as compared to last year’s fourth quarter operating earnings of $9.6 million. The operating margin in this segment was 6% in the 2015 period compared to 8% in the 2014 quarter. During the quarter, claims volumes decreased 3% in International. Excluding the positive impact from the GAB Robins acquisitions, cases would have decreased a 11% in the 2015 fourth quarter, as weather-related increases in the UK were offset by a decline in high-frequency low severity claims in Latin America, due to the company exiting certain unprofitable business lines during 2015. Broadspire revenues increased to $75.4 million in the 2015 fourth quarter, up from $69.2 million in the prior year quarter, primarily as a result of organic growth, new client wins, increased medical management services referrals, and a shift of affinity claims previously handled by our U.S. Services segment. Operating earnings in Broadspire totaled $7 million, or 9% of revenues in the 2015 fourth quarter, increasing from operating earnings of $6.3 million, or 9% of revenues in the 2014 fourth quarter. During the 2015 fourth quarter, cases increased 19% over 2014 levels. Included in this increase is the transfer of 16,100 affinity claims. Excluding this shift, Broadspire cases would have been up slightly in the current quarter. Garden City Group revenues totaled $27.7 million in the 2015 fourth quarter, decreasing from $40 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 2015 period. Operating earnings totaled $1.7 million in the 2015 fourth quarter, or 6% of revenues declining from $4.5 million, or a 11% of revenues in the prior year period. Our backlog at the end of 2015 was $81 million compared to $102 million at the close of last year. The company’s cash and cash equivalent position at December 31, 2015 totaled $76.1 million, as compared to $52.5 million at the 2014 year-end. Our investment in unbilled and billed receivables has decreased by $20 million during 2015, as a result of strong collections and the impact of foreign exchange rates, partially offset by increases from the GAB Robins acquisition. Goodwill and intangible assets arising from business acquisitions decreased by a net of $7.3 million, reflecting the impact of recording the preliminary balance sheet for the GAB Robins acquisition, offset by the write-off a portion of our goodwill balance. Pension liabilities decreased by $20.6 million, reflecting cash contributions made in the U.S. and UK during 2015, and the conversion of the Netherlands plan from a defined benefit to a defined contribution plan. Our total debt increased in 2015 by $90.5 million, as a result of borrowings to fund the GAB Robins acquisition in our 2015 restructuring activities. Cash provided by operations totaled $61.7 million for 2015 compared to $6.6 million provided in the prior year. This improvement was primarily due to the collections of 2014 year-end accounts receivable and lower payments for accrued liabilities, including incentive compensation. Let me now review the initial guidance for 2016. We’re optimistic that our 2015 cost takeout initiatives will drive margin expansion and earnings growth through 2016. 2016 guidance includes the impact of restructuring cost related to the ongoing implementation of the Global Business Service Center and the completion of the GAB Robins integration. In the aggregate, these 2016 charges are expected to total approximately $15.6 million pre-tax, or $0.19 in diluted earnings per share after tax. Our initial 2016 guidance is as follows. Consolidated revenues before reimbursements between $1.05 and $1.1 billion. Consolidated operating earnings between $80 million and $90 million. Before reflecting the restructuring charges, net income attributable to shareholders of Crawford and Company on a non-GAAP basis between $36 million and $42 million, or $0.67 to $0.77 per CRD.A share, $0.59 to $0.69 diluted earnings per share for CRD.B share. After the restructuring charges, net income attributable to shareholders of Crawford & Company between $24 million and $30 million, or $0.48 to $0.58 per diluted CRD.A share and $0.40 to $0.50 per diluted CRD.B share. With that, I would like to turn the call back to Harsha for concluding remarks.

Thank you, Bruce. On our third quarter call, we updated our full-year guidance, which called for operating earnings of $62.5 million at the midpoint of the range. We ended the year with operating earnings just above $70 million in large part due to the aggressive restructuring initiatives that we implemented through the year. Importantly, these results are an affirmation of the culture that we are instilling at Crawford, a culture of meeting and beating our goals both internally and externally. Looking forward, I’m optimistic that 2016 [Technical Difficulties] will see strong margin expansion, given the significant progress made, combined with incremental opportunities that we see to reduce expenses further. Our continued vigilance on costs will not only restore Crawford’s profitability, but also position the company to drive organic operating growth – earnings growth beginning in 2017. Along those lines, I’m pleased to report that we have started the year ahead of our initial expectations as our cost reduction efforts have gained traction. Our businesses are performing well and we’re heading in the right direction as a company. I look forward to updating you on our continued progress on subsequent calls. Operator, please open the call to questions.

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

Hello, this is actually Kevin Alloway on for Mark today. Just to start with, what is the duration of the large outsourcing agreement you’re currently boosting the U.S. segment? And what sort of run rate should we be expecting there?

Hey, this is Bruce. We anticipate that to run through 2016, based on our current agreement with the client, but that could extend into the future years as well.

Okay. And is that…

And I’d like to add that the outsourcing contract is not as large as you might imagine. But at the same time, we plan beyond all of these thing on a continuous basis, but go ahead.

So I was going to ask, is that projection included in your 2016 guidance, or that will go through 2016?

Yes.

Okay, great. And then maybe if you could give a little more detail around the deceleration you’re expecting to see in Garden City in 2016? And you mentioned I think maybe to position your growth in 2017 there?

Yes, I think what I would tell you is with the deepwater horizon slowing down, as claims volume is coming down. We’re going to see a drop, but we can’t tell you the precision on the drop other than we have not only planned for it, it is baked into our guidance. So in my opinion, it will not have a major material impact, if anything as you can see with the guidance we’re taking our numbers up from a year ago.

Okay, great. Thanks. And then one more, it looks like you’re expecting a little bit lower top line for your 2016 for revenue before reimbursement. Just wondering why and then is that mostly related to the Garden City stuff, or is it coming from some other places as well?

It’s probably coming from two main places. One, there’s going to be some drag from FX that we’re going to see in 2016 compared to 2015, given the relative strength of the U.S. dollar. But then also we expect for the Garden City revenues to be down year-over-year as the large projects continue to roll off into 2016.

Okay, great. That’s it from me. Thanks.

Your next question comes from the line of Greg Peters with Raymond James.

Good afternoon, Harsha and Bruce.

Hi, Greg.

Thank you for the call. Harsha, could you just step back, I know, you are operating in interim capacity as CEO of the company. But it seems like you’re making a lot of decisions and putting the organization in a lot prospectively better place than it was before. And I’m just curious, does that mean that you’re going to be considering removing the interim title?

First of all, Greg, I appreciate all your positive comments. I’m not authorized to remove the interim title until the Board makes that decision. But I also want to tell you maybe I should kind of bring this up at the time that the Board is involved in proceeding forward with the CEO search. The search is on. The search firm has been appointed and being in the interim role, I really cannot kind of delve into a deeper, because we need to, for governance perspective, the Chairman of the Board has to run the search as opposed to myself. And if the Board approaches me with the opportunity, I think, I will have that conversation with the Board. But clearly, the company is moving forward not just because of the interim CEO, frankly, the management team at Crawford is very, very strong. All our lines of business are well run by our business leaders that are very focused and Our Chief Financial Officer, our CIO, Our Chief Administrative Officer, our Chief of Development and Strategy, and our Chief People Officer are fixated on supporting the four businesses. Our execution is only continuing to improve each day, Greg. So I’m sitting in an envious position of taking credit when I should not be.

Harsha, just as a follow-up, because you are executing on a lot of changes internally. Often times it’s hard for us on the outside to gauge whether you’re trimming fact or actually to follow the expression cutting into the bone. What kind of metrics are you watching to make sure that, in fact, you’re not harming the organizational infrastructure yet getting rid of the required fat that you’ve isolated in or working on?

Yes, what we did do, Greg, just to make sure where we were doing this the right way, you’ll always make mistakes. But we did bring in a outside firm that actually has the expertise in these kinds of restructuring activities. And they identified very specific areas using benchmark of other similar companies and where we identified, if you will, excess costs, and we’ve been very thoughtful in how we have trimmed our costs. But really our focus was to bring our costs in line if you will with today’s business environment, one. And then the second really was to make sure our centralized services or our shared services is that efficient as it can be. And I would tell you there’s always room to improve. But the good news is, I have a strong executive management team that can challenge as well as keep balance as we try to do this.

Right.

And I’ll say this is in a very light manner that being primarily vegetarian, I don’t cut to the bone typically.

That’s a funny comment. Just one final question for you. Can you provide us an update on how Contractor Connection is doing? That seem to be a pretty interesting business that sort of fit within the Crawford family. And have your cuts affected any of their business and or the outlook for that segment?

Sure. First of all, I think in the way we reduced our costs, we have kept our non-weather dependent businesses that are growing quite nicely, we have left them largely untouched and undisturbed.

Okay.

So they can continue to grow. Where Contractor Connections has been doing well? I’d call it par excellent in execution. They execute extremely well. They’re methodical almost military like in how they go after increasing their business and executing project. Now, the one other piece that in addition to all of that is Contractor Connection it is just starting to embark on a consumer testing program and this will be the first year where we’re going to do a very, very limited test. And if that is successful, we will continue to expand it, but that will only increase if you will the top line as well as the margin dollars as time continues. And I can tell you, I don’t see a slowdown at this time on Contractor Connections.

Perfect. Thank you very much for your answers.

Thank you, Greg.

Thanks, Greg.

And we have no other questions in queue at this time. And I would like to turn the conference back over to Mr. Agadi.

Okay. Thank you. If there’s no other questions, I thank everybody for being on the call. And we hope to see you at the next quarterly earnings release and best wishes and regards to all inside and outside the company.