Mark Hughes - SunTrust Greg Peters - Raymond James. Adam Klauber - William Blair and Company

Good afternoon. My name is Ian, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Crawford & Company's Third Quarter 2017 Earnings Release Conference Call. In conjunction with this call, a supplementary financial presentation is available on our website at www.crawfordandcompany.com under the Investor Relations section. 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, November 6, 2017. Now I would like to introduce Joseph Blanco, Crawford & Company's General Counsel

Thank you. Some of the matters to be discussed in this conference call and in the supplementary financial presentation may include forward-looking statements that involve risks and uncertainties. These statements may relate to among other things, our expected future operating results and financial condition, our ability to grow our revenues and reduce our operating expenses. Expectations regarding our anticipated contributions to our underfunded defined benefit pension plans. Collectability of our build and unbuild accounts receivables, financial results from our recently completed acquisitions, our continued compliance with the financial and other covenants contained in our financing agreements. Expectations regarding the timing, costs and synergies from our global business and technology services center, our other long term capital resource and liquidity requirements and our ability to pay dividends in the future. The Company's actual results achieved in future quarters could differ materially from results that 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-Q for the quarter-ended September 30, 2017 filed with the Securities and Exchange Commission, particularly the information under the headings, Business, Risk Factors, Legal Proceedings and Management’s Discussion and Analysis of Financial Conditions and Results of Operations, as well as subsequent Company filings with the SEC. This presentation also includes certain non-GAAP financial measures as defined under SEC rules. As required, reconciliation is provided for those measures to be the most directly comparable GAAP measures. I would now like to introduce Mr. Harsha Agadi, President and Chief Executive Officer of Crawford & Company. Harsha, you may begin your conference.

Thank you, Joseph. Good afternoon and welcome to our third quarter 2017 earnings call. Joining me today are Bruce Swain, our Chief Financial Officer and Joseph Blanco, our General Counsel. After our prepared remarks, we will open the call for your questions. To start, the hurricane activity during the quarter was almost unprecedented in terms of the storms’ severity, proximity to one another over several weeks and damage inflicted. We believe this challenged the capabilities of the entire P&C industry to cope with assessing the claims arising from the storms. To support our clients in this time of great need, we have reached into our US network to find the best adjusters available, we have used our global reach to mobilize Crawford adjusters from Canada, the United .Kingdom and Australia, and we have also hired and trained a new generation of adjusters. We view these efforts as a significant investment in our business which will demonstrate our strong financial commitment to our clients, build brand loyalty, and position Crawford as a more valuable partner for the future. Importantly, we have made this investment to differentiate Crawford in the market and better position the company to take market share, win more day-to-day business and drive growth. The early results of which can be seen in our U.S. Services segment which delivered strong revenues growth in the third quarter. While our U.S. Services business performed well, our third quarter results were impacted by decrease in CAT activity in our International segment as well as soft market conditions in our Garden City Group segment. Turning to our third quarter results in more detail. Revenues before reimbursements declined by 2.4% versus the 2016 third quarter. The largest driver to the decline was a change in accounting for our Contractor Connection business in the UK…

Thank you, Harsha. Company wide revenues before reimbursements in the 2017 third quarter were $270.6 million, down compared with $277.3 million in the prior year’s third quarter. FX changes were not material in 2017 quarter. The Company’s selling; general and administrative expenses or SG&A totaled $57.9 million down from $60.3 million in the prior year quarter. As a percentage of revenue, these costs decreased to 21.4% of revenues in the 2017 third quarter from 21.8% of revenues in the prior year quarter. The decrease and the amount of these costs are primarily due to lower professional fees and administrative cost reductions during 2017. During the 2017 third quarter, the Company recorded restructuring and special charges of $1.4 million or $0.02 per diluted CRD-B share compared to $1.5 million or $0.02 per share in the 2016 quarter. These charges were associated with cost reduction activities in our international operations in U.S. based administrative functions. Our net income attributable to shareholders of Crawford and Company total $11.8 million in the 2017 third quarter compared to $10.9 million in the 2016 period. Third quarter 2017 diluted earnings per share were $0.22 for CRD-A and $0.20 for CRD-B, compared to $0.20 for CRD-A and $0.18 for CRD-B in the 2016 period. On a non-GAAP basis before restructuring costs and special charges in both the 2017 and 2016 periods, third quarter 2017 diluted earnings per share were $0.23 for CRD-A and $0.22 for CRD-B, compared to $0.22 for CRD-A and $0.20 for CRD-B in the 2016 period. I will now review the third quarter performance of each for our business units starting with the U.S. Services segment. Revenues from U.S. services segment totaled $63.1 million, up from the $56.5 million reported in last year's quarter, primarily as a result of revenues from hurricanes Harvey and…

Thank you, Bruce. To conclude, while our U.S. services segment has performed well and is poised to see improved profitability in the fourth quarter. Garden City Group challenges continued to be a headwind to our financial results and will partially offset the benefits from the recent CAT activity. As a result, we have tightened our operating earnings guidance to reflect a recent activity relative to our original expectations when we first issued our guidance in March. Returning GCG to profitability is a key focus of our management team through 2018. Overall, I am very pleased with the strong execution that we delivered to our clients this quarter and I am confident that the investments we've made in our business will pay dividends in the future. Importantly, the breadth of Crawford's platform and product offerings became increasingly evident to the market this quarter and I am optimistic that we can deliver on the many cross sell opportunities that exist. Appointing Ken Fraser to the role of chief client officer is a critical component to the successful delivery of this opportunity and returning Crawford to growth. To close, I am pleased that we are going to deliver our second year in a row of EPS growth in 2017. Operator, please open the call for questions.

[Operator Instructions] And your first question comes from the line of Mark Hughes from SunTrust.

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

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

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

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

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

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

Okay.

And Mark we haven't touched on the GTS claims, the Global Technical Services is the large and complex claims. That's continued coming as well on top of all this.

Okay. You had suggested margin expansions in the fourth quarter in the US business as you leverage some of this, is that year-over-year or is that sequential?

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

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

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

I think on cultural basis Mark we are keeping a pretty good handle on what we call a shared services cost because if it's not revenue generating we need to be very, very careful that our investments are pointed towards revenue generating activity.

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

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

Our next question is line of Greg Peters from Raymond James.

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

Right. So we had one of the biggest changes that we had -- been around the timing of bonus payment. So in 2016, in the calendar year 2016 we did not have very much in a way of significant bonus payment that were paid, bonuses that would been earned during 2015. 2015 was a challenging year for us particularly the back half of that year. During 2017, we had much more significant bonus payments that were made based on 2016's results. So there was a just a shift in the amount of cash outflow related to incentive compensation. We also had a change in define contribution payment as well between those two years where they were greater in 2017 than they were in 2016 because the 401(k) payments were something that we had cut back on in 2015. So that's the big driver of it. We also have higher tax payments this year and higher self insured payment even though our expenses down the payments on claims is higher this year. And then the other item that we had in 2016 which is the benefit that we didn't have 2017. You might recall we had cross currency swap on the Canadian dollar to hedge an inter company's loan that we had. And we converted that inter company loan to a third party borrowing and unwind that hedge and it had a $4.9 million benefit to us that was a cash benefit we recognized in 2016, it wasn't in 2017.

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

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

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

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

Okay. And then last accounting clean up question. You mentioned change in accounting as it relates to the contractor connection. And I am wondering if that is precursor to I know there some new revenue recognition rules coming out at the beginning of next year. I am wondering if that's precursor to something we might see beginning 2018 regarding new accounting rules.

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

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

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

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

Thanks, good afternoon, guys. Couple of quick questions. So does GCG need to grow revenues to become profitable next year?

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

Okay. And I am not sure if you mentioned, how is the backlog looking for next year at this point compared to six and nine months ago in GCG?

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

So longer term if the litigation environment does not rebound, how will you get that unit profitable? Just continue to cut cost or I guess what happens if the environment is depressed?

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

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

Yes.

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

It should grow into next year next year. And as time goes by it should pickup even more steam if you ask me. And because we've obviously the workers comp business, we are signed to win more and more disability activity as well as the medical management and they have the product recall piece that they are leading that should also make a difference.

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

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

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

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

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

Yes. Thank you very, very much. And as I will reiterate my final point to close. I am pleased that we are going to deliver our second year of EPS growth in succession. And this one is for 2017. So I want to thank my team across the globe for bringing a strong year against a CAT backdrop. Thank you. Bye, bye.

Thank you for participating in today's Crawford and Company conference call. This call will be available for replay beginning at 6:00 PM today through 11:59 PM on December 6, 2017. The conference ID number for the replay is 637-4542. The number to dial for the replay is 1855-859-2056 or 404-537-3406. Thank you. You may now disconnect.