CRD.B (CRD.B) Q1 2018 Earnings Report, Transcript and Summary

Good morning. My name is Angela, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Crawford & Company First Quarter 2018 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, Friday, May 11, 2018. 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; collectibility of our billed and unbilled accounts receivable; financial results from our recently completed acquisitions; our continued compliance with the financial and other covenants contained in our financing agreements; expectations regarding the timing, cost and synergies from our global business and technology services centers; 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 may be implied by such forward-looking statements. The company undertakes no obligation to publicly release revisions to any forward-looking statements made in this conference call to reflect events or circumstances occurring after the date of this 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 March 31, 2018, 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, President and Chief Executive Officer of Crawford & Company. Harsha, you may begin your conference.

Good morning, and welcome to our first quarter 2018 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, this is an exciting time at Crawford as the comprehensive strategy that we implemented through 2017 is beginning to show signs of success as can be seen in our first quarter results, where sales grew 2.2% and earnings per share improved year-over-year by $0.02 per share. Central to our strategy, designed to return Crawford to sustained revenue growth, was the review of our core values, which led to the realignment of our organization around a refreshed corporate mission and vision. This now drives everything we do, including how we go to market, how we service our clients and who we hire. Our mission is to restore and enhance lives, businesses and communities. This is at the center of what we do every day. Our vision is for Crawford to be the leading provider and most trusted source for expert assistance, serving those who insure and self-insure the risks of businesses and communities anywhere in the world. These core values now define Crawford and differentiate us in the market globally. As we have discussed on prior calls, our focus has been on gearing up for growth. To accomplish that, the second step of our growth strategy was the recruitment of experienced solution-based salespeople to improve our capabilities as we focus on selling the One Crawford Solution. We have also re-evaluated our entire sales process, including our marketing collaterals, how we respond to RFPs, how we measure and track our sales leads as well as exploring opportunities to improve our technology and training to support our global team. Improving top line revenue growth is core to our strategy, and early signs of success are clear as the momentum in our new business pipelines is building. The effectiveness of our sales teams is critical to our success, as we deliver innovative solutions designed to solve the industry's most complex challenges. The last step in our strategy was the realignment of our organization, such that Crawford faces the market in the same manner as our clients. What we have found through our extensive review this past year was that our prior business structure was not delivering the full value of Crawford to our clients, not to mention, limiting the growth potential of the company. As a result, we have successfully reorganized the company into Global Service Lines, effective the beginning of the year, which will sharpen our method of delivery to our clients and better enable our sales teams to increase market share and grow the company. As part of this realignment, we are driving our global sales teams to become more client- and growth-focused, as they move away from geographic silos and toward solution-based selling. Importantly, we are creating a more holistic sales force that can effectively sell the One Crawford Solution, making us more client-centric. Recognizing how our markets are organized, we have also realigned our sales teams by channel, where they are focused on carriers, corporations and intermediaries or brokers. Additionally, we have implemented a more streamlined account management structure designed to maximize our share of wallet. These are important steps, which are fundamental to maintaining and accelerating our growth. Another benefit of our move to Global Service Lines is our ability to harness the expertise and product knowledge from across the company in order to develop innovative solutions designed to solve the challenges of carriers, corporations and intermediaries. This will position Crawford to be a stronger partner to our clients as technology continues to drive the evolution of our industry. Our goal is to drive innovation in the claims settlement process in order to deliver value to our clients in the form of improved customer satisfaction and service and reduce claim leakage, which will result in improved market share and continued profitability for Crawford. Our recently launched TruLook solution is a great example. TruLook utilizes WeGoLook to initiate the claims process and determine the most effective way to handle the claim. TruLook also utilizes Contractor Connection at the conclusion of the adjustment, thereby providing an integrated solution and elevating the claim settlement process from an art to a science and ultimately resulting in improved speed of service, accuracy and importantly, improved profitability to our clients and Crawford. We want to own the market and represent the complete claims solution through One Crawford & Company. We are also working to launch new intelligent and integrated solutions for our clients, focused on specific industries. These solutions are an embodiment of our depth of experience, technology and innovation that we can draw upon to effectively and efficiently solve long-standing industry problems. Our recently launched Total Construction Solutions is focused on the construction industry and is the first of many verticals to follow. Since our fourth quarter call, we have already added 7 new clients, which demonstrate the strong early traction that the Total Construction Solutions has achieved. Looking forward, we are currently developing solutions for other industries, which represent large market opportunities for Crawford. The hospitality industry is another such example where we have recently developed a solution focused on the lodging and restaurant industries, which are currently in a soft launch. Overall, we see these and other innovative solutions that we are developing as being meaningful revenue drivers to Crawford. Importantly, our realigned organizational structure and sales force will ensure the effective delivery of these innovative solutions to our clients. Beyond innovation, we see the opportunity through our reorganization to Global Service Lines to more effectively identify pertinent local solutions and expand them across our global client base. A perfect example is Contractor Connection where we are taking the U.S. and Canadian business model to scale in the U.K. and Australia and have now had a successful launch in Germany. We're also taking WeGoLook to Canada and the U.K. and expect to launch in Australia by year's end. Importantly, our best solutions are not just being developed in the United States. For example, our Australian business has built a market-leading forensic accounting practice that we are now exporting to our other major markets. This highlights a few of the many opportunities that we are realizing as a result of our move to Global Service Lines, as we expand our industry-leading solutions globally. As you can clearly see, we have now become a borderless company. To conclude, the momentum of our business is clearly accelerating as our move to Global Service Lines is unleashing the vast potential that exist within Crawford. Looking forward, 2018 will be a year of execution where the results of our strategy will become more apparent. Importantly, we are excited with the early progress that we have achieved as evidenced clearly by our first quarter results. Overall, we have made real progress towards the achievement of our longer-term goal of delivering 5% revenue growth and 15% earnings growth annually. I would now like to turn the call over to Bruce to review the financial results of the first quarter in more detail.

Thank you, Harsha. Company-wide revenues before reimbursements in the 2018 first quarter were $273.1 million, up 2% compared with $267.3 million in the prior year's first quarter. Our net income attributable to shareholders of Crawford & Company totaled $8.6 million in the 2018 first quarter, up 12% compared to $7.7 million in the 2017 period. First quarter 2018 diluted earnings per share were $0.16 for CRD-A and $0.14 for CRD-B, increasing from $0.14 for CRD-A and $0.12 for CRD-B in the 2017 period. There were no restructuring or special charges in the 2018 first quarter. As a reminder, on a non-GAAP basis before restructuring costs and special charges in the prior year period, first quarter 2017 diluted earnings per share were $0.15 for CRD-A and $0.13 for CRD-B. The company's operating earnings totaled $18.2 million in the 2018 first quarter or 6.7% of revenues compared with $18.3 million or 6.8% of revenues in the prior year period. Consolidated adjusted EBITDA was $28.9 million in the 2018 first quarter or 10.3% of revenues, increasing from $26.6 million or 10% of revenues in the 2017 quarter. As discussed in the last earnings call and as Harsha mentioned earlier, we have made a strategic decision to reorganize the company into Global Service Lines. Our new reportable segments are known as: Crawford Claims Solutions, which comprises our global insurance claims business; Crawford TPA Solutions:Broadspire, which includes our global Broadspire business; and Crawford Specialty Solutions, which contains Contractor Connection, Global Technical Services and the Garden City Group. On April 24, we issued a Form 8-K revising our historical results of operations and related non-financial information for the 2016 and 2017 quarterly periods to conform to our current segment presentation. I will now review the first quarter performance of each of our business units, starting with our Crawford Claims Solutions segment. Revenue from the Crawford Claims Solutions segment totaled $90.4 million, up 9% from the $83.1 million reported in last year's quarter, primarily as a result of revenues from hurricanes Harvey, Irma and Maria and strong performance in Canada. On a constant currency basis, first quarter 2018 revenues were $87.2 million. Operating earnings in the segment were $700,000 in the 2018 first quarter or 1% of revenues compared to operating earnings of $2.4 million or 3% of revenues in the prior year quarter. Margins declined primarily as a result of incremental operating expenses to support the increase in weather-related claims in the U.S. and higher administrative costs. Revenues generated by our catastrophe adjusters in the U.S. totaled $15 million in the 2018 first quarter compared to $13.1 million in the 2017 quarter. The revenue increase for the 2018 quarter was primarily driven by a response to the recent hurricanes, substantially offset by lower revenues from a project-based outsourcing contract with a major U.S. insurance carrier, which has been largely completed. Revenues for Crawford TPA Solutions, or Broadspire, increased 4% to $100.2 million in the 2018 first quarter from $96.3 million in the 2017 period, largely due to increased revenues in the U.S. and Canada. On a constant currency basis, first quarter 2018 revenues were $98.8 million. Broadspire operating earnings were $7.8 million during the current quarter, substantially unchanged from last year's first quarter operating earnings of $8 million. The operating margin in this segment was approximately 8% in both the 2018 and 2017 quarters. Crawford Specialty Solutions revenues were $82.4 million in the 2018 first quarter, down from $87.8 million in the prior year quarter. The change in the customer contract in our U.K. Contractor Connection business, which we discussed last quarter, changed our accounting presentation from a gross to a net basis and reduced revenues by $6 million during the 2018 first quarter. However, this change had no impact on operating earnings. On a constant currency basis, 2018 first quarter revenues were $80 million. Operating earnings in Crawford Specialty Solutions totaled $10.5 million or 13% of revenues in the 2018 first quarter, improving over operating earnings of $8.4 million or 10% of revenues in the 2017 first quarter, primarily due to a reduction in advertising cost during 2018. The company's cash and cash equivalent position at March 31, 2018, totaled $64 million as compared to $54 million at the 2017 year-end. Our investment in unbilled and billed receivables has increased by $23.6 million during 2018, reflecting an increase in unbilled receivables, which is expected to show improvement during the 2018 second quarter. Pension liabilities decreased by $5.5 million, reflecting cash contributions made in the U.S. and U.K. during the 2018 first quarter. Our total debt increased during the 2018 first quarter by $41.6 million, primarily as a result of growth in unbilled receivables and other seasonal working capital needs. Cash used in operations totaled $13.6 million in the 2018 period, improving from $20.5 million used in operations in the prior year period. This decrease in cash used was primarily due to lower working capital needs and incentive compensation payments in 2018 as compared to 2017. The free cash flow deficit improved by $2.2 million year-over-year. Looking forward, we expect meaningful improvement to both operating cash flow and free cash flow over the balance of 2018. During the 2018 first quarter, the company repurchased over 1 million shares of CRD-A and over 50,000 shares of CRD-B at an average cost of $8.28 and $9 -- and $8.96, respectively. Let me now review the reaffirmed guidance for 2018. Our 2018 guidance is as follows: consolidated revenues before reimbursements between $1.12 billion and $1.14 billion; net income attributable to shareholders of Crawford & Company between $43 million and $48 million or $0.78 to $0.88 per diluted CRD-A share and $0.71 to $0.81 per diluted CRD-B share; consolidated operating earnings between $85 million and $95 million; and consolidated adjusted EBITDA between $127 million and $137 million. With that, I would like to turn the call back to Harsha for concluding remarks.

Thank you, Bruce. This is an exciting time in Crawford's more than 75-year history as we build our start to 2018. As we look forward, we have 6 primary objectives. First, we are focused on increasing the velocity of our revenue growth. Second, we will continue to launch new products and services, which will position Crawford as an innovator in the industry. Third, we will continue to maximize the benefits of our go-to-market strategy with carriers, corporates and intermediaries or brokers. Fourth, we will prioritize our IT investments to improve our capabilities across the globe. Fifth, we will focus on our cash generation capabilities and improve our free cash flow. And sixth, we will continue to advance our employee training and leadership development programs. All of which will position the company to achieve our longer-term target of 5% revenue and 15% earnings growth annually. We are committed to delivering sustained results, as we celebrate our 50th anniversary as a public company this November of 2018. Thank you, again, for your time today, and a special thanks to all the employees of Crawford, who have worked extremely hard in delivering our good Q1 results. Operator, please open the call for questions.

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

Morning.

Morning, Mark.

Thanks for shifting the conference call timing. This is - it works out very well. The Crawford Claims Solutions, you had good revenue growth but the margins are meaningfully under pressure in the quarter. And I think you had talked about the increased operating expenses, higher admin costs. Could you go into a little more detail about what happened in that quarter? And what kind of visibility you've got for both revenue and margin performance through the balance of the year?

Sure. This is Harsha, Mark. Just very, very quickly. As you know, the Crawford Claims Solutions serves in the high-volume, low-severity part of the claims market. And in there included are obviously a variety of claims. But we are continuing to invest correctly in a number of areas. The first is we've, I would call it, reawakened our interest in the cat area. And we are investing on ramping up our cat services. Second, we have also continued to invest as planned in WeGoLook. And third, we have invested quite heavily, purposefully in the training programs for our adjusters and the broader employee base. Because I think as the innovation and disruption is happening, these investments are necessary. Having said that, I think the revenue traction will continue, and I think margin, over time, will pick up. We have -- our expectations in this segment are actually no different than it is with the CSS or our TPA business. We are driving towards a 10% operating margin longer-term in all three businesses. And frankly, EBITDA will also be higher and higher over time. So to me, this is expected, and we are not surprised. And I think as we invest in our sales force, in our technology as well as in some of our new front-facing solutions, these margins will be expected. But over time, they will continue to improve.

The corporate expenses, am I right in thinking they were a little lower in Q1? Any particular driver for that? And what's a good expectation going forward?

Yes. Here is what I would say. First is you can lower SG&A two ways as you know. One is lowering the sheer cost of operating, and that can happen through more technology and common platforms, but the other side is we're also starting to inflect the revenue upward and that also will, over time -- SG&A goes down as a smaller percentage, so both of those things are happening. And in addition to that, with the reconstruction of our structure, where we have Global Service Lines, the increasing accountability and the reducing duplication in some of these shared services is actually going to make a difference over time.

The Garden City Group. Any update on that? How they're - are they performing still? Can you say whether they're profitable at this point?

Yes. I can tell you the following: that as you know now with the realignment of our Global Service Lines, Garden City is part of Crawford Specialty Solutions, and Garden City is going through a turnaround. And I am quite optimistic actually as each month passes, based on the results we're seeing, that Garden City is continuing to turn in the right direction.

Thank you.

And we have no further questions. I would now like to turn the call back to Mr. Agadi for closing remarks.

Thank you very much. Again, a big thank you to all of the employees of Crawford & Company, all of the investors of Crawford & Company. We are pleased to say that our strategies are in place. We're moving ahead. Q1 has turned out nicely, and we should continue to see better and better performance. Thank you. Good luck. Good-bye.

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. June 11, 2018. The conference ID number for the replay is 4496059. The number to dial for the replay is 1 (855) 859-2056 or (404) 537-3406. Thank you. You may now disconnect.