CRD.B (CRD.B) Q2 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 Second 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. [Operator Instructions] As a reminder, ladies and gentlemen, this conference is being recorded today, Tuesday, August 7, 2018. Now I would like to introduce Joseph Blanco, Crawford & Company's General Counsel.

Thank you. Good morning. Some of the matters to be discussed in this conference call and in the supplementary financial presentation may include forward-looking statements that involve risks and uncertainties. These statements may relate to, among other things, our expected future operating results and financial condition; our ability to grow our revenues and reduce our operating expenses; expectations regarding our anticipated contributions to our underfunded defined-benefit pension plans; collectability 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; our long-term capital resource and liquidity requirements; and our ability to pay dividends in the future. The company's actual results achieved in future quarters could differ materially from results that may be implied 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 Jun 30, 2018, filed with the Securities and Exchange Commission, particularly, the information under the headings: Risk factors, and Management's Discussion and Analysis of Financial Condition and Results of Operations as well as subsequent company filings with the SEC. This presentation also includes certain non-GAAP financial measures as defined under SEC rules. As required, a reconciliation is provided for those measures to the most directly comparable GAAP measures. I would now like to introduce Mr. Harsha Agadi, President and Chief Executive Officer of Crawford & Company. Harsha, you may begin your conference.

Good morning, and welcome to our second quarter 2018 earnings call. Joining me today are Bruce Swain, our CFO; and Joseph Blanco, our General Counsel. After our prepared remarks, we will open the call for your questions. To start, I'm pleased to with our results as the comprehensive strategy that we implemented through 2017 continues to show signs of success. Our team's singular focus is to return Crawford & Company to sustained revenue and earnings growth. The initiatives that we have put in place are beginning to take hold as you can -- as can be seen in our second quarter results, where revenues grew 4% from the year ago quarter representing our third consecutive quarter of growth. Of note, on a pro forma basis, revenues grew 6% in the quarter, when excluding GCG, which demonstrates the building momentum in our core business. Our second quarter results also demonstrate our commitment to our clients, which we delivered day in and day out. It is this commitment, which builds brand loyalty and positions Crawford as the most valuable risk partner. An example of this was our response to the major windstorms in Canada, during the quarter where we leveraged our global scale to deliver for clients who were suddenly inundated with a high volume of claims. Another example occurred in the U.K. where we were retained by clients on major losses to iconic properties. This reinforced the recognition of our deep technical capabilities by the market. Ultimately, as we continue to deliver for our clients in their times of need, we will differentiate Crawford and see our market share grow. Of note, we experienced growth across most of our businesses and segments during the quarter with many growing at a double-digit pace. This growth is noteworthy given the competitive pressures that we continue to face in the marketplace. A key factor to our success and ability to overcome industry challenges has been the successful achievement of our commitment to invest in our sales team and our sales effectiveness. The benefits of which can be seen in Contractor Connection, which has continued to experience robust new client wins, including a new contract with a top 5 U.S. insurer which will be supportive of future growth. Another example can be found in our Broadspire segment, which has achieved a 98% client retention rate year-to-date. Overall, our RFP win rate has improved significantly to 38% and we have retained 100% of our U.S. CAT clients this season, both of which are marked improvements over prior years. I'm especially pleased with our CAT retention and the increase in this business overall given the substantial investment that we made during the unprecedented hurricane season. An example of this investment is the build-out of our industry-leading RENOVO platform, which we just announced. In short, our commitment to our clients during last year's storms was reciprocated. Our commitment was also a manifestation of our vision to be the leading provider and the most trusted source for expert assistance, serving those who insure and self-insure the risks of businesses and communities anywhere in the world. These successes also demonstrate our renewed focus on execution in order to drive improved results. Our sale of GCG in the second quarter is another key step, which will further sharpen our focus as we move towards providing integrated end-to-end solutions to our clients. With the sale complete, we will now be able to focus our entire organization on our core client segments, which are carriers, corporates and brokers. Additionally, we have now realigned and augmented our sales teams to more aggressively pursue these segments. We're also increasing our investment in our Tier 1 countries, United States, United Kingdom, Canada and Australia, where we are best positioned to leverage our strengths and more effectively sell One Crawford to our clients. These investments will deliver a much higher market share than we have today. Our reorganization to Global Service Lines has enabled us to effectively make this investment. Additionally, we are now able to focus on businesses that are under-penetrated in favorable geographies where the market opportunity is significant. An example in the quarter came in Europe, where we were engaged by a top 5 global carrier to form the first of its kind pan-European response team on a weather-related surge for Crawford. Another example is Contractor Connection, where we have started to take the United States and Canadian business models to scale in the U.K. and Australia. We have also had a successful launch in Germany through the first quarter and into the second. Importantly, our new business development has been extremely strong. Beyond geographic expansion, we're also active in driving industry collaboration. An example is our 20th annual Contractor Connection Conference, which we recently hosted and had over 3,000 industry attendees. We realize that being an industry leader comes with the responsibility to continuously innovate for clients. As such we have increased our investment year-over-year in technology. While this has increased our SG&A, we're moving our organization to be more data-enabled as we can focus our efforts on what matters most to our clients, which is timeliness, quality, productivity and insight. We're also investing in new capabilities and solutions to open large greenfield market opportunities that we are uniquely positioned to exploit. As you will recall, I shared with you on our last call the launch of our Total Construction Solution, which is focused on the unique needs of the construction industry. I'm extremely proud to tell you that we now have 22 clients as the market acceptance has been very strong. Another attractive industry is the hospitality sector where we will be officially launching our solution over the coming weeks. Our hospitality solution is focused on lodging and restaurant industries, which represents significant market opportunity for Crawford. Of note, Crawford is well positioned to take share in this vertical as we are already the leading claims management company in the luxury hotel segment. Looking forward, we will continue to roll out new industry verticals over the coming quarters with the transportation vertical in the design phase and retail set to follow. Our industry solutions provide Crawford a market-leading position, as well as critical differentiation where we can demonstrate our expertise and drive incremental business. Our focus is to carefully blend our deep claims experience with groundbreaking technologies to deliver world-class claims service with top quality, and always promptly. Along those lines, another new area that we are excited about is our Recall 360 solution, which is focused on solving the complex challenges of product recalls. In a recall, the most important aspect is to ensure that you have helped the client minimize the damage from any defective product in the market. We performed our first consumer recall in the second quarter, which was a midsized event. Our Recall 360 solution performed well and the feedback from the client was very positive. We believe there is much more that we can do with this solution in terms of value and service and expect this product to gain strong market adoption over the coming quarters. As you can see, we are continuing to invest in new solutions in order to be the leading edge of innovation. This investment in creating new revenue streams, which will positively impact growth, looking to 2019 and beyond. We're also investing in technology to become a more tech-enabled company and are adding artificial intelligence and data analytics into our day-to-day claims. While we expect to invest more capital into the business for growth, we also appreciate the continued discipline on margin management. As such, we will continue to analyze our footprint and explore opportunities to be more efficient to ensure that we drive margin expansion as we grow the top line. To conclude, the momentum in our business is clearly accelerating as we deliver upon our commitments to our clients and sharpen our focus on innovation, growth and profitability. Along those lines, I'm pleased to welcome Michelle Jarrard to our board. Michelle brings a unique skill set of innovation, technology, global business and people services from her more than 25-year career at McKinsey, where she served on their global operating committee. Her experience is precisely what we need as we continue the transformation of Crawford. I would now like to turn the call over to Bruce to review the financial results of the second quarter in more detail.

Thank you, Harsha. Company-wide revenues before reimbursements in the 2018 second quarter were $279 million, up 4%, compared with $269.2 million in the prior year's second quarter. As previously disclosed, during the second quarter, we disposed of our GCG business line for $44.6 million. The sale resulted in a pretax loss on disposal of $17.8 million or $0.24 per share. The net cash proceeds from the sale were used to pay down outstanding borrowings under our credit agreement. Our net income attributable to shareholders of Crawford & Company totaled a loss of $2.4 million in the 2018 second quarter compared to income of $10.2 million in the 2017 period driven by the loss on the disposal of GCG. Second quarter 2018 diluted loss per share were $0.04 for CRD-A and $0.06 for CRD-B compared to earnings of $0.19 for CRD-A and $0.17 for CRD-B in the 2017 period. There were no restructuring or special charges in the 2018 second quarter. On a non-GAAP basis before restructuring costs and special charges in the prior-year period and the loss on disposal of the GCG business line in the 2018 quarter, non-GAAP 2018 diluted earnings per share were $0.20 for CRD-A and $0.19 for CRD-B as compared to 2017 diluted earnings per share of $0.27 for CRD-A and $0.25 for CRD-B. During the 2018 quarter, the company incurred approximately $3 million in operating cost not expected to continue in future quarters related to professional fees associated with U.S. tax reform and our transition to a new ERP system along with certain higher operating cost associated with GCG. The company's operating earnings totaled $21.6 million in the 2018 second quarter or 8% of revenues compared to $29.2 million or 11% of revenues in the prior-year period. Consolidated adjusted EBITDA was $31.3 million in the 2018 second quarter or 11% of revenues compared to $38.2 million or 14% of revenues in the 2017 quarter. I will now review the second quarter performance of each of our business units starting with our Crawford Claims Solutions segment. Revenues from the Crawford Claims Solutions segment totaled $93.2 million, up 15% from the $81.1 million reported in last year's quarter, primarily as a result of carryover revenues from the 2017 hurricanes and other weather-related activity in the U.S. and strong performance in Canada and Europe during 2018. On a constant currency basis, second quarter 2018 revenues were $89.6 million. Operating earnings in the segment were $3.8 million in the 2018 second quarter or 4% of revenues compared to operating earnings of $3.3 million also 4% of revenues in the prior year quarter. Revenues for our Crawford TPA Solutions or Broadspire increased 6% to $102.6 million in the 2018 second quarter from $97 million in the 2017 period, largely due to increased revenues in the U.S., and Canada. On a constant currency basis, second quarter 2018 revenues were $101.7 million. Broadspire operating earnings were $8.1 million during the current quarter compared to last year's second quarter operating earnings of $9.7 million. The operating margin in this segment was approximately 8% in the 2018 quarter and 10% in the 2017 quarter. As previously mentioned, on June 15, 2018, we sold our GCG business line, which was a component of Crawford Specialty Solutions. We have included pro forma supplementary materials in the appendix to this presentation that completely removes GCG's operating results and the loss on disposition from the 2018 and 2017 financial results to aid in comparability between the periods. We will update these materials for future quarters as we move through the rest of the year. Crawford Specialty Solutions revenues were $83.2 million in the 2018 second quarter down from $91.1 million in the prior year quarter. The change in a customer contract in our U.S. Contractor Connection business, which we have previously discussed, changed our accounting presentation from a gross to a net basis and reduced revenues by a $2.8 million during the 2018 second quarter. This change had no impact on operating earnings. In addition, we experienced lower revenues in our U.S. Contractor Connection service line partially offset by higher Global Technical Services revenues. On a constant currency basis, 2018 second quarter revenues were $80.5 million. Operating earnings in Crawford Specialty Solutions totaled $10.4 million or 12% of revenues in the 2018 second quarter compared to operating earnings of $14.1 million or 15% of revenues in the 2017 second quarter. The company's cash and cash equivalent position at June 30, 2018, totaled $46.3 million as compared to $54 million at the 2017 year-end. Our investment in unbilled and billed receivables has decreased by $17.6 million during 2018 reflecting the sale of GCG that reduced total receivables by $48.4 million. Apart from the impact of the GCG sale, the increase in receivables is expected to turn around during the third and fourth quarters. This should drive an improvement in free cash flow. Pension liabilities decreased by $10.5 million reflecting cash contributions made in the U.S. and U.K. during the 2018 year-to-date period. Our total debt was largely unchanged from 2017 year-end as the net proceeds of the GCG sale were used to repay outstanding borrowings, which had increased during 2018 as a result of growth in unbilled receivables and fees in the working capital needs. Cash used in operations totaled $18.7 million for the 2018 period compared to $16.4 million used in operations in the prior-year period. This increase in cash used was primarily due to increased unbilled receivable balances in 2018 driven by increased revenues. The free cash flow deficit grew about $4.2 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 second quarter, the company did not repurchase any of its shares. On a year-to-date basis, during 2018, the company has repurchased over 1 million shares of CRD-A and over 50,000 shares of CRD-B at an average cost of $8.28 and $8.96, respectively. Let me now review the updated guidance for 2018, which reflects the sale of our GCG business line. The operating results for GCG were expected to be essentially breakeven for the remainder of 2018 after considering corporate costs allocated to GCG that are now retained at the corporate level. This is illustrated on Slide 28 in the appendix to today's presentation. Our updated 2018 guidance is as follows. Consolidated revenues before reimbursements between $1.07 billion and $1.12 billion. Net income attributable to the shareholders of Crawford & Company between $31 million and $36 million or $0.56 to $0.66 per diluted CRD-A share and $0.49 to $0.59 per diluted CRD-B share. On a non-GAAP basis, before the loss on disposition of the GCG business, 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 begin to deliver sustained revenue growth. As we look forward, we have 6 primary objectives. First, we will continue our focus on increasing the velocity of our revenue growth. Second, we will continue to launch new products and services, which will position Crawford as a leading innovator in the industry. Third, we will focus to maximize the benefits of our go-to-market strategy with carriers, corporates and brokers. Fourth, we will continue to prioritize our IT investments to improve our capabilities across the globe and to be at the forefront of innovation and disruption. 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, which will help transform the company into an engine for growth. All of which will position the company to achieve our long-term target of 5% revenue and 15% earnings growth annually. We are committed to delivering sustained results as we celebrate our 50th year as a public company in November. Thank you again for your time today. Operator, please open the call for questions.

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

Do you think there will be opportunity to cut the corporate expenses related to GCG? I know your guidance is for a relatively steady. I think you touched on corporate expenses. Is that an opportunity for next year?

Absolutely, Mark. There is an opportunity to get more efficient with our SG&A. And we're actually already in the middle of taking some of that action. And I think over time, you'll see more and more efficiency because we study this rather carefully, we benchmark against others. And not to mention, as we focus on the lines of business we want to focus, I think there will be efficiency to be add without question.

The -- in Broadspire, I think the margins were influenced by investment in technology and in sales. When do you start to leverage that investment and see a margin improvement?

Sure. Just in a quick summary. Broadspire has had a stellar year, in my opinion thus far, because they've had 98% retention of clients and significant wins in disability, but across the board just in a single quarter, they've had 25 wins. Now having invested now in the sales force and in technology, specifically in robotic processing, automation, as well as in Europe and the U.K. in terms of geographic focus. We've also now launched it in Australia and in several verticals. So in my opinion, from a timing perspective, I would say that you should start seeing traction early next year, but I think Broadspire, as you quite well know, is our most reliable business, our Crawford TPA business, most predictable. And I think they will still have, in my opinion, a good year in 2018 and they will continue to move forward. But I think the investments were necessary because even though they have been growing several years, we thought we should pick up the pace on the sales side and actually start moving the needle even more.

Understood. How about the -- on Contractor Connection sounds like the top line was down this quarter. You alluded to some new business wins. Why the decline? What are the prospects there?

Sure. I think the decline is momentary and temporary caused by a shift in the mix, which goes to the kind of assignments and the size of the average assignment. So that's what's driving it a little bit, but the actual assignments interestingly are up. We have won a major contract with a top 5 carrier and that is starting to populate if you will within Contractor Connection as we speak and it will run nationwide with this new customer. The ramp up has been a little slower than expected as we tweak technology on both sides and the timing is off just a tad bit, but I believe that Contractor Connection will solidly end the year and should be up versus year ago both on top and bottom line. So even though it's a Q2 phenomena, I don't see that for frankly the year.

And then Bruce, how about the tax rate outlook, still low 30s? I think I've got 32%, is that sound correct?

Yes. I think that's fair. It may nudge a few basis points below that, but 32% is a good number to model.

[Operator Instructions] Your next question is from Greg Peters with Raymond James.

I wanted to just zero in around your talking about the RFP win rate. And how it's improved substantially year-over-year. Where was it a year ago? And what's driving the success? Is it more proactive a response to the process or is it better products? Or could you just -- provide us some color behind that.

Sure. First of all, the RFP win rate was significantly lower a year ago with the exception, I would say of Broadspire. So having said that, I'll tell you what has changed. As you may know, we have appointed a chief client officer, as well as we've started to invest heavily in our sales force. And the tracking of the actual RFP process, the actual RFPs that are going out is vetted in a very systematic manner, including several senior members of the team and at a minimum, our chief client officer, our GSL leader, our global Chief Operating Officer, and sometimes myself, as well as our CFO, we're all leaning in to make sure we increase the probability of the win. Winning RFPs, Greg, actually can become a science as opposed to an art. And we're moving from art to science because there is a lot of activity that we can have big and small. And we need to just get better and better at it, this is just the beginning, this is early, but I think it's going to continue to increase in momentum. And -- sorry, one another piece, Greg, is we're fixated on one of the values, which is One Crawford. So as an example, it's -- let us say, it's a workers' comp RFP and/or it's a property RFP, we actually don't hesitate in certain cases to offer other Crawford services in addition to what they've asked, which actually makes it attractive for the client.

So when I look at the margin in the TPA Solutions and the Crawford Claims Solutions, should I infer from your comments that you've -- that the margin -- the near-term margin has been under pressure because you've been investing in this process to better -- have better success with RFPs? And then as you automate it going forward, it's going to -- you're going to harvest the margin improvement? Or maybe I'm misreading it all together.

No. No. No. I think, Greg, your assessment is actually right on that we have invested in the sales process to fine tune it. So that is an investment. The other investments that I have to point out is, we did invest in technology, purposefully, RENOVO is the example on the CAT side, but also we're installing if you will or implementing a new ERP system in the United States that's costing us some money as well and that -- all of this is coming to a final stage here. And we also had to spend some money on our U.S. tax reform work. In addition to that, while we were selling GCG, we did incur certain onetime cost as it related to GCG. So yes, in Q2, there is temporary margin pressure, but if you notice, we haven't really changed our guidance because we're quite optimistic that Q3, Q4, we're going to get back to where we are. And I'm talking now in the middle of August, and obviously, I have some sense even though our books are not closed in July, but all I can say is that Q3, Q4 should have significant pickup in margin.

Your next question is from Jack Wang with SunTrust.

So could you talk about the underlying growth prospects in the Claims Solutions segment, aside from weather please?

Yes. Sure. I think the first I'm going to talk about is CAT and we did identify that as a serious growth area. And frankly, many, many, many years ago, we were up there in the CAT space. What we have been able to do is a 100% retention of clients. We introduced RENOVO, which is a state-of-the-art adjuster dispatch and delivery system that is going to make a significant difference and we're starting to leverage the global workforce that we have across our several countries. When Puerto Rico happened at the end of last year, we were able to leverage if you will our Spanish adjusters. When the windstorms in Canada happened, our U.S. adjusters were backing up the Canadian adjusters on volume. So we're able to do all of this simultaneously. In addition to that, we've had an overall win rate in Q2 of $32 million of additional incremental annualized revenue. So we know that revenue is starting to move up as these contracts come online. In addition to that, in the claims business, we have launched the Total Property Solution, which is starting to gain traction. We have introduced multiple verticals. First is the construction vertical that has had a number of wins. But in addition to that, we're moving heavily into hospitality, as well as restaurants. And in fact, we've had some very large claims in the hospitality segment that is actually spilled over to claims coming out of large iconic properties, particularly in Britain, that are of a different nature, more historical, government-owned buildings that is now coming to us. In addition to that we are also in the process of launching transportation. It's in design phase followed by retail. And we've also launched what we call as Recall 360, which was mentioned in my remarks, and we got our first claim from a very large retailer and we were very successful. Tied into all of this, WeGoLook is also being offered simultaneously as a solution that is making a difference. And finally, I think by clearing and redesigning the way we play, which is the GSLs and having an increased focus on Crawford Claims is making a difference. We do have a fixation, if you will on increasing gross profit margin. We examine every branch in every country having so many locations in so many countries. And we have benchmarks established as well as operations metrics that people need to hit. So we have several things moving in the same direction on the revenue front -- on the claims.

This concludes the Q&A portion of today's call. I will now turn it back over to Mr. Agadi for closing remarks.

Well, thank you for all listening. I do want to take a quick minute and thank all of the employees globally for working extremely hard across 70 countries as we're moving the top line and the bottom line simultaneously. And I'm also pleased to say that the future looks bright and we are intending to impress our shareholders as well as the marketplace. And finally, deliver promptly in a top-quality manner to all our clients. Thank you very much.

Thank you for participating in today's Crawford & Company conference call. This call will be available for replay beginning at 11:30 a.m. today through 11:59 p.m. on September 7, 2018. The conference ID number for the replay is 3199486. The number to dial for the replay is 1 (855) 859-2056 or (404) 537-3406. Thank you. You may now disconnect.