CRD.B (CRD.B) Q3 2018 Earnings Report, Transcript and Summary

Good morning, my name is Jessa, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Crawford & Company Third 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, November 6, 2018. I would now like to introduce Joseph Blanco, Crawford & Company's General Counsel. Please go ahead, sir.

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 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 September 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 the 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 third 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, our third quarter results demonstrate the continued progress that we are achieving in our journey to return Crawford & Company to sustained revenue growth, though we fell short of our expectations for operating earnings. For the quarter sales increased nearly 2% after excluding the disposal of the GCG business from the year-ago period. Our global TPA Solutions, Broadspire segment grew revenues 3% and Crawford Specialty Solutions was up almost 4% after adjusting for the GCG business. While our Crawford Claims Solution segment was down slightly, as compared to the same period in 2017 when we were responding to the surge in claims from Hurricanes Harvey, Irma and Maria. After adjusting for the GCG business disposal, Crawford has delivered a 4% revenue growth year-to-date versus 2017 and represents a marked acceleration from previous years. To deliver this growth and increase the pace of growth, we have made purposeful strategic investments into our 4 primary areas. First, in our salespeople to drive market share. Second, in our ongoing staff development training and rewards programs. Third, in technology to become more efficient. And fourth, in new product development to deliver innovative solutions designed to solve industry challenges where we see large untapped market opportunities. This investment is critical in order to achieve our goal of delivering strong sustained revenue growth. Investment in our global sales team has been a priority as we require experience solution based salespeople, who can deliver the full suite of Crawford's products to our clients around the world. Our focus this year has been to increase our local sales presence in attractive Tier 1 global markets. Our people are the reason why we are successful and we have also made strategic investments in ongoing staff development and training as a result. Through the third quarter, our employees' dedication can clearly be seen as they supported our clients in Asia, who were impacted by catastrophic tycoons, cyclones and earthquakes. They also continued to support our clients in the United States, who were impacted by severe hurricane activity in the Southeast and by the wildfires in California. Our teams have been busy responding to these events and working diligently to deliver on our mission of restoring and enhancing lives, businesses and communities. We will continue to invest in our people as they differentiate Crawford in the marketplace every day. To reward our employees and as part of our commitment to driving excellence, we have created a series of awards. These programs are designed to recognize our employees as we strive to ensure Crawford & Company remains one of the best claims companies in the world. The Restore Award has been established for individuals who best embodies the values of our company. Our Innovation Award is given to employees who are at the forefront of driving innovation in our company and for our clients. As we drive the transformation of our company, a key metric that we are watching is our efforts to improve, increase our customer focus in our Net Promoter Score. We have surveyed over 330 clients and I'm happy to report that our NPS score is 40, a strong number. That said, our goal is to be at our above 50 and we're driving our organization in that direction. Our reorganization to global service lines has enabled our sales teams to deliver our full suite of solutions to our clients around the globe. We have a laser focus on our businesses that are underpenetrated in favorable geographies, where the market opportunity is significant. This also enables our team to more effectively market our industry-leading solutions. Signs of our success are evident this quarter as a GTS adjuster referred a significant hospitality opportunity to Contractor Connection and our Canadian team opened the door to a major customer win in our construction vertical. I am proud of the progress we have made in advancing our One Crawford value as the GSO and the country teams have worked hand in hand to craft and deliver these solutions. Another important driver to our improved sales growth has been our investment in technology towards transformational efforts versus maintenance spending. We are moving our organization to be more data enabled, so 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 green field market opportunities that we are uniquely positioned to exploit. An example is our Total Construction Solution, which launched in the first quarter is focused on the unique needs of the construction industry. I am proud to tell you that we now have over 30 clients as the market acceptance continues to be very strong and this is the fastest growing vertical for us. Our Hospitality Solution which is focused on lodging and restaurant industries launched in the third quarter and represents a significant market opportunity for Crawford. Of note, Crawford has the leading market share in this vertical as we are the #1 claims management company in the luxury hotel segment. While we are early in the launch, we have considerable market interests and have multiple proposals outstanding. Looking forward, we will continue to roll out new industry verticals over the coming quarters with the transportation and logistics 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 value for our customers. Our focus is to blend our deep claims experience combined with disruptive technologies to deliver world-class claims service with top quality promptly. While our innovation is differentiating Crawford in the marketplace, we're also focused on demonstrating our thought leadership declines. As a result, we have formed an advisory board to facilitate candid dialog on the direction of our industry. Our goal is to elevate Crawford in the minds of our clients to a true partner that is focused on solving their most complex challenges and being very committed to their success. An effective demonstration of the full breadth of Crawford Solutions was shared with a key client at our Global Support Center in Atlanta in the third quarter, which featured Crawford's groundbreaking disruptive solutions like YouGoLook (sic) [ WeGoLook ] and RENOVO. YouGoLook (sic) [ WeGoLook ] is an assisted self-service solution for submission of photos, videos and reports, furthering our on-demand workforce. RENOVO is a roster management and deployment tool that allows adjusters to interact through a mobile application, provide intelligence on roster help and streamline adjuster on-boarding. These solutions were well-received and strengthened our client relationships. We will continue to showcase these capabilities to our clients, both of these technology-driven solutions will result in a top quality, promptly claims resolution for our clients. Beyond innovation and organic growth, we're also actively exploring opportunistic acquisitions to enhance our capabilities and geographic reach. We have recently closed 2 GTS acquisitions in Canada that will augment our market-leading agricultural and crop claim services in that country. This also supports our strategy of attracting the best and the brightest talent in the industry to better serve our clients' unique needs. To conclude, our investments are clearly delivering revenue growth, while positioning Crawford for future success. That said, the increase in investment spend is temporarily suppressing our operating margins and earnings. Importantly, we're carefully managing the business and watching our gross profit growth and margins to ensure that we're not sacrificing profitability for revenue growth. Excluding the results of the GCG business are nearly $30 million in pro forma revenue growth so far this year has generated impressive gross profit dollars that we have more than reinvested back into the business to continue to bolster revenue growth. As we look forward, the pace of business is accelerating at Crawford as our investments continue to deliver results and our long-term goal of achieving 5% revenue growth and 15% earnings growth annually is coming into focus. While operating margins and earnings have been impacted by our conscious investments into the business, we are committed to deliver margin expansion and enhance profitability. We will remain vigilant on expenses and investments to ensure our accelerating revenue growth translates to impressive flow-through to the bottom line. I would now like to turn the call over to Bruce to review the financial results of the third quarter in more detail.

Thank you, Harsha. Company-wide revenues before reimbursements in the 2018 third quarter were $255 million compared with $270.6 million in the prior year's third quarter. On a non-GAAP basis, 2017 revenues excluding the disposed-of GCG business would have been $255 million, resulting in pro forma revenue growth of 2% in the 2018 quarter. Our net income attributable to shareholders of Crawford & Company, totaled $7.9 million in the 2018 third quarter compared to income of $11.8 million in the 2017 period. Third quarter 2018 diluted earnings per share were $0.15 for CRD-A and $0.13 for CRD-B compared to earnings of $0.22 for CRD-A and $0.20 for CRD-B in the 2017 period. There were no restructuring or special charges in the 2018 third quarter but we did record a $1.2 million non-cash adjustment to increase our loss on disposal of the GCG business line in the quarter. On a non-GAAP basis, excluding the operating results of GCG in all periods, restructuring costs and special charges in 2017 and the loss on disposal of the GCG business line in 2018, our third quarter 2018 non-GAAP diluted earnings per share were $0.17 for CRD-A and $0.15 for CRD-B as compared to 2017 diluted earnings per share of $0.22 for CRD-A and $0.20 for CRD-B. The company's adjusted operating earnings, totaled $16.5 million in the 2018 third quarter or 6.5% of revenues compared with $22.6 million or 9% of revenues in the prior-year period. Consolidated adjusted EBITDA was $25.5 million in the 2018 third quarter or 10% of revenues compared to $31.1 million or 12.4% of revenues in the 2017 quarter. I will now review the third quarter performance of each of our business units. To aid in the understanding of our underlying operating results, we have added supplementary information that highlights the gross profit results of our segment operations in addition to operating earnings. Revenues from the Crawford Claims Solutions segment, totaled $85.3 million, decreasing slightly from the $86.3 million recorded in last year's quarter, primarily as a result of catastrophe revenues from Hurricanes Harvey, Irma and Maria in 2017. Gross profit in the segment expanded 13% over the 2017 period, with the related gross margin improving by 250 basis points. After indirect expenses, operating earnings in the segment were a loss of $700,000 in the 2018 third quarter or negative 1% of revenues compared to the operating earnings of $2 million or 2% of revenues in the prior-year quarter. Revenues for Crawford TPA Solutions Broadspire, increased 3% to $100.3 million in the 2018 third quarter from $97.2 million in the 2017 period, largely due to increased revenues in the U.S., Canada and Europe. Gross profit in the segment increased 1% over the prior year period though the related gross margin decreased by 50 basis points, in part as a result of investments to increase our sales staff. After indirect expenses, Broadspire operating earnings were $8.1 million during the current quarter compared to last year's third quarter operating earnings of $9.9 million. The operating margin in this segment was approximately 8% in the 2018 quarter and 10% in the 2017 quarter. As a reminder, in June 2018, we sold our GCG business line which was a component of Crawford Specialty Solutions. We have included pro forma supplementary materials in the accompanying presentation that removes GCG from the 2018 and 2017 financial results to aiding comparability between the periods. Including the results of the GCG business line, Crawford Specialty Solutions revenues were $69.4 million in the 2018 third quarter, down from $87 million in the prior-year quarter. Gross profit in the segment decreased by 15% from the 2017 period. Though the related gross margin improved by 240 basis points. After adjusting for indirect expenses, operating earnings in Crawford Specialty Solutions, totaled $14.9 million or 21% of revenues in the 2018 third quarter, compared to operating earnings of $16.4 million or 19% of revenues in the 2017 third quarter. Excluding the results of GCG, Crawford Specialty Solutions revenues, grew approximately 4% year-over-year on a pro forma basis. Pro forma gross profit would have increased by approximately 7% and the gross margin would have improved by 120 basis points. However, after adjusting for indirect expenses, the pro forma operating margin would have declined by 290 basis points in the 2018 period. On a year-to-date basis revenues and gross profits have increased across all of our segments excluding GCG, we expect to maintain a relentless focus on both of these measures. The company's cash and cash equivalent position at September 30, 2018 totaled $53.3 million as compared to $54 million at the 2017 year end. Our investment and unbilled and billed receivables has decreased by $36.2 million during 2018, reflecting the sale of GCG that reduced total receivables by $48.4 million. Our billed and unbilled accounts receivables are expected to continue to decline during the fourth quarter. Pension liabilities decreased by $25.6 million reflecting -- reflecting cash contributions made in the U.S. and U.K. during the 2018 period including a voluntary $10 million contribution made to the U.S. plan, in part to realize a onetime tax benefit. Our total debt declined by $12.7 million from the 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 seasonal working capital needs earlier in the year. Cash provided by operations totaled $16 million for the 2018 period compared to $13.9 million provided by operations in the prior-year period. This increase in cash provided was net of the $10 million U.S. pension contribution and excluding this voluntary contribution, our operating cash flows would have been $26 million for the 2018 year-to-date period. The improvement is primarily due to the collection of billed receivable balances during the 2018 third quarter. The free cash flow deficit declined by $7 million year-over-year and but for the $10 million pension contribution, free cash flow for the 2018 period would have been slightly positive. When looking at our cash flows on a quarterly basis, our third quarter 2018 cash flows were very strong at $34.7 million and after excluding the $10 million U.S. pension contribution we would have been at nearly $45 million for the quarter. Looking forward, we expect meaningful improvement to both operating cash flow and free cash flow to continue during the fourth quarter. During the 2018 third quarter, the company repurchased approximately 43,000 shares of CRD-A and 11,000 shares of CRD-B at an average cost of $8.86 and $8.87, respectively. On a year-to-date basis during 2018 the company has repurchased nearly 1.1 million shares of CRD-A and 65,000 shares of CRD-B at an average cost of $8.30 and $8.95, respectively During 2017 Hurricanes Harvey, Irma and Maria generated approximately 40,000 claims for us. Although, Hurricanes Florence and Michael have been destructive, the volume of claims expected will be much less than those generated by last year's storms. However, we expect other aspects of our business to show strength through the fourth quarter giving us confidence in our outlook for the remainder of the year. Let me now review our reaffirmed guidance for 2018 as follows, consolidated revenues before reimbursements between $1.07 billion and $1.12 billion, net income attributable to 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 share, the 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. We are starting to prove that we can grow revenues and gross profit. We must now show that we can translate this growth into operating earnings growth and improved profitability. As we look forward, let me remind you of our 6 primary objectives. First, we will continue our focus on increasing the velocity of our revenue growth. Second, we will continue to innovate new solutions and services, which will position Crawford as the established leader in the industry. Third, we will focus to maximize the benefits of our go-to-market strategy with carriers, corporates and intermediaries. 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 to transform the company into an engine for growth. 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 month by ringing the closing bell at the New York Stock Exchange on November, 16. Thank you again for your time today. And also a huge thank you to all our employees for all their efforts throughout the year. Operator, please open the call for questions.

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

Appreciate the breakout on the gross profit versus operating profit, when you look at that growth in indirect expenses, any way to break out how much of that might be kind of mix shift in the business versus these investment items that you've talked about?

Sure. I think I'd be leaning more towards the investment items than the mix shift. And we've done a series of investments purposefully just to name a few, just to remind you, one is our ongoing investment in WeGoLook. We also have renewable phase 2, which is our adjusted deployment system. We have invested in data analytics that is starting to produce some early results. And frankly, our execution in our current hurricanes is significantly superior to last year and we're actually moving up, if you will, in the service provider rankings for large carriers. And some of the carriers are actually sharing that information back to us. We have had to invest in security, more firewalls as well as a different set of virus protection as the world is changing in front of us. We have started to get real estate more efficient. So we're doing things that are much more beneficial long-term. And finally, a pretty heavy investment in training and in executive development. Crawford & Company, Mark, for years and years was known as the company that trained adjusters in the entire industry. And over the last say 15, 20 years we had kind of walked away from that a little bit. And we've reenergized, we've reinvested and we actually are seeing a fair amount of traction with now, carriers inquiring about sending their folks to our training programs, of course for a charge.

The unallocated corporate expenses were -- it's been a volatile line that was net flat for the first half of the year and then $5.8 million, if I'm seeing it properly, for the third quarter. Could you just talk about that kind of expense profile and then, how does that trend in the fourth quarter and as we think about next year.

Sure. So this is Mark -- this is Bruce, Mark. The cost in the third quarter picked up a bit over where we were year-to-date, we had some higher self-insured expenses as well as a bit higher allowance for doubtful accounts that hit in the quarter. We've also got some costs that we think are probably going to be non-continuing around certain professional fees that we've incurred for complying with tax reform looking in at cost related to the implementation of our ledger package, and then some of the real estate costs and lease termination costs that Harsha mentioned. And that line can have a little bit of volatility for us. As we look to the fourth quarter, we would certainly expect for that line to be a lot less than where we were last year in the fourth quarter. We had a number of pretty significant lease termination costs that came in last year in the fourth quarter really related to the GCG business line. And of course, those won't be continuing this year. So we should see that line moderate pretty significantly in the fourth quarter compared to last year's fourth quarter.

How about sequentially, this last year's fourth quarter, if I'm looking at this properly, was $11 million?

Correct. Yes and sequentially, we think that this cost will be down versus the third quarter.

And how about an update on the Contractor Connection expansion in the new geographies or underlying growth in the business, can you talk a little bit about that?

Sure. I think, Mark, first of all, we're continuing to ramp up in Germany and in Canada, we're actually reaching levels that we haven't reached before, so Canada continues to scale. But even more importantly, in the United States, we do have a ramp-up of a very large carrier that signed up with Contractor Connection and I am pleased to say when it activated sometime in the latter half of Q3, it has ramped up every single day and will continue to ramp up through 2019 and possibly beyond. And Contractor Connection being the largest and the best and the most highly rated, their execution being close to flawless, the carrier is quite pleased with the intake that's coming in and for Contractor Connection, if you will commit to the Managed Repair Solution to the carrier. So we see very positive news coming out of Contractor Connection as time goes by.

Then a final point on Broadspire. Are you getting -- what kind of visibility do you have for 2019 now presumably many employers have made decisions in this area, do you have a good sense of backlog, is that something that only emerges in coming weeks and can you talk about how that may be shaping up?

Sure. I think, first of all on our sales pipeline, we continue to harness and feed it very early on in the year and these are longer cycle businesses. So I'm happy to report that the sales pipeline on Broadspire is the highest it's ever been, it's very robust. We are seeing the marketplace change, unemployment being at its lowest, worker's comp claims will continue to increase, so we see a lot of positiveness coming out of the TPA business. Also the other piece is as we went to GSLs, our TPA Broadspire leader, Danielle Lisenbey, has taken control of both the Canadian as well as the U.K. and in fact also the Australian Broadspire businesses. And they're also starting to have traction both bottom and top line similar to the United States. It's early in those markets. The U.S. is far more advanced but having a robust sales pipeline we see a fair amount of growth expected over the years on Broadspire and we will see growth in 2019.

There are no further questions at this time. Mr. Agadi, I turn the call back over to you for closing remarks.

Yes, thank you very much. I just wanted to summarize very quickly the good news of Q3. Revenues are up 3% and more, gross margins are up, operating cash flow is up significantly in Q3 in excess of $35 million, even after taking into account a voluntary pension contribution. Our pension balances are down significantly by over $25 million. We've paid down debt just shy of $13 million. And our effectiveness of execution in hurricanes have gone up. All in all, I feel very optimistic about the business as we move forward. Again, big thank you to all of the employees around the world for really putting in a huge effort in Q3, as well as already in Q4. Thank you.

Thank you for participating in today's Crawford & Company Conference Call. This call will be available for replay beginning at 11:30 a.m. Eastern Time today through 11:59 p.m. Eastern Time on December 6, 2018. The conference ID number for the replay is 939-2449. The number to dial for the replay is 1 (855) 859-2056 or (404) 537-3406. Thank you. You may now disconnect.