CRD.B (CRD.B) Q1 2019 Earnings Report, Transcript and Summary

Good morning. My name is Natalia, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Crawford & Company First Quarter 2019 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, May 7, 2019. 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, 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 March 31, 2019, 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 operation as well as subsequent company filings with the SEC. This presentation also includes 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 2019 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. Turning to our first quarter results, we delivered GAAP revenue before reimbursements of $247.1 million. On a constant currency basis and excluding GCG in the prior year quarter, we delivered revenue before reimbursements of $252 million, which compares to revenue of $257.2 million in the year ago quarter. Our revenues were impacted by a more benign weather environment globally as well as a stronger U.S. dollar. Additionally, prior year revenues included $7.1 million from the completion of claims from hurricanes Harvey, Irma and Maria. While our overall segment results were in line with the prior year, our operating earnings were negatively impacted by an increase in self-insurance costs and higher professional fees, both of which we expect to reduce over the balance of the year. Importantly, our results for the first quarter do not reflect the building momentum in our business, driven by the purposeful strategic investments that we have made in our operations and sales functions to drive market share and in new product development to access large, untapped market opportunities. It is this momentum combined with our growing sales pipelines, which provides our management team with real confidence in our ability to deliver our full year 2019 guidance, which we are reiterating today. Additionally, we remain firmly on track to deliver our long-term goal of achieving 5% revenue growth and 15% earnings growth annually, signs of which will be evident as we continue to execute upon our many initiatives over the balance of this year. As discussed in our previous call, we opportunistically repurchased approximately 1.8 million shares during the first quarter, given the confidence in our outlook, combined with our share price, which we believe is trading meaningfully below intrinsic value. Central to delivering our growth commitment has been the cultural renaissance that we have engineered across our entire organization globally. We have refocused all of our employees on delivering value to our clients and the communities that we serve every day across the globe. To affect this change, we have reviewed our core values and realigned our organization around our refreshed corporate mission and vision, which drives how we go to market, how we service our clients and who we attract to come work with us. Our mission is to restore and enhance lives, businesses and communities. This is the very epicenter of our existence. Our vision is for Crawford to be the leading provider in the most trusted source for expert assistance, serving those who insure and self-insure the risk of businesses and communities anywhere in the world. To deliver on our growth commitment, we have recruited experienced solution-based salespeople to improve our capabilities as we focus on selling the One Crawford Solution. As part of our unwavering commitment to growth, we have announced the creation of a strategic account-management approach for top clients, which are multi-GSL and multinational. As part of this initiative, we have identified global accounts of strategic importance that will have an executive sponsor and a global relationship leader assigned. We have hired 2 global relationship leaders, one in the U.K. and one in Atlanta, who will both start this month. We're also promoting from within having assigned several key Crawford leaders to specific accounts. The goal of this initiative is to ensure that we are delivering Crawford's full suite of industry-leading solutions to our largest clients and deepening relationships at the most strategic levels. Today, this represents a very large, untapped market opportunity. We're also working to better understand our clients' needs and offer solutions to help them tackle the complex challenges that they face. As we have discussed, technology is disrupting our industry. We are meeting this disruption head-on on resulting in lower maintenance Capex, which is reflected in our results this quarter. Over the last year, we have shifted our investment in technology towards transformational efforts versus maintenance spending. Our focus is on developing capabilities and solutions that open large market opportunities that we are uniquely positioned to capitalize on. As we have discussed, we have launched industry verticals and integrated solutions for the construction, hospitality and transportation industries. Client adoption has been strong, and we have started to expand these verticals and their capabilities. Notably, at the beginning of the first quarter, we launched end-to-end claims management solutions for transportation clients in the U.S. and Canada. This comprehensive set of claims management services helps transportation clients reduce legal and indemnity spend, stem the tide of litigation and improve decision-making and performance via aggressive claims' investigation and management. By leveraging the appropriate Crawford solutions from YouGoLook to WeGoLook for site inspections, TPA for workers compensation, Contractor Connection for managed repairs, and finally, GTS forensic accounting services for business interruption. We knit together the appropriate solutions for our clients. In the second quarter, we plan to expand this vertical globally along with our construction and hospitality industry verticals to our Tier 1 markets. Looking at the second half of 2019, we plan to launch verticals targeting real estate and retail industries. We have also launched the industry's first smart water detection and mitigation solution to address escape of water claims. Speed of response is critical with the escape of water events as water can do substantial damage to a property over a short period of time. In fact, escape of water represents the largest nonweather peril in the industry's property book of business. Our escape of water solution is focused on real time detection and quality managed repairs. Importantly, our solutions provide Crawford a market-leading position as well as critical differentiation where we can demonstrate our expertise and drive distinctive business value for our customers. Our focus continues to be on blending our deep claims experience with disruptive technologies to deliver world-class claims service. Importantly, we have identified specific industries and applications where we expect continued growth and a higher frequency of losses, which will provide a favorable market backdrop for our solutions. Another benefit of our innovation is the increased client engagement that we are experiencing as we work to solve longstanding industry challenges. This is evident in our TPA business, where our new verticals and solutions are driving active discussions, resulting in a strong new business pipeline. While we experience lower claims volume in TPA in the first quarter, new business wins provide visibility to sequential growth as our new client business ramps through subsequent quarters. Additionally, our new business pipeline provides real optimism for sustained growth in our TPA business. While our new outsourced claims solutions are driving increased client engagement, they're also targeted at a sector of the market that has more significant and predictable claims volumes and should therefore deliver a more predictable financial results for us. This is a key aspect of our strategy as we continue working to reduce our dependence on extreme weather. Our overall innovation approach is a step in this direction. We're also developing a complete outsourced claims solution for small and midsized carriers, whereby Crawford would serve as the company's internal claims department on an outsourced basis. As the cost to maintain in-house claims department continues to rise, Crawford can offer a best-in-class solution at a more competitive price. We are in the process of finalizing this solution and going to markets selectively. I look forward to updating you on this initiative in subsequent calls. Beyond our strategic initiatives, our management team has also been focused on improving the company's cash generation while delivering value to shareholders through a disciplined capital-allocation strategy. Notably, we delivered a $21.7 million improvement in free cash flow in the 2019 first quarter, which is a significant up suite. Our focus on expenses and efforts to reduce our working capital needs contributed to the improvement combined with a planned reduction in pension contributions. We will continue to remain disciplined in order to improve our cash generation and maintain our strong balance sheet, which provides us a significant competitive advantage. We will also maintain a disciplined and balanced capital-allocation strategy focused on delivering long-term value to our shareholders. Looking forward, our priority is for capital allocation, our investments back into the business, dividends to shareholders, debt repayment, share repurchases and opportunistic M&A. Lastly, I would like to take a minute and thank George Benson and Joia Johnson for their many years of service on our Board of Directors. We appreciate your dedication and counsel over the years as we work together to transform Crawford. Your wisdom and critical insights were a great benefit to me as well as the company. We wish you both well in your future endeavors. 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 2019 first quarter were $247.1 million, and on a constant currency basis, were $252 million. Revenues in the 2018 first quarter totaled $273.1 million, which included $16 million from the disposed of GCG business. On a non-GAAP basis, first quarter 2018 revenues, excluding the results of GCG, would've been $257.2 million, resulting in a non-GAAP constant currency revenue decline of 2% in the 2019 quarter, largely due to lower catastrophe revenues in 2019. Our net income attributable to shareholders of Crawford & Company totaled $6.1 million in the 2019 first quarter compared to $8.6 million in the 2018 period. First quarter 2019 diluted earnings per share were $0.12 for CRD-A and $0.10 for CRD-B compared to $0.16 for CRD-A and $0.14 for CRD-B in the 2018 period. The company's operating earnings totaled $14.8 million in the 2019 first quarter or 5.9% of revenues compared with $19.1 million or 7.4% of revenues in the prior year period. Our corporate and unallocated cost increased by $3.1 million in the 2019 quarter as a result of an increase in self-insurance costs and higher professional fees. We expect these costs to subside during the remainder of the year. Consolidated adjusted EBITDA was $21.2 million in the 2019 first quarter or 8.4% of revenues compared to $29 million or 11.3% of revenues in the 2018 quarter. Our non-GAAP results for the current quarter have been calculated excluding the impact of FX changes, and the prior year quarter excludes the net operating results of the GCG business, which we sold in June 2018. I will now review the first quarter performance of each of our segments. Revenues from the Crawford Claims Solutions segment totaled $83.3 million, decreasing from the $90.4 million reported in last year's quarter as a result of $7.1 million in revenues from the runoff of claims from hurricanes Harvey, Irma and Maria in the 2018 first quarter. On a constant currency basis, first quarter 2019 revenues were $85.6 million. Gross profit before the allocation of indirect costs was $17.1 million or 20.5% of revenue in the 2019 quarter compared to $17.9 million or 19.8% of revenue in the 2018 quarter. After indirect expenses, operating earnings in the segment were a loss of $300,000 in the 2019 first quarter or negative 0.4% of revenues compared to operating earnings of $1.1 million or 1.3% of revenues in the prior year quarter. Revenues for Crawford TPA Solutions: Broadspire were $97.8 million in the 2019 first quarter, down from $100.2 million in the 2018 period, largely due to a temporary decline in claims volumes. On a constant currency basis, first quarter 2019 revenues were $98.9 million. Gross profit before the allocation of indirect cost was $25.5 million or 26% of revenue in the 2019 quarter compared to $26.4 million or 26.3% of revenue in the prior year period. TPA operating earnings net of indirect costs were $6.7 million during the current quarter compared to last year's first quarter operating earnings of $7.8 million. The operating margin in this segment was 6.9% in the 2019 quarter and 7.8% in the 2018 quarter. As discussed, we sold our GCG business line last year, which was a component of Crawford Specialty Solutions. We have included pro forma materials and the accompanying presentation that remove GCG from the 2018 financial results to aid in comparability between the periods. Crawford Specialty Solutions revenues were $65.9 million in the 2019 first quarter, down slightly from pro forma revenues of $66.5 million in the prior year quarter, which excludes $16 million in revenues from the disposed of GCG business line. On a constant currency basis, 2019 first quarter revenues were $67.5 million. Crawford Specialty Solutions gross profit before the allocation of indirect cost was $22.4 million or 34% of revenue in the 2019 first quarter compared to $26.9 million or 32.6% of revenue in the prior year quarter. After indirect expenses, operating earnings in Crawford Specialty Solutions totaled $12.2 million or 18.5% of revenues in the 2019 first quarter compared to operating earnings of $10 million or 12.2% of revenues in the 2018 quarter. The company's cash and cash equivalent position at March 31, 2019, totaled $49.7 million as compared to $53.1 million at the 2018 year-end. Our investment and unbilled and billed receivables has increased by $9.7 million during 2019, reflecting growth in Australia, Canada and the U.K. from increased business. Pension liabilities decreased slightly in the quarter. The company is not planning on making any additional voluntary contributions towards U.S. and U.K. pension plans during 2019. Our total debt increased $19.7 million from the 2018 year-end as a result of seasonal working capital needs and share repurchases, but is down significantly year-over-year. Our net debt at the end of the 2019 first quarter was $160.4 million, reflecting our ongoing financial strength and flexibility, which is a competitive advantage for us and gives us the ability for continued investment in our business. Cash provided by operations totaled $500,000 for the 2019 period compared to $13.6 million used in operations in the prior year. This $14.1 million improvement in cash flow was primarily due to better accounts receivable management and lower working capital requirements, including the positive cash flow impact as a result of the Garden City Group disposal and the absence of discretionary U.S. and U.K. pension contributions during 2019. Our free cash flow was negative $2.8 million for the 2019 period but improved by $21.7 million year-over-year. Looking forward, improving our free cash flow generation remains a top priority for the company. As previously disclosed in our fourth quarter call, during the 2019 first quarter, the company repurchased approximately 421,000 shares of CRD-A and 1.4 million shares of CRD-B. The company is reaffirming its guidance for 2019 as follows: consolidated revenues before reimbursements between $1.05 billion and $1.1 billion; net income attributable to shareholders of Crawford & Company between $46 million and $51 million or $0.85 to $0.95 per diluted CRD-A share and $0.78 to $0.88 per diluted CRD-B share; consolidated operating earnings between $90 million and $100 million, and consolidated adjusted EBITDA between $130 million and $140 million. With that, I would like to turn the call back to Harsha for concluding remarks.

Thank you, Bruce. As you can see, we have made strong progress, positioning Crawford not only for growth but also for continued leadership in the outsourced claims industry. Our innovative solutions are driving increased client engagement, which is leading to strong new business pipelines across our company, which provides confidence in our outlook. More recently, we are making significant progress expanding our outsourced solution offerings, which will increasingly reduce our reliance on extreme weather as we strive to deliver more predictable financial results. Looking forward, let me reiterate our 4 primary objectives for 2019. The first is growth as we must increase the velocity of revenue growth through continuous innovation, as we work to deliver our long-term goal of achieving 5% revenue growth and 15% earnings growth annually. As we have discussed, we are well on our way as our new business pipelines have expanded, which will translate to accelerating revenue growth as we progress through 2019. The second is systems readiness as we continue to prioritize IT investments across the globe in order to position Crawford to be at the forefront of innovation and disruption. This has resulted in a forecasted reduction in maintenance CapEx. The third is people readiness where we continue to attract, develop, engage and retain the caring and capable people who deliver the company's mission every day. Our alliance with colleges and universities is getting stronger every day as we partner with them to develop the next generation of claims' professionals. And lastly, we need to remain fiscally responsible as we continue to focus on improving the company's free cash flow while maintaining prudent expense management and the most conservative balance sheet in the industry while maximizing our return on invested capital, all of which will position the company to achieve our mission of restoring and enhancing lives, businesses and communities while delivering our long-term financial targets of 5% revenue and 15% earnings growth annually. Thank you to all our employees worldwide who are driving our strategy as we service clients in over 70 countries and to our shareholders who have placed their trust in us to deliver an attractive return on capital for them. Thank you, again, for your time today. Operator, please open the call for questions.

[Operator Instructions] Your first question is from the line of Marcos Holanda with Raymond James.

So my question is just around the guidance and what we've seen here in the first quarter in terms of the like CAT quarter. So I just wonder if you guys maybe bridge the gap if we were to have a light year, where would -- how would you be able to hit the outlook? And I'm assuming it would be through some margin gains in some of the segments. So if you guys can spend a minute and talk about that and where those gains could come through for the balance of the year, that'd be great.

So Marcos, let me first attempt to answer that and then I'm sure Bruce will add some points as well. So to begin with, we have a ramp-up of clients going on inside our business. Clients that we have won as recently as last year, and that is coming in as each month transpires this year. So that's the first thing. The second is we have planned for a lighter CAT year in 2019 as opposed to what activity we saw in '17 and '18. So our guidance, in my opinion, fully reflects a lighter CAT year, and we are reasonably confident that we are moving towards the guidance. In addition to that, one other piece that I should mention is we had a very successful RIMS conference, and I've been going to these for the last 4 times in the last 4 years, and I have to tell you that the amount of activity and interest, both in our Broadspire business or TBA as well as in our GTS business as well as our managed repair business is very, very heightened, while our claims business is continuing to innovate, as I discussed, solutions like escape of water. So we feel that the momentum is picking up, and in fact, we're seeing that on a daily basis in our business as the year is progressing. It is, when -- you look at the last several years, our Q1 is generally lighter, but it goes without saying, we should have done a little better at Q1, no question there.

Yes, I think that's right, Harsha. And the other thing to keep in mind is we had a negative experience in our corporate unallocated costs in this quarter, which is really the primary driver of lower overall earnings. So we had some negative self-insurance experience in the quarter, which as we looked at it was just a couple of individually significant claims. We don't think that reflects a change in trend, and we don't think that will subside through the -- or continue through the remainder of the year. And we also had some higher professional fees in the first quarter, which we think will dissipate as we exit the second quarter. So those 2 items were the primary driver in the first quarter, and we don't expect those to continue going forward.

And coming to margin very quickly, we are seeing gross margins are starting to increase as each month is progressing. And as we continue to be efficient and hold our shared services cost or even reduce a little bit, we should see margin improvement as well. And that's also reflected in the guidance. So we've been pretty thoughtful in looking at our guidance very carefully.

Okay. Well, thanks for that. That's helpful. And then can we -- can you guys perhaps talk about a free cash flow and how we should be thinking about that in terms of EBITDA? And also if you could spend a minute and talk about the fund status of the pension plan?

Sure. So this is Bruce. We are obviously very pleased with the free cash flow performance in the first quarter and that's coming off of 2018, which also had a nice improvement over 2017. So we've been talking over the past several quarters about the importance of cash flow generation and the company and our focus on that. I think we're starting to see the results come through in the numbers. We expect for the year -- while we don't guide cash flow specifically, we do expect a material improvement in 2019 over 2018 as we continue our efforts to drive our cash profit margin to equal our accrual profit margin. So that's a primary focus for us in the company. There's a couple of things that are driving that improvement in cash flow. One is better accounts receivable management, and that's one of the primary levers we have as a management team to affect that. We also have lower pension contributions in the U.S. and U.K. during this year. And the Garden City group, which we disposed of midway through '18, if you remember, that was a business that had heavy working capital requirement. So the absence of that business is actually helping the cash profile of the company overall.

Your next question is from the line of Mark Hughes with SunTrust.

This is Michael Ramirez on for Mark. I guess first, it seems that growth within the TPA solution's Broadspire segment has been trending lower, I guess, over the last few quarters despite, as you mentioned today, winning some new businesses and that's just this quarter but in prior quarters. Can you please help us -- I guess, provide us some insight what you believe are the gross prospects for this segment, I guess, through the remainder of the year?

Sure, Michael. So first of all, when you see the first quarter results, we've had a couple of turnover situations with certain clients. So as clients have left us, which is, by the way, normal in the TPA business, our retention rate is extremely high, nevertheless, very, very high. Now when clients leave and new clients are coming on, there is a gap in ramp-up and that's what is being reflected in the Q1. In addition, there weren't generally lower claims across the board that we were experiencing as we cannot, as you know, initiate these claims. But lower claims were there. But I think as the ramp-up of new clients is on and we do have couple of wins that are substantial that are already starting to come into the business that you should see the growth and the ramp-up of the TPA business in subsequent quarters. So we are quite confident with the wins we have that this is moving up.

All right. I guess on the same subject as a follow-up. I guess you mentioned a strong pipeline for Broadspire. Not sure if you've been able to do this in the past, but would you be able to quantify this for us maybe like a dollar amount or even maybe at the share of existing business?

Yes, sure. Absolutely. We have in excess of $200 million in total business pipeline right now at Crawford & Company, which is a very robust pipeline, and a little over half is actually in the TPA business. So that is helping immensely because I would say, TPA is extremely well positioned for growth. In addition to that, our President for TPA, Danielle Lisenbey has made some management changes in our overseas TPA businesses, for example, in the United Kingdom, and that is also making a material difference just in terms of a cultural change as well as a focus on growth. So all of that is making a difference to the business pipeline. So we remain quite confident about the future growth of our business.

Okay. That's great and helpful. I guess one last one on Broadspire. I'm not sure if you can disclose this, but how much of the claim volumes declined during the quarter?

We typically don't disclose that in a lot of detail. But we can come back to you on that question if that helps. But it's not very material at the end of the day. And also within the quarter, we've seen the pick back up, if you will. I mean case volume we do disclose in our filings. Yes, go ahead.

So the case volume is down year-over-year by 5.9% with the majority of that being in the U.S. for the reasons that Harsha was discussing.

Okay. That's helpful. Just a few more, I guess. You spoke about shifting investment and technology towards, I guess, what you called transformational versus maintenance spend. Could you please provide us with the magnitude of this spend and relative to last year?

Yes, the total CapEx will be lower than last year, and it will make a meaningful difference to our free cash flow as well. Interestingly, as we've lowered CapEx, our dollars are being positioned more towards innovation as well as maintenance -- as opposed to maintenance, sorry. And where we're investing very quickly is in artificial intelligence, robotic process automation as well as virtual reality. All of these are moving simultaneously, including innovative solutions as it relates to the escape of water. The escape of water very quickly is the largest nonweather peril, and the size of that claims business is -- or the claim segment is about $150 billion. As 5G will come on eventually, we're getting ready as we are actually testing sensors with a particular carrier where we can actually initiate a first notice of loss all the way to the management of that repair in real time. And escape of water, as I mentioned in my prepared remarks, has the maximum damage in the shortest time when there is leakage going on in a property that it can really cause damage. So all of these solutions we're working on is moving in the same direction.

Okay. Great. I guess one last one from us. What was the organic growth rate in the quarter? I believe it was 1.5% in fourth quarter.

I think we were down in the quarter 2% on a constant currency basis, excluding GCG. And the majority of that decrease is related to the approximately $7 million in catastrophe revenue variance that we saw quarter-over-quarter.

As we -- the runoff of Harvey and Maria coming down versus a year ago where we don't have the runoff this year that we had in 2018. And as I mentioned earlier, we planned for it and that is reflected in our guidance.

So when you adjust for the catastrophe revenue, it's basically kind of a flat or 0 quarter-over-quarter.

There are no further questions. I will now turn the call back over to Mr. Agadi for any closing remarks.

Thank you very much for everybody who was listening and the questions asked. And just in conclusion, I would say, onward and upward, as we go through the second quarter, we should see more momentum in our business. Goodbye.

Thank you for participating in today's Crawford & Company conference call. This call will be available for a replay beginning at 11:30 a.m. today through 11:59 p.m. on June 7, 2019. The conference ID number for the replay is 629-9119. The number to dial for the replay is 1 (855) 859-2056 or (404) 537-3406. Thank you. You may now disconnect.