Allen W. Nelson - General Counsel and CAO
Jeffrey Bowman - President and CEO
Bruce Swain - Chief Financial Officer
Adam Klauber - William Blair
Crawford & Company (CRD.B) Q3 2013 Results Earnings Call November 4, 2013 3:00 PM ET
Good afternoon. My name is Rachel, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Crawford & Company Third Quarter 2013 Earnings Release Conference Call. In conjunction with this call, a supplementary financial presentation is available on our website at www.crawfordandcompany.com under the Investor Relations section. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer period. Instructions will follow at that time. (Operator Instructions)
As a reminder, ladies and gentlemen, this conference is being recorded today, Monday, November 4, 2013. Now I would like to introduce, Allen W. Nelson, Crawford & Company's General Counsel and Chief Administrative Officer.
Allen W. Nelson
Thank you, Rachel. 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 include but are not limited to statements regarding the funded status of our defined benefit pension plans, our expectations related to future revenues and expenses, our long-term liquidity requirements and our ability to pay dividends in the future. The company's actual results achieved in future quarters could differ materially from results that maybe implied by such forward-looking statements.
The company undertakes no obligation to publicly release revisions to any forward-looking statements made in this conference call to reflect events or circumstances occurring after the date of the call or to reflect the occurrence of unanticipated events. In addition, you are reminded that operating results for any historical period are not necessarily indicative of results to be expected from 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-K for the year ended December 31, 2012, which is 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 any subsequent company's 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. Jeffrey Bowman, President and Chief Executive Officer of Crawford & Company. Jeff, you may begin our call.
Thank you, Allen. A warm welcome to our investors, clients and employees this afternoon. I’m Jeffrey Bowman, President and CEO of Crawford & Company. Joining me from the global executive management team this afternoon are Bruce Swain, our CFO; and Allen Nelson, our General Counsel and Chief Administrative Officer.
I will begin with some opening comments on our third quarter 2013 results. Bruce will then review the third quarter financials in more detail, which will be followed by a review of our business performance, comments on our strategic initiatives and conclude with our corporate focus and our affirmed 2013 guidance.
Our third quarter results met our expectations, reflect profitable results in all segments and continue the previous quarter’s improved balance of contribution among our operations.
We have indicated since early in the year that we anticipated the activity level in two large special projects would wind down as the year progressed and that is exactly what we are seeing. We do not expect these declines to continue into the fourth quarter and into 2014.
While we have experienced the declines just mentioned, I’m pleased to report the impact was partially offset by improvement in two of our other segments. The Americas operation which reported at a 12% revenue increase and Broadspire, which was profitable for the second consecutive quarter and reported 6% growth in revenues.
As a result, our third quarter 2013 financial metrics met our expectations against a very strong quarter last year. We have affirmed our guidance for the remainder of 2013 and are encouraged by the outlook for 2014.
Overall, revenues decreased 3% from the third quarter of 2012 and consolidated operating earnings decreased 20%. However, on a year-to-year basis revenues has increased 2% and consolidated operating earnings has increased 5%. Within the Americas segment, I’m pleased that our ongoing investments in our Contractor Connection operations have produced increase revenue for the quarter.
We also saw an increase in claims in our key Canadian market as a result of significant flooding. Through the capabilities of our catastrophe division in the U.S. we were able in a short time period to support our Canadian division with 160 U.S. catastrophe adjusters, which met our client’s immediate needs and drove revenue increases in both Canada and the U.S. for the quarter.
Segment operating earnings increased 49% on 12% revenue growth and margins reached our target level of 10% for the quarter. Our EMEA/AP segment saw 12% decline in revenue and 67% decline in operating earnings, mainly reflecting the anticipated wind down of the Thailand flooding claims in the Asia-Pacific region. We’ve also seen a significant reduction in U.K. claims, reflecting a number of market factors.
Cost control and process improvements in this segment remained a higher priority. While the Thailand project should remain meaningful for us during the fourth quarter, this project will effectively close by year end.
And turning to Broadspire business, I’m pleased to report, we saw a continued progress in the third quarter as operating earnings remained positive for the second consecutive quarter. We are optimistic that this segment will show sustained operating improvement through the remainder of 2013 and into 2014.
Given the strong performance of the new sales and marketing team, we believe Broadspire will continue to gain market share in the coming year but I'm very pleased to the quality of our work as evidenced by our retention rate for the quarter.
During the 2013 third quarter, our Legal Settlement Administration segment remained engaged in responding to the Deepwater Horizon Special Project. We expect operating activity in this segment to continue to taper during the fourth quarter. However in the quarter, we secured a number of other significant class action and bankruptcy matters. It is encouraging to see our non-Gulf activity increasing and we believe this bodes well for the long-term outlook of this business segment.
As we continue to focus on an improved shareholder experience, we also announced today the declaration of our quarterly dividends on both our non-voting A shares and our voting B shares of $0.05 and $0.04 respectively. And in addition, we continue to seek stock repurchase opportunities under our June 2012 stock repurchase plan.
That concludes my initial remarks on the third quarter and the year today. I will discuss the business unit operations after Bruce has reviewed the financials. Bruce, would you please review the company's overall performance for the third quarter.
Companywide revenues before reimbursement in 2013 third quarter were $293.3 million, a decrease of 3% from $302.1 million in this prior year’s third quarter. Our net income attributable to Crawford & Company was $13.4 million in 2013 third quarter, decreasing 26% from $18.2 million in the 2012 period.
Third quarter 2013 diluted earnings per share were $0.25 for CRDA and $0.24 for CRDB compared to earning per share of $0.33 for both CRDA and CRDB in the 2012 period. Consolidated operating earnings, our non-GAAP financial measure totaled $26.3 million for 2013 third quarter, decreasing 20% from $33 million reported in the 2012 third quarter.
The company’s selling, general and administrative expenses or SG&A totaled $56.7 million or 19.3% of revenues in the 2013 third quarter, down from $59.2 million or 19.6% of revenues in the prior year quarter.
Revenues from the Americas segment totaled $95.9 million in 2013 third quarter, up 12% over $85.9 million in last year's quarter. This increase was primarily due to a substantial increase in weather-related claims activity in Canada and continued growth in contractor connection.
Operating earnings in Americas segment were $9.7 million in 2012 third quarter or 10% of revenues. This is compared with operating earnings of $6.5 million or 8% of revenue in the prior year quarter.
Revenues generated by our catastrophe adjusters in the U.S. totaled $13.9 million in the 2013 third quarter, increasing from $9.6 million in the 2012 quarter. The increase in revenues was a result of assistance, our U.S. catastrophe team provided to Canada in response to their recent catastrophic flood losses.
EMEA/AP revenues decreased 12% in the 2013 third quarter to $84 million from $95.9 million in the 2012 period. Our revenue decline reflects the wind down of catastrophe cases in our Thailand operation and decreases in the U.K., partially offset by growth in CEMEA.
EMEA/AP operating earnings decreased to $4.3 million during the 2013 quarter as compared to last year's third quarter operating earnings of $13 million. The operating margin in this segment was 5% in the 2013 quarter, decreasing from 14% in the 2012 third quarter.
Revenues from our Broadspire segment increased to $63.3 million in the 2013 third quarter, up 6% from $59.8 million in the prior year quarter, primarily due to new business wins. Broadspire recorded operating earnings of $1.9 million or 3% of revenues in the 2013 third quarter, reversing an operating loss of $0.2 million in the 2012 third quarter.
Legal Settlement Administration revenues totaled $50.1 million in the 2013 third quarter, compared with $60.6 million in the prior year quarter for the reasons Jeff discussed a moment ago. Operating earnings totaled $10.2 million in the 2013 third quarter, or 20% of revenues as compared $15.6 million or 26% of revenues in the prior year period. Legal Settlement Administration continues to have a strong backlog of projects awarded, totaling $117 million at September 30, 2013, compared to $118 million at September 30, 2012.
Our cash and cash equivalent position at September 30, 2013 totaled $51.1 million, as compared to $71.2 million at December 31, 2012. Our investment in unbilled and billed receivables has increased by $34.6 million during 2013, primarily as a result of increases in Legal Settlement Administration, Canada and EMEA/AP.
Our pension liabilities decreased by $24.1 million, reflecting cash contributions during the 2013 year-to-date period. Our total debt has increased in 2013 by $19.1 million, reflecting incremental borrowings needed to fund our year-over-year growth in receivables.
Cash used in operations totaled $9.5 million for the 2013 year-to-date period, compared to $10.3 million provided by operations in the prior year period. During 2013, there has been an increase in working capital requirements in our EMEA/AP, Canadian and Legal Settlement Administration operations. Free cash flow declined in the 2013 third quarter by $17 million from the 2012 period.
Back to you, Jeff.
Thanks, Bruce. We have seen the benefit of a balanced portfolio across our business segments. And in addition to an improved performance in the Americas and Broadspire segments, both EMEA/AP and Legal Settlement Administration are successfully broadening their new business pipelines to replace claims volume types to Thailand from the Deepwater Horizon’s special project.
We are seeing good consolidated performance in cases received. In the majority of our markets, we are gaining new clients and gaining market share. This is reflected in our year-to-date figures, which are showing improvement in 2013 over 2012. In addition, we are taking advantage of our geographical spread and building on our new business initiatives, which we believe will improve our operational performance and results in the 2014 and beyond.
While our consolidated revenue was down for the quarter, our revenue year-to-date is up 2% over last year. In the third quarter, we have seen a 10% increase in cases received with increases in the Americas, CEMEA, Asia-Pacific and Broadspire’s casualty business.
Let me now turn to the performance of each of our business units, starting with the Americas segment, which represented 33% of our total consolidated revenue for the quarter. Overall performance in both revenue and operating earnings improved over the third quarter of 2012, which included a number of new business wins in a difficult market.
Continued success cross border catastrophe management differentiates Crawford from both competitors and carriers who have limited capacity. We continue to emphasize this unique capability to all of our Americas clients.
Our Contractor Connection division continued to grow by 1% in assignments and revenue grew 12% over the third quarter of 2012 with both current and new insurer and consumer services clients being contracted.
We continue to develop and implement private label consumer website capabilities for all consumer services and are excited about this products future. During the third quarter we enhanced our senior staff and sales leadership in this business.
Our Canadian division has also benefited from the Canadian Contractor Connection module during the recent flooding which took place during the third quarter. And in our -- Global Technical Services division, our large complex claims business unit, we are aggressively developing our offshore oil and energy, marine, aviation and forensic accounting capabilities through the ongoing recruitment and addition of executive general adjusters.
The EMEA AP operations represented 29% of our consolidated revenues for the third quarter of 2013. In the third quarter, our revenues declined in the Asia-Pacific region primarily due to completion of claims related to the Thailand floods. This segment is finalizing the claims from the 2011 Thailand floods. We have been actively working to replace this declining revenue with new business from the oil and energy, motor aviation and marine sectors throughout the region.
In our U.K. operations we have seen revenue and operating earnings decrease in the quarter due to a volume decrease in low value claims and the general property and casualty sector. This decline is attributable to many factors and as a result, we continue to restructure our U.K. operations to compensate for the decrease in volume.
In our CEMEA operations in the third quarter, we saw claims increase 24%, including high frequency, low severity claims volume in several countries. The CEMEA market is a mature competitive market and we have focused our revenue efforts on TPA activities including our international Broadspire operations.
Our Broadspire operation which represented 21% of our consolidated revenue in the third quarter reported an increase in revenue and a second consecutive quarter of positive operating earnings as I mentioned earlier. During the year, we have been very pleased with the improved execution of our thousand marketing plan in this business segment.
Our new sales wins have been very strong and we expect to grow our pipeline of business opportunities for the remainder of the year and into 2014. In addition, our retention rate for the quarter was an excellent 97%.
We continue to see overall case volume increase against the previous year’s quarter through new client wins and a stronger workers compensation environment. We believe strongly that Broadspire solid market position, integrated service model and quality of service offer the market a truly competitive product and we should improve profitability as we move through 2013 and into 2014. We see the increase use of medical management services as a growing opportunity reflecting our ability to help clients manage increasing medical costs.
Despite the expected revenue decline associated with the Deepwater Horizon special project, we continue to be very pleased with the Legal Settlement Administration’s revenue and operating earnings performance.
LSA represented 17% of our third quarter revenue. We are pleased that our revenue during the quarter was also generated from a number of other significant class action and bankruptcy cases, providing more balance to our results.
We continue to expect to see solid performance from LSA for the coming quarter, although at a reduced level from 2012 as claims activity declines in the Deepwater Horizon class action.
Our backlog at the end of the 2013 third quarter remain strong at $117 million compared to a $118 million last year, which gives us reason to be optimistic about the future of this business segment.
That concludes my comments on our business segments. Let me now turn to our guidance and 2013 focus. Based on the results of the third quarter and year-to-date, we are affirming and updating certain aspects of our full year 2013 guidance as follows.
Consolidated revenues before reimbursements between $1.13 billion and $1.15 billion, consolidated operating earnings between $95 million and $99 million, consolidated cash provided by operating activities between $50 million and $55 million, net income attributable to shareholders of Crawford & Company on a GAAP basis between $51.5 million and $54 million, or $0.90 to $0.95 diluted earnings per CRDB share.
Our outlook remains upbeat and the balance of positive results among our segments is encouraging. Our goals in 2013 remain in place, driving operating performance. As stated earlier, our third quarter 2013 results were more balanced, consolidated operating performance as all of our segments produced positive earnings in the quarter.
We continued focus on cost savings, technology and process efficiency improvements as well as significant client wins. And we are driving our company to create long-term shareholder value and our results for the year-to-date are evidence of that strategy.
Strengthening our balance sheet, we remain disciplined in our approach to both our balance sheet and cash management. This is a fundamental strategy from which we will not waiver. We look at conservative leverage as a competitive advantage in the marketplace, especially when compared to many of our privately owned peers who have highly leveraged balance sheets. Our proven approach to leverage ensures we have the financial flexibility to invest in market-leading solutions for our clients and respond to opportunities as they emerge.
So improving total return to shareholders, Crawford's stronger balance sheet and improved cash generation capabilities supports both growth of dividends and continued share repurchases which enhance shareholder return. Crawford continued its quarterly dividend payments in the quarter, as the Board declared the dividend of $0.05 per non-voting Crawford A share and $0.04 per voting Crawford B share.
In addition, we continued to seek stock repurchase opportunities under our 2012 June stock repurchase plan. With these actions, we expect to continue to offer meaningful rewards to our shareholders. Crawford continues to make progress in 2013. Our worldwide management team is focused on core strategic and operational goals.
Our third quarter results are evidence of the benefit of having diverse operations in a volatile market. We expect to continue to expand market share, invest in technology to deliver operational efficiencies and capitalize on the client opportunities that present themselves through the remainder of 2013 and into 2014.
Reflecting on our strong market position, our ongoing investments in the efficiency and innovative support services, and the quality reputation of our business segments, we are optimistic about Crawford's opportunity for the future.
Thank you for your time and we look forward to your questions. Operator, will you please explain the process for asking questions to the audience?
(Operator Instructions) And your first question comes from the line of Adam Klauber from William Blair.
Adam Klauber - William Blair
Thanks. Good afternoon everyone. Couple of different questions, I’ll start with Broadspire. What level of revenue growth or what do we need to get that margin on say to the 10% level?
Okay, first of all, Broadspire is -- we are looking sequentially -- we’re improving the organization. We’ve spent a lot of time on that technology efficiencies, replacing and improving our sales and marketing making sure we got the right processes in place for that. We are beginning to make very good success on that.
We have strong pipeline and new clients. I think you’re going to see the margins improving. It is more of a dimmer switch than it is a light switch and as those accounts come on board and we have the sustainability of the contracts in place, we will start to see margin improvement coming true on that.
I think, that goal is 18-24 months to get to the areas where we think it will be in excess of 10%.
Another way to think -- hey Adam, this is Bruce. Another way to think about that is when we look at new business coming in, we try to achieve 25% to 35% incremental margin on that business by holding our SG&A costs flat and getting a better absorption of our fixed costs. So that's really a critical part of the equation.
Adam Klauber - William Blair
Okay. And staying with Broadspire for a minute or two, could you talk about the buildup of the medical management business. Have you been hiring some sales people in that area. Have you been winning some contracts and what if the pipeline looks like in that segment of business?
The answer to that is yes we are recruiting sales people in that particular area. I mean, it comes into our overall strategy of selling both bundled and unbundled services with medical management. We have won some unbundled services quite recently, which have been significant. And it’s an area that we have very highly focused on in both in the medical bill reviews, the care management of clients and then obviously on rehabilitation services moving forward.
Adam Klauber - William Blair
The unbundled, are those coming from insurance companies?
No. This would be multinational in self-insured clients.
Adam Klauber - William Blair
Okay. Thank you. Could you talk about progressing contractor connect, how is that business growing and maybe talk about some future initiatives for that business also?
Yes, contractor connection, obviously we have in excess of 4,500 contractors now in the program. We have really two revenue streams in that business, one is where we have service level agreements with carriers to triage the claims into the contractor connection network, which has obviously been the core of our business and that’s how we’ve started to grow that business.
The second revenue stream we now have is where white labeling the contractor network for really large, what I call an affinity programs and that’s gaining a lot of ground as well. And we’re building up our internal resources but on the south side and the management of those programs to effectively drive the forward strategy within the contractor connection program, which we -- we're saying as I said earlier seeing very large takeup by our clients.
Adam Klauber - William Blair
But the white labeling of that product or services, I know that’s a newer effort, is the traction I guess running ahead or -- running ahead of what you’d expected and what is the potential ramp of that white label as you go into 2014, 2015?
Yes, we had lot of pilots going on for last two years which are now going into full-time widely spread geographic programs. We’re seeing quite a significant increase taking place but -- and very -- let say is conservatively happening in each client and in each client we put onto it has a time period where I guess, with pilot then they go through getting their members comfortable with what’s going on. But we do see increases in excess of perhaps 10% in the revenue of that business for the future going through really the next three years.
Adam Klauber - William Blair
Okay. And then, as far as the pension, I imagine you will go through that review at year end but any expectation as far as your contribution levels going forward?
I think our contribution levels going forward will be roughly comparable to what they were this year as we look to 2014. Of course, we mark everything in the market at the end of the year and we’ll reevaluate where we stand at that point, certainly with the performance of the equity markets and where discount rates have gone this year. We hope that that’s going to be favorable, but what can happen between now and 12/31, so we will be updating contributions expense and where we stand from a funded basis during the fourth quarter call.
Adam Klauber - William Blair
Okay. Thanks a lot.
Okay. Thanks, Adam.
There are no further questions at this time. I would now like to turn the call back over to Mr. Bowman for closing remarks.
Thank you. Thank you everyone for your time and for the questions this afternoon. I would like to thank you for joining us and wish you a good day.
Thank you, for participating in today’s Crawford & Company conference call. This call will be available for replay beginning at 6:00 p.m. today through 11:59 p.m. on November 18, 2013. The conference ID number for the replay is 87285900. The number to dial for the replay is 855-859-2056 or 404-537-3406. Thank you. You may now disconnect.