Crawford & Company

Good morning. My name is Angeline, and I will be your conference facilitator for today. At this time, I would like to welcome everyone to the Crawford & Company's third quarter 2024 earnings release conference call. In conjunction with this call, a supplementary financial presentation is available on our website at www.croco.com under the investor relations section. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer period. Instructions will follow at that time. Should anyone need assistance at any time during this conference, please press star, then zero, and an operator will assist you. As a reminder, ladies and gentlemen, the conference is being recorded today, Tuesday, November 5th, 2024. Now, I would like to introduce Tammy Stevenson, Crawford & Company's General Counsel.

Thank you, Angeline. Some of the matters to be discussed in this conference call and 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 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 the 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 day 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, 2024, filed with the Securities and Exchange Commission. Particularly the information under the headings Risk Factors, and management's discussion and analysis of financial conditions 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. Rohit Verma, Chief Executive Officer of Crawford & Company. Rohit?

Thank you, Tammy. Good morning and welcome to our third quarter 2024 earnings call. Joining me today is Bruce Swain, our Chief Financial Officer, and Tammy Stevenson, our General Counsel. Before we start today, I would like to take a moment to comment on the recent devastations in North Carolina and Florida from Hurricanes Helene and Milton. Our thoughts are with all those affected, and our staff are on the ground to support impacted communities as they rebuild. Our thoughts are also with those in Florida and Louisiana who are preparing for Tropical Storm Rafael as it forms in the Gulf. Our third quarter consolidated revenues were consistent with the previous year's quarter, reflecting our ability to drive continued momentum in our core non-weather-dependent businesses. Broadspire achieved a new quarterly revenue record, and our international operations also demonstrated revenue growth with margin expansion, driven by growth across key markets. That said, our third quarter results, similar to the second quarter, reflect the lower weather-related revenue in our North America loss adjusting and platform solutions segments, contributing to a decline in consolidated earnings for the quarter. Today, I'll walk you through the key operational highlights of the quarter, and then I'll turn it over to Bruce for a deeper review of our financial performance. Crawford is the largest publicly traded claims management provider, managing over $20 billion in claims each year across 70 countries. We are proud to serve a broad base of clients, including some of the most recognized names in the insurance industry. With a team of approximately 10,000 skilled professionals and tens of thousands of field resources, our scale and global reach set us apart in a fragmented market, making us the preferred partner for top carriers, many of whom have been longstanding clients. The longevity of our relationships is a significant competitive advantage among our peers, and I'm proud of the progress we have made in reinforcing the strength of these relationships. At a high level, Crawford leverages several long-term growth drivers, which increase demand for our services. It has been widely evidenced that there is an increasing severity and frequency of extreme weather. And over the long term, that trend is driving greater demand for our services globally. We remain well positioned with our ability to deliver high quality services in response to catastrophic weather. Our teams remain prepared and ready to act, ensuring we can swiftly support clients whenever and wherever severe weather strikes. With our carrier relationships, we are well suited to meet the rising demand for outsourced claims processing. Crawford delivers proximity, expertise, and scale to efficiently and cost-effectively manage claims for our clients and their end customers. We are recognized as a valued and experienced partner within the fragmented U.S. independent loss adjusting sector and continue to deepen our partnerships across all verticals, expanding our influence and reach. Finally, we remain committed to continually enhancing and deploying advanced insure tech solutions to help clients save time and money while improving the efficiency of the claims process globally. Consolidated revenues for the third quarter of 2024 were consistent year over year, underscoring the overall resilience of our business model despite the continuance of reduced weather-related activity. In the quarter, we saw continued momentum in our core non-weather dependent businesses. Broad Spire and our U.S. GTS service line both achieved a new quarterly revenue record. Our international operations segment delivered solid revenue growth and margin expansion with gains across key markets. However, operating earnings in our North America loss adjusting and platform solutions segments were impacted by lower storm severity and frequency compared to the previous year. Additionally, an increase in corporate unallocated costs also contributed to the decline in operating earnings this quarter. And Bruce will provide some more information on that later on. We added $24.4 million in new and enhanced business this quarter, reflecting our focus on driving sustainable growth, expanding our customer base, and establishing strategic partnerships that will further strengthen our market position. Our balance sheet remains strong, with leverage at approximately 2.2 times EBITDA. As we've done in the past few quarters, we want to illustrate the decline in severe storm activity year over year. While Hurricanes Helene and Milton were headline economic loss events, the overall storm frequency in the third quarter of 2024 decreased by almost 50% compared to 2023. The middle chart shows that in the face of that significant decline in severe weather during the third quarter, Crawford achieved 5% growth in our non-weather business. Our weather-related business, which includes U.S. catastrophe, U.S. loss adjusting, and Australia decreased 11%. Finally, the chart on the right shows the impact of decreased storm frequency on our network revenue in the quarter. This segment assists our largest clients with their catastrophe specific claims handling needs and we saw a 39% reduction in revenue directly related to weather activity this quarter. It is important to note that much of the economic damage from Helene in September and Milton, which occurred after the quarter in October, was the result of flooding and storm surge, which remains largely uninsured as compared to wind damage. These hurricanes have caused more significant economic losses as opposed to insurance losses however in the fourth quarter we are likely to drive a 20 to 30 million dollar revenue increase from these events compared to the prior year period given that there was no storm activity in the 2023 fourth quarter we remain well positioned to respond to any increase in severe weather as we move forward through the fourth quarter Our capital allocation strategy prioritizes investments for our future growth through innovation, advancing our technology, and making strategic acqui-hires. Our conservative approach to leverage affords us significant financial flexibility and liquidity. We're also committed to returning capital to shareholders as demonstrated by our ongoing quarterly dividend for CRDA and CRDB shares. Our balance sheet is strong, positioning us well to continue to deliver consistent long-term value to shareholders. With that, let me turn the call over to Bruce for a deeper look at our operational and financial performance.

Thank you, Rohit. As most of you know, our business is diversified and is comprised of four segments. North America Loss Adjusting encompasses our loss adjusting business in the U.S. and Canada and accounted for 24% of our third quarter 2024 revenues. Our international business is comprised of all reported service lines outside of North America and contributed 32% of our revenues. Broad Spire is our third-party administrator in the U.S. and accounts for 30% of our revenues. And Platform Solutions, which includes Contractor Connection and our networks and subrogation businesses, contributed 14%. Now let's review each of these segments. Beginning with North America Law Suggesting. In the third quarter of 2024, our revenues were $79.3 million, consistent with the prior year quarter. Operating earnings were $5.4 million, a decrease of 48% from the prior year quarter. This decrease was a result of a difficult year-over-year revenue comparison in U.S. field operations in Canada and increased expenses in our U.S. GTS operations. Within these results, our USGTS service line achieved a record for quarterly revenue and continues to demonstrate solid topline growth, with 19% revenue growth in the quarter, as we reap the benefits of our ongoing investments in this service line. International operations continues to demonstrate a solid recovery post-pandemic. Revenue for the 2024 third quarter was $105.7 million, and operating earnings were $5.1 million. Our revenue grew 8% from $98.1 million in the third quarter of 2023, or 10% when measured in constant currency. Our operating earnings showed a significant increase of more than 130% over the prior year quarter, reflecting improved performance in the UK and Europe. We are confident that our strategies to improve efficiencies in key growth areas will continue to position us well for the future. Our Broad Spire business set a new quarterly revenue record of $99 million in the third quarter, demonstrating continued growth as a cornerstone of our non-weather-dependent business. Revenues increased 7% from $92.2 million in the 2023 period. Operating earnings for the third quarter increased to $14.4 million compared to $13.5 million in the 2023 period, and Broad Spire's operating margin was a company-leading 14.5%. Client wins in this business line continue to drive our growth in 2024. These client wins continue to become long-term partners contributing to recurring revenues as we retain 94% of our business year-to-date. Platform Solutions' third quarter revenues of $45.3 million decreased by 24% compared with $59.8 million in the third quarter of 2023. Operating earnings in Platform Solutions total $3.8 million. or 8.5% of segment revenues in the 2024 quarter, compared to operating earnings of $8.5 million, or 14.2% of revenues in the prior year quarter. Our subrogation revenues for the quarter grew 12% compared to the third quarter of 2023. We continue to see the effects of reduced storm frequency, particularly in our networks business line. As Roeth mentioned earlier, the decline in storm activity year-over-year has left many carriers with excess capacity, leading to reduced demand for our catastrophe services this quarter. Additionally, much of the hurricane-related damage in the quarter, and likely the fourth, has been due to flooding, which is often uninsured. We have experienced similar periods of lower storm frequency in the past, but our long-term outlook remains optimistic. as we are well-positioned to support our partners during critical times. Despite quarter-to-quarter variations, long-term trends indicate an increase in both the severity and frequency of natural disasters. And now for a look at our consolidated financials. In the third quarter of 2024, company-wide revenues before reimbursements were relatively unchanged at $329.4 million. Foreign exchange rates decreased revenues before reimbursements by $2.2 million, or less than 1%. GAAP net income attributable to shareholders totaled $9.5 million, compared to net income of $12.3 million in the same period of 2023. GAAP diluted EPS in the 2024 third quarter was 19 cents for both CRDA and CRDB, decreasing from 25 cents for both share classes in the 2023 period. On a non-GAAP basis, diluted EPS was $0.22 for both CRDA and CRDB, compared to $0.35 for CRDA and $0.36 for CRDB in the prior year period. The company's non-GAAP operating earnings totaled $21.8 million in the 2024 third quarter, or 6.6% of revenues, compared to $29.9 million, or 9.1% of revenues in the prior year period. Consolidated adjusted EBITDA. was $29.6 million in the 2024 third quarter, or 9% of revenues, compared to $38.6 million, or 11.7% of revenues in the 2023 quarter. Companies cash and cash equivalent position as of September 30, 2024, totaled $52.3 million, compared to $58.4 million at the end, at the 2023 year end. Our total receivables were up $18 million from the 2023 year end, primarily due to an increase in unbilled revenues that we expect to unwind through the remainder of the year. The company's total debt outstanding as of September 30, 2024, totaled $238.4 million, up from $209.1 million as of December 31, 2023. Net debt stood at $186 million as of September 30, 2024, while our U.S. pension liability was $23.1 million at the end of the third quarter, reflecting a funded ratio of 93.6%. We made no discretionary contributions to our U.S. defined benefit pension plan during the third quarter of 2024, and we do not intend to make contributions for the remainder of the year. Cash provided by operating activities in the 2024 year-to-date period was $11.1 million, with free cash flow of negative $18.4 million. This compares to cash flow from operations last year of $68.1 million and free cash flow of $40.4 million. This decrease in free cash flow in the 2024 period was primarily due to lower operating earnings, higher incentive compensation payments compared to the prior year, and increased unbilled receivables. This decrease in our free cash flow is a result of timing-related variations. and it is not uncommon for us to see such fluctuations. We believe that the decrease in free cash flow observed year-to-date is not a reflection of the company's long-term cash generating capabilities. Unallocated corporate costs were $7 million in the 2024 third quarter, compared to corporate costs of $4.8 million in the same period of 2023. The increase was primarily due to increases in self-insured expense, professional fees, and other reserves. During the 2024 third quarter, non-service pension costs were $2.4 million compared to $2.2 million in the 2023 period. We recognized a pre-tax contingent earn-out credit of $2.1 million in the 2024 third quarter compared to an earn-out cost of $2.1 million in the 2023 period. We paid a $0.07 dividend per share for both CRDA and CRDB shares in the third quarter. During the third quarter of 2024, the company did not repurchase any shares of CRDA, but repurchased approximately 155,000 shares of CRDB at an average share cost of $9.89. As a reminder, approximately 1.1 million shares are eligible to be repurchased under our 2021 share repurchase authorization. With that, I'll turn the call back over to Roweth for concluding remarks.

Thank you, Bruce. As we conclude, I want to emphasize the strength and resilience of our diversified business model. While the quarter presented challenges to North America loss adjusting and platform solutions associated with reduced storm activity, our non-weather businesses continue to drive strong performance and steady growth. The strength of our diversified business lines enables us to mitigate challenges encountered in one part of the business with growth from other segments. Looking ahead, we remain optimistic about our long-term prospects. Our teams are well prepared to respond swiftly to any future weather events. Additionally, our strategic focus on non-weather businesses, technology, and operational excellence provides a solid foundation from which we can deliver value for our clients and shareholders. We will also maintain our disciplined approach to capital allocation, prioritizing investments that enhance our capabilities and strengthen our market position. I want to take this opportunity to thank our dedicated employees for their hard work. Your commitment to supporting our clients and communities has been remarkable. I also extend my gratitude to our shareholders and partners for your continued trust and support. We look forward to building on our successes as we close out the year and move into 2025. Thank you for joining us today, and Angeline, we can now open the call for questions.

Thank you. At this time, if you would like to ask a question, please press star, then the number one on your telephone keypad. To withdraw your question, please press the pound key. If you are using a speakerphone, please pick up your handset before asking your question. We'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Mark Hughes from Truist. Please go ahead.

Yeah, thanks. Good morning.

Hey, Mark. Hi, Mark.

How much revenue do you think weather revenue might extend in the Q1? I think you described kind of a $20 million to $30 million benefit in Q4. Will that cover it, or will there be more next quarter?

I would say, Mark, that most of it will get covered in Q4 until we see storm activity from Rafael. which, as you know, is just forming in the Gulf right now.

Understood. And then the GTS had strong growth there. How much of that is headcount growth versus volume pricing? Just kind of sense of what's driving that for you.

I would say it's volume growth, but it's driven by the increased headcount. which gives us the ability to have the experts on staff and giving us more confidence to our clients to give us larger and complex losses. Pricing, you know, as you know, we've been making sure that we continue to stay price competitive. So we feel that we've been good on pricing, but the growth is not a pure price play here. It's more of an expertise play.

Understood. How is BroadSpire shaping up for a new business? Am I right in thinking kind of the Q4 to Q1 is their big season for new business? How are you seeing that shape up for 2025?

Yeah, I would not say that Q4 to Q1 is necessarily. I mean, there are some parts of the business that you're right, tend to start in Q1. We're seeing a good amount of RFP activity. We're very active in the marketplace. And we feel we have good momentum on new business. No reason for us to believe any slowdown in 2025. Okay.

And then the corporate expenses, I think some insurance, self-insurance. Was there some catch-up this quarter? Would we expect that to calm down a little bit in the fourth quarter? Is this kind of the new normal?

Yeah, hey Mark, it's Bruce. No, we, you know, self insurance can bounce around a little bit for us. We can see credit some quarters and expenses others. This was not a catch up. We had some some higher severity claims in our self insured medical. That was the primary driver, but we saw a little bit increased frequency in our couple of our other PNC lines as well. The other thing that drove the increase in the quarter was we had some higher professional fees quarter over quarter, which we expect to tamp down as we go into 2025. And we also had some other reserves on assets and severance-related costs, which is more one-time in nature.

Okay. And then on the cash flow front, the compensation was – headwind in the quarter. Was that a timing issue? I guess I won't say reverse at any point.

The cash flow drivers year over year are really three. It's reduction in operating earnings. We paid out higher incentive compensation in 24 related to 23 earnings. And so that put pressure on operating cash flow from the first quarter on. And then we've seen an increase in our unbilled revenues related to revenue growth that we've seen in Broad Spire and GTS and our international business. And that's a timing difference. And that's going to reverse and bring our operating cash flow up as we close the year. We'll be we're expected to be down. Last year, 23, was a tremendous operating cash flow year, so we'll be down compared to that, largely because our earnings are down and we had higher cash outflows related to incentive compensation earned in 23.

Contractor Connection, do you have the revenue comparison for that specific business for Q3 versus Q3 last year? I do. Yeah, so it's down 10% quarter to quarter from $19 million down to $17.1 million. Okay. And then the international operations, kind of high single-digit growth, pretty steady the last three, four quarters. What are the prospects for that to be sustained?

Mark, we believe the international business will stabilize. As you know, we have been working on turning around that business. Again, our push on that business is continuing to improve profitability. and continue to diversify our revenue base. That business was helped a little bit by the extreme weather in Europe that we saw, Europe and Middle East that we saw in the quarter. But I think that the growth of that business should stabilize to low single digits.

Thank you. Appreciate it.

Thank you.

Thank you.

Thank you. As a reminder, if you wish to ask a question, please press star 1. The next question comes from Kevin Stein from Barrington Research. Please go ahead.

Good morning.

Hey, Kevin. Good morning.

I wanted to start off by continuing to talk about GTS. Obviously, you've had good success there. uh hiring specialist adjusters just just wondering what the opportunity is for continued hiring there you know i assume it's a fairly narrow set of available talent given this pretty specialized um you know expertise but just wondering what the available opportunity is for hiring there going forward as well as are you able to maybe at times develop those people internally as well.

Hi, Kevin. This is Roy. We're able to do both. We are developing people internally and bringing people in from non-insurance sectors and coaching them and developing them in the insurance aspect of the business. But we still believe that there's opportunity for us to hire people from the market. We believe that we've emerged as a solid and strong destination for talent. And there is quite a lot of movement in the marketplace, which has been benefiting us. So I feel that for the next couple of quarters, I don't see a reason why we can't continue hiring.

Okay, good. And obviously, you've talked about GTS with a quarterly record for revenue and 19% growth for that business is quite impressive. Just wondering how you think about that, you know, growth rate for that business, you know, longer term, next several years, kind of what would be a more normalized rate of growth?

Yeah, I think if you look at the three-year CAGR on that business, it's roughly about 24 to 25%. So it's come down slightly right now to about 19. I still think that, you know, low double digits is a decent growth rate for us to have for at least the next year or so.

Okay. Sounds good. And obviously, you know, you talked about continued new business wins. I believe you said 25 million of new and enhanced business. Okay, okay. But so are there any specific wins that stand out there? Is it kind of across the board or areas of the business that are in a particular momentum? I know Broad Spire continues to do well, but, you know, anything else that you would call out in that mix?

I would say that overall the U.S. business has had momentum, so whether that's broad spire or loss adjusting, be it GTS and our field operations business, as well as even business and platforms, I think the only reason you've seen a lower expression of revenue is because of lack of weather. So we believe that the winds are pretty secular across the business. U.S. obviously continues to lead the pack of those winds. And that's mainly because of the size of the market and our presence in the market.

Okay. Understood. And international profitability continues to improve nicely. You're around a mid single digit operating margin the last couple of quarters here. Do you have a sense as to the pace at which margins could improve there and Again, maybe touch on the longer term margin target for the international operations.

Our longer term margin target for the operation is about 10% operating margin. I think our near term that we've stated even last quarter is that we want to get to a consistent 5% margin, which is what we are shooting towards and getting to, that we can consistently deliver it, as you will see. this year, you know, we're getting there, but we did not deliver that consistently every quarter. Our goal is to get that to be consistently delivering to that level in the very near future with a long-term goal of getting to 10%.

Okay, thanks. And with the North American law suggesting, obviously highlighted GTS there, but I know Canada has been a bit softer recently? Has that started to pick up at all? And what are you seeing more on the small claim side? I guess that would be more driven by weather, but what are the trends there? Any new business or just trying to dig into the other parts of that North America loss adjusting segment?

Sure. Canada started to pick up. It's still not at a level that we need it to be. And you're right, the lower frequency there hasn't really helped the situation. But we're making some other changes in Canada that we believe position as well for the midterm. And we should see continued improvement in Canada in the coming quarters.

Okay. Sounds good. Well, thanks for taking the questions. I'll turn it back over.

Thanks, Kevin. Thanks, Kevin.

Thank you. There are no further questions at this time. I would like to turn the call over to Mr. Rohit Verma for closing remarks.

Thank you so much, Angeline, and thank you to all our employees, clients, and shareholders for your continued commitment to Crawford & Company. Thank you so much, and God bless.

Thank you. Thank you for participating in today's Crawford & Company conference call. This call will be available for replay beginning at 1130 a.m. Eastern Standard Time today through 1159 p.m. Eastern Standard Time on December 5, 2024. The conference ID number for the replay is 04164-POUND. The number to dial for the replay is 1-888-660-6264. Thank you. You may now disconnect.