Arthur J. Gallagher & Co. (AJG) 2009 Q3 法說會逐字稿

Good morning and welcome to the Arthur J.

Gallagher & Company third quarter 2009 earnings conference call.

Participants have been placed on a listen-only mode.

Your lines will be open for questions following the presentation.

(Operator Instructions).

As a reminder, today's call is being recorded.

If you have any objections, you may disconnect at this time.

Some of the comments made during this conference call, including answers given in response to questions, may constitute forward-looking statements within the meaning of the securities laws.

These forward-looking statements are subject to certain risks and uncertainties described in the Company's reports filed with the Securities and Exchange Commission.

Actual results may differ materially from those discussed today.

It is now my pleasure to introduce J.

Patrick Gallagher Jr., Chairman, President and CEO of Arthur J.

Gallagher & Company.

Mr.

Gallagher, you may begin.

Thank you, Rob and good morning, everyone.

Thanks for joining us on our third quarter conference call.

Today I'm joined by Doug Howell, our Chief Financial Officer, as well as the leaders of our operating divisions.

As is our custom I'm not going to read from the press release.

Instead, I would like to give some highlights from the quarter and a little bit of flavor on the nine months, then Doug will make a few comments and we'll move quickly to questions and answers.

Given that this has got to be one, if not the toughest market that I have seen in 35 years, I'm very pleased with our quarter, especially given the economic environment we are operating in.

Even with organic revenue dropping in the brokerage segment and the risk management segment, we moved EBITDA 11% for the quarter and 19% in the first nine months, and we've expanded our EBITDA margin by 2.5 points.

Let me pause for just a moment and give some additional flavor around the whole organic situation.

For brokerage, we are showing 5.7% negative organic ,but we know that 1% of that relates to life and retirement sales that were going strong last year until things crashed in September and about another 1% relates to our domestic wholesaling operations that are being hit by customers who are returning to the standard market.

I took those operating cells out of the results.

Our retail operations are showing 3.9% organic revenue.

If I look at risk management, you can see in the release that we have a large performance bonus in the third quarter of 2008, and that bonus -- we are eligible for that every two years.

Levelizing for that bonus puts the risk management segment at flat organic revenues.

And if you combine the brokerage and risk management, the way we look at our company, adjusted negative organic would be 2.7%.

Let me go back and make some comments on the brokerage segment.

To say that it is extremely tough out there would be an unbelievable understatement.

Rates are continuing to drop and the economy is taking a huge toll on our clients.

The decline in our brokerage organic revenue, I think that two-thirds of that can be attributed to the recessionary pressures on our clients exposure units and probably one-third from rate decreases.

We believe that the challenges we face are going to carry on into 2010 and that is why we have decided to reduce headcount in the coming months.

Letting people go is never easy, but with organic revenue falling, it's absolutely necessary to down size.

We've instructed everyone involved to do this while respecting the dignity and feelings of those employees who are going to be affected.

The property casualty market, as I said earlier, remains soft.

The latest quarterly results posted by a number of our trading partners show that balance sheets have recovered and combined ratios are still well under 100%, and this will keep pressure on rates for the foreseeable future.

Let me give you one example, I won't mention any names but a recent release by one of our key markets showed that even with the decline in premiums written of 6%, combined ratios were well under 90%.

So this does not reflect any need for firming rates.

Let me move over to the benefits arena.

Our benefits operations did quite well in the quarter and have performed quite well over the last nine months.

That's in spite of what I've already mentioned, the decline in the last nine months of our area of financial benefit sales which is related to life insurance sales and retirement services.

Life sales have been stymied by the credit prices and our retirement practice was hurt by a drop in invested assets.

If these two areas can get back on track as contributors in 2010, our benefits organic growth will pick up again.

Of course all of us here at Gallagher are focused on the healthcare reform efforts in Washington, DC.

We are involved.

These efforts seem to change on a daily basis.

We continue to support many of the reforms being discussed, but we do not believe a public option, i.e.

medicare for all, is in the country's best interest.

Our merger and acquisition activity continues to be slower this year than in previous years.

This reflects the sellers recognizing that values are declining.

However, we did complete two new deals in the quarter and have a pipeline that it is very, very strong.

Again I'd like to welcome our new partners.

I'm happy that they've joined Arthur J.

Gallagher & Company.

I do believe that potential tax increases and a recognition that values are not going to rebound soon will allow us to once again ramp up the number of deals that we do in 2010.

Our international brokerage operations continue to do well.

Our London operation where we've been the fastest growing mortgage broker for over five years has contributed nicely this year, as have our equity investments in the Caribbean and Australia.

All in when I look at our brokerage team, I am very pleased with what they have done, watching expenses closely and yet keeping over 90% of our renewals and we continue to generate double digit new business.

Our culture is a sales culture.

Everyone here knows that nothing happens until you ring the cash register.

All of us are involved in our sales efforts.

Let me turn to risk management.

I'm proud of the risk management team.

Revenues are declining because claims counts are down significantly.

This reflects our customers' decrease in employee count.

The story of Gallagher Bassett is one of the expense management.

Remember this is a labor intensive business.

Expanding margins with declining revenues is tough work and our team is working hard to hold on to our profitability.

Actually growing EBITDA 9% over the last nine months is that testament to the team's efforts.

Again international operations are performing well.

Adjusting for the performance bonus that I mentioned earlier, which I remind you is not annually available, and normalizing for foreign exchange, international revenues were up 9% in the quarter.

I think our team has reacted extremely well to this tough environment.

Moving our margin up 2.5 points over the last nine months is very hard work, and we expect further reductions in the work force to add additional savings in 2010.

We've harvested a sizable amount of savings from our efforts over the last few years.

And even so we are anticipating a very difficult 2010 as our clients' exposures continue to fall.

When you combine this with continuing reduction in rates, organic growth is really, really squeezed.

Nonetheless, we believe that our past nine months' growth reflects the fact that we continue to execute on our growth strategies.

We've told you for years that we are focused on five things; new business, we view our selves as a new business machine.

All of us are out every day, getting out after new customers.

Secondly, client retention.

Transparency actually helped in that, going transparent in 2006 and our client retention is nicely over 90%.

Thirdly is recruiting, both young people from our internship as well as seasoned professionals from other competitors.

Fourthly is mergers and acquisitions.

We have nicely tucked in our largest acquisition ever which is the Liberty operation, as well as continuing to do other tuck-in acquisitions.

And fifth, efficiency and margin improvement which you can see we did well through the first nine months of this year.

Doug?

Thanks, Pat and good morning, everyone.

Today I have six comments.

First some housekeeping.

While we intend on filing our 10-Q later this week and don't forget to use the quarterly spread on the website, see trend and seasonality, as you build your model.

For my second point, let's jump into our operating costs.

You can see both our brokerage and risk management segments nine month operating ratios are down around three points.

That is tremendous progress in this environment.

Looking beyond 2009, it's going to take hard work by the team to hold the current nine month operating ratios in 2010.

Then as we look towards 2011, the next significant area lies in our occupancy cost.

Teams are currently working to see just how much opportunity might be out there and I'll give you an update in our January call.

Third in terms of workforce, over the coming months we are again contracting our operations across the board.

Fortunately, the historical investments we have made in technology and improved processes in our service centers will enable us to maintain Gallagher's commitment to excellent customer service.

About half of the current actions will come if the brokerage segment and the other half will come from the raising management.

Unfortunately offsetting some of the savings in 2010 will be medical inflation which is nearing double digits, increasing pension costs due to declining investments yields and limited wage and performance compensation adjustment.

And since I'm on the subject, I want to point out that here in the third quarter we also had about $0.01 of severance across the brokerage and risk management segment that is running through our numbers.

My fourth comment relates to our clean energy investment called Chem-Mod.

In July, we told you we were expecting to spend about $15 million on several facilities to move Chem-Mod's technology into commercial use.

We now expect to have about a net $20 million invested into eight facilities, but we must have them in production by December 31, 2009 to capture early adopter tax credit subsidies.

If all goes well in getting the facilities up and running, then operating them as planned, we can generate earnings of up to $40 million per year for the next ten years.

Fifth, when you look at the corporate and financial services segment, you will see that we had a pick up from resolving some tax items of $0.035 this quarter.

But don't miss that we also had $0.02 of cost from additional professional fees and compensation, related to pushing Chem-Mod along its path to commercialization.

Sixth, a couple comments related to acquisitions.

The Liberty deal is going great and we now anticipate you could see $8 million to $10 million of EBITDA contribution from the deal here in 2009.

For 2010, the deal is still on track to contribute a total of $25 million to $30 million of EBITDA or in other words an incremental $15 million to $20 million more over 2009.

Like Pat said, we are encouraged by our M&A pipeline and we will continue to to deals even [with] the 25% cash and 75% stock.

While I'm on this subject, I want to point out again a new line item in the P&L here in 2009.

This shows you the accretion of acquisition earn outs.

This new accounting doesn't impact EBITDA, but it did cost us $0.01 of EPS this quarter and about $0.02 year-to-date.

This new accounting is here to stay.

It probably should be considered in your model.

As a wrap up comment, even in these difficult times the Gallagher team is delivering on our objectives.

We are implementing our expense savings initiatives.

We have optimized our workforce.

And during this time, we have raised our quality and all the while, our teams are delivering professional advice and excellent service to our clients.

Okay, Pat.

Those are my comments.

Rob, we are ready to go to questions and answers.

Thank you.

(Operator Instructions).

Our first question is coming from the line of Mark Hughes with Suntrust.

Thank you very much.

Any change in the average commission rate that you are earning over the last three to six months?

This is Pat.

I don't have the stats in front of me.

Anecdotally I would tell you that our people are paid on a commission basis.

They are paid to do as well as as they can at the underwriting desk.

But in terms of up front changes in the rate of commission by the insurance companies, very little.

Okay.

How big is the UK portion of the brokerage business at this point roughly?

Over $100 million in revenue.

Just over $100 million.

Okay.

As you look at your client base, how are they doing in the volatile economy?

Are the middle market customers doing as good, a little bit worst than what we might see in the broader economy?

Mark, I meet a lot with clients and they laugh at the green shoot discussions.

Some of the transportation clients think that maybe in the first quarter they will see some increase, but by enlarge our clients are really suffering.

Sales are down.

And again this is all anecdotal discussions in just meetings with clients.

But you take those electrical contractors that did housing developments and things like that, we have customers that did $6 million, $7 million, $10 million in revenue a year ago that are going to do $2 million this year.

Their businesses aren't down on order of 3%, 4%, 5%; these businesses are down 50%, 60%.

We are very large in Florida.

If you take a look at our customer base in Florida, you have 10% -- almost an 11% unemployment rate.

Commercial real estate down there, which is a big part of what we do, has collapsed.

In downtown Miami alone, there is 6500 unsold condominium units.

Our public entity business is a very large part of what we do.

They are literally in a crisis mode when it comes to budget.

The other business that we are very large and of course it's religious and not for profit, contributions are down.

And then of course we are large in construction.

I could keep going through our niches like that and every niche I look at, I don't see one that is robust at all and I don't see any that are planning on robust recovery in 2010, I'll tell you that.

Okay.

Thanks for that.

Thanks, Mark.

Our next question is coming from Keith Walsh with Citi.

Please state your question.

Good morning, everybody.

Good morning, Keith.

First for Pat.

As always, I appreciate the candor around the revenue and the client situation out there.

I am still trying to recognize the minus six organic and the timing of this relative to let's say, [Willis] reported the other day and their organic actually is improving in North America or decelerating the negative trends.

Just trying to get a sense for -- to reconcile some of those different things we are seeing out there.

Then I've got a follow-up for Doug.

I can't really comment on my competitors.

I'm not inside those firms.

I'm not even sure quite honestly exactly how all of us measure organic.

I don't think that's a GAAP defined term.

We just try to give it to you straight and then we give you the table in our press release as to how we calculate it and we try to stay very consistent with that.

This is very reflective of what is going on -- basically our brokerage unit on the property casualty side is 85% commission.

On the benefit side is probably -- even thought it's more negotiated, it's probably still 80%, 85% commission.

Our benefits' clients is down [FDE] significantly.

Our property casualty clients are down, sales, payrolls.

And our wholesaling business is losing business to the standard market.

It's tough to move well down the field.

Frankly when I look at our new business sales, I'm proud of our guys.

We are not losing accounts.

That is the interest thing.

Our retention has actually improved over the last three years.

We are nicely into the 90s.

When you take out stuff that we knew wouldn't reoccur, like surety bonds and one-time profits, we are nicely into the 90s, probably over 93%, 94% so it's not losing clients.

And we are getting new business.

We are a new business machine.

This is just really reflective of rates and the economy.

And I don't know -- we don't sense any significant improvement, I'll tell you that.

Thanks.

For Doug, some of the silver lining here in a tought environment is you raised your EBITDA margin with down six revenues.

It's extremely difficult to do, I would think.

Maybe you can give us more color behind that.

Was Liberty behind that?

Was the expense cuts you had done previously driving that?

Give us more color behind why that number went up.

I think the bulk of the things you mentioned are true.

But going back, I've told you for years for those who have been listening that we've been investing a lot of money over the last four, five years and trying to move ourselves into a more efficient and lower cost provider of service, at the same time rate and quality.

A lot of those things hit the harvest phase in 2009.

If you've been following along, you've heard me say that.

The places that we are doing -- is we are trying to reduce consumption of travel, meeting expense, generally not at the producer level.

That's more at the management and administrative layers that we are holding cost.

We have done a good job of looking at our E&O costs and make sure that we drive -- out of our costs and thereby raise quality.

That helps us restore some profitability.

We are shifting labor to lower cost labor locations.

We keep just as many hands on the ores, but we are paying less for those hands.

When you put in the Liberty deal, remember we still haven't had all the revenue on Liberty.

Liberty is not improving our margins right now.

Liberty is not a contributor.

We believe longer term, it will, when we have a wedge shape of revenue with respect to Liberty.

Basically, it's across the board and the team working hard to look at the cost they spend and how they are servicing the business.

And that is where we're dropping to the bottom line.

Last question for Pat or Doug.

Around the $10 million of recoverable contingents that you talked about last quarter, how are the conversations trending so far with that?

Any update there?

I'm very pleased with that.

It trended very well.

A lot of those contingents are coming from local markets and regional players.

I'm pleased to say that it's really an attitude of welcome back.

How are your customers reacting to this change?

I have zero complaints with some exception from the [RIM] society.

RIMs is beginning to shift their view of this because I believe that they recognize that our larger competitors are also going to try to move back to taking contingents.

Now they are focusing properly on the fact that the issue should be transparency.

I've said all along, this isn't a compensation issue.

It should be viewed as a transparency issue.

We are disclosing to every single client that we are in contingent arrangements.

When you get away from the RIMs members, there is zero controversy around this issue.

Thank you very much.

Thank you.

Our next question is coming from the line of Mike Grasher with Piper Jaffray.

Please state your question.

Good morning.

A few follow-up questions for Doug.

The eliminations, once they are completed, what would total reduction of workforce be at that point?

We are looking to level attrition and take out 400 on this round.

Is that what your question is?

Beyond this round if you go back to when this began.

I've you add up what we've talked about, we announced another 400 in January of 2008 and 130 in the fall of 2007.

We are well over 1,000 folks out of the organization.

And again most of this has been done through attrition over the last two years.

And then if you look at the various scenarios out there -- potential scenarios for an economic rebound or even a change in the underwriting cycle, how do you feel about the workforce level?

Would you have to add immediately?

Could you still absorb some change in either one of those outlooks?

This is Pat, Mike.

I think that if we were to get an economic recovery, we would simply be able to absorb that.

A change just in our client's exposure is not going to drive more work.

In fact, that is part of the problem right now.

Even with -- take that contractor I mentioned that drops from $10 million to $3 million in total billings, we are still sending out a thousand certificates for that guy.

The work doesn't really expand and contract all that much based, on how their exposure risk goes.

If you could combine, get me back to 5% organic growth and give me a flat rate environment, I will mint money.

Fair enough.

And then your comments about -- Pat, your comments about the change in the M&A environment, is that something that you are witnessing right now or just your sense?

No, it's something we are witnessing.

The pipeline is very strong.

I think that people -- again, it'sanecdotal, Mike.

The people that are coming through are reasonable sellers, recognizing that they have an opportunity to play a game with us -- with our stock.

We are hoping that they keep the stock.That's part of the discussion That's part of continuing to build the dream.

They get a very nice dividend while we wait for the explosion that is yet to come.

Okay.

Thank you very much.

Our next question is coming from Meyer Shields from Stifel Nicolaus.

Please state your question.

Good morning, all.

One question for Doug to start with.

If I look at the average compensation per average full-time employee, it has in the first half of the year -- it was up in both brokerage and risk management for the quarter.

Say that again.

I didn't hear you.

I'm looking at the average compensation for average workforce.

Okay.

And it had been down in the first quarter -- I'm sorry, the first half of the year for both brokerage and risk management.

But it was up in the third quarter.

Is that just a lagging indicator because of the anticipated workforce reduction?

I think -- let's put it this way.

It's nothing systemic inside the organization where we've been giving raises or there's been a substantial change in performance, compensation levels.

If compensation is going up in the third quarter by person, it's because of our producer -- our third quarter is a largest quarter.

That would drive more comp into it with the same number of folks because of the producer comp line.

Okay.

I'm sorry.

I cut you off.

As a person, it will go up as revenues go up and we have more revenues in the third quarter.

Okay.

Following on that question, what should we expect average compensation to do in 2010 for the non-reduced workforce?

Here is what we do.

Those branches that grow have an opportunity to fund a raise pool and we will take care of the branches that are showing growth.

Those that don't have to contract, and that's the way we do it around here.

The premise that we operate at Gallagher is fairness.

If somebody has had a great year and is deserved and they have been promoted, then you have to recognize them for that.

This is Pat.

I travel the branches all the time and I make no bones about it, that it's a simple equation.

Put yourself and your activities in a place where you can grow the business and everybody will participate in that.

Shrink the business and the same will happen.

Okay.

That's helpful.

Last question.

One of the things you commented on earlier I think Doug was that the travel expense reduction was largely management as opposed to producers?

The management and administrative folks.

People that are not directly touching the clients, that is the primary place that we've contracted.

Has there been any significant contraction for the client facing folks?

Not in terms of the number of trips taken to see clients.

A lot of our sourcing efforts and our negotiated contracts have helped contribute to the fact that they can travel to those locations cheaper, but they can still go.

Okay.

That's good.

Thanks so much.

Our next question is from the line of Sarah Dewitt with Barclays Capital.

Please state your question.

Hi.

Good morning.

Good morning, Sarah.

Of the $25 million to $28 million of expense savings from headcount reductions, how much of that do you expect to drop to the bottom line?

You had mentioned that there could be some offset.

I think we'll be able to get 75% of that number.

Okay.

Great.

Thanks.

And then in terms of organic growth, you mentioned you don't expect a recovery in exposure units in 2010.

And since most economists are predicting GDP growth in 2010, is it fair to say there's a lag between when the economy recovers and when exposure units recover?

If so, why do you think that is?

Absolutely, Sarah.

I think it's the fact that the recovery and exposure units were the lagging indicator.

What happens is clients will hunker down, their exposed units come down and you basically renew the account at what they think -- what they predict their sales and payrolls to be.

If they are a little more successful during the year than they originally predicted, so if economists are correct and the GDP recovers, we'll reflect that in the renewals and in the additional premium audits in 2011.

We lag our client's success.

Great.

Thanks for the answers.

Great.

Our next question is from the line of Scott [Coniac] with RBC Capital Markets.

Please proceed with your question.

Thanks.

I noticed that you reduced the debt levels again in the quarter.

I wonder how you are thinking about -- what your intentions were.

Do you expect that to continue in the next couple of quarters?

If you look at our numbers, one of the reasons why the debt levels are coming down in this quarter is because our first quarter is seasonally our lowest cash quarter.

The history of Gallagher typically is that the debt will come up a little bit in the first and second quarters, and then we start bringing it down in the third and fourth quarters.

It's a seasonal item in our cash flow.

How am I thinking about that?

We are looking at all options right now.

Okay.

And then on the -- relative to the initial expense saving targets you gave relative to the restructuring that was about a year ago.

Are those on track?

The number was $25 million to $30 million -- on track to meet those or ahead of expectations?

We well exceeded those numbers.

Great.

Last question is, you mentioned in your commentary as Florida being an area of weakness.

I wonder if you can talk about other regions where it really weakened versus Q2 where you had negative 6% organic growth versus basically flat versus Q2.

I am wondering where the big change was versus second quarter.

As I mentioned, Florida is very difficult location for us.

You can roam around the country, California is a very large part of our organization.

I think unemployment in California is now approaching 14%.

Homebuilding is completely stopped.

Infrastructure contractors are doing okay.

California is tough.

Where we seem to see a little bit of resiliency and where the economy has not been as impactful are places like Oklahoma City.

The northeast also is very weak.

If you look at southeast, most typically Florida, northeast, out of the whole New York corridor and California, those are our three weakest places from an economic activity standpoint.

Okay.

Thanks.

Our next question is from the line of [Brian Durubio with Yield Capital Appreciation].

Please proceed with your question.

Good morning, guys.

How are you?

Good, Brian.

How are you?

First off, two questions for you Doug.

First one, in the last three press releases you've had this little commentary how you've switched all your cash balances out of interest bearing accounts to things that are much more safe that essentially pays zero.

Recognizing that even interest paying accounts basically pay close to zero, given that much of the crisis has abated, is there an opportunity to put money back to work a little bit so you are earning something rather than nothing on the accounts?

Yes, there is and we are working on that right now.

But I caution that putting in fat paper which we typically do, maybe we are giving up a $250,000 to $500,000 quarter in our current stance right now.

Until rates return, it will be lower.

But I think we are looking at moving some money back into earnings accounts.

Okay.

And then Doug also for you.

The $40 million that you are talking about at Chem-Mod that you essentially get annually, is that going to be a discreet item on the P&L or is that going to be in the tax rate?

Can you remind us?

It will be both.

The way that we set these partnerships up is that there will be pre-tax income and then there will also be a tax benefit that records through.

We'll get them -- both in the corporate and financial services segment you'll see both pre-tax items and you'll see tax benefits coming through.

Great.

And lastly --

(multiple speakers) We'll identify it for you and break it down for you.

And lastly, Pat, for you.

Since you've experienced more winters than most of us on the call, the last time we went through a major inflationary cycle was the 70s and the early part of the 80s.

One of the other great debates out there besides green shoots is are we going to see [that as] inflation or not.

In general, would you say is that higher inflation better for you or is that worse for you in terms of pricing and what you can probably do with margins?

Inflation benefits the brokerage business.

It does.

Yes.

As our clients are recording more sales, they are paying more premium and more premium equates to more commission.

We have to be very careful on our expense side so it's not necessary relates to expanding margins.

But as clients are giving raises to people, payrolls are going up, cost of property is going up, that actually helps us.

Perfect.

Thanks a lot, guys.

Thanks, Brian.

Our next question is from Paul Howard with Langen McAlenney.

Good morning, everyone.

Doug, I just wanted to piggyback on the last question on Chem-Mod.

Can you walk us through the thought process or the risks involved?

The initial cash outlay is higher than previously thought.

Could that number go even higher on a cash outlay or a net investment basis?

With the shot clock ticking towards December 31, what are the risks involved with getting these eight facilities completed and up and running?

Let me take it -- first and foremost, he people that are working on these projects are the same group of people that have worked on our previous alternative energy projects over the last 15 years.

We have the same experience group working on it.

There are always risks with these types of opportunities that we think that -- there is IRS risk.

There is operations risk.

There's supply chain risk.

There's production risk.

We feel like these things have been tested in laboratory and tested in full scale testing enough to mitigate most of those, but we can't eliminate all of them.

In terms of how I look at it, and this is largely a way to capitalize in the investment in Chem-Mod, the technology has worked.

It is proven to take Mercury out of coal fired stacks over and over andover and we are putting them in place.

Right now, we think that we are going to price them at $30 million to $35 million in total.

But then when we sell off a piece of the plant, we'll recover $10 million to $15 million of that and get back to a net $20 million that we have laid out.

That should be all wrapped up within the next three to six months.

In terms of getting the plants into production, we have a production schedule that shows that plants should be going in towards the end of November early December.

That gives us a 30-day buffer with respect to getting it by the December 31st date.

We feel like the team is working hard on it.

I think we've got good construction partners working with us and the project is moving along.

I get pictures from the projects almost every day.

I feel comfortable that we'll have no problem getting in place by December 31st.

Is this economic benefit -- it it more binary where these eight facilities are up and running?

Is it certain that it will be the $40 million benefit?

Or is it going to be some adverse decisions by one of these parties that make a risk for the project and it would be zero?

Or could it be somewhere in between in terms of the benefit going forward?

I think the range right now is up to $40 million so zero is in the range.

Zero is unlikely, but certainly it could be between zero and $40 million.

And also because of the way coal fire plants work, we are going to have to iron out, just like we did in the section 29 projects, good production management schedules so that we can get chemical there, so we can get materials put into the coal.

That will take us a while to work out.

It would not be, using your words, binary.

It's not going to be on, off.

I think you'll see a ramp up in 2010.

I don't think we'll experience the full $40 million in 2010.

The other risk that is out there is that these plants have the ability to displace coal with natural gas.

We only get paid if we are burning coal.

If the plant natural gas remains low, then plants may choose to burn natural gas instead of coal.

There is always that risk, too, that they don't run the plants full speed.

But for 2011, if everything goes great, it could be a $40 million story?

We are hopeful that that's the case.

Great.

Thanks very much.

Our next question is from Dean Evans from KBW.

I as wondering if you can touch again on the estimated cost savings from the headcount reductions.

How do you expect that to flow through into 2010?

Do you expect it to be evenly throughout the year?

You already mentioned that it should be evenly throughout the segments.

But how much of that -- as the year goes on when are we going to get it?

Most of the contractual will happen here in the fourth quarter with some spill over into January.

But basically by February 1, we think most of this activity should be completed.

As far as the cost savings or the expense?

The expense -- the cost -- the workforce will be down.

We'll take the charge in the fourth quarter when we announce in the press release, and then the savings will come out throughout all of 2010.

It will begin in the beginning of the year and flow through?

Correct.

Great.

That was my only question.

Everything else has been answered.

Thanks, guys.

Thanks, Dean.

Our next question is a follow-up from the line of Meyer Shields from Stifel Nicolaus.

Thanks.

Pat, one quick question.

I think you mentioned in your commentary that one of the drags on organic growth was from wholesale.

Yes.

Was that new in the third quarter compared to earlier quarters this year?

It's an acceleration of something we've seen over the last probably 15 months.

Okay.

You have the likes of Cincinnati Financials going into the excess and surplus business.

God bless them, but that's not an area that we had ever seen them before .And they are not working with us as a wholesaler.

They are writing a lot of business.

As new players come in -- Ironshore is ramping up and others that we are doing business with -- the wholesale business is losing business to the standard markets.

Do you feel like you are winning your fair share of that on the retail side?

Yes.

Definitely.

Thanks so much.

Thank you.

Thank you.

We have no further questions at this time.

I would like to turn the floor back over to Mr.

Gallagher.

Thank you, Rob.

I would like to make a brief wrap up comment.

As I've said, I'm proud of our team.

We accomplished a lot in the last nine months.

We've reduced our headcount.

We've harvested the results of a number of expense saves.

We're are down $9 million in investment income and EBITDA margin is up 2.5 points.

We've integrated our largest acquisition ever and continue to do tuck-in acquisitions.

We've continuing to attract partners to the team.

We continue to sell new business and renew our accounts.

And we are still investing and training the next generation.

We know that we are still operating in a real difficult economic environment so our intense focus on what we are trying to do will continue through the fourth quarter and into 2010.

We expect to continue to grow our company.

Thank you for being with us this morning.

Rob, I think that's it.

This does conclude today's teleconference.

You may disconnect your lines at this time.

Thank you for your participation.