Crawford & Co (CRD.A) 2008 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen. My name is Tina, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Crawford & Company third quarter 2008 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, Monday, November 3, 2008.

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, including statements regarding 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 date of this call, or to reflect the occurrence of unanticipated events.

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, 2007, 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. This presentation also includes certain non-GAAP financial measures as defined under the SEC rules.

As required, a reconciliation is provided for those measures to the most directly comparable GAAP measures, which is available on our website at www.crawfordandcompany.com/quarterly releases. I would now like to introduce Mr. Jeffrey Bowman, President and Chief Executive Officer of Crawford & Company. Mr. Bowman, you may begin your conference.

Thank you. A very warm welcome to our investors, clients and employees this afternoon for a discussion of our third quarter 2008 and nine months results and expectations for the year 2008. I am Jeffrey Bowman, President and CEO of Crawford & Company. And 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.

This month, our Company will celebrate its 40th year as a publicly owned and traded business. All Crawford employees are the recipients of a great business history and tradition which we will extend and improve going forward. I am proud to be a part of that effort. Crawford & Company reported record third quarter revenues and increased quarterly net income 100% over 2007. This is the third consecutive quarter that we have exceeded our prior year results. We are focused on driving solid business performance while building long-term growth potential. We are gaining momentum with our strategy for profitable growth, especially in the areas of marketing and client profitability.

While overall revenue growth was a very respectable 8.6% over the 2007 quarter, our priority remains disciplined expense management to help navigate these difficult economic times. We are also very protective of our balance sheet with a laser focus on working capital management to generate the resources that will support future profitable growth as demonstrated by the free cash flow increase Bruce will discuss in a few moments.

In the middle of the current financial turmoil affecting all companies globally, and particularly the financial industry, insurance remains an essential part of business activities. In essence, part of the DNA of global commerce. For Crawford, providing an independent, quality-driven, local, regional, global claims service is crucial to our clients' business proposition. In a recent USA study carried out by Channel Harvest Research, independent agents identified quality of claims service as the most important factor in evaluating a carrier's performance.

Our goal is always to drive our operations to deliver quality to our clients by investing in training and maintaining very strong relationships at all levels. This objective as outlined in our strategic plan, positions Crawford & Company as a target driven corporation that achieves its financial and quality goals and meets its commitments to clients, employees and shareholders. I am still encouraged by the potential that we have in front of us in all of our business units. While we have made solid progress, a great deal of work remains in front of us to execute to achieve the potential we outlined earlier in our strategic -- long-term strategic plan.

Our strategic plan, strength of working together, continues to help Crawford employees derive a common understanding of the strategy and direction of our corporation based on Crawford & Company's vision and mission values. Our global executive management team is demonstrating its ability to adapt quickly to rapid changing market conditions, both locally and globally. In the third quarter, we continued to make progress in two areas in particular. Progressive management of our internal cost base and implementing better sales processes and information to grow the top line and produce increased operating earnings.

Over the long-term, and particularly in view of what will be a challenging market in fiscal 2009, we are hard at work on improving and increasing our corporate marketing and selling efforts across all of our business units to emphasize key account management which, in turn, should drive top line revenue growth. As discussed earlier this year, our commitment to delivering on our promised technologies solutions is going according to plan. The global insurance industry continues to face competitive and regulatory changes that require innovative technology solutions to the claims process.

Giving our clients access to timely and accurate data is critical to the business proposition we offer. After extensive development and testing, the new RiskTech product, our self-insured market technology system for Broadspire, will be deployed and ready for clients on November 15, again, as outlined earlier this year. So let me review some of the progress made in the third quarter.

Throughout the fall and despite the turmoil in the financial markets, we have continued to work hard to execute the plans we outlined at the beginning of the year. And, as I mentioned, the management team and global employees have produced another quarter with significant positive operational results over the prior year. Crawford delivered a third consecutive quarter of strong results, double-digit revenue growth in international operations and US Property and Casualty more than offset anticipated revenue declines in the Broadspire and legal settlement businesses.

Operating margins improved in three of the four segments for the quarter, and improved across all segments on a year-to-date basis. We are also pleased to report net income increased by 100%, producing fully diluted earnings per share of $0.13 per share versus the $0.07 per share in 2007.

We have stated before that 2008 is not just about improving earnings, it's about delivering on a strategy to improve our balance sheet and cash flow, through working capital management. The $29 million improvement in our operating cash flow over 2007 shows that we are making progress. That concludes my initial remarks. Now, let me turn things over to Bruce for a detailed review of the segment numbers. Bruce.

Thanks, Jeff. Company-wide revenues before reimbursements increased by 8.6% in the 2008 third quarter to a new quarterly record of $266.9 million from $245.8 million in the prior year's third quarter. Our pretax income totaled $9.5 million as compared to pretax income of $2.5 million we reported in last year's third quarter. We recognized fully diluted earnings per share of $0.13 for the current quarter as compared to earnings per share of $0.07 in last year's third quarter.

The Company's selling, general and administrative expenses, or SG&A, were 21.1% of revenues or $56.2 million in the 2008 third quarter, improving as a percentage of revenues from 21.6% of revenues or $53.2 million in the prior year quarter. The $3 million increase is primarily due to higher incentive compensation expense as a result of the Company's improved financial performance during 2008.

International revenues grew 14.6% in the 2008 third quarter on a local currency basis and by 19.3% in US dollars to a new quarterly record of $115.4 million. This revenue growth reflects increased case referrals in our Canadian and Asia-Pacific operating regions resulting from new business wins during 2007 and 2008 as well as higher catastrophic claims activity. We also benefited from the positive impact of claims generated by the 2007 UK flooding events which we were completing during the 2008 third quarter.

International operating earnings improved to $8.6 million in the current quarter, up 36.8% over last year's third quarter operating earnings of $6.3 million. This improvement reflects an increase in the operating margin from 6.5% in the 2007 third quarter to 7.4% in the 2008 quarter.

Revenues from our Broadspire segment decreased by 1.9% to $76.9 million due primarily to declines in workers' compensation claims referred in the current period. Broadspire's operating earnings in the 2008 third quarter totaled $1.1 million, or 1.4% of revenues, down from operating earnings of $1.4 million or 1.8% of revenues in the 2007 third quarter.

Legal settlement administration revenues, comprised of class action and bankruptcy claims administration services, declined 10.7% in the 2008 third quarter to $18.4 million. Operating earnings totaled $2.9 million in the 2008 third quarter, or 15.5% of revenues, as compared to $2.1 million or 10.3% of revenues in the prior year period. Legal settlement administration continues to have a strong backlog of projects awarded totaling approximately $43.5 million at September 30, 2008, as compared to $39.1 million at September 30, 2007.

Revenues from the US Property and Casualty segment totaled $56.2 million in the 2008 third quarter, growing 12.5% from the $50 million reported in last year's third quarter. Revenues generated by our catastrophe adjustors totaled approximately $6.3 million in the 2008 third quarter, increasing over the $3.4 million produced in the prior year period. Operating earnings in our US Property and Casualty segment totaled $6.8 million, or an operating margin of 12.1% of revenues in the 2008 third quarter. This is compared to operating earnings of $3.5 million or 7% of revenues in the prior year quarter. This improvement was primarily driven through technology-driven efficiencies and higher case volume.

Our cash and cash equivalents at September 30, 2008 totaled $56.8 million as compared to $50.9 million at December 31, 2007. Our investment in unbilled and billed receivables has declined by $5 million in 2008 and our total debt has also declined in 2008 by $3 million. Cash provided by operations totaled $33.1 million for the 2008 period compared to $3.8 million provided in the prior year period. This $29.3 million improvement was primarily due to higher net income and improved working capital management. This improvement is net of $14.4 million in increased cash contributions to our US defined benefit pension plan in 2008. Our working capital improvement reflects nearly seven day workday decline in days sales outstanding or DSO.

In 2008, we introduced a performance metric in our incentive compensation plans tied to DSO reduction which is helping to drive this improvement. Our free cash flow stood at $9.7 million for the 2008 year-to-date period, improving $28.4 million over 2007. Today, more than ever, liquidity is important and these results demonstrate better management and focus in this area. Let me now turn things back over to you, Jeff.

Thanks, Bruce. Let me add my thoughts about business progress and outlook for each of our business units, starting with the international operations. We saw strong revenue growth as we have benefited from a number of contract wins in the past years that are predominantly Property and Casualty programs. When looking at claims referred and comparing 2007 to 2008, we saw a decrease in international claims of 5.3% in the third quarter. This is primarily due to the 2007 flooding in the United Kingdom. It is a positive sign for these operations that, despite the claims trend, revenue and operating earnings continue to grow.

Year-to-date, international operations represented 42.7% of the Company's total revenue compared to 36.9% in the previous year. It is worth noting that in quarter three, in the international business unit is traditionally the low point of our annual cycle. Notwithstanding that, these results were acceptable.

Looking forward to the fourth quarter, the strengthening of the dollar in October is worth commenting on. Typically, there is not much movement in exchange rates on a quarter-over-quarter basis. Historically, the dollar has been gradually weakening against the currencies in which we do business over the past several years. That trend reversed abruptly in October. While we do not expect this shift to affect our fourth quarter results significantly, the stronger dollar is likely to have some impact in fiscal 2009.

So reviewing our US Property and Casualty segment, as previously stated, our goal in 2008 even in a challenging overall claims environment, was to improve the US Property and Casualty's revenue growth and to ensure that we manage costs to provide an acceptable operating margin. Financially, our US Property and Casualty operation has performed very well in quarter three and for the nine months, reporting its strongest top line for the year and double-digit operating margin. We are optimistic about our continued performance for the balance of the year and in 2009. As a result of the investment we incurred in previous years in trained employees, training and quality, we are now delivering a quality product. This is a significant strategy linked with our technology implementation of CMS2 in 2007. We are now benefiting financially and operationally from a process efficiency standpoint.

In this soft insurance market, we have positioned the US Property and Casualty business to take a bigger share of the claims market as our clients consolidate independent adjustors and we are beginning to see significant outsourcing opportunities from clients in the volume claims business. There were, in quarter three, an increased number of cat events and consequently we saw an increase in US Property and Casualty catastrophic claims revenue. Results were buoyed by the onset of several major hurricanes together with both related and unrelated storm activities through large portions of Florida, Louisiana, and Texas, in the Gulf and north through Missouri, Ohio, Pennsylvania, among other areas. The key storms, Dolly, Gustav and Ike, have produced almost 25,000 claims to date. A significant share of the Ike revenue will not be realized until quarter four and is expected that most of these claims will be closed by 12/31.

In the month of September, we had start-up costs from both Gustav and Ike. In addition to the traditional revenue stream from claims assignment, we also began to recognize work from FEMA. This fall we deployed over 400 cat adjustors in the Gulf region. Our high end technical adjustors received approximately 500 claims in the storm affected areas, including some high profile claims that will continue both into quarter four and 2009. Many of these losses involved multiple sites, some in the hundreds, insured by individual clients.

For 2008 hurricane operations, we implemented technology changes to our traditional claims model, allowing us to improve our work product by having cost effective systems using offsite reviewers to handle the work product. As a result, we had more cost effective -- a more cost effective model and delivered better quality. We also benefit in other areas unaffected by the storm as our clients relocated their own adjustors to the cat site creating a volume of backfill claims that we had to service.

Moving on now to Broadspire. Broadspire's revenue declined 1.9% from the comparable quarter last year. The key factor was a 10% decline in claims consistent with the broad workers' compensation market. We anticipated this decline in our business planning and we remain confident in the long-term opportunities for Broadspire.

In September 2008, Broadspire added additional focus and resources to their sales and marketing team to better sell services in the claims and medical management marketplace and developing innovative customer solutions. We have begun to restructure our sales territories and starting by redefining territories and key brokers to focus our attention on the future business opportunities. We see opportunity in expanding our business process outsourcing business for mid-sized carriers and program business. We have had some recent wins in this area and we feel -- we feel we will gain strength as carriers look to contain costs in an uncertain economic environment.

As discussed in quarters previously, Broadspire is in a transitional phase within its core claims business. When the Company was spun off from Kemper insurance, the new business opportunities from Kemper ceased as Kemper is no longer writing insurance. This means that a significant portion of the claims services in runoff, fortunately, Broadspire has been able to keep a good portion of the former Kemper business as TPA customers. However, the runoff and loss of new business through Kemper is difficult to replace at the same rate of decline. There has been a frequency decline in the workers' comp business throughout the industry. The 68% of our claims come from the workers' compensation business, our core customer base is stable but claims are declining.

We have carefully studied the claims frequency patterns for workers' compensation in periods of economic decline and while intuitively you would think that this would bring about an increase in claims frequency, people having more propensity to file claims, there is no historical data or empirical studies to support this theory. Through the last two recessions, workers' compensation frequency continued to decline, and we see no indications of change during this economic downturn. Our retention rates on existing business remain high, 93%. We continue to meet the needs of our existing customers and expand our relationships. We have also been able to increase that cross selling opportunities, selling additional claims services or new services with our current clients of over $3.8 million through the past three quarters.

We continue to see a healthy flow of new business opportunities and our sales pipeline remains strong. However, movement of claims services business has been slow across the industry and at Broadspire. Many are testing the waters from a pricing perspective, but not seeing the need to move at this time. The changes in the commercial insurance market have risk managers, our main buyers, more focused on the financial stability of their insurance carrier than on the claims service program. At the same time, the expansion of our medical management services from the traditional workers' compensation market into the health and productivity market, has begun to gain traction. We are seeing more opportunities to utilize our nurse case management, return to work and physical review services with a broader customer base that includes a self-administered customers disability and health insurers as well as some wellness service providers. With all that said, in the last two months, September and October, we have written $4.2 million of new third party administration business to come on the books for the new year, and $1 million of new medical management services.

Now, our fourth business unit, legal settlement administration. The Garden City Group's third quarter revenue continued to be affected significantly by the timing of case flow. This reflects a number of factors I will discuss in a moment. Offsetting these negative revenue trends, GCG management has been able to maintain very strong operating margins. While revenue is down 10.7%, as compared to last year's third quarter, we are actually up 34.2% on our operating earnings by managing headcount and aggressively controlling expenses.

For GCG's two business areas, legal class action and bankruptcy, the near-term economic environment does not look promising, but there remains hidden potential for the longer term. Over the past quarters and into next year, the revenue issues that we have been speaking about remain and, in some respects, have worsened. Over the last few months, we have seen competitive pricing at historic low levels and our expectation is that the recent economic turmoil is only going to make this worse going forward.

On the bankruptcy side of our business, we continue to make progress. While our bankruptcy revenue has still not grown to the level we want, the trends are very positive. For all of last year, we had approximately $2.8 million in revenue and started 17 new cases. For the period ending 30th of September 2008, we have nearly $4 million in revenue and we have brought on 23 new engagements. There is no doubt that the bankruptcy market provides us with significant potential in the months and days ahead. While the worst of the financial crisis did not hit until after the close of our third quarter, we have been seeing the effects of liquidity crisis since the beginning of the year as the pace of new security class action settlements, which had been GCG's bread and butter, slowing considerably.

Looking forward, we expect this to continue due to the uncertainty of many cases affecting major financial institutions. We do, however, expect that this will become a source of significant revenue to the industry over the next several years, although it is going to take some time for the industry and the courts to sort this out. In truth, we are expecting a similar market to the one that followed 9/11 where we saw first a significant contraction, followed by an expansion of new class action cases. We also began a new product in the third quarter that we have branded GCG Forensics. Many of our clients require extensive data mining and research during the course of the litigation and by providing this value added service, we make it easier for our clients to use us when the case eventually settles.

Now, looking at the updates, for the third time this year we are raising our guidance for fiscal 2008. Consolidated revenue before reimbursements between $1.04 billion and $1.05 billion. Consolidated operating earnings between $68.1 million and $72.4 million. And after reflecting stock-based compensation expense, net corporate interest expense, intangible asset amortization expense, special charges and credits and income tax, consolidated net income between $28.3 million and $30.4 million, or $0.54 to $0.58 per share.

Our fourth quarter outlook for 2008 does include catastrophic revenue resulting from land fall hurricanes this year in the US and, therefore, we are projecting our 2008 results including our revenue expectations on catastrophes. We recently sold a non-core component of our European operations which will generate a pretax gain of approximately $2.2 million in our fourth quarter results. Additionally, we are planning to restructure certain of our operations which is expected to result in a pretax charge of approximately $3 million in the fourth quarter.

Additionally, while our practice continues to be to provide initial earnings guidance for the coming year with our fourth quarter earnings release, our 10-Q that will be filed with the SEC next week will discuss the expectation of increases in our defined benefit plan expense and funding in the US and UK in 2009. This anticipated pension expense increase is a result of the recent stock market declines and downturns in the global economy which have negatively affected the asset value in our pension plans as they have affected many other companies. We cannot specifically determine the impact at this time but we believe it is likely to materially affect reported results in fiscal 2009.

Now, let me finish my comments by stating that our global executive management team will continue to build on these operational improvements as we look forward to next year. Our priority remains a disciplined approach to expense management and working capital, to help navigate these difficult economic times. As I have said, we are also protective of our balance sheet. We are in the 2009 planning process now but we will continue to focus on improving operational quality and efficiency and delivering results through expanded sales and marketing activities. We look forward to your questions.

(OPERATOR INSTRUCTIONS). Our first question will come from the line of Mark Hughes with SunTrust.

Thank you very much. The US Property and Casualty business, if you X out the cat volume, what was the trend in terms of the underlying level of claims?

Hey, Mark, this is Bruce Swain. The catastrophe volume in the quarter, in last year's third quarter, 2007 third quarter we had about 6500 claims handled by our catastrophe adjustor group and this year's third quarter we had 12,500. So about a 6,000 claim increase quarter-over-quarter in claims handled by our catastrophe adjustors. Now, the benefit that we get from storm work isn't just handled by our catastrophe adjustors. It does feed work into our existing branch network and those claims are not included in the number that I just gave you.

If you back out the catastrophe adjustor claims, our volume was up a little bit over 10% in the quarter. But some of that 10% increase would be the result of claims that we handled in our branch offices for run-off work that's the result of our clients sending their adjustors down to the areas affected by the hurricanes. So we get business not just from the immediate area of damage, but to the extent that our clients send their adjustors from all over the United States to report to the storm area, we get backfill work within our branch network.

Care to venture a guess what that might be, on a percentage basis?

It's pretty difficult to split that out, Mark.

Okay. And then do you have any sense that your focus on the DSOs, reducing the DSOs, has that had an impact on volume, do you think? Has that restrained the top line a little bit?

Not at all. The focus on the days sales outstanding has really been geared towards the working capital management of our accounts receivable and our conversion of work in process into accounts receivable. I think it's had no negative side at all.

Right. In the Broadspire business model you say that it sounds like case management you're seeing more opportunity there. What's the proportion of the revenue that comes from the case management?

Hey, Mark, this is Bruce again. It's about 50% from case management and about 50% from the underlying claims management.

Right. Okay. And then I've had requests or I thought I would pass along just some feedback I've gotten regarding the difference in the A versus the B. There's various people at various times have pointed out that it impacts the liquidity and the different shares that it's sometimes confusing for investors that some of the databases out there have a hard time sort of dealing with the split shares and some cases the governance that can be viewed as a negative when you've got voting shares versus non-voting. And the -- I've had one person, an example of Chipotle's Mexican Grill, they've got two classes of shares, they're kind of buying the cheaper class which is trading at a discount and that's the way to sort of -- they've normalized the different classes using that as one method. So wanted to sort of just pass that along and then get your latest thinking in terms of capital structure and what the strategy outlook might be going forward for the A versus B, whether you retain that, what your current thinking is.

Let me take that question, Mark. Management and the Board of Directors are obviously aware of the price differences between the two classes of shares and obviously we're continuing to monitor that. We do not discuss obviously capital structure outside of the Board of Directors and, as you know, the market sets the price for the Company's shares, which have expanded and contracted really over the past 10 years. I'd just point out that the only difference between the company's A and B shares are the voting rights attached to the B shares and that the A shares can receive a higher but not a lower dividend than the B shares. Any decision to change the capital structure of the Company is the Board of Directors' decision. The Board of Directors has not taken a position on that issue. Should they do so, we would announce any changes publicly and promptly.

Very good. Thank you.

Our next question which come from the line of Young Lee with [Attica] Partners .

Hi. Thank you very much for taking the question. I just had a follow-up question for A and B shares. I guess you've sort of answered it already but, [Newell Water] has recently announced that they're merging two shares. Are there any plans to merge these two shares? I mean that way you could not only simplify the capital structure, you will increase the liquidity of the shares.

I've got no further comments than I just made.

Thank you.

(OPERATOR INSTRUCTIONS). Next we'll hear from the line of Jamie Lester with Soundpost Capital.

Hey, guys. Can I get a general thought process for how the -- assuming that the markets were to be -- assuming we took these levels, what sort of impact should we be thinking about, cash and non-cash on the pension side of things next year? How dramatic could this be?

Well, we have a 12/31/08 measurement date for our defined benefit pension plan for determining expense and funding for next year, so we don't have specific figures that we can share with you at this time. Our returns to date within our defined benefit pension plan have been negative so we do expect for our expense next year, related to our defined benefit pension plans, to be material. We just don't have a specific figure that we can share with you. I would, however, point you to our Form 10-K that we file each year with the SEC. Within our management's discussion and analysis, we do perform some sensitivity analysis surrounding our defined benefit pension plan expense and that may be a place for you to go to get some further information on it. When we release our earnings in the fourth quarter, in February when we release our fourth quarter earnings, we will have figures that we can share at that time related to our defined benefit pension plan expense and funding for 2009.

Okay. And what is the total expense going to be in 2008 that goes through the income statement?

2008, we actually have a credit to the pension expense so our pension expense is a credit for this year as determined under the applicable accounting rules.

Of how much? Sorry.

The expense I believe is in the range of $2.5 million on --

$2.5 million of credit.

Right.

Okay. And then was it 75% was invested in equities as of December 2007?

That's correct.

75. Okay. And there's no change to that?

Given the downturn in the equity markets, I suspect that most of --

The weighting has changed because of the return.

Weighting is probably going to be changed, right. But again, I don't have those specific figures.

And again, just rule of thumb, is it -- if I make my own assumptions about what the decline is and then smooth that over five years or so, is that roughly what the expense would be or -- I mean, is there any -- I guess I'm just trying to figure out, is it going to be $5 million? Is it going to be $10 million? Is it going to be $30 million? What's the right framework to use in thinking about what that number could be?

We're not prepared to offer you a range on that. The other aspect of determining the pension expense is the discount rate that's used and obviously the interest rates have been increasing during this period of asset value declines. So that's going to have an impact the opposite way of asset declines. And again, in our MD&A filed in the 10-K last year, we have sensitivity analysis surrounding our discount rate assumptions as well. And a lot of it depends on what happens with the investment returns between now and the end of the year, of course.

Sure. Yes. Understood. Okay. There's a 13-D filed about seemed to be a large offering of the A shares by the founder of the Company. Could you elaborate on that? Would that be an open market sale or a negotiated sale? Seems like an awfully large number of A shares, especially as a lot of other people have pointed out given that the discount that the A shares are trading to the B shares, I could imagine it would exacerbate that.

As we understand, there's no sale as of yet. That is a decision that we are not involved in. It was an advance notification that that was a possibility of a sale.

Okay. So that's not -- you guys have no foreknowledge or no control over that?

That's right. That's correct.

Okay. Great. In your opening comments you made some comment about 2009 being a -- would with a more difficult year than 2008. Is there -- I guess can you -- obviously without providing guidance I guess that will be in your next quarter, but can you just kind of describe why that might be and is it any specific areas that you're seeing that or just kind of general caution, given the economic climate?

I think it's general caution given the economic climate, Jamie. I mean, a significant part of that business is contractually driven. We have very good performance at the moment. Our sectors are all beginning to perform very well. We've got a lot of process efficiency going in. And I think it's just a general tightening up that will potentially happen. Claims happen all over the world, all of the time. We're seeing with our clients that that has not abated to date. So I think it's a general issue rather than a specific one at this moment. There's nothing that's throwing us off kilter in any way.

Okay. Great. In the European business, the contracts that have been driving the growth, were those signed in any particular quarter in 2008?

Well, they've been signed over a number of years. The European arena, especially our United Kingdom operations, is involved in a lot of very large contracts. They are normally three-year type contracts. They can go longer. They're with very strong partnerships that we have and we've been working very hard on that over the past few years to have those coming in. They all come up at different times in the year and over different years. So there's a continual process that's taking place on that.

Okay. But the growth -- I mean, I guess I had heard the growth kind of characterized as some large contracts that were signed in earlier this year.

No.

Late last year. That's not really the way to think about it.

Earlier years. That would be back into '06, '07 and through '08 as well.

These are just still ramping up is the right -- ?

Well, they ramp up according to the volume on claims. It is significant clients that we have these programs with.

Okay. Just to take a half a step back. Historically, I think it's interesting what you said about the workers' comp, I had been assuming the same I guess as your description of what the intuitive immoral hazard situation would have been. But kind of broadening out to the greater claims environment, if you do see kind of a more cost focused client base, is that beneficial for you or is that -- do they drive a harder bargain on pricing? Is there more of -- I mean, in general, assuming that your customers are in -- are focusing on cost more acutely now than they have been, how does that actually impact your business going forward.

From a go-forward base, in a tightening of an economy there is a preponderance of clients that want to look to changing their model from a fixed cost basis to a variable cost basis. In that type of market, that's where a company in the Property and Casualty area or within obviously in our TPA business can offer the business propositions to the client as an alternative to them taking on further costs within their profit and loss account and that part of the model that we go out to talk to the clients about and we're increasing our sales and marketing around that at the moment.

Got it. Okay. And then lastly, there was one question about funds and trusts for -- to administer claims for certain clients, invest in high-grade bonds, municipalities, stuff like that. Assuming that some of those bonds ostensibly have declined in value given what's happened, is there any recourse to you or is that all on the client's balance sheet?

The company within our self-insured business, our TPA business, Broadspire, we hold cash deposits on behalf of our clients for claim payments and those funds are all invested in high-grade, short-term vehicles and there's no -- we haven't incurred any losses on those or have any credit exposures. They're all on governmental funds.

Okay. But in theory, could you have credit exposure? Like if that were invested in the reserve money market fund for example, is that your liability or is your client's liability?

That would be our liability.

Okay. Great. And then --

I would say to follow-up up on that that we have an extremely conservative investment policy around the management of those funds.

No, I would think if you haven't realized loss on it now than you probably are unlikely to given what's happened, right.

Right.

I guess just last question on the dollar issue, is there a way to think about on the -- I think you quantify it on the revenue side of things, is there a way to thing about kind of profitability-wise or revenue-wise, however you think about it, if the dollar stayed at this level for 2009, what sort of a -- I guess what sort of a headwind that would be for the international business?

Yes, we disclose in our annual report kind of similar to pensions, we give a sensitivity analysis around the change in the US dollar and essentially for every 10% decline in the value of the US dollar, that impacts our operating earnings international by about $2.5 million or that would be about $0.03 a share and that's based upon the level of operating earnings at the end of 2007.

So it would be higher since that number has increased in 2008?

Yes. I mean, you may be looking at $0.04 now.

Okay. And just so I know, the currency exposure, pound versus Euro versus any other significant ones?

The major ones are Canada, the Canadian dollar, Euro, sterling.

Those are all roughly a third or is that -- ?

No, I think that the UK would be the largest currency that we do business in outside of the United States and then the Euro and the Canadian dollar would probably be roughly equivalent. But the pound in our UK operation is our largest international business.

Okay. So, again, the pound has dropped 20%, so you could see -- I don't know if the others are quite as bad, but it could be $4 million or $5 million headwind if we stay at this level, that's not an unreasonable way to think about it?

That's based on --

Just ballpark.

Based on a 20% drop?

Right. Right. Maybe a little higher, based on if it stays at this level. All right. Okay. Thanks. Appreciate it. Thanks a lot.

Thanks, Jamie.

Our next question will come from the lined of [Philip Timmond] with [Endowment] Capital.

Hi. This is Chris Long calling in for Philip who is on a plane right now. Congratulations, gentlemen, on the strong results for the quarter. This is kind of a follow-up to Mark Hughes' question, not to belabor the point, but in the past we've always been agnostic as to the two share classes and today the dispersion is, as you commented on, pretty wide and it's exacerbating as we speak. Jeff, you seemed to confirm our understanding of the difference between the two share classes. So that was going to be one question. What could we be missing other than just the pure liquidity point?

Yes, it's -- I mean, the market sets the price. I mean, I don't think you're missing anything. I mean, the only differences are the differences I explained, which is the voting rights attached to the B shares and that the A shares can receive a higher but not a lower dividend than the B shares.

Is there any reason management would not advise the Board to, for example, issue B and buy in A?

We won't discuss that over the telephone.

Got you. All right. Thank you.

Our next question will come from the line of Manny Reiser with Wachovia Securities.

Good afternoon, guys.

Hi, Manny.

One comment I have is the one that you've been addressing for the last several callers and that's the A and the B. As you know, I brought that up on many occasions over the years and I would echo the comments by the previous caller as to looking at that A and B and hopefully management can make a recommendation that from a governance point of view it's certainly lacking in good governance and from a shareholders' perspective, shareholders of the A with a discrepancy right now of almost 50% are suffering mightily and I think it behooves the management to really look at this from the perspective of governance and shareholders.

As I said, Manny, earlier, capital structure is not to take the discussion outside the Board meeting but your point is noted.

Second question, area is the pension area. Jeff, has anyone done a study over the last five or 10 years how well the pension has performed relative to its measures of being 65 or 70 equity and 30% bond? How has the pension actually done over the last five or ten years.

Hey, Manny, this is Bruce. Actually, earlier this year we've undertaken a study with a company independent of the existing pension managers to review the investment performance and relative to the existing asset allocation model that we have, as well as peer groups and we are also undertaking an asset liability matching study as a result of that, looking at the liability profile that we have as a company with our pension obligations as well as the investment structure that we have and we're in the midst of that review right now and should have those results finalized this quarter in order for us to make any necessary changes going forward. But we have reviewed that and began that process earlier this year.

From an investment perspective, if my memory serves me correct, our performance for quite a few years has not really been up to par, as I would call it. I can recall several years back having discussion with various people at the company concerning the underperformance of that pension account. And now with interest rates rising and I know there's been a falloff on the equity market, but we are getting a benefit from rising interest rates, yet we're being hit on the performance side. So hopefully we would take a very critical look as to how that pension has been managed, what maybe has been right about it and what has not been. The last question I have concerns Broadspire. Margins for the last few quarters seem like they're declining and I'm wondering if you feel, Jeff particularly, that maybe we're at a plateau or bottoming area and we could start to see an increase on the margin side?

Well, we've got several events to address that sort of question, Manny. Number one is we have efficiencies that are going to start taking place for the release of the new technology system. That becomes an advantage to our selling to new programs and most of our work is around new revenue coming on-board and, as I said, September and October after the reorganization of our sales team we've seen some significant wins that have taken place which we see continuing over the foreseeable future. That's really getting past with -- sorry, getting past some of the integration issues that we had and moving forward of the Broadspire brand, the quality of the product, and the addressing of the management of sales within the organization.

Remember, we do have the runoff claims that come into the Broadspire operation and they will be decreasing over time and our absolute strategic goal is top line growth. The incremental margin that will come from new wins is quite significant because we have a very well-addressed structure and once the technology comes into play, we will be able to maximize that. So I think we're in a situation where the margins are our biggest issue, but it is a direct relationship on the revenue side that we are addressing and, as I said, we're getting some lights at the end of the tunnel beginning to come on that one.

Jeff, you mentioned that the RiskTech is due to be rolled out on November 15.

Yes, the first operation is Monday the 17th. As my team keeps telling me, it's being rolled out on a Saturday but it's actually effective on -- it's effective that day but it will be rolled out on the 15th and we do have already one client that effectively has already been implemented and we'll be reviewing that as a full scale rollout very quickly after the 17th.

Very good. Do we still feel the cost benefits, do we still feel the numbers that we threw out before, looking at 2009 regarding the savings of RiskTech, that those numbers are still accurate?

Manny, this is Bruce. The cost savings we think will begin in 2009, certainly, but those savings before they're fully realized and in our run rate, it's going to be through the end of 2010. Because the implementation of RiskTech is in three phases and we'll be actively implementing through next year as well.

What are the total numbers that we're looking for in terms of savings over the next, say, 12 to 15 months?

Over the next 12 to 15 months, we have pegged a number about $15 million in additional synergies that we still have remaining from the Broadspire acquisition. And those synergies are primarily related to the RiskTech implementation, although there's other areas where we think we can derive operating efficiencies that we still haven't fully realized. So that's the number that we're driving towards. We'll start to see some of that benefit in 2009, but the majority of it won't be until 2010 because as I said, 2009 is going to have significant implementation activities associated with RiskTech.

Thanks a lot, Bruce.

Thanks, Manny.

Our next question will come from the line of Matt Reams with Buckhead Capital.

Good afternoon, gentlemen.

Hi, Matt.

I had some questions about working capital improvements for the remainder of the year. Do you intend to get working capital improvements in the fourth quarter and how much are you expecting?

Well, number one, we hope working capital improvements will not only be the fourth quarter but 2009 as well. We've put significant effort into this on a global approach to change the way we accept assignments, we monitor assignments, we bill to our clients those assignments and then we collect the funds and we are in a very good position in changing a lot of the ways, the old ways of business being done and which will result in improved DSOs. So from a conceptual point of view, it's been a very large project that we've implemented, including changing bonus programs and incentive programs to include DSO in them as well. So it's not just a management issue. It's a corporation issue as well. And we're working a lot with our clients on this issue because we have, we think, significant improvements we can still make.

If my memory serves me correct, were you targeting like $35 million to $40 million in working capital improvements for 2008?

For 2008, we had set a target within our incentive comp plans to reduce days sales outstanding by 10%. So we've gotten in that -- that would be about nine days for this year, through the third quarter we've gotten about 6-1/2, so we've made some good progress there. At nine days, that would have -- if we get the nine days, that is about a $30 million benefit to us during the --

Okay. So it could in the fourth quarter, if you could get another $7 million improvement, you would hit your target?

Yes.

Do you think you can get that?

We are working diligently to get there and a lot of our operating managers, incentive compensation is a significant portion of it is tied to hitting those numbers and I can tell you that we have perfect alignment around this point from top of the organization.

I understand, particularly from a CFO speaking.

But we've been pleased with the start that we've made with these, that we've made there. To echo Jeff's comments, this isn't a 2008 project. It's the way we're operating the business today and tomorrow.

Okay. And then I guess you'll give us -- will you give us an update on what you expect for '09 in the fourth quarter?

Correct.

Yes.

Okay. What do you plan to spend on CapEx for the remainder of the year?

Our --

I think you've already spent about $22 million. I think your target was somewhere around $33 million?

Right. And I think that $33 million will get spent. That's about what our target remains at.

Okay. So still have another $11 million or so to spend in the fourth quarter?

Right.

Okay. And your pension expense is $15 million this year?

Well, our cash contributions were about $15 million in the US.

Okay. Do you expect any more in the fourth quarter?

Yes, we'll make another $2.5 million to $3 million in the fourth quarter. In fact, we've already made it. And that's the total of we're required to contribute this year.

Okay. Well, with the improvement in working capital, obviously your improvement in net income, I think your pension contributions are about in line with what you expected, same with CapEx. You should produce some positive free cash flow. Do you -- and I think your cash balance is about $16 million higher than what you actually need. I think you said you need about $40 million in cash to run your operations.

That's right.

Do you have any targeted debt reduction for the fourth quarter given that you're going to have some excess cash?

Right now our focus is on maintaining as liquid a position as we can, given the current state of the economy. We want to err on the side of caution in terms of having more cash on hand so our expectation for the remainder of the year is to not make any discretionary payments on our long-term debt. But depending on what happens between now and the rest of the year, that could change.

Okay. Your cash balance by year-end could be higher than $60 million though?

It's conceivable, yes.

Okay. Now, your EBITDA, it looks like if you kind of take your guidance is going to be around $100 million a year or $100 million in 2008?

Yes, that -- we don't have an EBITDA number that we can disclose to you, but --

Okay. But you're going to be well within your covenants?

That's correct, yes, we're --

You're around three times I think is what is allowed and you're probably going to be closer to two by year-end?

Yes, three times is the leverage ratio that we have to hit at the end of the year and through the end of the third quarter we're under 2.4.

Okay. Good. Just -- I understand the needs for liquidity but you're obviously going to have some cash cushion from what you actually need to run your business and given that there are A shares up for sale and from what other comments have been made earlier from shareholders, I would hope that you have some flexibility to be able to do what's necessary to improve the performance of the A shares or at least bring them in line with the B shares and I don't know what debt covenants or other restrictions you have on spending money for stock buyback, but I think that might be something you should be considering.

Yes, we do have a restrictive covenant around what's known as restricted payments and that's a rather broad basket. It's $12.5 million, which is outlined in our credit agreement which we filed an 8-K on and what goes into that basket are dividend payments, share repurchases, earn-outs on acquisitions consummated after the original date of the credit agreement which was October 31, 2006. So under our existing credit agreement, that's the basket that we have to operate with.

Okay. Just as far as the restructuring goes, I think you've outlined $3 million in restructuring costs fourth quarter. What is that -- can you talk about where that's targeted?

Okay. The first area is one or two countries in our European arena where we have some poorly performing operations and this gives us a chance to clean that particular act up. And then we have in North America, we have some efficiencies that we're bringing into the organization through the technology and, again, that gives us a chance to lose some leases and consolidate some offices. And it's really -- it's not a very big restructuring charge but it is -- it could produce significant results by doing it.

Okay. And I guess if you net out the difference between the gain and the restructuring charge, that's about a penny hit after tax?

That's right.

Okay. That's all the questions I have. Thank you very much.

Okay. Thanks,.

We do have a follow-up question from Mark Hughes with SunTrust.

What was the restructuring charge, what area is that going to be in?

As I just said to Matt, Mark, I don't know if you heard it, but it's the European and North American areas, arenas.

I'm sorry. I apologize. And then you talked about, again, about good outsourcing opportunities domestically. Has that picked up since the second quarter? Are you seeing more progress in terms of actual RFPs or awards of new business? Could you give just an update there?

Yes, I mean, as I said a little bit earlier, we are seeing some additional TPA styles that are coming through and we have some very good wins on that. On the Property and Casualty side, we've obviously benefited from some of the catastrophe, but we're also putting in place some very strong contracts to increase our revenue on existing programs. I mean, we're digging very deep into our clients through key account management. We're selling the business proposition to them in terms of being able to make an efficient distribution of claims throughout our organizational structure that in fact gets their results and the higher quality of the results back to them much more quickly.

One of the things I mentioned was actually in the cat organization this year, through technology efficiencies we were able to very much speed up the closing of claims for our clients and improve the quality at the same time. That business proposition is what a lot of our clients are looking for and we're working hard with a number of new potentials and existing clients at this moment, digging into what we call the share of the wallet of what we don't do with our current clients is very important part of our key account management.

Final question, I think you had suggested you boosted the sales team within Broadspire. Can you say how much on a percentage basis?

I think you could say it was changing the management around, bringing in a new head of sales, is doing reorganization and we've had some small turnover in that particular area. I don't think there's significant increase in costs there. It is purely getting the right people on the bus.

Okay. Thank you.

Okay.

And we have no further questions at this time. I would like to turn the call back to Mr. Bowman for closing remarks.

Thank you. I would like to thank everyone this afternoon for joining us. And would like to wish you all a good fourth quarter. Thanks and have a great day. Bye-bye.

Ladies and gentlemen, thank you for participating in today's Crawford & Company conference call. This call will be available for replay beginning at 6 p.m. today through 11:59 p.m. on November 10, 2008. The conference ID number for the replay is 70532795. The number to dial for the replay is 1-800-642-1687 or 706-645-9291. Thank you. You may now disconnect.