Oct 28, 2009
Executives
J. Patrick Gallagher Jr., - Chairman, President & Chief Executive Officer Doug Howell - Chief Financial Officer
Analysts
Mark Hughes - SunTrust Keith Walsh - Citi Mike Grasher - Piper Jaffray Meyer Shields - Stifel Nicolaus Sarah DeWitt - Barclays Capital Scott Heleniak - RBC Capital Markets Brian Durupio - Field Capital Paul Howard - Langen McAlenney Dean Evans - KBW Meyer Shields - Stifel Nicolaus
Operator
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. (Operator Instructions) 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.
J. Patrick Gallagher Jr.
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 customer I going to read from the press release instead I like here some highlights on the quarter and allow to flavor on the nine months.
Then Doug will make few comment and we’ll move quickly to questions-and-answers. Given that this has going to be one of the - if not the toughest markets 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 risk management segment we moved EBITDA had 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.
The 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 whole selling operations that are being hit by customers who are returning to the standard market. So I took those operating cells out of the results.
Our retail operations are showing about 3.9% organic revenues. Then 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.
So, levelizing just for that bonus puts the risk management segment about flat and if you gain brokerage and risk management the way we look at our company adjusted negative organic would be about 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 under statement. I mean rates are continuing to drop and the economy is taking a huge toll on your clients.
The decline in our brokerage revenue I think that two thirds of that can be attributed to the recessionary pressure on our clients exposure units and probably a 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. Instructed everyone involved while respecting the dignity 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 is going to keep pressure on rates for the foreseeable future.
Let me give you an example, I want mention any names, but a recent release by one of our key markets show 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 right now. Our benefits operations did quite well in the quarter and it performed well over the last nine months.
That’s in spite of what I’ve already mentioned the decline in the last nine months of the area financial benefit sales, which is related to life insurance sales and retirement services. Life sales have been timely by the credit crisis 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 Gallagher are focused on healthcare reform efforts in Washington DC.
We’re 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 a little slower this year than in previous years.
I think, this reflects the sellers recognizing that values are declining. However, we did complete two new deals in the quarter and have a pipeline that 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 our 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 large broker for over five years and contributed nicely this year as some of our equity investments in investments in the Caribbean and Australia.
All in, when I look at our brokerage team, I’m pleased with what they’ve 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 am proud of the risk management team.
Revenues are declining, because claims counts are down significantly. This reflects our customers decrease in employee count.
So 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.
So I think our team has reacted extremely well to this tough environment. Moving our mar margin up 2.5 points over the last nine months is very hard work, and we expect further reductions in the workforce 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’re anticipating a very difficult 2010, as our client 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, review ourselves as a new business machine.
All of us are out everyday getting out after new customers. Secondly, client retention, transparency actually help to met going transparent 2006 and our and our client retention is nicely over 90%.
Thirdly, as recruiting, both the young people from our internship as well as season professionals from other competitors fourthly are mergers and acquisitions. We’ve nicely tucked in our largest acquisition ever, which is Liberty operation as well as continuing to do other tuck in acquisitions and fifth efficiency in margin improvement, which you can see we did well through the first nine months of this year.
Doug.
Doug Howell
Thanks Pat and good morning everyone. Today I have six comments: First some housekeeping.
We intend on filing our 10-Q later this week, and don’t forget to use the quarterly spread on the website see trends and seasonality as you build your models. My second point, let’s jump into our operating cost.
You can see both our brokerage and risk management segments, nine month operating ratios are down around three points, has 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’ve made in technology and improved processes and 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 from the risk management segment. Unfortunately, offsetting some of the savings in 2010 will be medical inflation, which is nearing double digit, increasing pension costs due to decline in investment yields and limited wage and performance compensation adjustment and since on the subject, I just want to point out that here in the third quarter we also had about a penny 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’re expecting to spend about $15 million on 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 tax credit subsidies. All goes well, and getting the facilities up in running, then operating them as plan, we can generate earnings up to $40 million per year for the next ten years.
When you look at the corporate and financial services segment, you will see that we had a pickup from resolving tax items of about $3.50 this is 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. A couple comments related to acquisition.
The Liberty Wausau deal is going great and we now anticipate. We could see $8 million to $10 million of EBITDA in contribution from the deal here in 2009.
For 2010, the deal still on track to contribute a total of $25 million to $30 million of EBITDA or in other words incremental $15 million to $20 million moreover 2009. Like Pat said, we are encouraged by our M&A pipeline and we will continue to do deals using a mix of 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 a penny of EPS this quarter and about $0.02 year-to-date. This new accounting is here to stay.
So it probably should be considered in your model. As a wrap up comments even in these difficult times, Gallagher team is delivering on our objectives.
We are implementing our expense savings initiatives. We have optimized our workforce and during this time we’ve 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.
J. Patrick Gallagher Jr.
Rob, we’re ready to go to questions-and-answers.
Operator
(Operator Instructions) Your first question comes from Mark Hughes - SunTrust.
Mark Hughes - SunTrust
Any change in the commission rate that you are earning over the last three to six months?
J. Patrick Gallagher Jr.
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, and they’re paid to do as well as they can the underwriting desk, but in terms of upfront changes in the rate of commission by the insurance companies, very little.
Mark Hughes - SunTrust
How big is the U.K. portion of the brokerage business at this point roughly?
J. Patrick Gallagher Jr.
Just over $100 million in revenue.
Mark Hughes - SunTrust
As you look at your client base, how are they doing in the volatile economy, sort of the middle market customers doing as good, a little bit worst than what we might see in the broader economy?
J. Patrick Gallagher Jr.
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’ll see some increase, but by enlarge our clients are really suffering.
I mean sales are down, and again this is all anecdotal discussions of just meeting with client, but you take just those electrical contractors that did housing developments and things like that. We have customers that did $6 million, $7 million, and $10 million in revenue a year ago, that are going to do $2 million this year.
Their businesses are down in the order of 3%, 4%, 5%, these businesses are down 50%, 60%. We’re very large in Florida, and if you take a look at our customer base in Florida, you’ve almost an 11% unemployment rate.
Commercial real estate down there, which is a big part what we do, is collapsed. In downtown my EMEA alone, theirs is 6500 of our public entity business in Florida is a very large part of what we do.
They’re 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, and contributions are down and that of course we’re large in construction so I could keep going through our niches like that and every niche I look I don’t see one that’s robust at all and I don’t see any that are planning on robust recovery in 2010 I’ll tell you that.
Operator
Your next question comes from Keith Walsh - Citi.
Keith Walsh - Citi
I guess first for Pat, as always I appreciate the candor around the revenue and then client situation out there. I am just still trying to reconcile recognize the minus 6 organic and the timing of this relative to maybe say lets say well its reported the other day and their organic actually is improving in North Americas decelerating the negative trends.
So, trying to a sense for to reconcile some of those different things we are seeing out there I got a follow up for Doug?
J. Patrick Gallagher, Jr
I can’t really comment on my competitors. I’m not inside those firms and I’m not even sure quite honestly exactly how all of us measure organic, I don’t think that’s a GAAP define the term.
So we just try to give it to you straight and then we give the table in our press release as to how we calculate and we try to stay very consistent with that. I think this is very reflective of what’s going on; basically our brokerage unit on the property casualty side is 85% commission.
On the benefit side its probably even though is more negotiated, it’s probably still 80%, 85% commission. Our benefits clients are down FTE significantly, our property casualty clients are down sales, payrolls and our wholesaling business is losing business to the standard market.
So, it’s just tough to move well down the filed frankly when I look at our new business sales, I’m proud of our guys, we’re not losing accounts that’s the interest thing. Our retention is actually improved over the last three year we’re nicely into the 90s.
When you take out stuff that we new it wouldn’t reoccur like and one time projects and we are nicely into the 90, probably over 93%, 94%. So, it’s not loosing clients and we are getting new business this is we are a new business machine.
This is just really reflective of rates and the economy and we don’t sense any significant improvement I’ll tell you that.
Keith Walsh - Citi
Then for Doug and I guess some of the silver lining here in a tough environment is, you raised your EBITDA margin and with down six revenues. It’s extremely difficult to do I would maybe you can talk give us more color behind that was Liberty behind that, was the expense cut you guess its done previously driving that.
It gives us a little more color behind why that number went up.
Doug Howell
I think both of the things you mentioned are true but going back, I 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, in a more efficient and lower cost provider of service at the same time rate and quality. A lot of those things hit in the harvest phase here in 2009.
If you have following you heard me say that. So, the places we are doing is we are trying to reduce consumption of travel, meeting expense, but generally not at the producer level, that one of the management in administrative layers that we’re holding cost on there.
We’ve done a good job of looking at our ENO cost and make sure that we drive out of our cost and raise quality and provide so that helps us restore some profitability. We are shifting labor to lower cost labor locations.
So, we keep just as many hands on yours but we are paying less for those hands and when you put in the Liberty deal, remember we still haven’t had all the revenue on Liberty. So Liberty is not improving our margins right now.
Liberty is not a contributor we believe longer term it will, when we get all the revenue and we have a wide shape of revenue with respect to Liberty. So 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’s dropping to the bottom line.
Keith Walsh - Citi
Just around the $10 million of recoverable contingents, they talk about last quarter how are the conversations trending so far with that, any update there?
J. Patrick Gallagher, Jr
I’m very pleased with that. It trended very well.
A lot of those contingents are coming from local markets and regional players and I’m pleased to say that it’s really kind of an attitude of welcome back.
Keith Walsh - Citi
How are your customers reacting to this change?
J. Patrick Gallagher Jr.
I have zero complaints with some exception from the RIMS 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 and I think now they’re focusing properly on the fact that the issue should be transparency.
I said all along, this isn’t a compensation issue, which should be viewed as a transparency issue. We’re disclosing to every single client that we are in contingent arrangements and I will tell that when you get away from the RIMS members, there is zero controversy around this issue.
Operator
Your next question comes from Mike Grasher - Piper Jaffray.
Mike Grasher - Piper Jaffray
Just a few follow-up questions here for Doug. I guess the eliminations, once they are completed, what would total reduction of workforce be at that point?
Doug Howell
We’re looking to level attrition and outlays were picking out 400 on this round. Is that what your question is?
Mike Grasher - Piper Jaffray
Beyond this round, if you go back to sort of when this began?
Doug Howell
We announced another 400 in January of 2008 and 130 in the fall of 2007. So we’re well over a thousand folks out of the organization.
Again most of this has been done through attrition over the last two years.
Mike Grasher - Piper Jaffray
Then I guess, 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 sort of change in either one of those out looks?
J. Patrick Gallagher Jr.
I think that, if we were to get an economic recovery, we would simply be able to absorb that. I mean, a change just in our client’s exposure it’s not going to drive more work.
In fact, that’s part of the problem right now. Even with take that contract, where I mentioned the drops from $10 million to $3 million in total billings, we’re still sending out a thousand certificates for that guy.
So the work doesn’t really expand and contract all that much based on how their exposures go. If you combine, get me back to 5% organic growth and give me a flat rate environment, I will mint money.
Mike Grasher - Piper Jaffray
Your comments about the change in the M&A environment, is that something that you’re witnessing right now or just your sense?
J. Patrick Gallagher Jr.
No, it’s something we’re witnessing. I think that the pipeline is very strong.
I think that people are going to get again anecdotal, Mike, but the people that are coming through are reasonable sellers, recognizing that they have an opportunity to play the game with us, with our stock, we’re hope that they keep the stock. That’s part of the discussion, that’s part of continuing to build the dream, and they get a very nice dividend, while we wait for the explosion that’s yet to come.
Operator
Your next question comes from Meyer Shields - Stifel Nicolaus.
Meyer Shields - Stifel Nicolaus
I guess, one question for Doug to start with. If I look at the average compensation per average full time employee, it has been funding the first half of the year with up in both in both brokerage and risk management in the quarter?
J. Patrick Gallagher Jr.
Say it again, I didn’t hear you.
Meyer Shields - Stifel Nicolaus
I’m looking at the average compensation for average workforce.
J. Patrick Gallagher Jr.
Okay.
Meyer Shields - Stifel Nicolaus
It had been down in 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?
Doug Howell
It’s nothing systematic inside of the organization or we’ve been giving raises, or there’s been a substantial change in performance compensation levels. So, if compensation is going up in the third quarter by percent, it’s because of our producer compensate, our third quarter is a larger quarter so that would drive more comp into it with the same number of folks, because of the producer comp line.
As a person, it will go up as revenues go up and we have more revenues in the third quarter.
Meyer Shields - Stifel Nicolaus
I guess following-up my question, what should we expect average compensation to do in 2010 for the non-reduced workforce?
Doug Howell
This 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’s fairness and if somebody has had a great year, and had deserved and then promoted then you have to recognize them for that.
J. Patrick Gallagher Jr.
This is Pat. I travel the branches all the time and I make no bones about it that it’s a simple equation.
Put your self in 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.
Meyer Shields - Stifel Nicolaus
Last question I guess. One that you commented on earlier I think Doug, was that the travel expense reduction was largely management as opposed to producers?
Doug Howell
Management and administrative folks, people that are not really directly touching the clients is the primary place that we contracted.
Meyer Shields - Stifel Nicolaus
Has there been any significant contraction for the client facing folks?
Doug Howell
Not in terms of the number of trips taken to see clients. I think that lot of our sourcing networks and our negotiated contracts have helped contribute to the fact that they can travel to those locations cheaper, but they can still go.
Operator
Your next question comes from Sarah DeWitt - Barclays Capital.
Sarah DeWitt - Barclays Capital
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.
Doug Howell
I think we’ll be able to get 75% of that number.
Sarah DeWitt - Barclays Capital
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 and if so why do you think that is?
J. Patrick Gallagher Jr.
I think it’s the fact that the recovery and exposure units we are the lagging indicator. What happens is, clients will hunker down, the exposure units come down and you basically renew the account at what they predict their sales and payrolls to be.
If they are a little more successful during the year than they originally predicted, so economics are correct and the GDP recovers. We’ll reflect that in the renewals and in the additional premium audits in 2011, so we lag our client success.
Operator
Your next question comes from Scott Heleniak - RBC Capital Markets
Scott Heleniak - RBC Capital Markets
I noticed that you reduced the debt levels again in the quarter. I just wonder how you are thinking about what your intentions were.
Do you expect that to continue in the next couple of quarters?
Doug Howell
If you look at our numbers, one of the reasons why the debt levels are coming down is quarter, because our first quarter is seasonally our lowest cash quarter. So the history of Gallagher is that the debt will come up a little bit in the first and second quarter and then we start bring it down in the third and fourth quarter.
It’s a seasonal item in our cash flow. How am I thinking about that?
I think we’re looking at all options right now.
Scott Heleniak - RBC Capital Markets
Then relative to the initial expense savings targets you gave relative to the structure was about a year ago. Are those on track?
I think the number was $25 million to $30 million on track to meet those or ahead of expectations?
Doug Howell
We well exceeded those numbers.
Scott Heleniak - RBC Capital Markets
Last question is, you mentioned in your commentary as Florida being kind of an area of weakness. I wonder if you could talk about other regions, where it really weakened versus Q2 where you had negative 6% organic growth versus flat versus Q2.
I wonder where the big change was versus second quarter.
Doug Howell
As I mentioned, Florida is very difficult location for us. If you can roam around the country, California is a very large part of our organization and I think unemployment in California is approaching 14%.
Homebuilding is completely stopped. Infrastructure contractors are doing okay.
So California is tough. Where we seem to see a little of resiliency and where the economy has not been as impact or places like Oklahoma City.
So really the Northeast is also very weak. If you look at Southeast typically, most typically Florida, Northeast out of the whole New York Corridor and California, those are our three weakest places from an economic activity standpoint.
Operator
Your next question comes from Brian Durupio - Field Capital.
Brian Durupio - Field Capital
First of all, two questions for you Doug. First one, in the last three press releases you’ve had this little commentary how you 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 a bit, so you’re earning something rather than nothing on the account?
Doug Howell
Yes, there is and we’re working on that right now, but I caution that, putting in fact paper which we typically do, maybe we’re giving up a quarter to million to half a million dollars in quarter in our current stance right now. Until rates return, it will be lowered, but I think we are looking at moving some money back into earnings accounts.
Brian Durupio - Field Capital
Doug also for you, the $40 million that actually you’re talking about at Chem-Mod that you perpetually get annually, is that going to be a discreet item on the P&L, or is that going to be in the tax rate?
Doug Howell
It will be both, the way that we set these partnerships up, is there will be pre-tax income and then there will also be a tax benefits that records through. So we’ll get them both in the corporate and financial services segment you’ll see both pre-tax items and you’ll see a tax benefits coming through.
We’ll identify it for you and break it down for you.
Brian Durupio - Field Capital
Lastly Pat, 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 ‘70 and the early part of the ‘80. One of the other great debates out there besides green suite as though we see maximum 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?
J. Patrick Gallagher Jr.
Inflation benefits the brokerage business.
Brian Durupio - Field Capital
It does.
J. Patrick Gallagher Jr.
Yes. As our clients are recording more sales, they are paying more premium and more premium equates to more commission.
We’ve to be very careful on our expense side and so it do not necessarily 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.
Operator
Your next question comes from Paul Howard - Langen McAlenney.
Paul Howard - Langen McAlenney
Doug, I just wanted to piggyback on last question on Chem-Mod. Can you sort of walk us through the thought process with the risk involved, I think maybe the initial cash outlay is a little bit higher than previously thought and could that number go even higher on a cash outlay or a net investment basis and with a shot clock sort of ticking towards December 31, what are the risks involved of getting these eight facilities complete and up and running?
Doug Howell
The 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. So we got the same experience group working on it.
There are always risk with these types of opportunities that we think that there’s IRS risk. There’s operations risk.
There’s supply chain risk, production risk. We feel like these things have been tested in laboratory and tested in full scale tested 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, technology has worked. It’s proven to take Mercury out of coal fire stacked over and over and over, and we’re putting them in place.
Right now, we think that we going to price spend $30 million to $35 million in total, but then when we sell off a piece of the plant will recover, $10 million to $15 million of that to 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 the plant should be going in towards the end of November early December, so that give us a 30 day buffer with respect to getting it by the December 31, date. So we feel like that the team is working hard on it and I think that we’ve got good construction partners working with us and the project is moving along.
I get pictures from the projects almost every day. So I feel comfortable that we’ll have no problem in place by December 31.
Paul Howard - Langen McAlenney
Is this economic benefit, is it more binary where these eight facilities are up and running. Is it pretty certain, it’s going to be the $40 million benefit or is it going to be maybe 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?
Doug Howell
I think the range right now is up to $40 million, so zero is in the range. I think zero is unlikely, but it could be between zero and $40 million and also because of the way coal fire plant works, we’re going to have to iron out just like we did in the section 29 project.
Good production management schedules, so that we can get chemical there. So that we can get materials put into the coal.
So that will take us a while to work out. So it would not be using your dealers binary.
If not any no, off to $40 million. I think you’ll see a ramp up in 2010.
So I don’t think we’ll experience the full $40 million in 2010. The other risk that’s out there is that these plants have the available to displace coal with natural gas.
So we only get paid if we’re burning coal. The plant at natural gas remains low, that plant may choose to burn natural gas instead of coal.
So there’s always that risk to they don’t run the plant full speed.
Paul Howard - Langen McAlenney
For 2011, if everything goes great, it could be a $40 million story?
Doug Howell
We’re hopeful that’s the case.
Operator
Your next question comes from Dean Evans - KBW.
Dean Evans - KBW
I was 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 sort of evenly throughout the year? You already mentioned that it should be evenly throughout the segments, but how much of that sort of as the year goes on when are we going to get it?
Doug Howell
I think most of the contractual will happen in the fourth quarter with some spillover into January, but basically by February 1, we think most of the activity should be completed.
Dean Evans - KBW
As far as the cost savings or the expense?
Doug Howell
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 throughout all of 2010.
Dean Evans - KBW
So it will beginning in the beginning of the year and kind of flow through?
Doug Howell
Correct.
Operator
Your final question comes from Meyer Shields - Stifel Nicolaus.
Meyer Shields - Stifel Nicolaus
Pat, one quick question, I think you mentioned in your commentary that one of the drags on organic growth was from wholesale?
J. Patrick Gallagher Jr.
Yes.
Meyer Shields - Stifel Nicolaus
Was that new in the third quarter compared to earlier quarters this year?
J. Patrick Gallagher Jr.
It’s an acceleration Meyer, something we’ve seen over the last probably 15 months.
Doug Howell
You have the likes of Cincinnati financials going into the excess of surplus business, that’s not an area that we never them before and they’re not working with us as a wholesaler and they’re writing a lot of business. So as new players come in, iron shore is ramping up and others that we are doing business with, I mean wholesale business is losing business to the standard markets.
Meyer Shields - Stifel Nicolaus
Do you feel like you are winning your fair share of that on the retail side?
Doug Howell
Yes.
Operator
Thank you. We have no further questions at this time.
I would like to turn the floor back over to Mr. Gallagher, for closing remarks.
J. Patrick Gallagher Jr.
Thanks Rob. I’d like to make a very brief wrap up comment.
As I’ve said, I’m proud of our team. I think we accomplished a lot in the last nine months.
We reduced our headcount. We’ve harvested the results of a number of expense savings.
I mean we’re down $9 million in investment income and EBITDA margin is up 2.5 points. We’ve integrated our largest acquisition even and continue to do tuck in acquisitions.
We continue to attract Merger Partners to the team. We continue to sell new business and renew our account and we’re still investing and training the next generation.
So we know that we’re still operating in a still difficult economic environment. So intense focus on what we’re trying to do.
We’ll continue through the fourth quarter and into 2010, and we expect to continue to grow our company. Thank you for being with us this morning.
Rob, I think that’s it.
Operator
This does conclude today’s teleconference. You may disconnect your lines at this time.
Thank you for your participation