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Crawford & Co. (NYSE:CRD.B)

Q4 2007 Earnings Call

February 4, 2008 3:00 pm ET

Executives

Jeff Bowman – Chief Exec. Officer and Pres

Bruce Swain Jr. – Chief Financial Officer and Exec. VP

Analysts

James Kiern – New Salem Investment

Matt Reams - Buckhead Capitals

Bruce Winter – Private Investor

Operator

Welcome to the Crawford and Company Fourth Quarter 2007 Earnings Release Conference call.

(Operator Instructions)

Some of the matters to be discussed in this conference call may include forward-looking statements that involve risk and uncertainties including statements regarding the integration of Broadspire Services Incorporated and our ability to pay dividends in the future. Crawford and Company faces risks that the integration of Broadspire into the Company’s operations may not be successful or may be more expensive than anticipated. The Company’s actual results achieved in the future quarters could differ materially from these 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 the call or to reflect the occurrence of unanticipated events. For a complete discussion regarding the factors, which could affect the company’s financial performance, please refer to the Company’s Form 10-K for year ended December 31, 2006 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 Conditions and Results of Operations.” This presentation also includes certain non-GAAP financial measures as defined under SEC rules. As required, a reconciliation is provided for those measures to 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, Chief Executive Officer of Crawford and Company. Mr. Bowman, you may begin your conference.

Jeffrey Bowman

A very warm welcome to our investors, clients and associates this afternoon for a discussion of our fourth quarter and 2007 year annual results and expectations for 2008. I am informed that we have a significant number of listeners today, so thank you. I am Jeffrey Bowma, President and CEO of Crawford & Company. Joining me from our global management team this afternoon are Bruce Swain, our CFOE and Allen Nelson, our General Counsel and Chief Administrative Officer.

As you are all aware, on January 1, Tom Crawford assumed the role of Chairman of the Board and Jesse Crawford assumed the role of Chairman of the Executive Committee of the Board of Directors. I have now been President and CEO since January 1, just 35 days and I would like to update everyone on this call with the initial actions, future plans and fundamental strategies that this management team has or are putting in place for Crawford and Company. Before I do that, I would like to acknowledge and say thank you to Tom Crawford for the positive contribution he made to Crawford in his three past years as CEO.

I personally look forward to continue working and partnering with him in his new role as Chairman of the Board. For those of you who have not me, my background is 25-plus years in the financial services and claims industry. My experience at Crawford & Company was development and management of the International Business Unit, which now represents approximately 39% of our group total revenue, and recently, the combination of the global property and casualty business unit. I am continually encouraged by the potential that we have in front of us which I would like to take a few minutes to discuss with you.

Globally, insurance is a growth business and providing an independent quality driven local, regional or global claims service is crucial to our client’s business propositions. In support of that objective, it goes without saying that we plan to drive our operations to continue to deliver quality of product, investment and training and maintaining a very strong client relationship at all levels in the organization. Being the largest global claims administrator is important, but not as important as having the best quality in the industry, the best practices, the best processes, the best associates and lastly, delivering a sustainable and attractive return for investors.

Therefore, I see my role is to position Crawford & Company as a target driven corporation that achieves its financial goals and meets its commitments to its clients, associates and shareholders.

Let me now discuss several of the strategic actions currently taking place. Firstly, my international team used to say first two and then one. On January 7, we put the self to who in place by announcing a new global management team. This team has a fantastic blend of experience together with a commitment to a fresh and energetic management approach.

As part of the reorganization, Crawford will benefit from a global chief administrative officer, chief strategy officer and chief information officer who will bring operational cohesion to the project teams and help align our global strategies.

A new global CIO also has responsibility of bringing together a global information communication and technology practices that will help us share and implement improved processes and efficient designed global basis.

Secondly, we are implementing a communication plan to execute a common understanding of the strategy and direction of our corporation for our associates, clients and investors. This will take shape through a program we calling the strength of working together that will be rolled out over the next few weeks. The theme is based on Crawford & Company’s vision and mission values that we outlined to our clients, associates and investors.

Thirdly, we are expanding our account management plans to increase marketing and selling efforts across all of our business units. We will continue to expand the business propositions to our clients around the globe as we operate in Crawford, Broadspire and the Garden City Group.

Fourthly, our management team at Crawford & Company is committed to delivering on our promised technology. While the roll out of the RIS Tech product in our sales insured market technology was delayed due to the acquisition of Broadspire last year, the decision to include the Broadspire legacy IT systems transfer to RIS Tech was the right decision. We expect the new system to be deployed and ready for clients during the fourth quarter of 2008.

In our property and casualty division, CMS 2 have property and casualty claims management system now has about 3000-plus internal users throughout the group. In 2007, we rolled out the system to the USA and are now seeing many process improvements and positives and operational efficiency.

Lastly, turning to Crawford & Company associates, we will continue to retain, recruit and reward staff throughout the corporation. We are reviewing our performance-based incentive programs to ensure they are designed to drive the growth and revenue quality and operational efficiencies we need.

Additionally, in 2008, we will implement some major improvements to our training approach on a global basis. With our recent investment in distance learning capabilities, we can now offer Crawford online and are now offering classes that are conducted partially online prior to the on-site application process taking place. Our company has changed dramatically over the past few years regaining its rightful stature in the TPA arena and as a global claim solution business.

Our management team now has the opportunity to build on this program a platform through the programs I just discussed and through a better execution deliver a stronger and more consistent financial performance. That is our collective objective for 2008.

Bruce will discuss the detailed financial performance of the fourth quarter 2007 results and the year-to-date results for 2007 in a moment. I would comment that we are now on a year, a year on from the acquisition of Broadspire. We are pleased that in 2007, we turn to 2006 losses in the combined Broadspire corporate business unit to a profit. The progress made through into 2007 is right on line with our planning.

For those of you with the results of the four corporate business units in 2007 shows mixed performance. International had its best ever year in 2007 with record revenue in income. These trends reflect growth in accounts and a 28.3% claim volume increase over 2006. We have now had five years of revenue in income growth internationally by focusing on good management practices and real attention to client performance which will continue to be our strength in 2008.

Looking a little at the US property and casualty division, performance this year of the US property and casualty has been a concern and the results in the fourth quarter were particularly disappointing. For the past several years, industry declined in our overall claims frequency has been a concern and had an effect on this business unit.

We saw a frequency decrease in the fourth quarter of 1.7% over all product lines which reversed a 2% increase in the third quarter. The frequency reduction and assignment has meant we were continually managing our cost to revenue ratios despite winning new contracts and many client handling nominations. Despite the challenging conditions that have existed the whole year, we produced an operational profit of $4.7 million at a margin of 2.6% and continue to provide a good quality product to all of our clients. We have continually stated before that while we are not building a company based on catastrophic and storm events, it is worth noting in December 2007, we had the lowest number of catastrophe adjusters deployed since 1991.

Our goal even in a challenging overall claims environment is to restore US property and casualty revenue growth in 2008.

As mentioned earlier, we completed the first phase of the integration of our Broadspire operation in 2007 and exceeded our plan against losses of over $21 million in 2006, we improved to operating earnings of $3.8 million in 2007. The fourth quarter operating loss while small underlines the importance of revenue growth in this business unit. We anticipate continued pressure into early 2008 from the declining runoff of the existing book of business.

Growth opportunity supports borrower evidence in a large backlog of RFP’s with larger clients and the anticipated continuing growth in our old services such as telephonic and field case management, E-triage position reviews, profit care and neutralization management. I should note that unbundled services represent about a third of the Broadspire business as it is today and we are poised to grow this business unit in 2008.

Our remaining business unit is legal settlement administration and despite major industry head wins, we are pleased that legal settlement administration maintains double digit profit margins. In addition to the hurdle of trying to match LSA’s unprecedented record performance in 2006, the legal landscape was punctuated by growing trends to restrict the use of class action.

The fourth quarter revenue decreased 28.9% from 2006 and management has responded throughout the year by managing cost to revenue trends. In the fourth quarter, operational income decreased slightly, but operating margins improved from 12% to 15%. In 2007, we significantly expanded our Garden City Group sales force with new associates and offices in San Francisco, Atlanta, New York City, Chicago and Washington DC. Garden City Group enters 2008 as the market leader in legal settlement administration services. We are also encouraged by the prospects for the year as we have a significant backlog of cases that we have accumulated over the last six to 12 months. Our management team sees significant opportunities ahead in the area of bankruptcy filings in 2008.

So returning to the group, while the operating earnings improvement from the business segments indicate a stronger performance, our consolidated group margin remains an unacceptable result and below our long-term expectations.

My new team is committed to substantially improving this result in 2008 through the initiatives mentioned and many others taking place.

We have therefore issued the following guidance for fiscal 2008. Consolidated revenues before reimbursement between $990 million and $1 billion and $20 million, consolidated operating earnings between $54 million and $58.7 million and after reflecting stock-based compensation expense, net corporate interest expense, intangible asset, amortization expense and income tax, consolidated net income between $19.1 million and $22.1 million or $0.38 to $0.44 cents per share.

Our 2008 theme, The Strength of Working Together is the message that this team would lead shareholders with. We have made progress over the past several years in improving profit quality and restoring profits industry leadership position. We are committed to being a target driven corporation that delivers quality outcomes to our clients and improved financial performance for our investors.

Crawford has very bright future. We thank you for your continued support and commitment as we enter 2008 and I look forward to your questions after Bruce has finished his financial summary.

Over to you Bruce to review the company’s overall performance for the fourth quarter.

Bruce Swain

Company-wide revenues of total reimbursements increased by 7.4% in 2007 fourth quarter to $245.2 million from $228.3 million in the prior year’s fourth quarter. This increase is attributable to $12.4 million in incremental revenues from the acquired Broadspire Management Services, Inc business and double-digit organic growth from our international operations which offset declines in revenues generated in our legal settlement administration in US property and casualty segment.

Our pretax income totaled $4.1 million as compared to a pretax loss of $1.2 million we reported in last year’s fourth quarter. We recognize the earnings per share of $0.07 for the current quarter as compared to a net loss per share of $0.03 in last year’s fourth quarter.

Fourth Quarter 2007 earnings per share includes $0.01 related to the recognition of certain tax benefits during the quarter. The pretax loss in the 2006 fourth quarter included a restructuring charge and loss on early extinguishment of death related to the Broadspire acquisition of $3.1 million, which after related income taxes was $0.04 per share.

The company’s selling, general and administrative expenses or SG&A totaled $50.8 million or 20.7% of revenues in the 2007 fourth quarter increasing $5.3 million from $45.4 million or 19.9% of revenues in the prior year quarter. The acquisition of Broadspire added $3 million of incremental SG&A cost during the current quarter. For the full year, the acquisition of Broadspire added $45.8 million of incremental SG&A cost excluding the effect of the Broadspire acquisitions, the company’s increases in SG&A cost are primarily due to higher self insurance expense in the US and higher administrative cost in our international operating segment.

Turning to operations, international revenues surged 15.9% in the 2007 fourth quarter on a local currency basis and by 27.1% in US dollars to a new quarterly record of $107.3 million on a 16.1% increase in claim referrals. This growth reflects increased case referrals in each of our international operating regions resulting from new business wins during 2006 and 2007 and the impact of claims generated by the UK flooding which occurred during June and July of this year. The acquisition of Specialty Liability Services Limited in the UK during the early part of 2006 fourth quarter contributed incremental revenues of $1.3 million in the 2007 fourth quarter.

International operating earnings improved to a quarterly record of $9.9 million in the current quarter increasing 43% over last year’s fourth quarter operating earnings of $6.9 million. This improvement reflects an increase in the operating margin from 8.2% in the 2006 fourth quarter to 9.2% in the 2007 quarter.

Revenues from our Broadspire segment increased by 10% to $75 million due to incremental revenues of $12.4 million from the Broadspire acquisition completed in last year’s fourth quarter.

The Broadspire segment operating performance improved in the 2007 fourth quarter to a loss of $277,000.00 or 4.4% revenues from an operating loss of $3.5 million or 5.2% of revenues in the 2006 fourth quarter. These results were driven by the incremental profits generated by the acquired Broadspire entity and the results of the cost reduction initiatives carried out in 2007.

Legal settlement administration revenues including both the administration and inspection services declined 28.9% in the 2007 fourth quarter to $22.5 million on a comparison with record revenues and operating earnings generated during 2006. Despite the short production in revenues, operating earnings totaled $3.4 million in the 2007 fourth quarter or 15.3% of revenues as compared to $3.7 million or 11.7% of revenues in the prior year period.

Legal settlement administration continues to have a backlog of projects awarded totaling approximately $45 million at December 31, 2007.

Revenues from the US property and casualty segment totaled $40.4 million in the 2007 fourth quarter down 8.1% from the $44 million reported in last year’s fourth quarter. Revenues generated by our catastrophe adjusters totaled $1.8 million in the 2007 fourth quarter down slightly from $2.1 million in the fourth quarter of 2006.

Fourth quarter 2006 revenues included $640,000.00 in revenues generated by the Company’s segregation services unit, which was sold in February 2007.

Excluding the impact of claims referred to our catastrophe services group, claim referrals in our US property and casualty segment were down less than 1% in the 2007 fourth quarter. Operating earnings in our US property and casualty segment totaled a loss of $911,000.00 or an operating margin of 2.3% of revenues in the 2007 fourth quarter. This compares to a slight operating loss of $39,000.00 or 4.1% of revenues in the prior year quarter.

During the 2007 fourth quarter, the company made a discretionary $2.5 million prepayment on its outstanding long-term debt. For the full year, $12.5 million in discretionary payment have been made.

Our cash and short-term investment position at December 31, 2007 totaled $50.9 million as compared to $66.7 million at December 31, 2006.

Cash provided by operations totaled $23.3 million for 2007 compared to $52.7 million provided by operations in the prior year.

The change is primarily due to growth in unbilled revenues during 2007 and the reduction of deferred revenues associated with the completion of claims assumed in the Broadspire acquisition.

This wraps up my comments. Now I would like to give our callers a chance to ask any questions they might have about our fourth quarter release.

Question and Answer Session

Operator

(Operator Instructions)

Your first question will come from the line of James Kiern with New Salem Investment.

James Kiern – New Salem Investment

In looking at your third quarter release, I tried to do the adjustments since I see only your guiding for the fourth quarter, I came up with $0.09 to $0.12, would that be reasonable?

Bruce Swain

Yes, at the end of the third quarter that would have been where our guidance for the fourth quarter would have been.

James Kiern – New Salem Investment

And then taking out the tally, it looks like you came in at $0.06, so could you describe the one or two areas that mostly attributed to this?

Jeff Bowman

Really there are three areas that we were down on our projections on the fourth quarter. The largest one was the US property and casualty division which had about $0.02 miss on the quarter for the fourth quarter just basically on the frequency decline that we saw coming in over that period. Secondly, Broadspire frequency was slightly down as well and that was a sink because of the increase run off claims that we have taken out and the new business that resulted in that frequency decrease and they were the main reasons that we had. There were some administrative expenses on slightly higher insurance premiums in terms of their E&O, but they were on the administration cost. In fact, they were the major reasons for the decrease.

James Kiern – New Salem Investment

I see your intangible amortization of $1.5 million for Q4 and stock-based compensation of $200,000.00, is that correct? What can you people plan on going forward for those numbers?

Bruce Swain

The amortization expense $1.5 million for the quarter and about $6 million for the year relates to the amortization of customer relationships, intangible assets primarily related to the Broadspire acquisition, but we also had some related to the SLS acquisition in the United Kingdom. Those intangible assets are being amortized over a period of 15 years, so you can expect for that non-cash expense to continue for fourteen years.

The stock option expense is the expense related to the stock options the company had granted prior to our implementation of the new stock options accounting standards a few years ago and we do not currently issue other stock options we have performance restricted share plans in place, but these old historically granted stock options we have not allocated them to the operating unit level for their corporate cost. That expense should decline over the next two to three years and it would be probably zero in the next three or four years.

James Kiern – New Salem Investment

You mentioned some significant IT upgrades, are there costs built in to accomplishing those in ’08 or ’09 and how much is that and how much costs saves do you expect to get once it is implemented?

Bruce Swain

We do have several IT initiatives going on across the globe. The one that has been the largest for us is the RIS Tech project in the US which supports our self-insured Broadspire business.

We are in the midst of converting the systems that the Broadspire acquisition brought to us onto the RIS Tech platform. We do have cost we expect to incur during 2008 and 2009 related primarily to internal use capitalized software. They will be capitalized and amortized over the life of the project and the implementation costs that we will have on the data migration and transfer cost which are not capitalized while they are considered in our expenses and are placed into the guidance range that Jeff mentioned earlier.

James Kiern – New Salem Investment

Is that over the next year or two years?

Jeff Bowman

Well, the RIS Tech project will be deployed to clients in the fourth quarter of this year and then there will be a series of transfers of client data et cetera in release 1.2, they will go through for another six months or so, but at a lower level than the cost of the present stage.

James Kiern – New Salem Investment

So can you give me a feel for how much that is kind of holding back your earnings this year or next year?

Bruce Swain

When we put the RIS Tech, when we are fully implemented in RIS Tech in our Broadspire operations, we believe that we can achieve synergies related to IT in the back office processing operations of between $15 million and $20 million.

James Kiern – New Salem Investment

Is that cost saves or revenue synergies or both?

Bruce Swain

Cost saves.

James Kiern – New Salem Investment

You said $15 million to $20 million?

Bruce Swain

Correct.

James Kiern – New Salem Investment

And you are recognizing any of those right now?

Bruce Swain

We are recognizing very, very little of that right now. In the Broadspire acquisition, we inherited several systems with that group. We were running a system on our own in the Crawford Self-insured business and RIS Tech is the one system that we are migrating those three platforms onto. When we accomplish that and during the calls that we had and the disclosure that we had over the acquisition of Broadspire, we indicated that those synergies and cost savings were going to be for a long term because systems integration always take a little bit longer than you think.

We had those pegged for 2009 and 2010, to really get traction on that and it is a significant amount of money, but when you go from managing and operating multiple systems down to one platform, they should be very dramatic.

James Kiern – New Salem Investment

With that system, you hope to bring in revenue, bring in customers because of the business quality?

Jeff Bowman

Absolutely. The consolidation into one platform will make a significant difference, not to the current data that we provide our clients with because that actually will remain and improve slightly, but on the internal efficiencies that we are able to gain through using one system rather than the three we have got.

James Kiern – New Salem Investment

The legal segment, could I assume that basically in the past where you had the revenue was kind of legacy from the ‘(inaudible) era’?

Jeff Bowman

The 2005 and 2006 era and 2006 more was a record year in revenue and in earnings for the Garden City Group. That was the combination of a number of significant class actions. We anticipated that that would be a lower number in 2007, so that was it following on from the high number of class action securities that there were.

James Kiern – New Salem Investment

There had been a confidence in saying those out here or is there any way of knowing?

Jeff Bowman

Well, you take the press on this, there is the prospect of a significant number of class actions being filed over the forthcoming period. So we are very optimistic about the prospects for that particular business division.

James Kiern – New Salem Investment

When you say forthcoming, you are talking about this year or next quarter?

Jeff Bowman

I think you are going to see this over a couple of years as they come through the system.

James Kiern – New Salem Investment

Can you describe your debt to me in the short term and long term, at least the bulk of your debt and what the terms are and how much is it?

Bruce Swain

We have outstanding at the end of the year two components of debt, one is from over borrowings that are about $23 million and their terms typically are anywhere from 30 to 90 days and they roll over. We have long term borrowings in the form of term loans indicated with a group of banks of $185 million and the other component of our total funded debt, all of those are in our balance sheet are our letter of credit obligations which go against our capacity under our revolver of about $20 million.

James Kiern – New Salem Investment

I guess, what is the rate on the term loan?

Bruce Swain

The term loan is LIBOR from 275 and the revolver is LIBOR plus 250 and they both have performance based pricing associated with them with the company’s leverage ratio I guess below 2.5 the rates as the rate of decline.

James Kiern – New Salem Investment

Are there several steps to that?

Bruce Swain

On the term loan, there is only one step. On the revolver, it continues to get down I guess two times at 1.5%.

James Kiern – New Salem Investment

What is your leverage ratio right now?

Bruce Swain

Our leverage ratio at the end of 2007 was 3.1 to 1. Under our accredited agreement, we were allowed 3.5 to 1.

James Kiern – New Salem Investment

And what is this LIBOR plus 275, what did it step down to a rate below 2.5?

Bruce Swain

It steps down to, the spread is 2.5, 250-basis points.

James Kiern – New Salem Investment

I think your short terms and LIBOR and coming into loan, are you taking that into account for your guidance?

Bruce Swain

Yes, we have taken that into account for our guidance.

Operator

Your next question will come from the line of Matt Reams with Buckhead Capitals.

Matt Reams - Buckhead Capitals

I would like to be a little more specific than the first caller. I have got a bunch of questions related from your guidance. You talked about amortization, what is your D&A expectations for ‘08?

Bruce Swain

Our appreciation and amortization expectation for ’08 would be approximately $31 million.

Matt Reams - Buckhead Capitals

So $6 million is for amortization, the remaining is for depreciation?

Bruce Swain

Correct.

Matt Reams - Buckhead Capitals

What are you assuming for interest expense for the year? I mean, if my math is right, assuming now your cash balance is probably around $11 million a year? Unless there is a bunch of other items in there than just interest cost?

Bruce Swain

The interest expense for 2008, we are assuming is about $17 million.

Matt Reams - Buckhead Capitals

Well, the debt you just went over based on the rates and I know you have a SWAP agreement too, but it looks like your average rate is going to be somewhere between around 5.5%, so what else is in that interest expense category?

Bruce Swain

We have in the SWAP arrangement, we have got a certain amount of our debt that is fixed. So not all of the reduction in the LIBOR rate is going to be realized through lower interest expense. The LIBOR rate that we have assumed when we put the budget and projections together and the guidance was based on, I think about 4.8% to 4.9% so to the extent that it has come down lower from there, there would be some marginal improvement in interest expense. Conversely, if it goes up, it could be the other way.

But typically, when we set our budget for interest cost in our guidance, we look at the level of debt that we have got today, projected payments, the rate of interest that exist today and we just run the calculation out.

Matt Reams - Buckhead Capitals

Well, you just said you had $185 million in your term loan, right?

Bruce Swain

Right.

Matt Reams - Buckhead Capitals

At today’s LIBOR, that is going to be under 6%, right?

Bruce Swain

Right, but we have got a $150 million swapped at 5.75%.

Matt Reams - Buckhead Capitals

So that lowers the rate then?

Bruce Swain

Well it increases, it is higher than the LIBOR rate that exists today.

Matt Reams - Buckhead Capitals

Okay, so it is LIBOR plus?

Bruce Swain

Right.

Matt Reams - Buckhead Capitals

So 175, it is LIBOR plus 5.75?

Bruce Swain

No, it is LIBOR plus 2.75 is our existing credit arrangement. Within our term loan fee, we have fixed $150 million of our debt at a rate of 5.75 per LIBOR.

Matt Reams - Buckhead Capitals

Okay. I understand now.

Operator

(Operator Instructions)

Your next question will come from the line of Bruce Winter with Private Investor.

Bruce Winter – Private Investor

Could you please tell me your current dividend policy?

Jeff Bowman

First of all, from the management team, we reiterate my support for our dividend and the board’s support. I think as we have indicated before, we believe the suspension will be temporary as we integrate all of the actions that are taking place. At this time, we are not providing a timetable for the restoration of the dividend. The recent statement terms that we are looking at is one that the bull board were obviously discussing the earnings are produced on a quarterly basis.

Bruce Winter – Private Investor

Why was the previous timetable changed and when was it changed?

Jeff Bowman

That decision was taken in the third quarter.

Bruce Swain

Under our credit agreement, our original credit agreement and our agreement that exists today, we have to meet a leverage ratio of 3:1 in order to declare and pay a dividend and we ended the year at 3.1 to 1, so partly above the level that we needed to be at in order to declare and pay a dividend.

Bruce Winter – Private Investor

I understand now. The only other question I have is, why is the international claims business so much more profitable than the US claims business?

Jeff Bowman

That is really a good question. The issues we are dealing with in the US are very different to the issues we are dealing with on the international side. And I come in from obviously the international side where we have really attacked technology, savings and client penetration. What we are doing at this present stage is last year, we deployed new technology which came in from the international group. It has been rolled out to the US operation. We are changing our business distribution model at this moment to effectively get more client wins et cetera. We have won in 2007 a large number of new assignments, new nominations and input in technology. What we are dealing with is a frequency issue in the US which is very different to what is happening overseas.

That has had an effect whereby we have been adjusting on a regular basis our costs to our revenue base in the US. The frequency is down in the whole of the industry at the moment. Really, if you look back and take catastrophes as a situation and just storms that happen on a regular basis, there has been a significant decrease in that frequency and that has caused us to readjust the model to get back to the efficiencies that we need. Implementation of the technology is also having some significant effects and that is something that the management team has been working very hard on in the past 12 months, but we have had different times in our evolution on the international side, but number one is that we must really push the new client wins that we have and then hopefully they will produce the frequency claims.

Bruce Winter – Private Investor

From a marketer’s standpoint in the US, everything is trending in the right direction?

Jeff Bowman

We are getting our costs absolutely under control. In the guidance, you will see that we have significant improvement in our operating earnings. Even with very little into our catastrophe or storm revenue, we will be adjusting and have adjusted our base to ensure that we are producing an adequate return.

Bruce Winter – Private Investor

Good. I look forward to seeing your future progress.

Operator

We have a follow up question from James Kiern with New Salem Investment.

James Kiern – New Salem Investment

On the Broadspire business, if you look sequentially through the year, the revenues have been going down from almost $85 million to $75 million and earnings from the first quarter which I assume we are still getting some cost saves and annuities have gone down with it, I know you did talk about this meeting that you had some runoff, but I mean, that seems like a significant runoff, were people going away from it because of the merger or is there seasonality in the business, can you kind of give us some more granularity there?

Bruce Swain

One piece of the Broadspire acquisition you touched on is the runoff claims that we acquired from Broadspire. There is a certain number of claims that Broadspire had that were really the result of its creation from the old Kemper National Services that were being runoff and those claims as we worked on their deferred revenue on the books that we have recognized and as we work these files, we close them and that population of files represent a diminishing revenue stream for us in the future.

To offset that, we have to replace those revenues with new active clients and we put new business on the books in Broadspire during 2007, but one of the things that we saw in the marketplace was any time two big entities come together, there is somewhat of a wait and see attitude that was taking place in the marketplace to make sure that we can get the integration right and that we could bring the two companies together, so that puts some downward pressure on our business.

Jeff Bowman

If you looked forward to this, in 2007, we were awarded the TPA of the year award by the Business Insurance magazine. That has assisted very much in getting us past this look and see effect and we are seeing some significant RFP’s in the sales cycle at this moment and the team is very much working on a number of significant business wins as well as very targeted on the actual client RFP’s that we have at various levels within the organization.

We have also planned in 2008 to increase our unbundled services in the organization as well, so I mean, we see some upsides coming through into the organization, but there is no doubt in the industry that we have that look and wait and see how the organization came out.

I think our clients have been very pleased with the way that we have achieved our objectives and got the organization moving in one step with everybody together.

James Kiern – New Salem Investment

Has there been any changes in your sales force or process?

Jeff Bowman

In the process, we have a fairly sophisticated RFP process which when we merge the two sales teams together, we took the best people that we had, so from that point of view, yes.

Operator

We also have a follow up question from Matt Reams with Buckhead Capital.

Matt Reams - Buckhead Capitals

What are you assuming for tax rate in ’08?

Bruce Swain

We are assuming an effective rate of 35%

Matt Reams - Buckhead Capitals

How about total capex for the year?

Bruce Swain

Total capex for the year, we are expecting about $33.5 million.

Matt Reams - Buckhead Capitals

And how much of that is for the RIS Tech and how much is just general maintenance? Or can you break out the components of capex?

Bruce Swain

I do not have the amount for RIS Tech in front of me. I can do that for the US and the National. US is approximately $21 million and international would be about $12.5 million. Within our budget, just on a global basis, our capitalized software assumptions in our overall capital expenditure number is about $15.4 million and that would be about $10.6 in the US that is not just RIS Tech. That would be really any project that we have got planned for 2008 related to software development and then in our international operations, the number would be $4.8 million.

Matt Reams - Buckhead Capitals

Are you expecting any working capital improvements this year? I know your unbilled revenues and deferred revenues have been a drag on working capital? Do you expect that to reverse?

Jeff Bowman

Absolutely. That is significantly coming out of our UK and European operations where we have some significant events that took place June-July which flow through into obviously August and September and as you are aware, the international division works on the October yearend, so we see that flashing through in the first six to nine months of the year as we work off those excessive number claims that we receive.

Matt Reams - Buckhead Capitals

Do you have a target for working capital in 2008?

Bruce Swain

We do not have a target of such for working capital. What we have set as target for in our operations and in our incentive compensation planning through 2008 is a reduction in day sales outstanding of 10%. That should drive significant amounts of cash in flows to help drive better operating cash flow performance. The other part that you mentioned to drag on the current revenue side really is primarily related to Broadspire and the challenge there is in increasing the revenue from new client arrangements in order to provide cash in flow into that line item, so through a better management of accounts receivables in growing the top line and replacing our runoff clients with new active clients with Broadspire, we should be able to significantly improve our operating cash flow performance going into 2008.

Matt Reams - Buckhead Capitals

Do you expect your debt levels to be down? I have not gone through all the math of the earnings, non-cash charges and capex, but do you expect, as all of those flush through that you will be able to pay down more debt and by how much?

Bruce Swain

We think that we will be able to pay down more debt. We are in our budget. We have put through about $12.5 million of debt repayment in a range between $10 million and $15 million is what we are looking at.

Matt Reams - Buckhead Capitals

Do you expect any more asset sales? You have had quite a bit of asset sales in the last couple of years, do you expect anything else there?

Jeff Bowman

Not from a business point of view. I mean, the two we made were very strategic in terms of we did a complete review of our products and there were two product lines that we absolutely found were better off partnering with two corporations and investing large sums in getting the systems and the integration up to speed. We have got enough emphasis on the CMS 2 system and on the RIS Tech system without taking on another project, so we made some decisions around that which have proven to be the right decision until the end of the time, but they are no others that are planned.

Matt Reams - Buckhead Capitals

Do you continue to have a pretty healthy cash balance for next year?

Bruce Swain

We do and are planning as we have gone through the budget planning for cash which we have always quite a bit of attention to. We plan to maintain between $40 million and $45 million of cash at any one point in time with excess cash generated over those levels to pay down our debt. Now at the end of the year, we ended at a little bit north of $50 million, clearly above $40 million to $45million, as you know in the first quarter, we typically have a pretty heavy cash outflow, so we wanted a little bit higher than we normally would during a typical quarter point because we know we have significant cash requirement in the first quarter.

Matt Reams - Buckhead Capitals

Jeff, in your opening comments, you talked about this communication plan and strength of working together, can I assume that you are going to talk about each of your various operating units, your strategies to grow the business and ways in which you are going to continue to try to improve margins?

Jeff Bowman

Absolutely, we are finishing the whole plan, it will be linked into the annual report, it will be linked into a specific strategic plan and discussion as well, but it is an overriding story board for the organization as well as the direction of the management style that we are putting in place with the new management team.

Matt Reams - Buckhead Capitals

Okay, so we will hear more about that next quarter?

Jeff Bowman

Yes, absolutely, by next quarter. We are just working out how to push that out to our clients and investors as well at the same time. But we will be making some announcements in the next couple of weeks on that.

Matt Reams - Buckhead Capitals

Okay, great. We look forward to hearing those.

Operator

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

Jeff Bowman

I would like to thank everyone for joining us this afternoon and look forward to talking to you in the near future and on the call at the end of the first quarter in May. Thank you and have a great day.

Operator

Ladies and gentleman, thank you for participating in today’s Crawford & Company conference call. This call will be available for replay beginning at 6 p.m. to l1:59 p.m. on February 11, 2008. The conference ID number for the replay is 32434094. The number to dial for the replay is 1-800-642-1687 or 706-645-9291. Thank you, you may now disconnect.

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Source: Crawford & Co. Q4 2007 Earnings Call Transcript
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