Arthur J. Gallagher & Company (AJG) — Q1 2015 Earnings Call Transcript

Thank you, Melissa. Good morning, everyone, and thank you for joining us this morning. This morning, I'm joined by Doug Howell, our Chief Financial Officer, as well as the heads of our operating divisions. As we said in our press release a few weeks ago, we wanted to announce this morning and have our conference call because many of us will be at RIMS next week. So, again, thank you for being with us early this morning. I am very pleased with our quarter. Brokerage and Risk Management are both off to an excellent start to the year as we carry the momentum we created in 2014 into 2015. As I have said often, we are focused on four strategic efforts: number one, organic growth; secondly, mergers and acquisitions; thirdly, quality, margin improvement, and productivity; and fourth, we work hard to maintain a very unique and different culture. Adjusted revenues in our Brokerage segment advanced 36%, with 4.5% of that being organic. I am pleased with our continuing new business growth. Sales are what we are all about. Every day we get up and service our clients and work very hard to add new clients to our list. The first quarter was a great start to our year. In addition, we expanded margins by 210 basis points, which is just outstanding work by the team. In our Risk Management segment, revenues are up 11%, all of which is organic. Our margin expanded, finishing the quarter at 16.8%, a bit ahead of our 16.5% full year target. Together, our Brokerage and Risk Management operations are up 30% in revenues, up 46% in EBITDAC, margins are up two full points, and we are up 18% in earnings per share. Let me move to mergers and acquisitions. Our large acquisitions in 2014 are integrating extremely well. We are seeing good opportunities to do smaller bolt-on acquisitions in the U.K., Australia, New Zealand, Canada, and of course, the United States. We are off to a good start in 2015, having closed 11 acquisitions for about $34 million and added revenue. Our partners see the benefit of our unique culture and the capabilities we are investing in, and they want to be part of what we are building. As I do every quarter, I want to welcome and thank our new partners. The merger and acquisition world is really competitive, with lots of choices, and I am proud that these fine firms chose to join us. A warm welcome to all of you, and our pipeline continues to be very strong, so I see 2015 to be a very good acquisition year. Let me give briefly some color to the individual operations. Our U.S. property/casualty retail business continues to operate what I like to call a rational market. Rates across all lines and geographies were essentially flat for us in the quarter. This is good news for both our clients and Gallagher. Give us a stable rate environment, and with our aggressive sales culture, we will drive organic growth. We are seeing our customer businesses improved with some growth in revenues and payrolls. Both our international retail and our domestic wholesale businesses also had a strong quarter. Our employee benefits team is very busy, helping our customers manage their benefits and HR needs as a result of increased complexity and higher benefits and wages. In the United States, employers continued to deal with the impact of the ACA. Our consulting team has tools and resources necessary to assist our clients in complying with this legislation. We continue to see solid interest in the Gallagher Marketplace, which is our private label insurance exchange, as more employers understand the advantages of offering this to their employees. The team continues to invest in tools and resources our clients need to manage their employee benefits and human resource needs, and this has helped with strong new business sales and continues to drive increased merger opportunities in the U.S. and globally. Our Risk Management business, Gallagher Bassett, is off to an outstanding start, with strong top-line organic growth, margin expansion, and we are still investing in systems and people on our march to be recognized globally as the TPA who consistently delivers the best claim outcomes. Our Gallagher Bassett International business continues to expand and contributed nicely in the quarter. Our culture is thriving. We received two significant awards in the quarter. For the fourth year in a row, Gallagher was named one of the world's most ethical companies by the Ethisphere Institute. In addition, we are recognized as one of America's Best Employers by Forbes Magazine. We work hard to promote and protect our unique culture, and we are very proud of this recognition. So we are off to a great start. We believe we have a solid momentum and hope to deliver a solid 2015. With that, I will turn it over to Doug.

Thanks, Pat, and good morning, everyone. The first quarter was a terrific start to our year. Before I start, two housekeeping items: first, we have a small unit getting reclassified from the Brokerage segment to the Risk Management segment. All historical numbers have been reclassified. There was only about $4 million of revenue this quarter, and it really doesn't have that much impact on your segments earnings or ratios this quarter. Second, last year we formed a start-up Brokerage venture that we control, so we consolidated, but we own less than 50% of it. Since we don't own the majority, we've adjusted organic to reflect only our portion, and we have also footnoted the impact on EBITDAC. Frankly, it's not all that big, and that's also seasonally the strongest in the first quarter, so you can probably just ignore it in the next three quarters when you build your models. Okay, on to the results on the first page: $0.36 for Brokerage, $0.09 for Risk Management, and $0.18 loss for the Corporate segment show as an adjusted EPS of $0.27. The Brokerage segment adjusted EPS of $0.36 is nicely up 24% in the quarter. You will then see the typical integration costs, changes in earn-outs, and some severance, and you can also see that foreign currency didn't have much year-over-year impact in the quarter. Looking forward, some modeling help on revenues. First, rollover revenues, we have added on page 16 of the Investor Supplement a table showing our range for rollover total revenues for the next three quarters for mergers done in 2014 and in the first quarter of 2015. We will update that table each quarter. But be careful to not double count premium funding revenues. We're giving you total revenues on page 16, not just commissions and fees. Next, when you model new M&A revenues, please ensure that your models weight the closing dates more towards the last month of the quarter. Finally, foreign currency, we believe that before you apply your pick for organic growth, you should first adjust prior year revenues for the stronger dollar. For the first quarter, you'll see that FX caused a reduction of revenues of about $11 million for the Brokerage segment and $4 million for the Risk Management segment. Looking forward and assuming current exchange rates, we estimate the decrease in revenues due to the stronger dollar to be about $30 million, both in the second and third quarters, and then about $15 million in the fourth quarter. That was for Brokerage. As per Risk Management, assume about a $5 million reduction in both the second and third quarters and $3 million in the fourth. In the end, step back to make sure your models consider that the impact of FX will cost us about $0.03 in the second, $0.02 to $0.03 in the third quarter, and about a penny in the fourth quarter. Making these tweaks for currency, M&A timing, and premium funding should help refine your models on revenues. Next, integration: you heard Pat say that our integration is moving along as planned. So looking out over 2015, we are still seeing integration costs of about $0.07 to $0.09 a quarter in the second quarter, then about $0.06 to $0.07 in the third quarter, and about $0.05 to $0.06 in the fourth quarter. Staying with Brokerage by turning the page to the organic revenue table. First, let me give you some flavor behind the 4.5% organic growth in base commissions. Domestically we are about 3%, which we call can be our seasonally smallest quarter. So we feel really good about that number. Also, rate and exposure together had about one point of drag on our domestic results this quarter, but since 2011, the rate and exposure impact has been about zero, a little plus, a little minus. So like Pat said, it seems we are in a really healthy environment for brokers. Internationally we posted about 10% organic growth. So we are seeing some nice solid numbers around the globe. Next, as for supplements and contingents together, up about 5%, and we did see a couple carriers move from supplemental to contingent, contingent was caused by some geography shifts. But by and large, we did renew most of our contracts as is, and we expect to see some moderate growth in these lines yet this year. Now flip to page three to the appropriate segment, adjusted EBITDA margin table near the bottom of the page. Adjusted margins are up over 2.4 points excluding the non-owned share. About half came from our organic growth and expense controls, and the other half from the roll-in impact of the larger deals. That's really excellent work by the team. As for the remaining quarters of 2015, we don’t expect much more margin expansion from the rolling of our larger deals as most of them were already in our numbers by the end of the second quarter of 2014. We’ll get a little, but not much more. Finally, on the Brokerage segment, let me give you some non-cash estimates for the remaining quarters for the Brokerage segment. For depreciation, I assume about $15 million of expense, for amortization of about $55 million, and for acquisition earn-out amortization, assumed about $5 million. Then as we do more M&A for every dollar we spend, you’ll need to increase amortization by about 1% of the purchase price per quarter, and that will get you close. Now turning to the Risk Management segment, really a terrific quarter across the board for Risk Management also. Our domestic operations grew organically over 12%, and internationally about 5%, and we’ve continued to improve margins and slightly surpassed our 16.5% target for the year. We expect organic to be in the upper single digits for the rest of 2015. Let’s shift to page five to the Corporate segment, a really nice quarter for our clean energy investments and right in line with the estimates we forecasted last quarter. We haven’t changed our outlook for the rest of 2015 very much that we have provided on page 15 of our investor supplement. So right in line both this quarter and looking forward. And finally, some comments on our M&A program: we did 11 mergers this quarter at a weighted average multiple of just over seven times. Also remember that we tend to do fewer mergers proportionately in the first quarter. I guess we could call it lower seasonality with our M&A program, and has been that way for five years or more. We feel very good about our opportunities to do a lot of nice tuck-in mergers this year. Next, looking at the remainder of 2015 in terms of M&A funding, we used about 1 million shares this quarter and we think we’ll use about 3 million to 4 million shares in the second quarter, then for the balance of the year will be mostly using cash. So those are my comments and, like I said at the start, it was a really terrific quarter on all measures. Back to you, Pat.

Thank you, Doug. And Melissa, we’re ready for questions.

Thanks. Hey, Pat, I was just wondering. You mentioned 10% organic growth internationally. Can you talk a little bit about what’s underneath there and can we talk maybe specifically about the recent integration or the recent acquisitions in the one that is being currently integrated? What sort of organic did we see out of those guys? Thanks.

Mike, this is Doug. I made the comment about 10% growth internationally.

Okay.

We’re seeing good results out of our London specialty business. The retail businesses there that have been in our books for at least a year are performing nicely. So those are the two segments internationally. Our small previous operation down in Australia had a terrific quarter, but again, it’s so small it didn’t move the number. But those are the three places we’re seeing strong spots.

Also, like Canada contributed nicely.

Okay.

That’s for our organic. But Canada actually had almost 6% organic growth, but that’s not in our organic growth numbers yet. If you look across the globe, it’s a little difficult in the first year or so until we get the accounting squared away on all the operations consistent last year, but consistent this year, just the way the billing practices were. But our best guess right now says that if you add up all our other international operations that are not included in our organic, they’re probably flat to where they were the prior year as we measure about the same. Our organic would have been close to 4% total if we would have thrown them in and started counting them as organic in this quarter. So we’re pleased with the results. There is some softening in Australia and New Zealand, so you are seeing some market pressures there. Canada is holding up nicely, and the U.K. is holding up nicely.

Got it. And then just could you update us on sort of leadership in the U.K. I mean, there is, I’m sure there’s continuing to be some turnover and change as you guys kind of continue to purchase three companies together. Any update on kind of what’s happening on that front?

Yeah. Mike, I think we’ve got a very stable situation now. Grahame Chilton has taken over as our CEO for the overall international operations. Retail U.K. is very stable right now. Specialty is very stable. So really what we had in U.K. is we’ve got about 5,000 people there, and we had five people depart, and we’ve got a really solid leadership team that we’re excited about.

Okay. Lastly, regarding Risk Management, what kind of operating leverage should we expect in that business? You mentioned 10% organic growth and approximately 16% margin. Is there a certain growth level where we could see additional operating leverage, which might lead to an increase in that margin? Also, could you elaborate on what's driving the current organic growth and what gives you confidence in achieving upper single-digit growth for the rest of the year? Thanks.

Hi. So a lot of questions in there, but first, if you recall, we have stepped up our margin target in the past. We were at 16 point, and our margin target is now at 16.5 for this year. So we are moving the margin target up. It is the business that the operating leverage on that. We’ve done that in the past. You need about 5% to 7% organic growth in order to show much margin expansion in that business, unlike the Brokerage segment that you can start to see some margin expansion at between 3% and 4%. Around 3% you start to get it. The operating leverage on it is probably incremental at 25% to 30%, whatever you grow in excess of that 5% to 7% range. It should be able to hit the bottom line.

Okay.

Claim outcomes are really what we’re selling in that business. That is when we show our customers that settling claims do it using Gallagher Bassett produce a better claim outcome. Our analytics drive that, and it supports it. Domestically, our customers are seeing the value that Gallagher Bassett brings. And I wish it were more sophisticated than that. It’s just our customer sees better claim outcomes.

Also, like Gallagher Bassett, it’s a bit of a proxy for the U.S. economy. We’re seeing work comp claims on existing clients up in claim count by about 4.8% and liability claims up about 2% on existing clients. So that basically is because of increased sales and hiring.

Got it. Great. Thank you so much.

Thanks, Mike.

Good morning and congratulations on a good start for the year.

Thank you, Kai.

So first question is a number of questions. You guided for the first quarter, acquired revenue around $175 million, but it looks like the reported number is meaningfully below that. Just wondering what would have driven that?

Yeah, Kai, you're asking the right question. We reported about $162 million in total rollover revenues for the quarter. This is different from the $175 million we had guided for. I rounded up by about $5 million, and factoring in another $5 million due to foreign exchange impacts probably brought us down further. So, the $162 million on the bottom of page two of 11 contrasts with the $175 million guidance. I also noticed that many were including the entire $175 million in commissions and fees, which also accounted for the premium funding revenue that was reflected in the investment income line. This resulted in some double counting in several models regarding the premium funding revenue, which may be causing confusion in your calculations.

That’s great. My second question is about your margin. I understand you projected an increase of about 80 to 100 basis points from the acquisitions, but you weren't expecting much from organic growth. However, it seems that organic growth contributed around half of the margin expansion this quarter. Can you clarify if this is due to better-than-expected organic growth or if it’s mainly due to expense control measures? How should we view this moving forward?

First, my guidance last quarter indicated that we expected about a point of margin expansion from the larger deals, and we achieved that. The rest of the margin expansion came from our 4.5% organic growth. We have consistently stated that margin expansion can occur above 3% in this environment. We also implemented effective expense controls during the quarter, particularly regarding headcount. Looking ahead, we anticipate some additional margin expansion next quarter from the larger deals, possibly around 25 to 50 basis points. The remainder will depend on our organic growth exceeding 3%, which we hope will lead to further margin expansion. This is the outlook moving forward.

That’s great. Last question, more of a bigger picture. Regarding acquisitions, one of your comments mentioned that pricing for deals is becoming competitive, especially for private equity funds. Do you notice this trend and consider it a challenge to your acquisition strategy, as well as for industry consolidation? Additionally, do you anticipate significant consolidation occurring in the broker space among publicly traded and bank-owned broker entities?

I will give you the numbers. I will let Pat give some of his response on how he sees the consolidation of the industry going. The numbers last year of our 57 smaller deals, the weighted average multiple that we paid was about 6.7 times. When I look at this first quarter, we are just slightly over 7 times. There was one in that mix that may have moved it a little bit. How do I see the rest of the year? I see that there is still competitive pricing in that 6 to 7 times range. I think that the reason why is that people, when they look at joining Gallagher versus perhaps a PE firm or something, they really see our capabilities that can drive them to be more successful also. So when we look at it, we think that our multiples are competitive. We think that people are choosing us because of the capabilities we bring and the expertise. As for the consolidation of the industry, I will let Pat talk about.

Yeah. I will talk about the environment a little bit, Kai. It’s very, very competitive on business that’s a little bit larger in scale. So if you take a look at business insurance last July, to be number 100 in terms of U.S. size, you did $24 million in revenue. I was at the conference this past week, and the estimate that this consulting firm had in terms of the number of brokers in the United States was 37,000. I have used anything from 18,000 to 30,000 in many of my speeches. So there's a very, very fragmented industry, and there just aren't an awful lot of those that are over $25 million revenue. And we are very good at attracting those people that have entrepreneurial firms, $3 million to $5 million in revenue, make us have a solid margin on those, have no expectation of 9 to 10 times. And frankly, as Doug said, it's not just about the money. Yes, we have to be competitive at 6 to 7 times. EBITDA is probably right in the wheelhouse. But really it’s about the capabilities and the culture. Our people are choosing to join us. They have lots of choices, and in the end, they are choosing to join Gallagher because of what we are building, and we are excited about that. We are very happy to have people with $3 million to $5 million in revenue join the company.

And on the largest skill side, do you see sort of a more consolidation happening in this space?

I think you are going to see consolidation happening just like it has for the last decade.

All right. Thank you. Thank you very much.

Thank you.

Yeah. And follow-up to each of Kai’s and Mike’s questions. On Kai’s question about the margin expansions, Doug, you said that you don’t expect any more margin expansion from the roll-ins, and if there is no more margin for the rest of the year, I just want to be clear that’s just related to the roll-in. Do you still probably expect margin expansion as long as your growth remains consistent on the organic side?

Yeah. What I said was is the roll-in acquisitions in the second quarter might contribute a quarter to a half of a point of margin expansion. By that time, most of all will be in our books, so it won't have much impact going through the rest of the year. Then if we grow over 3%, we might see margin expansion at that level too in this environment of wage inflation. So you're hearing it right that the roll-in of the deals, maybe another quarter to a half in the second quarter. After that, not much more because they are already in our books, and then organic growth should drive margin expansion if it’s above 3%.

Okay. That’s helpful. And then regarding Mike’s question, I was wondering if you can give me a Theory of Everything on management and producers and whatnot? To what extent do you lose something when you lose managers and important businesses, and to what extent have you gained someone, you pickup someone like a Chily to run the business? What is the potential weight of producers? What is the potential gain of producers? What’s the net sum on all of these changes?

Okay. So, Josh, the Theory of Everything is this. We will do extremely well when people join us, and we will take a hit when people leave us. And the size of that will depend on whether or not the folks that are with the company are excited to be here and stay or whether they leave. And to tell you the truth, the nice thing about Gallagher is I think if you take a look at our turnover, if you make $100,000 at Gallagher, you don’t leave. Our turnover is literally nil. And we do a very good job of bringing people aboard both by the merger and acquisition efforts, as well as just organic recruiting. And so frankly, I look at where we are today, and I know you're referring to our London departures. We haven’t lost $1 of revenue, not $1. And I think with Chily in the seat, the line of people that are looking to be hired by Gallagher has actually expanded substantially and we feel really good about that. So, I think net-net in the end, we are going to be up nicely in revenue.

Have you net gained or net lost? There is really no need to worry.

Not one, not one. Not one producer.

Have you gained some?

Yes. We are still looking at new hires as a great opportunity, not just in London, globally. And yeah, we are net up and we are thrilled about it.

And regarding cash to come, is there any risks of having Chily being dual-added or are there any significant benefits to Gallagher in that?

The benefit to Gallagher is outstanding. I mean, I’ve just got to tell you. This guy is the real deal, just intended our Board Meeting this week. The Board is incredibly comfortable with Chily. I have known Chily for a long, long time. And to be on the same team is really exciting. He is a solid, solid Senior Executive who has great experience in running public companies. He is a broker’s broker, which I like because we are a brokerage run by brokers and we speak the same language. He is a very solid executive with a great reputation and we’ve got, as I said, we’ve got a very long line of people who want to join us. So it’s exciting.

I apologize for the misunderstanding. Are there any benefits to having a connection with Capsicum? Is there anything you can leverage from that partnership?

We own 25% of it and have about 35% economic interest, and ultimately, Capsicum will be one of the stories that will impress you in the future.

Okay. Great. Thank you very much and good luck with everything.

Thanks, Josh.

Good morning, Gallagher.

Good morning, Glasspiegel.

I’m glad you ran the last name basis, that’s great. Given your presence in the U.K., I’m going to use you guys as my quasi economists. We’ve had the euro and the pound go down in these currency wars, but in theory, it’s going to cause a little bit more economic growth in the region because currency wars are zero-sum games. But the outlook for European growth has expanded the markets. Stock markets are up in those regions. So, yeah, you’ve got the currency hit there, but the offset is you may get a little bit faster economic growth in the region. What your economists had on and tell me what you're seeing in Europe and U.K. economically?

I believe you heard correctly, Bob. Our organic growth during the quarter was strongest outside the United States. The changes in the dollar, pound, and euro are likely to stimulate some growth in those economies, and we expect to benefit from this, particularly due to the actions we took last year in retail.

So it seems to me, I mean, devil’s advocating Doug’s currency headwind needs to be offset by a little bit better growth underneath, so we really shouldn’t take $0.03 out of Q2 completely.

Well, I don’t think it moves that fast, Bob.

Bob, if I were you, I would use Doug’s guidance.

Right. I know those will come out on the currency and we will see levelized currency from the revenues coming out the year ago for sure. But my point is that there is an offset if in fact you are getting more growth outside the U.S.

Yes. I hope so, Bob. I really do. From your lips to God’s ears.

Okay. The other thing is CIAB numbers, I guess down 2, you would quarrel that sort of with your flattish commentary, or is minus 2 sort of consistent with flattish?

No, I think minus 2 is what I have been saying for the last number of quarters. You and I have witnessed real cyclicality going back to the 70s, the 80s, and the early 2000s, and that’s real cyclicality. Everybody is worried about the rate of increase decreasing. I am saying that if it’s 1% to 2% up or 1% to 3% down, in my history and experience, that’s not a cycle; that’s flat. In our business for the quarter, rates and exposures essentially produced no increase or decrease. But I don’t dispute the CIB. I think they are accurate, and that information is anecdotal as well. However, I believe that we are in a flat and rational environment. There is still no investment return for these companies. I have said this many times: in my career, for the first time, I meet with CEOs of major insurance companies who tell me what’s happening in the field, and they are right. There is much better information now, and I think they are just more disciplined. So, a rational market, which is fantastic.

Pat, that’s my market, that’s my crystal ball as well. I hope we are both right.

Me too.

Good morning. And congratulations on the quarter.

Thank you, Paul.

I was hoping you could talk a little bit about the competitive environment within the Brokerage business itself. It looks like you are gaining a little bit of market share relative to your peers. Maybe you could talk about where you think that market share is coming from in general?

Yes. I would be glad to talk about that. In fact, we know for a fact, Paul, we are getting better and better at knowing our data and being able to study what’s going on in our book of business. And we know that over 90% of the time when we go into competition, we are competing with somebody that’s smaller than we are. So when you look at share, I don’t want you to think Marsh, Aon, Willis, Brown, and we are battling it out on every account. That’s just not the way it is. The real marketplace is that fragmented place, which is relationship-driven and is middle market driven. We do a very good job on Risk Management accounts. We love to pursue large accounts. But by and large, our people day in and day out are competing in the middle market. When they do that, they are competing with the local broker. One of the reasons our acquisition pipeline is so robust, and one of the reasons we are closing as many deals as we are, is because people really like to see the capabilities. When I started in 1974, we fought above our weight class every single day. Today we can go out to any account of any size, anywhere on the globe and tell them we could be helpful. Our brand is getting stronger. People are beginning to know more about Gallagher and frankly, we put a lot of boots on the ground, and we are an aggressive cold-calling company. So we are out there every day pounding the street trying to get new business. And when we don’t write an account, it is frankly because we can’t break the relationship. And I look forward to the future time when those relationships, you could hold onto your best friend from high school for a while, but ultimately my capabilities are going to push you.

I am not sure my best friends even talks to me anymore. Thank you. Appreciate it.

Thanks, Paul.

Thanks, Paul.

Thank you. Good morning. Could you give us general thoughts on contingents and supplementals, how you think those will be shaping up as we get through 2015? If pricing is a little bit more flat to down, underwriting results flat to down, how do you think that will show up on your revenue line?

For the remainder of the year, we anticipate that if you combine the two figures, last year's performance will show organic growth this year. The carriers understand the value we bring through distribution, and they recognize how the supplemental and contingents align our interests with those of our customers and the carriers. As a result, they typically respond positively. We are engaging in professional discussions about the elements that advance our mutual interests as we develop together. Overall, I believe our relationship with the carriers is quite strong.

Yes, Mark, I would say that having gone through the Eliot Spitzer era and all the controversy around contingents and supplementals and what you have and going through the rounds of negotiations, it’s very stable right now. I think the carriers are at a point where they have got programs that they believe are driving good results for them, and it’s a very stable thing. We are not having a lot of conversations about should it change next year, how much should it change up or down; they are those carriers that solidly believe that they just want to stick with contingents, and that’s fine with us. And there are others that understand that supplementals drive the bus as well. So I would agree with Doug. I think you will see. I think supplementals and contingents will follow our organic growth.

If we see underwriting results under a little more pressure, we wouldn't necessarily assume that will have an impact on your contingents or supplementals?

No, I think that the underwriting results do deteriorate, then you will see in the contingent line. So if you look at the table on page 2, I think it is, then the contingent line will come under pressure.

There is no pricing power in the market right now, Mark. However, we believe that carriers still have some ability to adjust their pricing rationally. There are certain lines that are struggling, and they have the opportunity to increase prices on those lines to restore their profits to a healthier level.

In the Risk Management business, do you have a view on workers' comp claims, whether frequency is up, down, sideways? I know you are taking share and your clients are adding payroll, so that may be influencing your frequency, but aside from that? You hit right on it. The Gallagher Bassett is up 4.8% in workers' compensation claims this year from existing clients; that's a definite proxy for the economy. That's because there are more employees in place.

Got you. Great, guys. Thanks for the comment.

Thanks, Brian.

Good morning, gentlemen.

Good morning, Brian.

Just a conceptual question, probably more for you Doug. As you guys are thinking about more, a few more international acquisitions, does it make more sense to use your cash that’s located overseas, or to start issuing debt overseas, especially with the European bond markets are doing right now in terms of yield?

Well, I think first is use the cash that’s created by the indigenous operations there, so it’s better to keep it there reinvestment, and that actually works great. And remember, if we do bring it back, we are in a fortunate position that even if we brought it back to higher tax jurisdictions, our tax credits will shelter that. So we do have the flexibility of moving currency around the globe and not have a damning effect on our taxes. So that’s worth a thing. Looking at international, yes, I think those are some opportunities there. There are some issues about doing that. There needs to be enough of a sizeable offering there to attract attention, but it’s certainly something that on our radar screen to see as we look forward. Maybe that’s a spot to do the debt. So you’re thinking about it the right way.

Got you. And then just, Pat, for you. At what point do rates have to start coming down before your clients start pushing you to change carriers? I mean, do rates have to start coming down 5% or more for that to start occurring in the market?

Yes. I think what’s interesting, of course you have to be competing on price. I mean, people say, whether you compete on and prices are a big part of it, and if there was a carrier that wanted to break for market share and was willing to be 7% to 10% off, I think, but not 5%, but 7% to 10% off, that could cause some consternation in the market and could cause some movement. They would in fact pick up share doing that. And that’s why it’s interesting to me to see this rational behavior in terms of the competitive landscape. I’ve never really lived with this before, so it’s been one way or the other — either you’ve got rates coming down substantially, and you sharpen everything or rates are going up and you’re scrambling to get the coverage you want. So I think there is a change here. It’s been probably four years now of relatively rational behavior by underwriters, and I think it’s very similar to what we saw with the benefits business in the 70s, going into the 80s. The cycle came out because people began to understand that the inflation behind what was going on with medical care would not allow you just to compete on price. And I think people see that. We do have claim inflation in the marketplace. There is tort inflation. There is not a lot of good rates of return in the buyer market, and they have to make their money underwriting, and they’re very, very — they are much better equipped at this time in my career with information that I’ve ever seen. So when I talk to CEOs of insurance companies, they know by line, by geography, where they’re making money, where they’re not making money, and they’re holding those offices and those underwriters accountable for underwriting profit. And I think that’s a great place to be.

Got you. Great, guys. Thanks for the comment.

Thanks, Brian.

Thanks so much. Good morning.

Good morning, Meyer.

So one question. We haven’t talked about this in a while. Heath Lambert had some sort of Western Europe aspiration. Can you talk about what you’re doing outside of the U.K. and Europe?

Yes. We have — in fact, I will be meeting with them next week. We have what we refer to, Doug refers to, our branded network as the Gallagher Global Alliance, and that’s how we’re trading in Europe through affiliates that are independently owned agencies that are vetted by us and contracted by us to help our clients, and we mutually share the work on clients that they have in locations where they don’t have operations, in the same and we do the same. And right now in Western Europe, we have nothing in the pipeline to move in that direction.

Okay. Thank you. And then a question for Doug, I was just trying to get the straight. You talked about getting — I don’t know about half of the margin expansion from headcount control internally. Does that change the bogie from 3% organic growth to translate into margin expansion or is that sort of assumed in there?

That’s assumed in there. The fact as we get better at what we do, we have the opportunity to become more efficient, more productive and still raise our quality, but there’s just a natural — people deserve — where those stay reserves raise though that we don’t re-hire. We consolidate jobs, but that’s baked in there. Headcount controls or something that are baked into my assumption that you still got to have headcount controls even you have 4% organic growth too.

Okay. And then finally given the London market presence, is there any impact on margins from foreign exchange changes?

Yeah. I mean, just the math would show that could cause some margin contraction. So just by the way you do the math, we actually have a nice book of dollar-denominated revenues, because of our specialty business in London, so that kind of helps a little bit with the pounds. So it’s not so big. We don’t have that kind of dollar-denominated revenues in Canada, Australia, and New Zealand there. So it does have a little impact on margin but it’s — but not that much just by the pure math.

Okay. But the little impact is, it’s sounds like you’re saying it is adverse on that base?

Correct.

Okay. Great. Thanks so much.

Great. Thanks, Meyer.

Good morning, Pat and Doug. Congratulations on the quarter.

Thanks, Greg.

Hey. From a big picture perspective, it seems like technology and analytics are playing an increasingly important role in revenue production. And so I was wondering, how you measure the adequacy of your continuing investment in this area in the context of the margin improvement you laid out for the balance of the year?

Well, we’re getting good technology improvement lift. As you know, we’re still investing in Gallagher Bassett, our analytics workbench there is probably the best in the business right now, but beyond a doubt its bringing great value to our customers, and so we’re getting value from math. Some of the technology investments we are making, they are table stakes. So we’re doing that, and then when you look over in the Brokerage segment, our ability to capture all the premium that we place around that globe, so we can sit down and have valuable productive conversations with our carriers is delivering value too. So in terms of measuring our technology investments, some of it just stay competitive in the business, and some would generate revenue, and we think that what we’re doing both in Gallagher Bassett, analytic workbench, and then in the Brokerage side, of our smart market, our advantage products, which are data products, we think we’re doing a good job on that. And it’s leading to some nice revenue opportunities for us.

Yeah. I would agree; I think, when you look at this, Greg, the payback that we’ve gotten on technology investments, it’s pretty high to put your finger right on it, but putting salesforce.com in place. Having the technology — the technical capabilities now to have all of our U.S. operations on the PC side, on one agency system, we’ve been in — basically one agency system in the benefit side for years, giving us tremendous abilities to use a data warehouse. We now know more about our book-of-business every single day than we did years ago, and it’s incredibly helpful in terms of being able to compete. When I go see the contracting risk, and I can tell them exactly how many dollars of premium we have in the contracting space, you can tell them how many accounts, where they are, what size they are and why they should trade with us. And I can translate that to what that means to the insurance carriers that we are placing that business with; it gives our producers a real leg up.

From a budgeting perspective, do you measure your investment as a percentage of revenue and is it done by segment? And would you say that that increase stable or decrease trend-wise?

It's about stable with our percentage of revenues, though I don’t have the exact figure in mind. We haven't seen it increasing. One of the benefits of achieving scale is that it allows us to reinvest in technology. Our goal is to eliminate redundancy that arises from consolidating numerous agencies, taking their individual spending and reallocating it into tools and technology that enhance our sales and improve our clients' risk management. This is the clear advantage of scale. There’s no doubt that our offshore centers of excellence in India benefit from this scale. As we integrate more smaller tuck-in agencies onto our platform, we can capitalize on that spending for reinvestment. So, there are undeniable advantages to scale.

On the offshore centers of excellence, have we pretty much harvested all that can be done out there or do you see further opportunities?

No. I see huge opportunities. I believe 20% to 25% of our employees ultimately will be in those centers, whether they are in India, whether they are in the Philippines or they are here in the U.S. or wherever we put them. I think the service centers that we are creating will continue to be tremendously additive to two things, both — first, our margin, but most importantly to our quality. We’ll issue over a million certificates of insurance out of India this year. We know for a fact. We can go in and look at this. We do that at 99% accuracy. Now when I was addressing a group of independent agents and brokers just last week, I asked them how many of them had any clue what their level of quality was on the certificates they put out. There’s not one of them that even knows how to measure it. And that I believe is sellable in the marketplace. When I can go into a client and say look, here are the facts, your certificates are going to come out at 99% accuracy, do you care about that? Well, yeah, you do care about that because that's what you're relating to your vendors and your clients, what your coverage is, it better be accurate. So there's tons of opportunities.

Right. Thank you very much for your answers.

Thanks Greg.

Thanks Greg.

Thanks. Doug, I think you mentioned it's more about your perspective. Could you provide additional insights for us to gain clarity, and do you still believe that business could see significant growth this year compared to last year?

I’ve never said that it’s going to be up materially this year. I said that this year is a platform year for a step-up in ‘16.

Okay.

And perhaps this is a flat year, but I do believe there is upside in next year. We are having tremendous appetite for our remaining plans. Remember, our desire is to own a portfolio of plans, so you are going to have always have some that start-ups, some that shut down for production reason, for appetite for clean call. We see that the appetite for further planned installation has been very strong at this time. So this is a platform year relative to 2014, but in ‘16 we see another step-up in that.

Okay. And then as far as interest and banking costs, should we think about the rest of the year similar to what we saw for this quarter?

Yes. We provided the guidance back on page 15, I think of the supplement. We feel comfortable with the ranges that we provided on that supplement there. So if you use that you will get pretty close to your interest and banking cost, as well as the other corporate line.

Okay. And then finally, as far as share count, non-acquisitions, what should that do?

Typically, what we have is about 1.5 million shares between basic and fully diluted related to our option in our restricted stocks, et cetera that go out, would be the employee compensation that is on slide. I see that somewhere in the 6 million to 7 million ranges, just constantly at that level.

So is that for quarter, for the year?

That’s just for the year.

Just for the year. Okay.

Our basic plus is essentially the basic amount plus about 6 million to reach the fully diluted total.

Great. Okay. Thanks a lot.

Thank you.

Thank you.

Thank you for taking the follow-up. Doug, you mentioned you issued 1 million shares first quarter, expecting 3 to 4 million in the second quarter. Just curious, is that because you see some large deal in the pipeline that would need some larger allocation of the stock component?

Kai, we’ve got a couple of tax-free exchanges that are lined up during that quarter. Remember, we use stock in a tax-free exchange, and frankly, there is a lot of our partners right now that want the stock. We have future partner that want the stocks, which we like. So that’s the real reason there.

Okay. So it's not specifically allocated for some potential large deals?

That’s right.

Okay. Thank you very much.

Thanks, Kai. I think that’s all our questions. Lisa, is that correct?

Okay. Just one quick comment. Thank you again everyone for being with us this morning. We really appreciate it. As I said at the beginning, I’m incredibly pleased with our start to 2015, and look forward to continuing to execute. I think we’ve got good momentum and hope to have a solid 2015. Thank you for being with us this morning.