Brown & Brown Inc (BRO) — Q4 2018 Earnings Call Transcript

Thank you, Bryce. Good morning everyone and thank you for joining us for our fourth quarter 2018 earnings call. Before we get into the performance of the quarter, we’d like to welcome all of our new teammates that joined us this quarter from recent acquisitions. We definitely had a busy quarter adding almost 800 new teammates and acquiring five businesses with approximately $227 million of annualized revenue. The largest deal we completed in the quarter and in our history was the Hays companies, and it closed effective November 15. We’re excited about the additional talent and capabilities these acquisitions bring to our customers and to our team. I’m now on slide four. Now, let’s get into results for the fourth quarter. We delivered $508.7 million of revenue, growing 7.3% in total. Excluding the impact of the new revenue standard, our total revenues for the quarter grew 8.6%. Our organic revenues decreased by 2.1% for the fourth quarter, which was driven by the significant claims processing revenue we recognized in Q4 of 2017 associated with Hurricane Harvey and Irma. Isolating this impact, our organic revenue growth would have been over 3%. I will get into more detail in a few minutes about the organic growth for each segment. Our EBITDAC margin was 28.1%, which is down 210 basis points versus 2017, and it was primarily impacted by the claims revenue recognized in the fourth quarter of 2017, and the new revenue standard in 2018. Andy will discuss the detailed movements of our margins later. Our net income per share for the fourth quarter was $0.26 versus $0.66 in the fourth quarter of 2017. Remember that our EPS for the fourth quarter and the full year 2017 was impacted by the one-time benefit of $0.43 associated with tax reform. On an adjusted basis, which excludes the one-time tax benefit, the change in acquisition earn-out and the new revenue standard, our earnings per share was $0.27, which is an increase of 12.5% as compared to 2017. I’m now on slide five. We’re pleased with our full-year performance as we surpassed $2 billion in total revenues for the first time. This is a significant milestone for Brown & Brown. It was seven short years ago that we crossed the $1 billion threshold, with a lot of positive changes and improvements in our company since then. This is a result of all the efforts of our outstanding team of almost 10,000. For the year, we grew total revenues over 7% and experienced organic revenue growth of 2.4%. Please remember, Q4 2018 was negatively impacted by a significant amount of claims revenue recorded in Q4 2017. Isolating the year-on-year variance in claims activity, we would've grown organically approximately 4% for the full-year. Our EBITDAC margin was 30.6 and our net income per share for the full-year 2018 decreased to 122 from 140 in 2017, almost entirely driven by one-time tax adjustment I mentioned earlier and the nonrecurring claims processing revenue. On an adjusted basis, which excludes the one-time tax benefit, change in acquisition earn-outs and the new revenue standard, net income per share increased by 23% to $1.18. For the full year, we closed 23 transactions with approximately $323 million of annualized revenue; by far our largest year ever for acquisition activity. In regards to acquisitions, 2018 was one of those years that everything seemed to work out for the Brown & Brown team. We’re really pleased to have completed at least one acquisition in each of our four segments last year, another first for our company. Lastly, we would like to extend a huge thank you to all of our teammates that supported our acquisition activity. It was a busy year, and our success would not have been possible without their significant efforts. In 2018, we grew the top and bottom line nicely. We added talented teammates, increased our capability to serve our customers, invested in technology, and continued to invest in our teammates. Our performance is the direct result of the incredible effort and dedication that our team strives to achieve each day for our customers. Later in the presentation, Andy will discuss our financial results in more detail. On slide six, the economy during the fourth quarter continued to expand with exposure units increasing across most industries and geographies as our customers continue to invest in their businesses. We’re seeing a lot of construction going on around the country and there's a general shortage of qualified labor for many industries. Rates for most lines remain generally flat. The exceptions continue to be commercial automobile, which is up 3% to 7% or more depending upon the loss experience, and almost all employee benefits accounts continue to experience rate increases. Worker’s compensation continues to be down in the 1% to 3% range in many states across the country. Coastal property rates for the quarter remain generally flat with some downward pressure on the best accounts and upward pressure on those with poor loss experience. We made a lot of progress this past year and are pleased with the investments in our core commercial program as well as our technology investments related to both core infrastructure and innovation. Now on slide seven. Let’s talk about the performance of our four segments. The retail segment delivered solid organic growth of 3.5% in Q4 with most lines of business growing through solid new business activity. During the quarter, we completed five acquisitions and realized approximately $44 million of year-on-year revenue growth from acquisitions. For the year, we delivered 3% organic revenue growth which represents continued incremental improvement over prior years. As we’ve discussed before, while it’s good to look at the quarter as we believe the real measure is the full-year results, and 2018 was another year of improvement. Over the past four years, we are pleased with the continual improvement from 1.4% organic revenue growth in 2015, then increasing to 1.9% in 2016, then 2.9% in 2017, and 3% for 2018. Our national programs segment decreased 14% organically. This was driven by approximately a $20 million decrease in claims processing revenues as compared to the fourth quarter of 2017. Isolating this change, our national programs segment would have delivered positive organic revenue growth of just over 1%. A number of our programs performed well, most notably our earthquake and all risk programs, but we had some experiencing changes in carrier risk appetite that resulted in decreased performance year-over-year. For the full year, our organic revenue was about 1% negative, which was impacted by lower year-over-year claims processing revenues. Isolating this change, we would have delivered positive organic growth of over 4%. So, it was a good year for the national programs segment. Our wholesale brokerage segment delivered organic revenue growth of 3.4% for the quarter driven by expansion in all lines of business. This is down versus prior quarters –the prior quarter of last year, which is consistent with the past three years that we had lower organic growth in the fourth quarter due to the amount of new and renewal business in the quarter. For the full year, we’re very pleased with the organic growth of 5.7% for our wholesale brokerage segment. Our services segment organic revenue decreased by 3.3% for the quarter driven by claims processing revenues recorded in Q4 2017 as a result of Hurricane Harvey and Irma. Isolating these claims revenue, the services segment experienced strong organic revenue growth of approximately 7% for the quarter driven by new business; isolating the decreases in claims processing revenues, our full-year organic revenue growth would be approximately 6%. When we look back on the year, we’re pleased with the performance and the acquisition activity of our four segments. Now, let me turn over to Andy who will discuss our financial performance in more detail.

Thank you, Powell. Good morning, everybody. Consistent with previous quarters, we’re going to discuss our GAAP results and then our adjusted results excluding the impacts of acquisition earn-outs, the impact of the new revenue standard and the impact of the fourth quarter 2017 reevaluation of our deferred tax liabilities that Powell mentioned earlier. As a reminder, we have excluded the impact of the new revenue standard for calculation of organic growth in order to provide a better comparison of 2017. Moving on slide number eight, this presents our GAAP and certain non-GAAP financial highlights. For the fourth quarter, we delivered total revenue growth of 7.3% and with organic revenues declining 2.1%. The decrease in organic revenue is a result of the claims processing revenues recorded in the fourth quarter 2017. Isolating these revenues, our organic revenue growth would have exceeded 3%. Our income before income taxes decreased by 5.3% and our EBITDAC declined by 10 basis points, both of which were negatively impacted this quarter by the new revenue standard and the claims processing revenue we realized in the fourth quarter of 2017. Our net income declined by $114 million or 60.8% to $73.5 million and our diluted net income per share decreased by $0.40 or 60.6% to $0.26 versus $0.66 in the fourth quarter of 2017. The one-time deferred tax benefit recorded in the fourth quarter of 2017 was $120 million or $0.43 of earnings per share. During our third quarter earnings call, we estimated the impact of the new revenue standard for the fourth quarter of 2018 to negatively impact revenues by $3 million to $7 million, and the pretax income impact to be in the range of zero to negative $5 million. For the quarter, the actual revenue impact was a negative $6 million and the pretax impact was a negative $4.5 million. Net income and diluted net income per share were impacted by the one-time benefit of tax reform recorded in the fourth quarter of 2017 and the lower claims processing activity. Our weighted average number of shares outstanding decreased approximately 930,000 as compared to the fourth quarter of 2017. This was driven primarily by the share repurchases we initiated in the fourth quarter of 2017 and we completed in the first quarter of 2018. During the fourth quarter of 2018, we also initiated a $100 million accelerated share repurchase program. This is expected to offset the dilution associated with the Hays acquisition. As we discussed before, we still intend to repurchase shares periodically in 2019 to manage the share creep associated with our equity plans. Our goal is to generally keep our share count flat. Lastly, our dividends per share increased by $0.08 or 6.7% compared to 2017. Moving over to slide number nine, this slide presents our results after removing the change in estimated acquisition earn-outs payables for both years. The one-time tax revaluation adjustment recorded in the fourth quarter 2017 and the impact of the new revenue standard in 2018, this approach provides a more comparable basis. For the quarter, our revenues increased by 8.6%, income before income tax decreased by 1.4%, and EBITDAC increased by 3.1%. The lower EBITDAC growth rate was primarily due to the claims processing revenues in 2017 and increased non-cash stock compensation costs in 2018. In a few slides we'll talk more about the components of our margin change year-over-year. The lower growth rate for income before income taxes was driven by incremental interest and amortization associated with the acquisitions we completed during the year. Our net income grew by 14.9% and diluted net income per share was $0.27, growing by 14.9%. Both of these metrics benefited from our lower federal income tax rate, which was 27% for the fourth quarter as compared to 37.3% for the fourth quarter of 2017. Moving over to slide number 10, this slide presents the key components of our revenue performance. For the quarter, our total commissions and fees increased by 7.3% as compared to 2017. Our contingent commissions increased to $9.1 million as compared to 2017, which was driven almost entirely by the adoption of the new revenue standard. As a reminder, we now recognize contingent commissions throughout the year upon the effective dates of the underlying policies rather than when received per our previous treatment. Guaranteed supplemental commissions were down $800,000 year-over-year and were not impacted by the adoption of the revenue standard. Our core commissions and fees increased by $26 million or 5.6%. When we isolate the impact of the new revenue standard and the net impact of M&A activity, our organic revenue growth declined 2.1%. As noted earlier, this growth rate was materially impacted by lower claims processing revenues of approximately $24.5 million; isolating this revenue, our organic growth rate would have been approximately 3%. We’ll move over to slide number 11 to provide some additional insight and the components for our EBITDAC margin. We've included a walk-through of our quarterly EBITDAC margin from 2017 to 2018 and highlighted the main drivers. The acquisition of Hays negatively impacted our margin by about 10 basis points for the quarter and this is in line with our expectations. Keep in mind this only represents 45 days of operations with the acquisition effective November 15th. Later in the presentation, we’ll provide additional information regarding the quarterly numbers for Hays in 2019. During the quarter we realized about a 30 basis point impact to our margins as non-cash stock compensation costs have increased due to the incremental financial performance and higher retention of teammates. The new revenue standard negatively impacted our margin for the quarter by 50 basis points. Other reflects the significant year-over-year decrease in claims processing revenue which more than accounts for the margin decline year-over-year. We also had some one-time items, the most significant being performance-based bonuses for certain businesses. On the following slide, we presented the results of our business segments on an as-reported basis as well as excluding the impact of the new revenue standard. We’ve included a reconciliation by segment in the appendix. Let’s go ahead and start with retail which is on slide 12. For the fourth quarter, our retail segment delivered total revenue growth of $39 million or 17%. When excluding the negative impact of the new revenue standard of $12 million, total revenues increased by $51 million or 22.3%, and we delivered 3.5% organic revenue growth. Total revenues benefited primarily from the acquisitions we completed over the past 12 months that contributed $44 million of incremental revenue. Overall it was a good quarter for our retail segment. When excluding the $6 million impact of the new revenue standard, our EBITDAC for the quarter grew by $13 million and our margin declined by 40 basis points. This decline was driven by increased inter-company allocations for technology as well as our investment to upgrade our agency management systems, and as we mentioned earlier, increased non-cash stock-based compensation costs as our equity plans are performing higher-than-expected resulting in incremental cost. These two items more than offset the underlying margin expansion from leveraging our revenues during the quarter. The growth in income before income taxes was impacted by higher intercompany interest expense and amortization for acquisitions we completed during the year. Moving over to slide number 13; for the quarter, revenues for our national program segment decreased by 12.5% and organic revenues declined by 14%. The revenue decline was due to significantly lower year-over-year claims processing activity of approximately $20 million, as well as a $2 million impact from the new revenue standard. These items more than offset other organic growth and revenues from acquisitions. Without this decrease in claims activity, organic revenues would’ve been slightly over 1%. Income before income taxes declined by 38.8% primarily due to the lower claims processing revenues, the new revenue standard, and was partially offset by lower intercompany interest expense. EBITDAC excluding the new revenue standard decreased by $15.7 million or 27% primarily due to the lower claims processing revenues, the finalization of year-end bonuses, calculations associated with the performance of certain programs, and incremental non-cash base compensation cost. Over to slide number 14. The impact of the new revenue standard on the wholesale segment was about $1 million for both revenues and EBITDAC. Excluding the impact of the new revenue standard, the wholesale brokerage segment delivered total revenue growth of 3.7% and organic revenue growth of 3.4%. Our EBITDAC margin excluding the new revenue standard decreased by 190 basis points for the quarter. The decrease was impacted by lower contingent commissions, higher intercompany technology allocations, and increased non-cash stock-based compensation costs. Our income before income tax margin excluding the revenue standard decreased by 60 basis points, impacted by the same factors contributing to the EBITDAC margin change but benefiting from lower acquisition earn-out liability expense and intercompany interest expense. The services segment delivered 19% total revenue growth, and excluding a $6 million impact for the new revenue standard, total revenues grew 5.3% primarily driven by an acquisition we completed in the third quarter of 2018. Our organic revenue declined 3.3% driven by lower year-over-year weather-related claims processing activity. This decline was about $4.5 million, and if claims volumes were consistent year-over-year, organic revenue growth would’ve been about 7% as most businesses continue to grow. For the quarter, our EBITDAC excluding the new revenue standard increased by 6.8% and margins expanded by 30 basis points due to leveraging our higher revenue growth. The lower growth for income before income taxes was driven by intercompany interest charges for the acquisition of the third quarter. On slide number 16, we presented our GAAP results for the full-year 2018 and 2017. For 2018, we delivered $2,014,000,000 of revenues, growing 7%, and earnings per share of $1.22. For the year, we also decreased our total outstanding shares by approximately 2 million. Over to slide number 17. Due to all the moving parts and difficulty with comparability, we presented on this slide certain GAAP and non-GAAP financial highlights. For the full year 2018, we adjusted for the impact of the change in acquisition earn-out payables and the new revenue standard. For the full year 2017, we adjusted for the impact of the change in acquisition earn-out payables, the legal settlement we had in the first quarter, and the one-time impact of the tax reform we realized in the fourth quarter. Since these are non-cash or nonrecurring and can increase or decrease by year, we believe it's helpful to evaluate the business excluding them. For the year our total revenues grew 7.2% or $134 million, and our organic revenues grew 2.4%. Isolating the year-over-year decrease in claims processing revenues of $24.5 million, our organic revenue growth would be approximately 4% or $70 million, which is a really good year for Brown & Brown. Our EBITDAC grew by 2.1% and was impacted primarily by the 2017 claims processing revenue, our investment in the core commercial program as well as additional non-cash stock compensation expense. Income before income taxes grew by 2% due to higher interest and amortization related to the acquisitions we completed this year. Our net income grew by 22% and earnings per share increased by $0.22 or 23% to $1.18 as compared to 2017 benefiting from the lower federal tax rate. Our effective tax rate for 2018 was 25.6%, decreasing from 38% in 2017. Over to slide number 18; this slide presents the quarterly and full-year impact of the new revenue standard. In connection with the implementation of the new revenue standard, we now record certain of our revenues in the services segment on a gross basis. For the full-year 2018, the total impact of this change was an increase to core commissions and fees of $10 million and other operating expense of $10 million. As a reminder, in the third quarter we recorded an $8 million nonrecurring adjustment to revenue and income within the national program segment. Isolating the one-time impact, our full-year income before income tax benefit would have been approximately $8 million to $9 million. Please take both these items into consideration in your modeling for 2019. Moving over to slide number 19, we’d like to provide some additional information regarding the anticipated annual performance for Hays. We continue to believe that Hays will deliver $210 million to $220 million of annual revenues, $47 million to $53 million of EBITDAC and diluted net income per share of $0.02 to $0.03 for 2019. The chart shows our current view of the estimated quarterly phasing and incorporates the impact of the new revenue standard, similar to what we expected for the remainder of Brown & Brown. Hays will have a significant shift of revenues and profit into the first quarter due to the high percentage of employee benefits business. Please take this quarterly phasing into account when you build your models for 2019.

Thank you, Andy, great report. I wanted to make a clarification. The dividend increased to $0.08, an increase of 6.7%. And I know you know that. In closing, we have really good momentum across the company and feel great about our business. I want to thank first and foremost our 10,000 teammates for all their contributions in 2018 to help grow our company and serve our customers and also for everything they’ll do in 2019. We remain optimistic about the economy, but as I mentioned earlier I think there's a reasonable possibility that the economy may slowdown in the second half of 2019 or in early 2020 and it's something that we will watch very closely, and we’ll keep you posted if and when we see that. We talked about premium rates earlier in the call and would say we don't expect any material changes in premium rates in 2019. There’s still a lot of capital out there that will keep pressure on rates and we just don't see them moving up. We feel really good about our acquisition activity in 2018 as we talked about. And today as I usually say, our pipeline is good. It's been that way for the past few years and we’re actively talking with a lot of people. We will remain disciplined in our approach as you've heard me say before; when and why someone sells is different for each party, but we’re always out talking to people, and when that time comes we would like to be considered particularly if there's a cultural fit. As we’ve said in the past one of the most important things we can do is invest in our teammates. We’re proud to announce that we're setting aside $25 million to help fund an education program for our teammates and their dependents. The interest income from this money will be used to fund tuition reimbursements, student loan repayments and scholarships for dependents of teammates. This new program will commence this year in 2019 and is something we expect to continue going forward. We believe this program will be a great benefit and motivator for our teammates. Our goal is to continue to grow the top line and the bottom line and do this in a disciplined manner. In 2019 we expect to generate over $500 million in cash, again, something we’re very proud of. Our capital deployment philosophy is to invest this money into acquisitions, return it to our shareholders, pay down our debt and invest where appropriate in our businesses. We will do this prudently with the objective of driving long-term shareholder value. With that, let turn it back over to Bryce to start the Q&A session.

Hi. Good morning. My first question, going back to some of your outlook comments, you, Andy, pointed to organic growth in the first quarter due to revenue recognition being lower than the full-year number. My assumption was because revenue recognition went in place in 2018, it wouldn’t impact comparison. So, just a little confused there. And then, was that a comment with the first-quarter growth being lower than the full year? Was that just specific to retail or was that a consolidated company comment?

Hi, good morning Elyse. That's a great question. Let me address the last part first. The comment was related to retail, and as we look ahead to 2019 and the implementation of revenue recognition, we expect some fluctuations between the first and second quarter. So, although you may have a full-year organic growth expectation, we anticipate that the average for the first quarter will be slightly lower, while it will be higher in the second quarter. It’s just a matter of timing.

Okay. And then in terms of retail, sticking there for a minute, you guys saw a little bit of a nice uplift in the fourth quarter sequentially from the third quarter. I know the last quarter you’d said, new business was a little bit lighter, Powell, and I believe you kind of thought it would just be a one-quarter situation. Can you just comment about new business and retention trends within your retail segment that you saw in the fourth quarter?

Sure. As we discussed, we focus more on yearly results rather than quarterly ones as an indicator of success. We had a solid Q4, and while we always aim to secure more new business, we still managed to accomplish a good amount and effectively retain our clients. We're pleased with the 3.5% organic growth for the quarter. Looking back over the last four years, the trend has been 1.4%, 1.8%, 2.9%, and 3.0%. That's how I evaluate our performance.

Thank you. I have one final question about margins. Considering your comments on the anticipated challenges in some of your businesses, it seems retail is set for stronger growth. I would like to know if you can outline the five key factors that will influence the margin development for 2019. Clearly, Hays will impact margins, and as you provide figures, could you also address the other components we should consider for the consolidated margin expectations in 2019?

Yes. So Elyse, coming back to some of the comments we've made. So yes, you're correct. On Hays and the guidance that we've given, so make sure you incorporate that. Keep in mind, our comment about the $8 million adjustment that we recorded in the third quarter of 2018. Again, that will not recur, so that will be an impact. And then think about also the guidance that we've given on services, and then also keep in mind the stock compensation. So those are the primary ones. Okay? No other items.

Okay. And then one last quick question. Was there a couple million in flood-related revenue in the fourth quarter of 2018, or relating to the approximately $22 million in programs from last year, with a $20 million difference? Was there around $2 million that was included this year?

Yes. It was – yes, about $1.5 million, $2 million. Not a lot. It was really small.

Thank you and good morning. I would like to follow up on both questions Elyse has asked. First regarding the organic growth, you have seen sequential year-over-year improvements in the retail segment. Your overall organic growth for the company is 4% in 2018. Will we see better than 4% in 2019, or will other factors, such as national programs or services, weigh that down a bit in 2019?

Good morning, Kai. Thank you for your question. As we’ve mentioned before, we don’t provide guidance on organic growth. We believe that our business, including retail, typically experiences organic growth in the low to mid-single digits in a steady state economy. So, to answer your question, we have some positive developments, but we also anticipate some challenges. Ultimately, it will all balance out, but we won't specify our expected organic growth for the year like some others do.

Kai, we recommend that you make your projections by segment instead of using a general percentage, as that could lead to significantly different results due to varying performance across segments in 2019 based on our guidance.

Thank you for that. Regarding the margin question, I wanted to go into more detail. I estimate that the Hays headwind is about 70 basis points since they contribute 10% to your overall revenue and their margin is approximately 7 points lower than yours. I want to ensure my calculations are accurate.

Yes. The guidance that we gave back on the third quarter as we said it would be around 100 basis points. So somewhere in that range, depending upon if we're on the higher or lower end of the guidance that we've given.

Okay. And then the comp expense, non-stock comp. There had been a drag actually in 2018 as well. So is 2019, there will be further drag or the drag will be actually less, so it will be incrementally a positive factor for your margin overall?

Yes. So the guidance that we gave on it is, it will be an incremental expense year-over-year of another $3 million to $5 million in 2019.

Okay. Regarding the margin side, I was under the impression that the IT investment area would have core programs that would contribute positively in 2019. Would this imply a significance that more than compensates for the IT factor we discussed earlier?

No. It wouldn’t. I think those programs, as we mentioned during the commentary, are progressing along in accordance with plan. If you go back to our previous decks that we've talked about, they are progressing along. But no, they would not be enough to offset the other items.

Great. Thank you so much.

Thank you.

Thank you.

Good morning. I wanted to discuss a couple of the legacy initiatives, considering it's been over a year now, specifically regarding the 5 for 5 in tech spending. With retail growth accelerating as you pointed out, Powell, do you think the 5 for 5 has begun to have an impact there? Or do you anticipate it will produce better results in 2019 and 2020? I know you don’t provide organic growth figures. Additionally, regarding the tech spend, with Hays joining us, will there be added dilution from 5 for 5 or tech spending related to the integration of Hays?

The producer incentive plan is functioning as we anticipated, and we are satisfied with the outcomes. Each year, we assess its performance and have consistently been pleased with the results since its launch, which bodes well for the future. Regarding the technology spending, we do not expect any additional costs that we are currently aware of. However, we recognize that some states are implementing cybersecurity guidelines which could potentially increase expenditures in the future, particularly for compliance reasons. For example, the DFS regulations in New York are relevant if any of your operations are in that state. In relation to Hays, we believe that the expected expenses linked to the incentive plan and technology spending are already included in the guidance we provided last year, which Andy has just confirmed.

Great. Thank you for that color. I know you in your opening comments or your prepared remarks talked about the M&A pipeline. Given what's happened in the markets I suppose in the last half of 2018 and with the tax law change, I'm wondering if you've seen any sort of change in the appetite from private equity on M&A in your space? Or if you've seen any impact on multiples as you consider – as you look across your pipeline?

Yes. First of all, I believe it remains as competitive as ever. The latest count shows there are between 28 and 30 private equity-backed firms considering entering the market, and it seems like there’s always someone new looking to join. Typically, when we engage in these transactions, a consistent group of firms tends to participate, and their offers often resemble one another. Ultimately, it comes down to cultural fit and how well that aligns. That said, there are occasional outliers, which may be a new private equity firm or an attempt to enter a new market that doesn’t align with the existing offers. Cultural fit remains a crucial factor for us. It’s fascinating to note that private equity firms can put forth offers almost instantly, while we take our time to consider the cultural compatibility, talent, and personnel. Many capable firms may not be a good cultural match for us, and we prioritize understanding that early in the process. When there's a good cultural fit, we generally feel confident in proceeding with a transaction. It’s intriguing how some operate with quick, simplistic offers, which is quite different from our approach as an operator compared to a financial consolidator.

That's entertaining commentary. Thank you. I was just looking at the cover of your press release and on the cover and I know there's different accounting basis, but it does point out that your commission and fees were in excess of $2 billion for 2018. And I distinctly remember years ago when you launched and rolled out the $2 billion target. What's your new target? And what's – and have you established that yet?

Well, the answer to the question is we have, but it's a secret. And so, we will roll that out probably at the end of the Q1 because we are galvanizing all of our teammates around that theme. But what I would say is this, if you remember, Greg, and I appreciate the offer. When we were a billion dollars in revenue and we said we were going to be 2 billion, everybody said the following: How long is it going to take you to get there and what's the margin? And we basically said if we wanted to be 2 billion or to double overnight we could have done that in the last month, the last six months or the last year, but culturally that wouldn't have made sense. And more importantly, it wouldn't have made sense for our teammates of which our teammate owns 30% of the company. So what I would tell you is this; when we double again as a company it's not the number of years that it takes, it's the quality of the people, it's the quality of the people that we add. And so interestingly enough from a shareholder standpoint we believe that that applies to all shareholders not just teammates. That just is an interesting unique fact that you know that we happen to be large owners of the company which I believe is something that investors would find interesting. There's alignment.

Great. Thanks for the answers.

Good morning everybody. Powell, you ended the scripted comments with a couple of headwinds that you noted for 2019, namely possibly economic slowdown and maybe not a headwind but rates not necessarily being a positive trend. At the same time, you were also quite optimistic about opportunities for all four segments in 2019. So could you maybe talk about the opportunity set a little more?

Sure. We feel more confident about our company now than ever, particularly regarding the capabilities of our team and our collaborative work to benefit our customers. There are promising opportunities that will come our way. I often hear questions about our next big deal or how we’re using our balance sheet funds, and I want to emphasize that we plan to invest wisely. When the right opportunity arises, we will act, just as we did with our investments last year. I believe we are well positioned to continue growing our business and improving our margins. I’m not an economist by trade, but I hold an economics degree and pay attention to various factors that, while not directly impacting the U.S. economy, can have indirect effects. Many issues out there may not seem relevant at first glance, but assessing potential impacts on our business is part of my role. Many U.S. CEOs express concerns about a possible economic slowdown later this year or early next year, alongside uncertainties relating to Brexit, Angela Merkel, Italy, China, and trade wars, which could influence our customers. While I approach this with optimism, I also maintain a realistic perspective, which is reflected in our company culture. We are optimistic yet realistic about the opportunities in 2019, and we want to ensure you’re aware of these considerations.

Okay. I have a question regarding the IT initiatives. I understood that the IT investments were expected to decrease somewhat in the fourth quarter and provide a boost to margins. However, it seems they had a negative impact instead. Is this due to the discovery of additional opportunities, or are the initiatives simply taking longer than you initially anticipated?

Yes. Good morning. No nothing real unusual for the fourth quarter. Everything still right in line with what we were expecting. So it's progressing along course.

Okay. And then finally with the wholesale business it sounded like the organic slowdown was more a matter of timing than anything else. Is that a fair way to think about it?

I think it's fair. It's kind of interesting because I went back and looked real closely at their performance over the last several years and they've had one fourth quarter they'd have a really good fourth quarter relatively speaking and then they might have a slight down quarter year over year over year if you go back to 15, so you have up down, up down, up down. I don't want you to read something into one quarter performance in wholesale. That's a business that's had the most steady organic growth in our system over the last six years. And so I look at it and say they just didn't grow as much in Q4. But remember they grew 7.7% in Q3. They grew 5.3 and 2, and they grew 6.1 in one. So, there's a five-seven over the entire year. I feel real comfortable about Tony Strianese and his team.

Okay. Got it. Well, thanks for the answers and good luck on the year ahead.

Thank you.

Thank you.

Hey, good morning. Just one question. Powell, you mentioned that tight labor market in your prepared remarks. Obviously, compensation is your largest expense. Is that having or expecting to have an impact on your margins going forward? And I guess I ask because I thought comp plan you guys had implemented in previous years was going to be a tailwind in 2019 and it sounds like, unless I'm mixing apples and oranges, that that’s not going to be the case based on the prepared remarks?

Good morning, Mike. I want to clarify that the producer incentive plan affects a relatively small group of individuals within our retail segment, specifically those who are on commission only. While this may have an impact on the entire organization regarding wage pressure, our primary goal is to attract, retain, reward, and develop talented individuals who align well with our culture. There are times when we encounter candidates we believe are essential to hire, even if they aren't in the budget; we adapt as necessary. It's not a straightforward process. When we consider the effect on our business, it could influence around 35 offices, potentially increasing our salaries and rewards expenses for a quarter or two. However, these new hires often significantly benefit the organization by helping us retain existing clients or bring in new ones. I want to emphasize that the producer incentive plan is performing well, and while it only impacts a small number of our 10,000 teammates, we remain aware of wage pressure, which necessitates growth both organically and through acquisitions.

Got it. All the best in 2019. Thanks.

Thank you.

Yes, thank you. Good morning. I believe the original plan was for technology spending and the producer incentive payouts to begin decreasing in 2019, which would be beneficial for margins. You mentioned that you are performing according to the original plan. So, is it correct to say that expenses should decrease, which would then positively impact margins?

Yes. So good morning Mark, it’s Andy here. So think about those two in two different ways, okay. Is on the IT side, yes, you’re correct from a spent and thinking about it as a percentage of revenue. So that is correct. On the retail incentive program, it's actually not about the expense. If you recall back when we talked about the program the goal there was to drive incremental organic revenue which therefore compounds over time. So the expense remains relatively constant. We're just growing off of a larger base. So what that really means is and that's why we said in our previous comments you would see some margin expansion out in 2019. That's how the plan works and is designed.

Right. And then the stock compensation, a stock compensation is only up 3 million to 5 million. Presumably, if you have any sort of organic growth that likewise would be margin accretive if the expense is relatively fixed or up fractionally and your revenue grows faster, based on what we assume then that would also be margin accretive?

If total revenues grow faster than the increased stock comp, you are correct. Yes, that would be a margin. So the guidance that we gave on it was 3 million to 5 million. And if you look at the cash flow statement you can see we had about $33 million – $33.5 million of stock comp in 2018.

And then finally with the employee benefits you say the rates are up. How much do you participate in those higher rates at this point with your mix of business with Hays, how much do higher rates act as a tailwind for your revenue?

Limited, and the reason is the amount of self-funded business and/or in many states the smaller market; smaller market depending on a state defined is under 50 lives or under 100 lives. The companies in many states have moved the way you're paid on them from a commission whereas you know Mark if the premiums go up you would get more income per head per month. So the only way you get additional commissions would be if you add another head or another bellybutton and it's what they use, the term. So the answer is limited.

Thank you.

Thank you for taking my question. I just want to walk through the $22 million versus the $2 million of hurricane servicing revenues. It's the margin on those the same, or do you get their economies of scale benefit in a quarter like 4Q 2017 and what is that margin?

Good morning, Josh. So what we said on previous calls is the margin on storm claim related activity is higher than our average. We have not said exactly what the margin is.

And is there any reason why? I mean, that would be really useful for us for making a year-over-year comparisons given the exceptional circumstances a year ago?

Yes. I guess similar to we don't give exact margins on any individual business underlying.

Okay. Can we determine if there are economies of scale? If you generate $22 million in storm revenues, does it have a higher margin than a quarter where you only generate $2 million, or is it generally the same regardless of the situation?

Yes. The margins go up a little bit. But it does scale underneath. It's the magnitude.

Okay.

You will notice it, but there won't be a margin change related to a couple million dollars from flood claims.

Okay. As you expand and having experienced substantial growth in the first half of the year, are you noticing an increase in renewals during this time, possibly linked to employee benefits or similar factors? Or will the first half of 2018 pose challenges for the first half of 2019?

Yes, let's revisit this. To consider it properly, refer to the revenue recognition slide we included. If you review slide 18, you'll see that we moved $27 million of revenue into the first quarter and $14 million into the income before tax, which roughly balances out in the second quarter.

But I guess I mean maybe I’ll have to go through it. I feel I'm looking at apples-to-apples. There's no headwind coming from having a strong first half 2018, that’s an extra headwind in 2019.

Now the only the only piece in there is again when you're modeling it just keep in mind that we were making our core commercial program. We had not made the lap on it in the first half of 2018. So remember that program we started that up in July of 2017, okay.

Okay. Thanks very much. Good luck.

Thank you.

Great. Thanks. Two quick questions on Hays if I can. One, do the revenue numbers on slide 19 anticipate supplemental and contingent commissions that are roughly equivalent to legacy Brown & Brown?

Yes. It does include contingent commissions and GSCs, and yes, they are in a similar percentage ratio.

Okay. Perfect. And is there any reason that the inclusion or integration of Hays would slow legacy Brown & Brown organic growth? Or should that not be impacted at all?

We don't think it's going to slow Brown & Brown legacy organic growth.

Okay, excellent. Then one final question just to make sure I understand it. Powell, you talk about the potential for an economic slowdown in the back half of 2019. Would that impact revenues on a real-time basis? Or do you expect it to be a lag between when, I don't know, GDP growth slows when you actually see commission volumes reflect that?

I think it depends on how the clients manage their exposure units. And what I mean by that is there are some customers which will adjust their insurance exposure units particularly on larger accounts right when they see that change and sometimes they won't. And so there inherently I would say that there would be slight lag, but you could see other people adjusting if I mean like I said I don't think this would be the case, but if it was a severe rapid downturn then could people adjust their exposure units being their payrolls or their number of vehicles on the road or whatever the case may be. Could they adjust mid-year? And the answer is they could.

Okay that's very helpful. And then last question with regard to the revenue headwind guidance in lender-placed insurance and social security advocacy. Is any seasonality to that? Or should we just assume that spread out over the year?

I think you should assume that’s spread out over the year.

Good morning, Brown & Brown. I'm going to follow Meyer's questions on Hays with the more on the margin side. This quarter I think I saw it was a pretty negative. You said inclusive of any restructuring charges, deal closing charges. And I was wondering if you could spike what your one-timers were in Q4?

Good morning, Bob. No, they were minimal for the fourth quarter for the 45 days.

So there's no deal restructuring, there's no banking fees or anything else that's getting expensed to deployment for the numbers as of yet?

No, nothing materiality. We didn't have a banker on our side.

And is there any seasonality as we think about margins for you? You gave us $0.03 accretion in the Q1. So it looks like they have a heavier revenue contribution in Q1 than the rest of the year, and I assume it's mainly retail wholesale or the revenues are going to flow to?

It’s retail business. And remember they have a very large employee benefits portion of their business which is why from a rev rec standpoint, that's moved into Q1.

And one last – go ahead.

Yes, Bob, just make sure you look back to slide number 19 on Hays, because the phasing by quarter is really important.

Okay. We'll do that. And the restructuring charges, are you going to spike those out or are we just going to have to sort of guess at them and I think it was $0.02 to $0.03 of accretion. Does that include restructuring or exclude?

That is included of integration cost. So again we don't have restructuring cost. We've got integration. And what we said on our previous comments is they are more heavily weighted to the out years. We're really just trying to get all of our teams together and figure out all the moving parts in it. But we're not. And again similar to our previous discussion, the objective of this transaction was not to drive cost out, right. The objective was to drive the top line and grow the business. We will get some cost out but it is not a cost play.

No, I understand that. You're not going to be integrating the new office from day one; they are operating independently.

We’ll integrate the applicable offices at the right time when it's right for the business, but we're not driving down a plan that to kind of crash everybody together, Bob, that's not the goal. Again we're trying to keep all the momentum on the top line moving forward.

Good luck in 2019.

Okay. Thank you.

Good morning. Thank you, everyone. In the wholesale business, it seems the market is becoming more active, with some major players like Lloyd's and Lexington pulling back. How might that affect you? Would that be beneficial or detrimental for your business? I'd like to hear your thoughts on this.

I think it depends on how the rest of the market responds. If a major player in a segment pulls out or dramatically increases their pricing, the speed at which the market can fill that gap will affect whether this situation is beneficial for us. Based on what I’m hearing, there seems to be plenty of capacity in other areas to fill that need right now. There may be specific classes I’m not aware of, but generally, I believe there are other markets ready and willing to step in.

Okay. Thanks. And then as far as your retail business before Hays, what was the growth in your producers in 2018?

Yes. We haven't talked about the production growth publicly. And we aren't going to do that in terms of how many we've added or how many have left or whatever. But we're growing our business nicely and it's reflected in the organic growth and we continue to always look for people that can help bring new customers in.

Okay. And then on the technology, you've been upgrading your agency management system. Does that give you more analytic capability? And could you could you give us an idea what you're doing in the analytics front?

Sure. Well, I mean we have a way now to better look inside of our data and look at similar classes of business whether it would be in a state or in a region or across the country. And we are able to share information more easily which enables our teammates we believe to bring better solutions to our customers. So as we continue to migrate everybody onto this new one agency management system we think that that will only continue that that capability will be enhanced. So we put the first things in place and as we continue to migrate the rest of the offices onto that system we know and that it will get even better.

Okay. And how long will that migration take? Is that mainly 2019? Will that go into 2020 also?

Right now we are looking at a timeline that would fall between 2019 and 2020. If we did not pursue another acquisition, which we are planning to do, it would take until the end of 2020 to migrate everyone across using our existing businesses.

Okay. Thanks. Last question on Hays, have you disclosed the retention pool for existing producers at Hays? And how is that being accounted for in your financials?

So, no, we haven't described that publicly. And Andy…

Yes. Yes, for anything that was post transaction, Adam, is that's being expensed through the P&L.

Okay. And I’ll take it that's in the performance you gave us.

Yes, it is.

Okay, great. Thanks for that. Thanks for the answers, guys. Thank you.

Thank you, Bryce. And we appreciate everybody's time today. We wish you a great day and we look forward to talking to you next quarter. Thank you, and good day.