Brown & Brown Inc (BRO) — Q1 2021 Earnings Call Transcript

Thank you, Holly. Good morning, everyone, and thank you for joining us for our first quarter 2021 earnings call. We had an outstanding quarter, likely one of the best in Brown & Brown's 82-year history. The results of the quarter are the result of the incredible efforts from our team, not only this quarter but over the past several years. Each of our segments performed well, demonstrating significant organic growth and margin expansion driven by new business, strong customer retention, and increased premium rates across most coverage areas. These results highlight our focus on enhancing our capabilities, improving customer experiences, and delivering innovative risk management solutions. From a customer segment perspective, our large and middle-market customers, which make up a substantial part of our revenue, have recovered much faster. However, small businesses are generally recovering at a slower pace. During the quarter, we released our first ESG report, which offers insight into our company's values. We believe this report provides a thorough assessment of our current status and outlines our vision for the future. We hope that our existing and future teammates, customers, carrier partners, and investors see this report as a demonstration of our commitment to these vital issues. Now, let's move on to the quarter's results. As I mentioned, we had an excellent quarter and are pleased with our performance. We reported $815 million in revenue, reflecting a 16.7% total growth and 9.8% organic growth. This quarter was among our strongest quarters of organic growth since we began tracking this metric in the early 2000s. Our EBITDAC margin was 35.8%, which is an increase of 120 basis points compared to the first quarter of 2020. Our net income per share for the first quarter was $0.70, representing a 29.6% increase on a reported basis and a 37.3% increase on an adjusted basis, which excludes the change in estimated acquisition earn-out payables. During this quarter, we completed two acquisitions with an annual revenue of about $33 million. We are thrilled to welcome O’Leary Insurances, the largest independently owned retail broker serving the Irish market, to the Brown & Brown team. We extend a warm welcome to all our new teammates who joined us during the quarter. In summary, we are very satisfied with our strong performance as the team continues to excel and remains committed to execution every day. Later in the presentation, Andy will provide more detailed insights into our financial results. The economy is on the path to recovery with the vaccine rollout, leading to improved business confidence. However, growth rates vary across different geographies and industries. Premium rate increases in the first quarter mirrored those of the previous quarters, with some lines having faster growth than others. Admitted market rates continue to increase by 3% to 7% across most areas, while commercial auto rates are an exception as they remain up by 10% or more. We are still not observing positive trends in workers' compensation rates, though they are nearing stability. Overall, the market is becoming more competitive in certain areas, with carriers beginning to offer coverage at expiring rates for new business, although they will seek increases for renewals. From an E&S viewpoint, most rates are rising by 10% to 20%, with coastal property, including wind and quake, increasing by 15% to 25%. Professional liability is generally up by 10% to 25%, depending on coverage and industry. However, we continue to face notable challenges in E&S personal lines in Florida, California, and the Gulf states due to reduced carrier appetite linked to weather-related issues and a rise in litigated claims over the past few years. We expect the decline in personal lines capacity in catastrophe-prone areas to persist throughout at least 2021. Securing coverage for many lines, specific industries, or clients with losses remains a challenge, and we do not anticipate this trend will change this year. We believe that the rate increases seen in the first quarter are likely to continue for most of 2021, although we may see some moderation in the latter half. We completed two transactions this quarter with an annual revenue of around $33 million. Our acquisition activities can fluctuate quarterly as we prioritize cultural fit and financial sense. This disciplined approach has proven effective in delivering value from the companies that join the Brown & Brown team. Now, let's move on to discussing the performance of our four segments. Retail achieved a record organic growth of 9.8% for the first quarter. This performance was driven by growth across all lines of business, fueled by new business opportunities, solid retention, and ongoing rate increases. Our team's remarkable efforts to creatively engage with customers, build new business pipelines, and diversify across customer size, business lines, and geography made these results possible. We are very pleased with how our team is seeking new opportunities and utilizing our capabilities in both traditional and virtual models. The National Programs segment experienced a 13% organic growth, delivering an impressive quarter driven by strong performance in most programs due to new business and higher rates for our wind and quake programs. The Wholesale Brokerage segment achieved good organic growth of 6.8% for the quarter, continuing to grow faster due to improved new business and ongoing rate increases across most lines, including property, general liability, and professional liability. However, we still face challenges in our Binding Authority and personal lines businesses. Overall, Binding Authority grew but at a slower pace than previous years, primarily due to reduced catastrophe capacity for property and the economic effects of COVID on small businesses. The Services segment had a successful quarter, delivering organic revenue growth of 5.7%, largely driven by claims from recent winter weather events. Overall, it was a strong quarter, and we want to thank all our teammates for their commitment to delivering innovative solutions for our customers. Now, I will turn it over to Andy to discuss our financial performance in more detail.

Great. Thank you, Powell. Good morning, everybody. We're on Slide 6. As in previous quarters, we'll review our GAAP results and some important non-GAAP financial highlights. In the first quarter, we achieved total revenue growth of $116.8 million, which is 16.7%, along with organic revenue growth of 9.8% or $65.4 million. Our EBITDAC rose by 20.5%, outpacing revenue growth as we effectively managed our expenses in response to COVID-19. These efforts helped offset increased noncash stock-based compensation and lower margins from certain recent acquisitions. Regarding employee compensation and benefits and other operating expenses as a percentage of revenue, the ratio of these costs to total revenue increased compared to the previous year, largely due to about $10 million in higher noncash stock-based compensation expenses. In the first quarter of 2016, we began issuing annual equity grants with a 5-year vesting period. For the entire year, we expect noncash stock-based compensation expenses to be similar to those in 2020. Furthermore, as the market continued to recover during the first quarter of 2021, we saw an increase in the value of deferred compensation liabilities, contrasting with a decrease during the first quarter of 2020. This led to a negative impact on the compensation margin of nearly 200 basis points year-over-year. The ratio of other operating expenses to total revenue decreased due to better management of variable expenses in response to COVID, alongside benefits from the aforementioned deferred compensation cost changes. It's important to note that the impact of deferred compensation costs on the EBITDAC margin is minimal. Our income before income taxes rose by 16.5%, growing at a slightly slower rate than EBITDAC, primarily due to a $10 million year-over-year rise in estimated acquisition earn-out payables. Our net income grew by $47.3 million or 31%, with diluted net income per share increasing by 29.6% to $0.70. Our effective tax rate for the first quarter was 16.5%, compared to 25.8% in the same quarter of 2020, largely due to benefits associated with the vesting of restricted stock awards. Generally, we vest our stock awards in the first quarter of each year. We continue to expect our full-year effective tax rate for 2020 to fall between 23% and 24%. Our weighted average shares rose slightly from the prior year, and our dividends per share increased to $0.093, a 9.4% rise compared to the first quarter of 2020. Now, we're on Slide #7, which shows our results after excluding the change in estimated acquisition earn-out payables for both years. We believe this provides a clearer year-over-year comparison. In the first quarter of 2021, the change in estimated acquisition earn-out payables was a credit of $900,000, down from $11 million in the first quarter of 2020. Our adjusted net income increased by $54.7 million or 37.9%, with adjusted diluted net income per share at $0.70, reflecting an increase of 37.3%. Both metrics outperformed total revenue growth due to margin expansion and a lower effective tax rate. Overall, it was a robust quarter. Moving on to Slide #8, this presents the main components of our revenue performance. For the quarter, total commissions and fees grew by 16.9%, and contingent commissions and GSCs rose by 12.2%. Our organic revenue, excluding the impacts of M&A and currency fluctuations, increased by 9.8% in the first quarter. Now, on to Slide number 9, our Retail segment experienced total revenue growth of 16.8%, aided by acquisition activities over the past year, along with 9.8% organic revenue growth driven by strong performance across all business lines. The EBITDAC margin for the quarter increased by 80 basis points, with EBITDAC growing 19.5% due to leveraging organic revenue growth and expense management in response to COVID. This growth was somewhat tempered by recent acquisitions with margins below the segment average. Our income before income tax margin improved by 10 basis points but grew slower than EBITDAC, mainly due to changes in estimated acquisition earn-outs and increased amortization related to recent acquisitions. Turning to Slide 10, our National Programs segment saw total revenue grow by 20.6% and organic revenue by 13%. The revenue growth was fueled by strong organic performance across several programs, recent acquisitions, and higher GSCs and contingent commissions. EBITDAC rose by $12.7 million or 30.8%, outpacing total revenue growth due to improved revenue growth and reduced variable costs amid COVID-19. Income before income taxes increased by $11.5 million or 38.9%, outpacing EBITDAC growth due to slower growth in amortization and depreciation, alongside reduced intercompany interest expenses. On Slide 11, our Wholesale Brokerage segment recorded total revenue growth of 17% and organic revenue growth of 6.8%. Total revenue growth outpaced organic revenue growth due to recent acquisitions, with a slight decline in contingent commissions and GSCs year-over-year. EBITDAC increased by 20.6% with an 80 basis point improvement in margin compared to last year, owing to organic growth and lower variable expenses related to COVID. This growth was partially offset by lower contingents and GSCs. Our income before income taxes rose by 6.2%, slower than total revenue growth, mainly due to higher intercompany interest expenses and changes in estimated acquisition earn-out payables. Finally, on Slide number 12, our Services segment reported a 5.7% increase in total and organic revenue, mainly attributed to elevated claims from recent winter weather events. For the quarter, EBITDAC grew by 21.4%, driven by revenue growth and careful expense management amid COVID-19. Income before income taxes decreased by 7.9% due to a credit for estimated acquisition earn-out payables recognized in the prior year. Lastly, we enjoyed a strong quarter of cash flow generation, achieving $125 million in cash flow from operations compared to $34 million in the first quarter of 2020. Our cash flow from operations as a percentage of total revenue rose to 15.3%, aligning more closely with historical performance. Note that this ratio typically dips in the first quarter due to year-end bonus payments, then increases in subsequent quarters. With that, I'll turn it back to Powell for his closing comments.

Thanks, Andy, for a great report. From an economic standpoint, we believe the speed of vaccine rollouts, the overall vaccination rate, the pace of state reopenings and any additional stimulus will ultimately influence business confidence and drive economic expansion. We believe there should be further economic improvement through the remainder of 2021. As we talk with our carrier partners, we expect premium rates to increase at similar levels through most of '21, but may moderate slightly in the second half of the year. Please remember, we're starting to see a gap between renewal increases and new business pricing. While M&A in the first quarter was a bit slow for the overall industry, we believe the acquisition space will remain very active and competitive between long-term strategics and temporary private equity sponsors. This will result in continued aggressive pricing for deals. However, we remain well positioned with our low leverage to capital on our balance sheet and access to additional capital to fund our M&A activity. Our pipeline remains good, and we're talking with lots of companies. We're very pleased with the progress of our technology and data initiatives. Our investments in technology continue to focus on the following areas: optimizing and enhancing our utilization of data and analytics, expanding our digital delivery capabilities around products and services, and engaging in initiatives designed to drive greater efficiency and velocity through our underlying processes. The financial and operational performance for the first quarter was outstanding, and it was driven through the efforts of our 11,000-plus teammates and their commitment to help our customers win. While there may be some volatility in growth in future quarters, we have good momentum across the business, a highly diversified company, a great team, and we are well positioned for continued profitable growth. I would like to make one comment to the analysts during questions that we would encourage you to keep your questions to 2 questions, so we can allow everyone to cycle through. And if you have more than 2, you can get back in the queue. With that, let me turn it back over to Holly to start the Q&A session.

My first question is on organic revenue growth. Powell, you mentioned in your closing comments that the economic improvement should continue during the remainder of the year. You also alluded to still healthy price increases, maybe some level of moderation. But if we combine that with what looks like a pretty impressive Q1 organic number, should we think about the back 3 quarters to just continuing to accelerate, given that the comps, right, will get much easier given COVID compressed organic in the back 3 quarters of last year?

Thank you for the question, Elyse. We believe we had a strong quarter. First, we secured a significant amount of new business, achieved rate increases on most of our portfolio, and maintained solid retention rates. Additionally, it's important to note that the Retail sector experiences a significant focus on employee benefits in the first quarter. While we do not provide organic growth guidance, your observations point to positive factors for comparisons in the next three quarters. However, I caution against becoming overly optimistic.

Elyse, it's Andy. There are a couple of important points to remember. It's essential to evaluate the four segments separately rather than applying a broad overview to the entire company, as each segment is likely to perform differently in the latter part of the year. Specifically, in National Programs, we had an outstanding year for our lender-placed business in 2020. While we are anticipating growth in 2021, it will not reach the levels we experienced last year, which may dampen some growth expectations for the latter half of the year. We still expect growth, but it is unlikely to match the performance of National Programs last year, even in the first quarter.

In services, we experienced winter storms. If we encounter more storms, that could impact us, but those are the main factors to consider.

Okay. That's helpful. But there's no other than the employee benefits, when we're thinking just about Retail, we can think about the employee benefits concentration in the Q1? And then my comment is that we can think about that segment benefiting from easier comparisons as we move through the year?

Yes. Probably easier comp in the second quarter. The question, I guess, that we're at least thinking about is as it relates to the third and fourth quarter, the benefit of rate increase year-over-year, we do think will probably moderate in the back end of the year.

That's helpful. My second question is about the margins. You indicated a flat to modest improvement in your margins for the year, and you exceeded that in the first quarter. Additionally, as I mentioned earlier, you experienced significant organic growth, nearing double digits. Is it possible to achieve more margin improvement than what we observed in Q1 as we look towards the remainder of the year? Could you provide an update on the full-year margin outlook?

Andy?

Yes. When we made our commentary at year-end, we said that we anticipated full year '21 to be flat to slightly positive. It was a great Q1 on top and bottom line. We still think that we'll have some margin expansion in '21. We're not going to change any specific guidance for the full year. We got another 3 quarters to go, but we feel good about the business and where we're positioned.

I'll limit it to two questions. I want to follow up on the organic inquiries that Elyse made. Last year in the first quarter, you mentioned an impact to revenue from ASC 606 of about $10.5 million, and also noted a benefit to guaranteed GSCs of almost $9 million. I'm not hearing any similar remarks for this first quarter, so could you provide an update on the dynamics you discussed in the first quarter last year and how they performed this year?

Sure. Regarding the adjustment we made in the first quarter of last year, it was intended to reflect what we expected the impact on our revenues would be from the policies that were active at that time. Now that we are in the first quarter of this year, we're comparing against that adjustment. Therefore, you shouldn't include that $10 million in the calculation for this year's first quarter, as it wouldn't be a valid comparison. In terms of our thoughts on contingents and GSCs, we had a strong first quarter. Typically, if there's going to be fluctuations in any quarter, it's usually the first one since we tend to receive much of our cash related to prior year accruals then. Consequently, there can be either increases or decreases. We experienced a slight benefit compared to last year in the first quarter, though not significantly. For the year overall, we're still anticipating results that are flat or slightly higher, with three more quarters remaining to assess.

Yes. Okay. And then my second question is about M&As, which I will break into two parts. We're seeing reports of producers transitioning between firms while also observing the evolution of the Willis-Aon merger. You noted in your first quarter that the acquisition pipeline numbers were somewhat light. Can you discuss producer retention at Brown & Brown? And how do you view the M&A pipeline for the remainder of the year?

Producer retention at Brown & Brown is strong, and we are very pleased with that. Regarding your point about individuals leaving other firms, we want to emphasize our belief and adherence to nonsolicitation and nonpiracy agreements, which we expect others to honor as well. If someone joins us from another firm, we want them to respect that agreement, and similarly, we expect departing employees from Brown & Brown to do the same. Concerning the merger between the two large firms you mentioned, I believe it will indeed happen, though they may need to sell more revenue than initially planned. Time is not in their favor, and they wish to complete the process quickly. Consequently, you may hear news about individuals leaving or contemplating their next steps. On the topic of acquisitions, it's important to note that these transactions don't occur on our schedule or quarterly timeline. They happen when sellers feel ready to part with what is often their most significant asset, and this is both a financial and emotional decision for them. We anticipate plenty of opportunities in the acquisition space, as the market continues to change. Our focus has been on building capabilities at Brown & Brown to help our producers succeed, enabling them to retain existing customers while also acquiring many new ones. We are very satisfied with our progress in this area.

Actually, a quick follow-up for my first question from the last question on the Aon, Willis Tower. And you mentioned brokers and people. And Powell, you mentioned it's going to go through, but they're going to have to sell some stuff maybe more than they say. How much interest do you think you have in anything that might have to be sold off?

We don't comment on transactions that haven't occurred. What I can say is that we are always interested in good businesses that we believe could fit culturally and make sense financially. This is not an exclusive statement regarding your question; we are simply interested in businesses that align with our values and make financial sense. We generally avoid extreme terms like never or always.

Okay. Second question then just on overall competition. And Powell, you mentioned a couple of things here. The gap between renewal and new business, one, and then just overall competition in new business, I think you mentioned in your opening commentary. I guess, can you elaborate more on where, I guess, you're seeing new business competition more intense than other areas in certain geographies or certain lines where you're seeing more competition there?

Sure, Michael. I'm going to make some general statements primarily related to middle and upper middle market accounts. There are certain regions in the country, particularly the Northeast and the Midwest, where we are starting to see this trend more frequently compared to areas like Denver. To clarify, for those of you who have followed Brown & Brown for several years, you may have heard this narrative before. Essentially, if you have an account in the Northeast, such as a manufacturer or a beer distributor with a solid loss history, and the current insurer proposes a 6% or 7% rate increase, if you were to take that identical account—same loss history but different name—and submit it to the market, the incumbent would underwrite it at the expiring rates. We are beginning to observe this happening, though not universally across all areas. It's not confined to just one region or account, indicating a broader trend. We believe this signals the onset of a plateau in specific areas, as evidenced by certain rate increases that can’t keep compounding indefinitely. For instance, in Florida, seeing multiple consecutive 20% increases is pushing the insured to reconsider their policy terms, such as deductible changes or the necessity of excess layers. With rates rising, customers are increasingly focused on managing their costs, which goes beyond just coverage decisions. This overall trend is crucial to recognize.

On the organic growth in Retail, you've discussed this extensively, but I'm curious about the breakdown of new business versus rate. Additionally, how much of this might be related to the rate prompting policyholders to seek new partners, which has in turn enabled you to increase new business activity?

Well, Mark, we don't discuss the specific impact of new business versus rates. Historically, we've maintained that about two-thirds to three-quarters of the impact comes from exposure units, not from rates. That would leave one-quarter to one-third attributed to rates. However, I want to highlight that we wrote a significant amount of new business in Q1, which we're pleased about. You're touching on a key factor that applies across our entire platform and all divisions, particularly in Retail, Wholesale, and Programs, which is new capacity. This could involve new capacity in liability, property, or professional liability. In the first quarter, as in previous quarters, we've built strong relationships with carrier partners that have helped us succeed and provide winning solutions for our customers. We are continuously looking for new solutions, as strategies that worked last year may not be effective this year. We're actively searching both domestically and globally for capacity to deliver products, whether that's in our Retail space or through more specialized offerings in our Wholesale or Programs space. I hope that clarifies your question.

Yes, it's definitely helpful. Regarding the cat capacity for property, I believe you're referring to Binding Authority. The second quarter is significant for Florida renewals. Will the limited cat capacity affect you in the second quarter?

Yes. We've discussed how we expect it to impact our personal lines as well as the smaller Binding Authority business. Carriers in that area are likely reassessing how to adjust their books of business in locations like Florida. In a sense, this means there may be some business they prefer to avoid, while other business might become available to increase capacity for us as well. We think this should balance out. However, I don't want to give the impression that the Binding Authority is currently wide open, as it is not at all open in cat-prone areas. The situation is more limited, and cat capacity is very scarce.

Can you hear me okay?

Yes, we can hear you, Derek. Go ahead.

So my first question is, you talked about how new business opportunities are driving organic growth for the quarter. Were there any unusual factors or maybe one-time benefits that were impacting the organic growth as well as margins?

Derek, it's Andy here. No, nothing material that we called out for the quarter.

Okay. And then my second question is, Andy, last quarter, you talked about how some of the businesses were delaying investments. Have you seen that trend kind of subside in 1Q and then further into 2Q? Or is it really more of the same?

Yes. From our perspective on the customer side, we mentioned earlier that business confidence is beginning to improve. However, we would not suggest that we are entirely beyond the challenges. Business owners in various industries and regions are not universally optimistic about their prospects. Some have had very successful 2020 years and have started off well in 2021, but many companies are still working out how to restart their operations, determine the right amount to reinvest, and figure out the timing for it. Therefore, it seems to be still early to say that conditions are fully favorable.

My first question relates to your comments on mergers and acquisitions. I want to ensure I understand correctly. If there is a cultural alignment and it makes financial sense, are you open to exploring opportunities outside your typical acquisitions, especially if you identify businesses that are disrupted in other regions or in sectors where you currently lack strength? Is that accurate?

Yaron, the answer is yes, as long as they're in the insurance space. I'm making the assumption. I don't like to assume anything, but they are insurance businesses of some sort. But yes, we would consider and we would evaluate them. And if, in fact, they were overseas, obviously, you have to think about regulatory issues and all kinds of other things. But yes, we would be open to consider that. Yes.

Okay. And then my second 1 is really quick. IT expenses. I think last year, you talked about some uptick in IT expenses. Were they just flat year-over-year in the first quarter? Or did you see any change year-over-year?

Andy here. No, we didn't have any material year-over-year increases that we need to call out. One of the things that we have been talking about over the past year or 2 is where we are on our technology initiatives, the benefits that we're getting from some of those previous investments, those benefits allowing us to redeploy some of that capital into some of our newer initiatives around innovation and the experience for the customer. So we feel really good where we are right now on overall spend.

I believe that one of the most talked-about topics from the last earnings call was choppiness. It seems that some of the concerns regarding choppiness in organic growth this year may have lessened. I would appreciate an update on this matter and how we might interpret the standard deviations in organic growth we can expect this year.

Okay. So Phil, I would say that the current choppiness can be seen in specific industries. For example, in the service sectors like restaurants and theme parks, there are challenges in hiring employees back, which can create instability in those businesses. Not all of them face this issue, but it is one extreme example. Conversely, when it comes to contractors, it seems that outside of major metropolitan areas, demand is very high. Homebuilders and other related sectors are experiencing significant activity, along with rising material costs. Given this context, I believe that your statement about the situation is generally accurate. However, there is a noticeable difference between the confidence levels of CEOs or business owners and the sights of crowded bars on a Friday evening, where patrons aren't wearing masks and appear carefree. What I'm trying to convey is that there is still a gap in perception. Until we see business owners committing fully to reinvesting in their operations and purchasing new equipment, we aren't completely there yet. That being said, it does seem like the situation is becoming less choppy, although this varies by industry—some remain quite unstable while others are bouncing back robustly.

Yes. We had numerous discussions after the fourth quarter, and it seems that people have overinterpreted the term choppiness, which was not our intention. We aim to convey that we do not believe this recovery will be smooth or linear. It would be great if it were, but that’s just not the reality. We anticipate unusual fluctuations in how people approach buying insurance, considering their renewal dates, and hiring. This will cause the recovery to differ from a typical market. It will take some time to stabilize. However, we remain optimistic about the direction things are heading, while acknowledging that there will be some ups and downs along the way.

Okay. And the follow-up to that is maybe looking a bit more internally. And I guess I was hoping you could give us an idea of how has the conversations that you have with the regional managers changed over the past several months? Does it feel like they have an all-in mentality with investments in the way that they're thinking about their business? Or is there some hesitation internally in thinking about the investments that you're making?

Thank you for the question, Phil. First, I want to clarify that we have regional leaders, not regional managers, at Brown & Brown. Additionally, we refer to our staff as teammates, not employees, and we have leaders rather than managers. That being said, I assure you that our team has been fully committed throughout this period. I can confidently say that our senior leadership team has effectively navigated one of the most challenging environments we've experienced. This situation is different from the Great Recession in the years 2008 to 2012, as there are new challenges related to isolation and mental wellness, which we refer to as brain health. Overall, our teammates are enthusiastic about returning to the office to reconnect and create a clearer division between home and work. In summary, we are very satisfied with how our senior leadership has managed these circumstances and their investment strategies during this tough time. We are also excited about the potential for new team members to contribute significantly as we aim for $4 billion and beyond.

All right. Well, congrats on the quarter and apologies for the poor terminology there, but I.

No, no, no. We're just clarifying. Thanks, Phil.

Great. I wanted to revisit the previous comments to help clarify the situation. Powell and Andy discussed the various factors related to employee compensation, benefits, and noncash stock compensation, as well as other operating expenses. You provided a benchmark indicating that employee compensation and benefits as a percentage of revenue would remain flat in 2021 compared to 2020, excluding the first quarter. Could you provide a similar insight or any comments regarding other operating expenses?

I would like to clarify a couple of points, Greg. Our goal was not to provide guidance on the ratio of employee benefits as a percentage of revenue. We aimed to help everyone understand that when you look at the ratio for the first quarter, it appears to be higher compared to the previous year. We detailed two components: the impact of noncash stock compensation for the first quarter, for which we provided full-year guidance, and the effect of our deferred compensation costs. This cost fluctuates and does not significantly influence margins in the quarter, but it does shift between salary, benefits, and operating expenses. We provided that information to give you a clearer perspective on other operating expenses as well as salaries for the quarter.

Okay. Well, I'll go back to the transcript. There's a lot of information to unpack there.

No problem. Give a call afterwards, if you want to chat some more about it.

Yes. Regarding your point, I understand the $10 million increase corresponds to about 200 basis points in additional margin. That's the difference. However, for the full year, you're expecting noncash stock compensation to remain steady. Does that imply that the margin will be positive in the upcoming quarters?

Yes, the stock compensation had about a 100 basis point impact on margins in the quarter. However, for the full year, we expect stock compensation to be fairly consistent with 2020, although our performance in the next three quarters may lead us to adjust that up or down.

Yes. So as it stands today, it's probably a good guy, a modest good guy, depending on that. I don't know that you answered or addressed the issue of T&E spending. I think you gave us some good thoughts on margin overall. But how about the potential ramp in T&E?

Yes. So Mark, here's what we would say. Firstly, in a decentralized sales and service organization, our leaders manage their businesses like their own, which means they were efficient from the start. Secondly, we've noticed a significant decrease in travel and entertainment expenses, as you mentioned. In various businesses and regions, we're starting to travel again and meet with people or they are allowing us to visit them. While it’s hard to predict when we will return to previous levels, we do want to see our customers, and they want to see us too. There is a mutual desire to reconnect. We believe some businesses will recover more quickly than others. As for whether things will return to what they were by the end of the year, I'm uncertain. However, I am confident we will see a noticeable increase. If the COVID vaccination efforts and the situation in America continue to improve without spikes, I believe that will further contribute to this recovery.

And Mark, on that one, just make sure everybody takes into consideration everything we've said. We made a mention of that during year-end commentary that we do anticipate that it will grow during 2021 versus '20. But when we gave our guidance on margin expansion for 2021, that included the fact that we knew that our variable costs are going to go up during 2021, okay?

Holly, we'll take one final question, okay, if there is one in the queue.

Okay. Perfect. Well, thank you all very much for your time and questions, and we look forward to talking to you next quarter. Good day, and good luck.