Arthur J. Gallagher & Co. (AJG) 2003 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Gallagher & Company. earnings conference first quarter 2003 earnings conference call. All participants have been put on a listen only mode. The call will be open for questions following the presentation. It is important to note that some of the comments made by Arthur J. Gallagher and Company today may constitute as forward-looking statements within the meeting of the securities laws and are subject to certain factors in risks described in their filings with the Securities and Exchange Commission, which may cause actual results to differ materially. It is now my pleasure to hand the floor over to your host, J. Patrick Gallagher, President and CEO of Arthur J. Gallagher and Company. Sir, the floor is yours.

Thank you very much, Holly. And welcome, everyone, to our conference call. Thank you for signing in. I know it's a busy conference call day. I’m joined today by our new Chief Financial Officer, Doug Howell; our Chief Accounting Officer Rich Cary; our Chief Financial Officer of Gallagher Financial Services, Jack Lazzaro. Head of our retail brokerage operation, Jim Gault, and head of Specialty Marketing and this is our excess and wholesale surplus reinsurance operation, David McGurn, and our chief counsel, John Rosengren. We'll approach the conference call today just a little bit differently. I'm not going to pass the baton around for a lot of comments. I want to give some flavor on the quarter and then move quickly to questions and answers. Once again, this quarter, we tried to provide more detailed information to hopefully make it easier to understand us. If you have any comments on the format and the like, please feel free to call Doug Hall after the conference call.

I'm not going to read from our press release, but would really like to address six items. I want to talk about our brokerage business and the brokerage growth. Number two, what's happening with our new hires. Number three, I want to talk about our margins, in particular, salary and fringe. Number four, I want to talk about the rich management segment and the fifth thing I'll mention is our industry position, and lastly, I'll address Arthur J. Gallagher Financial Services. Let me start with number one, our brokerage segment.

Twenty two percent revenue growth, fifteen percent organic growth, we think is a great start to the year. This is a tribute to the sales and service culture that we've got in the company. New business is strong, and this is a tough environment for new business. I'm very pleased with our new business numbers. The fact is that, in a difficult rate environment, clients really have a tough time and they push back quite a bit. So it would be easy for our production force to spend a lot of time just renewing accounts and not worrying about getting after the new accounts , and we all know that that would not be a good thing. So the new business effort has been outstanding and it's a tribute to our people. There's been some press recently on the modification of the rate environment. We're still, however, seeing rate increases. I believe we'll be in a rate increase environment for the rest of 2003.

Our contingent commissions were strong in the quarter. Our niche strategy is working extremely well. We now have 18 niches that permeate across the entire U.S. and into the U.K., and we have a sales culture across all those niches that actually will work together. They're growing faster than our own expectations. The alternative market, which is clearly one of our key strengths, is growing rapidly as well. We see an awful lot of continued interest in captive self insurance pools and the like, and that plays very well to our strength. Finally, I guess I just want to compliment our ball team. I think this is a great quarter; it's a great start to the year, and these results come with an awful lot of hard work in a very tough environment, taking care of clients that, in that some instances, are looking at their third bump.

Secondly, let me talk about the new hires. I'm more convinced than ever, after this quarter, that this strategy that we laid out and talked about in the third and fourth quarter of last year, is going to be a home run for our company. We tried to give you some illustration of what those costs are in our press release, but let me give you another way to look at it. In measuring the cost versus the revenue, we know that the new hires of '01 cost us in pre-tax loss approximately $4 million. In' 02, the new hires from '01 and' 02 cost us a pretax loss of approximately $4.5 million. To put it another way, to acquire over 130 seasoned new producers, we invested on behalf of our shareholders approximately $8.5 million. Through the first quarter of this year, we see their production ramping up very, very nicely, in fact, faster than we had anticipated, which I think bodes extremely well for the third and fourth quarter of our year this year. It will also be helpful in the second. But, you'll remember that I talked in our third and fourth quarter conference calls, about the hope that we would see the benefit of this investment in the third and fourth quarter of next year, and I am more comfortable now than ever that we will, in fact, see that.

Let me specifically address the margin and the fact that salaries and fringes, you'll note, have ballooned against prior year comparisons in this quarter. You'll remember in the third and fourth quarter conference calls, one of the things I said was that it's going to be a difficult comparison on salary and fringe on the first quarter of this year because so many new people were on board that were not on board in the first quarter of ' 02. But if you also look at the spreads we provided in the press release, you'll see that total expenses down in the first quarter, versus the fourth quarter of '02, so what we're seeing here is actually what we expected. The first quarter is always a seasonalably lower quarter and also seasonably a lower quarter margin. Again, you can that in the -- quarter in margin. Again, you can see that in the spread. But the salary and fringe line will come into line through the third and fourth quarter of this year, some improvement in the second and then we will be more normalized throughout 04, and we are right on track with the plan that we've laid out for ourselves.

Fourthly, I'd like to talk about the risk management segment. You might remember that we had a slowdown in '02, primarily because claims dropped so dramatically. Let me give you an example. In August of '01 our claim counts at Gallagher Bassett, our property casualty claims management subsidiary, came in at 39,078 claims. By 12/01, the claims had dropped to 27,195. That's a 30 percent fall-off in claim activity in that period of time. I'm pleased to announce that new claims arising in March sold 41,000 in 96, a nice recovery. I believe in this segment, I believe in this company, Gallagher Bassett Services. We really have garnered a high quality reputation But it's very tough to come by. We have to perform every single day on losses that are coming in over the transit. But with the ability to handle those claims and with the quality that we've been able to drive, we now have a retention of accounts that exceeds 98 percent.

You might remember that we announced risk facts.com, two years ago, our web information system allowing clients to come over and browse over any ISP, 24-7, their claims information, right down to their individual checks. Last month, we received 9 million hits to that system from our clients. Those turned into 36,144 full-page views, which is part of the reason, I believe, that Gallagher Bassett has such a great retention rate. So we're very pleased with the start there as well.

Fifth, let me talk just briefly about our improving what I call industry position. Ten years ago, at the RIMS conference, that's the Risk and Insurance Managers conference in 1993, we hosted one of our first events. I don't think we were successful in attracting 150 members of the RIMS society at that event. This past month -- or earlier this month, RIMS was held in Chicago. We hosted another event. Over 1,000 attendees came. I mean, it's just unbelievably exciting to see the fact that people now really want to know what's going on. This I think is going to bode extremely well for our new business production in the quarters ahead.

Now let me turn number 6, to the financial quarters right down in the quarter. Of course, I'm disappointed. You never want to recognize that you've been wrong in terms of an investment, but every once in a while, you have to take a look and say, we're just simply not going to support a business strategy any longer. We will no longer be doing venture capital deals. We're not going to put any more money into start-up companies. But let me put the write-down in some sort of perspective here. The total portfolio managed at the company is over $700 million in value. After the write-down, we still have 400 million dollars in tangible net worth. At the end of 02, 12/31, we had $12 million in operating debt. At the end of March, we had no operating debt.

Our cash flow is excellent, more than covers our dividend payout, which our dividends have increased every year for 20 years, on average 19 percent.

So, kind of in conclusion, you can probably tell I'm very excited about the core business. I think what we're doing is going to pay off. I think the new hires are going to pay off. I think that we're beginning to see that book of business float to us.

We're stronger than we were even a year ago today. The new hires are no longer new people, they're part of the team, they're part of the culture. The people are turned on. We're having fun. We're writing a lot of business. The culture is together, and we're looking forward to having an outstanding year.

Now, I know there are a lot of questions and I'd like to go ahead and move to the question and answer period rather quickly here. Holly.

Thank you, sir. The floor is now open for questions. If you have a question or a comment, we ask you to please press the numbers 1, followed by 4, on your touch tone phone at this time. We ask all participants to please pick up their handsets for optimum sound quality. You may remove yourself from the queue by pressing the pound key. That's one, followed by four on your touchtone phone at this time. Our first question is coming from Allison Jacobowitz of Merrill Lynch.

Good morning, Allison.

Good morning. I was wondering if you could talk some about acquisitions? I know that's been a big part of the strategy over recent years. How you're seeing that come in. I know you provided the data in the press release. But your pipeline and how that looks?

Yeah, I'm sorry, as we're missing that. We've done three small deals so far this year, and as you know, we're not targeting the huge acquisitions. We're trying to pick off people that culturally fit in with the company. But, to your specific point, our pipeline is very strong. We've got some very neat deals that we're working on right now. A number of them are a bit larger than what we've seen in the past. We're very pleased with the three firms that joined us so far this year and expect that we'll be able to close any number more during the year. Remember, as I've said, 98 percent of our due diligence time in any acquisition is spent on the culture. We work very, very hard to bring in people that are going to fit with the company. So while there is increased competition in that market, and banks still are active, we still have a very full complement of opportunities.

Thanks. If I could ask one more question. As you look at your investments, are there other things, such as the venture capital portfolio, that you might be scrutinizing more closely, that you may look to in the future to divest yourself from as well?

I think what you're going to see, Allison, is a more focused concentration on three areas that we think we can do very well in. Synthetic fuel -- we've got five years to run on that strategy. We believe we've got the team that truly are the thought leaders there.

People are coming to us, asking us to get involved, to help them do some of the things we've done, and that's why the tax rate of 25 percent. We signed a new syn-fuel deal this past month, and I think you'll see one or more two deals there, and ride this thing out very nicely for five years. We have a land development in Florida that is -- the majority owner of -- that development is going extremely well. It does need attention and it's getting attention and they are selling homes. It's working extremely well, and that will be a number of years. And then low-income housing, we're very good at.

I think you'll see us staying focused in those areas, primarily working on tax rate and the like. We also have a large chunk in asset management, which is asset alliance, and we won't be expanding in that universe, but we do have a sizeable investment there, and you've seen that in the K.

Thank you.

Thank you, our next question is coming from Robert Glassbeagle of Lang and McElwaney.

Good morning, and let me say, appreciate the increased disclosure. I find it helpful, although it looks like we've changed some of the historic numbers, and I'll have to follow up with Doug just to make sure I understand how they tie together.

Thanks, Bob.

On the compensation and expense line and how it feeds through margins, I guess you were at 58 percent -- if I read the number right, on the first quarter within brokerage of revenues -- how do you see that trending this year? What do you consider normalized growth for that number?.

Let me kind of turn to the press release that we put out. If you go to the broker segment, you can take a look there, Bob, at the compensation ratio, historically. Typically, we're running in that segment in the area of 53 -- 52 to 53 percent. You'll notice that in '01 -- in '02, quarter '02 -- I'm sorry -- '02 first and second quarter, that began to pick up, and it's up still in 03. I would expect that to normalize through the next few quarters into the first quarter of next year.

So 52 to 53 is not an unreasonable ratio by Q 4, Q 1, is that what you're saying? If I could go to page two of your press release. Would you go through the margins with and without the hires? It looks like, even if we take out the hires and look at what pre-tax margins were for the brokerage segment, it looks like they were still down year over year at 13.8 versus 14.4. Is that just increased overhead covering the new hires that's not allocated out properly here?

When you're talking about half a point, it's pretty hard to get specific. But I think you can see --you can easily see that that goes with the new hires. You've got more space, more computers, more T&E, more travel, more cars, all that stuff.

So it's not a fully allocated estimated impact in new hire calculation? Because it seems like every other broker is reporting widening margins right now.

Right. And as I've said before, this whole gamble that we basically laid out in the third quarter and the fourth quarter of last year, we will be proven correct in our bet on people as you start to see margin improvement in the third and fourth quarter of this year. That's going to be the proof of the pudding.

Okay, thank you.

Thanks, Bob.

Thank you. Our next question is coming from Hugh Warren of J.P. Morgan.

Good morning. A couple of quick questions for you. First from Pat, sticking on the same schedule, looking at the new hires -- and I agree, I love the new disclosure here. It's very helpful. If you do a quick back and dirty analysis, it looks like you're actually generating a higher margin off your new hires than your existings, when you look at the $3 million of earnings off of $20 million of revenue, that's a 15 percent margin as opposed to 11 for the existing. Why would that be happening?

This is Doug Howell calling. Thanks for the question. I think that when you look at it, when you get into the roundings, I think that, like Bob pointed out, you're going to get half a point difference. I think the message that we're trying to show here, based on questions that we've received in previous calls and in private calls that have come in, that we're trying to answer here, is that what is the effect on EPS as a result of the new hires, and we think it's about three cents that it's costing us.

There is some rounding in here -- when you get into some of the percentages, when you're dealing with three cents on 22 cents. But when you really carve this back and you look at the new hires, they're performing nicely. They're at or a little bit below what our traditional portfolio of producers are doing, and so I would say they're in the hunt, let's put it that way. I wouldn't draw too terribly many conclusions about half a point one way or another.

I agree with you. I'm not trying to make a mountain out of a mole hill, and I'm trying to understand it. Because if just take the analysis, it's showing you a 15 percent margin for new and 10 for existing. So it's like 500 basis points, it was just bigger. We can talk about it off-line.

Actually, I come closer to what Bob's numbers were, Hugh, when you said 14 percent, versus 14.4. So I don't know exactly, about 11 percent. We talk can talk about it later.

That's fine. You mentioned about the new synthetic fuel. Is that something -- can you talk a little bit about what the transaction is and what the duration of the contract is, and what the impact is going to be on the tax line?

Yes. Why don't I have Jack Lazzaro, who is the Chief Financial Officer of AJG Financial Services, answer that.

Yeah. The way this deal should work is that we have around -- if you calculate the numbers, you come up with the same number, about $25 million of tax credits are anticipated this year. And there will be, as we had in the prior coal deals, there will be some expenses associated with that. And next year, if all goes as planned, which we certainly believe it will, it will actually generate some revenue without expenses, and the tax credits will actually end up going away.

We'll do the same thing, Hugh, that we've done with the other plants and projects. We take the leadership role in making sure that the partnership running the plant is actually burning. We prove that the synthetic fuel is actually creditable. We take the credits for that, we have the expense for that, then we turn around and monetize the investment to someone else who can more fully use, or who wants the credits. So you're talking about mid-20s tax rate --

For this year.

For this year, right, and then next year, then, it sounds like it would revert to a more normalized tax rate, like we were originally thinking. Correct. And the reason it's 25 is because of the new deal. Otherwise, it would have been -- as we indicated before. So 35 is the right run rate for 04, roughly.

Yes. And that's assumes that we don't sign another coal deal

Yeah.

We can try to predict-- but I can't predict coal deals.

Right. It looks like the expenses in the financial services were heavier than we expected. Is this specifically due to this transaction in the quarter?

Yeah, I think that there are significant professional fees that get associated with setting up a new deal, and that's driving those up.

Okay. Is there any way to get a snapshot at some point of what you think for the year would be a reasonable run rate, I guess, for this unit? As it's getting -- I think it's getting hit hard -- harder and harder to understand.

Yes. I think, based on what Jack said and what we're looking at now, I think that if you assume a 20 percent effective tax rate for the year, then I think that you have to assume, because of the expenses that are going to come in from this new deal, that Gallagher Financial Services will basically be about a break-even proposition for the rest of the year.

Okay.

For pre-tax -- on a pre-tax basis.

Right, okay. Okay. And Pat, is there is any explanation why the claims are actually popping up, any thoughts to speculation on the Gallagher Bassett side?

Yes. The reason for that is new business over the last two years. We're not seeing a recovery in the economy, by any means, so our clients are not going back to three shifts. But we've had tremendous new business, in two areas: significantly large corporations that are very self insured - three, four, five million dollar self-insured retentions. And in the alternative market, in the middle market, captive organizations, some MGAs coming back into the market, that type of thing.

Thank you.

Thank you, Hugh.

Thank you, our next question is coming from Nick Frisken of Stevens Incorporated.

Good morning.

Good morning. Pat, if you look back at the historical internal growth rates, we've been in that 14 to 20 since first quarter last year, and really four to nine in risk management, can you give us an outlook where you expect that to be for the balance of this year?

Well, I think -- I think that -- I've got to be a little bit careful, Nick, because we've never actually given guidance on the top line growth, but I'm very bullish in terms of what I see in the new business pipeline. I also have to remember that when I actually look at topline growth, we do now, with purchase accounting, have our acquisitions in there, and we never know when those are going to pop. But I think that, having said that, this quarter was really an outstanding quarter for us in new business. Historically, we have not had a 22 percent revenue increase in the first quarter. So I would not want to guide to you take a 22 percent number and run that out for the next three quarters.

I'm more isolating the internal growth, and if you look at first quarter '03 with 15, that compared for 14 in first quarter '02. I guess the more pointed question would be--

That I will stick my neck out on. But I have a caveat with that Nick. - I think that 14 percent run rate is good. But it has one caveat. This market has to stay difficult. If you saw the CIAB survey that was released this week, that's the Council of Insurance Agents and Brokers -- Their survey basically was titled-- the fact that they're seeing some moderation. Now, having said that, we're still seeing increases with the exception of things like large catastrophe property -- a solid middle market account that's been bumped two or three times may not be going up as much as the rest of the market. If you've got a small amount and it might be going up three, four, five percent. Probably two thirds of the accounts out there, at least according to CIB, are still experiencing upwards of 20 percent. So if this market stays like that, I think you can run that rate. Okay. If someone breaks from the pack, if somebody decides that the numbers are right, and they're going to break from the pack and this market softens, then all bets are off.

Two questions for Doug. In the K -- you had, in terms of the investments, you had a $48 million-dollar total, if you took the note receivables and the investment carrying value. And then in the press release, you said you had a$32 million-dollar net carrying value, and I'm wondering what the discrepancy is in there.

Good question, Nick. First of all, whence put the Q out here in the next week or so, we're going to expand our disclosures even more on the GFF segment. So you'll see increased disclosures there. But what we did is, we took a very hard look at our investments, certainly since I've been here in the last six weeks. And what we've said is that the characterization of some of our investments, of really, what is the true nature of those investments? Are they related to coal, are they related to low-income housing? And we've looked at that. So we'll give you comparative information going back into the past of how we looked at that. Some of our funds that we invest in, for instance, or that are managed by outside fund managers, are really venture funds or they're common stock funds. So what you'll see in the disclosure is kind of a peel-back of what the true underlying investments are in each of these, rather than using broad brush strokes like venture capital, for instance. So in answer to your question, we viewed about $30 million of that $48 million number as true venture money.

Although the K showed 27 --

27, right, but without the notes. Right. So $31 million of that is the -- what we consider to be venture money, and we actually only have 4 million of it left at this point.

Okay. Then lastly, the 1684 total investments going to 1672 despite a $26 million write-off. What's the offset there?

I'm sorry, Nick, say that to me, again.

At 12/31 you had total investments of 168.4 on the K and then in the press release today was 167.2. If you want to talk about this off line --

I don't see those numbers. Are you talking about other investments and notes receivable.

In the balance sheet. In the balance sheet, right.

You're looking at that line?

Right.

Yeah, I don't have that answer off the top of my head right now, but most of the write-offs that we're talking about were spread between other in that segment, and--

Nick, let's ruminate on that one.

I just wanted to make sure that you guys were investing in something new, to take that number back up.

Oh, absolutely not. No.

Doug, just call me later.

Okay.

Thanks.

The next question is from Adam Chlouber from Cochran Coronia.

Hi, Adam.

Could you give us some color-- there's been somewhat of a shift going on in the commercial middle markets, from I guess what you would call the standard and ENs and alternative markets. I guess the first question is, is that shift still going on? And if so, can you give us some color, and how that's been impacting both your brokerage and the Gallagher Bassett business?

I'll pipe in, and maybe I'll be joined in here in a moment. I'll let David McGurn pipe in as well, who runs the area. But what you're seeing in the commercial middle market is, it's classic of a hard market. It's a classic hard market experience. You've got people that want alternatives. If you're a middle market broker and you walk in and say, " this is all I've got, and by the way, the price is up again 20 percent this year," you're just a dead duck. I mean, there's a tremendous amount of push back out there. And luckily, as you know, we happen to be very good at things like group captives, where we've put either heterogeneous or homogenous groups together and let them become part of a group that is self insured. We see an awful lot of that going on. In addition, there's an awful lot more interest in single parent captives. And then there's just plain, straight interests, even in the middle market, for people to take much larger deductions. Just to simply say, you know what, I'm not going to pay that, so I'll take more risks.

The impact on Gallagher, as a whole from that, is both good and bad. If we have a client that's paying a million dollars in premium today and the market wants to take that to $2 million, we were garnering something around $100,000 in commission income. At that two million-dollar offering, the client will not accept that. He'll take a $250-$500 thousand to self insured retention, and we'll basically drop that premium to $500=$700,000. So right off the bat, our commission goes from 100 to 50 or 70.

Some offset to that is that Gallagher Bassett Services does, in fact, pick up additional revenue on the other side, depending on how many claims they have. And remember, GB runs at a much lower margin than we do as a broker, -- depending on how many claims they have. And GB runs at a bit lower margin than we do as a broker. So there is some pickup there, but it can be actually detrimental to our overall result and we're very good at that. By the way, we'll do that all day long, because once do that, we never, ever lose that client. When we take him into self insurance, in any form, our retention rate jumps well into the high 90s. So there's an awful lot of that going on and Dave, would you like to comment on that?

Yes, I'll just add to that in terms of the standpoint of the commercial middle market. On the wholesale side, the access and surplus line side, we have not seen a slowdown of business activity coming into the ENs marketplace that we would define as traditional middle market. And in fact, in some cases, we've seen an increase in activity as a result of the ratings downgrade of some carriers and the disappearance of a few other carriers. So the pipeline with new business activity on the ENs side continues to be very strong, and we do not see any change in that on the horizon.

Thank you very much.

Yes, thank you.

Thank you. Our next question comes from Jeff Thompson of KBW Incorporated.

First question, I think you mentioned, Pat, on the brokerage growth that that some of it did come up from contingent commission, and I was wondering if you could quantify that. .

I think we can. This is Doug. The answer to that is that the commissions and contingents grew at about the same rate, with maybe contingents growing 5 percent to 10 percent faster than the growth in just regular commissions, so --

Do you have the commission number?

Yes, we do. It's up about $3 million. quarter over quarter.

Can you just sort of take the 22 percent growth in brokerage, can you say it's 22 percent commission or whatever, give it to us that way --

Why don't I work that number. Do you have another question?

The second question is on the financial services segment. It seems like when I look back at the prior disclosure it was a little better, and maybe we'll get more on the K, I don't know. But can you talk about what's in the financial services segment, how it's been restated?

Jack, do you want to address that?

Yeah, it's going to be difficult to do that now. I'm going to probably have to defer, to get us to the 10 Q, because as Doug said before, we have made some classification changes, and that was actually part of the answer before, on the balance sheet , that $7 million-dollar, or whatever difference, so I just don't have that information. The best thing on that, then, Jeff, let's defer to the Q on that.

Okay, but just one follow-up. You did exclude the lines that are the venture capital that you wrote down. Is that all excluded from here, prior year and current?

Well, the $31 million is embedded in the numbers from the previous year, and the $4 million is embedded in the current numbers, but yes, all the write-off has been excluded from many of the numbers that you're looking at.

Okay.

And answer to the first question, 2 percent is the right number.

All right, thank you.

Thanks, Jeff.

Thank you, our next question is from Vaney Saki from Morgan Stanley.

Good morning, Vaney.

Just a couple of a quick questions, and tell me if you've hit on these. But, in terms of the risk management segment, when I look at the year-over-year management, it declined. Can you just touch on what's driving that? I know it improved on the fourth quarter, but I'm looking at 17 percent versus 14 percent, yet we had revenue growth. Is there something fundamentally going on in there?

Yeah. I think that the pre-tax margin has declined on that because of, primarily, an increase in certain rents, as we've taken on some offices to support the -- you see the revenues out, and if that revenue -- as that revenue matures throughout the year, you've basically got a straight-line cost that will grow into as that segment grows.

Okay, so there's additional facility costs that are built in there?

Right.

Okay. Second question, I guess, is on the top expense for the brokerage side,58 percent relative to revenues and was 57 last year.

Right.

You guys stopped hiring, and you put a freeze on hiring in September, correct?

Correct.

Okay. So when I look at the 58 versus 57, are there additional benefits that are built in here, given the fact that you did get some revenue growth from some of those producers?

I don't know if I'm answering the question properly, Vaney, but let me put it this way . As of the end of last September, we basically told the field, and ourselves, that hey, we thought we had done something really smart in investing in these folks. It was planned; the opportunity was there, we were opportunistic. But we realized, as one guy said, hey, the nets are full, let's take this thing to shore, let's prove that we can make this happen. So when you say are there some benefits, yes. There's actually more revenue in the first quarter this year than we had last year because of the new hires, but they're not fully covering their costs yet.

Okay.

So the salary and fringe line at 58 percent is, as I would say, it's ballooned on us a bit.

Okay. And then the final question is just on the synthetic fuel partnership, the new contract.

Okay.

Outside of the mid-20s tax rate, should we expect additional expenses also in the financial services segment?

Jack discussed that earlier, and the answer is yes. In fact, and Doug gave some guidance as well. You can pretty much use the 25 percent tax rate for the remainder of this year, and then move it back to 35 percent for next year, because our plan is to run the facility, which will in fact create costs, make sure and prove that those credits are real and then find a monetizer and sell it. Sell the partnership interest, I should say. So if you look at it, is that the segment should pretty much break- even, but provide the company with 25 percent tax rate.

Got it. Thank you very much. I apologize for the redundant question.

That's not a problem.

Thank you, our next question is coming from Ira Zuckerman of Nutmeg Security.

My questions have been answered already, thanks.

Thanks, Ira.

Right.

Our next question is coming from Ed Tokar of Allied Capital Management.

How large was the venture capital and related portfolio at its peak, and what was the IRR on that activity since its inception?

The answer to that, is we had between 50 and 60 million in venture capital at its peak. Today we have $4 million, a significant portion of the write-off taken off last September related to the same portfolio, the follow-up came in this quarter and I don't have an IRR on that portfolio since its inception.

Do you calculate it?

Yes, we have it internally. I'll have to get those numbers. If you want me to call you back, I'm more than happy to do that.

Does that $50 million include the turn-arounds, so-called turn-arounds in mezzanine investments as well, or is that just venture capital?

No. Development stage, start-ups, turn-arounds, restructuring, its all included in what we refer to as venture capital, as a generic over-arching term here. So the answer to your question is yes, that would include those other pieces, too.

Thank you.

As a reminder, to ask a question, you may dial the numbers one, followed by four on your touchtone phone at this time. Our next question is from Brynna Sullivan of Dowling and Partners.

Good morning, Brynna. -

Brynna, are you there? Brynna, your line is live --

The question must have been answered --

once again, to ask a question please dial the numbers one, followed by four on your touchtone phone at this time. Thank you. Our next question comes from Mark Dwelly of Farris Baker Watts.

Yes, good morning.

Hi, Mark.

I guess, to the extent that you're shifting away from the venture investments and so forth, can you give us an idea -- I guess -- I mean, your cash flows are obviously tremendous, and obviously, investing that profitably has long been one of your strengths. Will you be looking at doing more share buybacks, or just focusing on the real estate? Just some idea on where you might be thinking.

Yeah, very simple. We'll stay focused on the tax advantage investing, and we'll continue to do share buy-backs and we'll continue to buy brokers. We are finding now that, although we still prefer to use our equity as our primary currency, because we're still building a partnership, there is a need for cash in our deals. So we'll use that money to pay dividends, buy brokers, buy our stock back, and work on our tax rate.

Okay, thank you.

You're welcome.

once again, that is one -- press one followed by four to ask a question. Thank you, our next question comes from John Hawthorn of Bostick Kelton.

Good morning, guys. Quick question on the revenue side. The new producers have clearly brought on quite a bit, but if you back out their impact , it looks like the business before you hired the incremental is doing closer to a high single digit organic growth rate. I'm not sure if I'm looking at it that way. But can you talk a little bit about what the existing business is doing versus what the new hires have been doing?

The existing business is doing fantastic. I mean, it's -- I don't have a breakout for you, John. And if you wanted to call Doug after and chat through how that illustration was put together, I'm sure he can do it. But our field operation is just doing fantastic. New business is as strong as I've ever seen it and our retention rates are better than we budgeted.

Thanks, Pat.

Thank you.

Our next question is a follow-up, coming from Robert Glassbeagle of Lang and McElwaney.

Where did that extra four million get to be allocated?

There's depreciation in the segment, as we appreciate some of our equipment.

But if you add the two together, it's still less than how you originally had reported. It was 8.4, originally reported, 6.6. If you add the two together, you still don't get -- I was just wondering why amortization depreciation could have declined. Jack gave some guidance on the segments which disappeared on the new disclosure. I was wondering if he could go through and see if anything's changed from how he had originally given guidance, or is it the new system totally out of touch with the old system.

I think when we put the Q out here a week or so, in a couple of weeks work we're going to see more information that's coming -- and it's restated in a sense of -- reclassified in a sense of how we're looking at our investments today, which I think will provide us some clarity and in a sense, we condensed those into one line item now. Like we said earlier, though, if you're assuming a 25 percent tax rate for the rest of this year, then I think you have to assume the GFs segment, because of the additional expenses coming from the coal projects, et cetera, will be about break even. have to assume the GFs segment work because of the additional expenses coming from the coal projects, et cetera, will be about break even.

I think the guidance we gave in the third and fourth quarter, Bob, eight to ten million a quarter from the coal deals, and we were a little shorter, just a touch shorter of that.

You also gave equity -- and real estate venture prospects. Do you have those?

Bob, the revenue projections themselves really haven't changed. We anticipate about where we had been, and talked about it before for the year, getting out the of some of the venture capital, and ventures -- it really doesn't change anything. Some of those actually were a little bit of a drag based on equity accounting, so the revenue projections, coupled with back for the segment. You assume it's about to break even. The revenue projections, and they're just about where I talked about them before.

Can you spare one last question, because I've got to build a model today, unfortunately. We've got the stock trading today, and I have to wait a week or two, but I'm going to make some guesses ahead of time. Your other investment expenses, where was that line before?

You're talking about the expense line within the financial services segment?

No, total company, you know, page four of your release, top chart, you know. You have another investment expense line.

Yeah, that's basically the GFF segment, and that was spread between the -- the different GFF assets that we've had in the past and there are also some corporate expenses. If you go back and look at our-- remember there was a corporate segment that was put out.

Right.

We no longer have it, and that's being pushed off into the different units, based on what those expenses were, you know.

So there was some -- an equity income line that's now been broken into revenues and expenses separately; is that fair to say?

Yes.

In the general sense that there's more revenues than we thought, more expenses than we thought in that -- in that segment.

correct. Yes.

Okay, I think I understand, thank you.

Thanks, Bob.

Thank you, our next question is from Greg Lappin of CitiGroup.

Good morning, Greg.

Good morning. Just wanted to go -- circle back up on that section, and just -- how much capacity do you have in the tax line or the tax credits? Maybe can you get the tax rate down to zero, if you land the new deals? Do we think we can get the tax rate to zero? No.

No, we couldn't get it to zero. We still have some capacity in there, but not down to the zero levels, no.

Okay.

And, you know, we have -- what you see in the tax rate right now, is what we anticipate we're going to be doing for the year --

You mentioned the new potential partnerships.

The deal was signed in March. That's not potential; it's working.

Right.

All right, well, how many partners are in the deal, and are you using -- are you working with the same partners to pursue additional ventures?

Yes, Greg. What's happening is that there are people in the marketplace that recognize that what we've done is -- has been very successful, and they have not been as successful in different parts of the operating of the partnership. Primarily, in doing the monetization. And we're working with a number of opportunities that we may be able to have an involvement in the partnership. When it comes to running the plants and stuff like that, yeah, we're going to the same people. I'm just trying to see if we can sell it -- when you ramp -- do they wait till you ramp up to maximum capacity before you -- before they decide to buy it? What you do -- what you do is you have to -- you have to ramp up the plant yourself to make sure that everyone understands it's working and then there's due diligence. That's what provides them the opportunity to come see it and ulses have to do the testing on the -- and you also have to do the testing on the chemical product and you have to make sure that you're cleaning up America and coal finds, and there's all kinds of rules about--. So basically, it's the ramp-up of the plant, making sure that it's working and making sure that you're actually generating creditable burn in coal production, and then you can turn it to someone that's willing to monetize it.

Will they run it at 60 percent utilization, or full?

No work everyone would like full. It's the beauty of the partnerships that we've created. Because of the fact that we bring people that actually have the coal finds, and typically, we partner with someone that actually burns the coal, and then we sell off our position to someone that wants the credits. And those other people typically stay in the partnership. Okay. What you've got is someone that sells finds, and then we basically manufacture coal that we sell at a discount to a burner, and everybody in the partnership gets credits.

Okay. Just lastly, you brought up something -- say they -- they ramp it up, greater than what you assumed when you sold it, would you -- split the proceeds with the additional kilowatts of coal produced? Or will they just get the upside.

No we participate in the partnership. We win or lose based on production and on burn. If the plant goes down for a scrubber problem, you know, there's not -- there's not a good way to get the coal to them as fast as they'd like. In one instance, they had to build a side track for one of the plants and that ramped up their production, and ramped up their burn, so it's all predicated on tons of syn fuel burn.

All right, it looks pretty good.

Thanks.

Once again, to ask a question, you may dial the numbers one and four on your touchtone phone. Our next question is from Brynna Sullivan of Dowling and Partners? Brynna, are you live?

Brynna --

Thank you, our next question comes from Nick Frisken of Stevens Incorporated.

The question has already been asked and answered.

Thank you. Gentlemen, there are no further questions. Do you have any closing comments?

Yes, I would like to make a closing comment. First of all, I want to thank everybody for participating today, and thank you for your questions. If you have further clarification you need please call Doug or myself. Let me just reiterate that we really believe that our strategy is working and if I can say a forward-looking comment: This ain't the time to get off this bus. Take it from there, Holly.

Thank you. This does concludes today's teleconference. You may disconnect your lines at this time, and have a great day.

Thank you, Holly.