Arthur J. Gallagher & Co. (AJG) 2014 Q4 法說會逐字稿

Good morning and welcome to Arthur J. Gallagher & Company's fourth-quarter 2014 earnings conference call.

(Operator Instructions) Today's call is being recorded.

If you have any objections, you may disconnect at this time.

Some of the comments made during this conference call, including answers given in response to questions, may constitute forward-looking statements within the meaning of the securities laws.

These forward-looking statements are subject to certain risks and uncertainties that will be discussed on this call and which are also described in the Company's reports filed with the Securities and Exchange Commission.

Actual results may differ materially from those discussed today.

It is now my pleasure to introduce Mr. J. Patrick Gallagher, Chairman, President, and Chief Executive Officer of Arthur J. Gallagher & Co.

Mr. Gallagher, you may begin.

Thank you, Manny, and good morning, everyone.

Thank you for joining us this morning.

If you hear me rasp a bit through the call this morning, it's because I'm fighting my way through a cold.

This morning I'm joined by Doug Howell, our Chief Financial Officer, as well as some of the heads of our operating divisions.

What a great quarter we had, and what a great finish to an unbelievable year.

As we go into 2015, we remain very bullish.

Our team performed exceptionally well everywhere across the globe and in every operating business that we're in.

Strategically, I believe 2014 was really a seminal year, a year which we established a global base that will allow us to continue to grow over the coming decades.

We're done integrating our Bollinger acquisition.

And our new operations in Australia, New Zealand, Canada, and the UK are all integrating well and delivering results.

In 2014, we went from a small retail presence in Australia, Canada, and New Zealand to a top-five broker with a real platform for both organic sales and mergers, and our acquisition pipeline is growing there nicely.

In the UK Oval and Giles are now Arthur J. Gallagher.

Across our 70 UK offices, we are seeing good sales momentum as well as many acquisition opportunities.

I'm very pleased with how the UK team is coming together, putting the days of private equity ownership behind them and selling the Gallagher brand.

In addition to our larger deals, we did 57 other acquisitions; that's more than one a week.

These were our classic Gallagher deals: entrepreneurially owned, looking for a home to continue to grow and build their business.

In a nutshell, they see how joining Gallagher gives them access to our resources and capabilities, so they can sell more.

I want to welcome all of our new partners.

Together we will continue to grow a great business.

And I know you all had choices, so thanks for joining Gallagher.

Let me go back to the operating results.

As we said in the press release, the brokerage and risk management businesses had an outstanding quarter.

Good growth -- combined revenue up 31% on an adjusted basis.

Good organic growth -- 5.6% all-in.

Brokerage basic commissions and fees were up 4.2%.

Risk management organic was 12.6%, and we had nice margin expansion in both segments.

And on top of all that growth, our clean energy investments took another big step up and generated over 50% earnings growth.

Well done to all my colleagues and the whole team around the globe.

I'm very, very proud of these results.

Let me go into a number of our operating businesses for a little bit more color.

First, I will start with US retail property/casualty.

The Council of Insurance Agents and Brokers rates report is out, and once again rates are being reported as essentially flat -- which we agree with, by the way.

Small accounts were up 1.1%; medium accounts were reported about flat; large accounts were reported down about 2.2%.

In my opinion, we are in a new era of a prolonged, stable, and rational rate environment.

In my meetings with domestic insurance companies, they resolved to continue their four-year market of flattish rates.

Accounts that deserve decreases are getting them, so those that need increases are being quoted higher.

This really is an excellent market for our brokers and our clients alike.

This is a market that will continue to reward expertise, and one thing we are building everyday around the world is expertise.

Secondly, let me move to employee benefits.

In 2014 the employee benefits team was very busy helping our customers manage their benefits and HR needs.

This trend will continue nicely in 2015 as the complexity grows along with higher benefits and wage costs.

In the US, employers continue to deal with impact of the ACA, Affordable Care Act.

Our team has the tools and resources necessary to assist our clients in compliance with this law.

We continue to see solid interest in the Gallagher Marketplace, our private-label insurance exchange, as more employers understand the advantages in offering this to their employees.

2015 will be a very busy year for the exchange.

The team continues to invest in tools and resources our clients need to manage their employee benefits and human resource needs.

This has helped with strong new business sales, and it continues to drive increased merger and acquisition opportunities in the US and, truthfully, globally.

Thirdly, when we look at our UK and Canada, we are seeing the market there is flattish to a little down; and in Australia/New Zealand, it's down maybe mid-single digits.

And even in this environment, our existing operations posted 2% in organic growth.

Fourth, our wholesale and specialty businesses both in the United States and London had a fantastic quarter: solid organic growth of about 5%.

Domestically, our wholesalers overcame strong headwinds in the property market.

In international, our London specialty unit grows stronger by the day as we continue to service customers all around the world.

Fifth, let me shift to our risk management business, which is Gallagher Bassett.

What a strong quarter.

What a strong year.

12.6% organic; adjusted EBITDAC margin improved 225 basis points -- over 16 points of margin, and a great finish to the year.

Revenue growth was fueled by a number of things: first, strong new business domestically and internationally and across both our large commercial and carrier units; secondly, client retention at about 95%; and, thirdly, mid-single-digit growth in claim counts.

Finally, we continue to invest in our managed-care offering, our IT systems, and our claims analytics, all with the goal of delivering industry-leading claim outcomes.

I want to thank all my colleagues across the globe for pushing through the whole 12 months -- what a great finish we had!

-- for staying focused; for integrating our new partners; selling a lot of new business and taking good care of our clients and retaining those clients; and, in 2014, continuing to be recognized as one of the world's most ethical companies.

Let me finish by rephrasing why I think 2014 was in fact in our history going to be looked at as a seminal year.

We have had aspirations of being a global growth enterprise since my dad opened our offices in London and Bermuda in 1974.

We now have 20,000-plus people spread across the globe, bringing the expertise of our organization -- no matter where in the world that expertise is located -- to our clients.

We developed more clients; we developed more mergers; we developed more geographies.

We really made some giant strides in our journey in 2014, and I'm very, very pleased.

Doug?

Thanks, Pat, and good morning, everyone.

What a terrific finish to a game-changing year for Gallagher.

All right, please flip to the table on page 2. And here are some other items for you to consider as you review our results and work on your models for 2015.

We will start with the brokerage on page 2.

Brokerage segment: adjusted EPS of $0.50, up 22% in the quarter.

Foreign currency did not have much impact year over year in the quarter; but had the dollar remained at third-quarter levels, we would have earned another $0.01.

Looking towards 2015, if the dollar stays at current levels, it will cost us about a penny in the first quarter, and then about $0.02 to $0.03 in the second and $0.02 in the third.

Next, integration.

You heard Pat's comments that Bollinger is done, and the others are moving along as planned.

Looking to 2015, we are seeing integration costs of about $0.07 to $0.09 a quarter in the first half and $0.05 to $0.06 a quarter in the second half.

Again, that's $0.07 to $0.09 a quarter in the first half and $0.05 to $0.06 a quarter in the second half.

Staying with brokerage, but turning to page 3 to the organic revenue table at the bottom: Pat gave you some flavor around the world, so let me give you some more detail behind the 4.2% organic growth in base commissions.

We saw about -- a little over 4% came from our domestic retail operations.

International was nearly 4%, and domestic wholesale was around 7%.

So solid numbers around the globe, no matter how you add them up.

Second, as for supplementals and contingents, together, organically, about flat in the fourth quarter -- which, given we had a gangbuster fourth quarter in 2013, should be viewed as really excellent work by the team.

For 2015, we are feeling a little preference from carriers to move from supplementals to contingents.

But by and large, we are renewing most of our contracts as is, and we see some moderate growth in these lines.

Third, rate and exposure together basically had zero impact on our organic growth this quarter.

This is consistent with what we've been seeing since mid-2011.

So like Pat said, we are in a new rate environment, and still a very healthy one, for that matter.

Flip now to page 4 to the brokerage segment adjusted EBITDAC margin table near the bottom of the page.

Adjusted margins are up over 180 basis points; about two-thirds of that results from the roll-in impact of the larger deals, and about a third from organic growth and expense controls.

Again, that's also great work by the team.

Now let me give you some thoughts as you prepare your models for 2015 for the brokerage segment.

First, we've said this a lot in the past, but I can't emphasize it enough: that our brokerage segment has substantial seasonality in our first quarter.

You can really see it on page 4 of our investor supplement.

As a result, our first quarter has historically had by far our lowest margins, and we historically posted the smallest amount of organic growth in the first quarter versus the latter quarters and full-year.

I really encourage you to reflect this dramatic first-quarter seasonality in your models.

Second, given the sizable amount of M&A we had this year, projecting rollover revenues can be difficult.

So for your 2015 models, assume rollover revenues of about $175 million in the first-quarter 2015; $125 million in Q2; $25 million in Q3; and $10 million in Q4.

Then you'll need to add your pick for organic and for 2015 acquisitions.

Also, when you make your pick for 2015 acquisitions, please consider that M&A historically in a quarter tends to skew towards the last month, not the first month.

That can have an impact in your models if you don't control for that also.

Third, also please be careful when you model investment income.

Recall that our investment income has revenues from our premium financing businesses.

While revenues are somewhat apparent in the investment income line, it isn't easy to see the costs associated with that revenue.

That caused some confusion last quarter, so we've added a footnote on page 12 of the release to show that net impact to EBITDAC, which is very small, relatively speaking.

So please make sure your models don't have all the investment income hitting the bottom line.

Fourth, as for first-quarter 2015 margins, we estimate about 80 to 100 basis points of margin expansion from our larger deals as they roll into the numbers, but I am not seeing much more margin expansion from organic in the first quarter, given our seasonality.

Fifth, let me give you some non-cash estimates for the first quarter for the brokerage segment.

For depreciation, assume about $15 million of expense; for amortization, about $55 million; for acquisition earnout amortization, assume about $5 million; then, as we do more M&A, for every dollar we spend, you need to increase amortization by about 1% of the purchase price per quarter, and that will get you close.

Let's turn to page 4 to the risk management segment.

Really an excellent quarter across the board.

Breaking down the organic, our domestic operations grew near 12%, and internationally near 17%.

Margins were nicely up over last year, and we surpassed our 16% target for the year.

Let's turn to -- I guess that was on page 5.

Let's turn to page 6 to the corporate tables.

Overall, we came in slightly above our midpoint guidance.

And you'll see the retirement de-risking strategy that we discussed in our last call and in the December 8-K.

And remember, the de-risking charge is non-cash, and those payments are made from plan assets, not from our corporate cash.

So a very nice outcome on all fronts.

Looking forward, when you get ready to model 2015 for our corporate segment, please take a look at our investor supplement, page 15.

We have provided a 2014 adjusted view, and we've also provided our estimates for the corporate segment for each quarter of 2015.

We've adjusted 2014 on that page 15 for both de-risking and non-cash accounting gains on our clean energy investments, giving you an apples-to-apples view with our estimates for 2015.

A few other thoughts on 2015: first, we're still waiting for some production estimates from our utility partners, so there are still some wide ranges on the clean energy line of the estimates.

Second, you'll see that the midpoint of the clean energy estimates is about 10% up over 2014 adjusted.

We see 2015 as a stairstep year to 2016, where there could then be another move-up in earnings as we put a few more plants back into service this year.

Third, you'll see that our first-quarter clean energy estimates are also seasonally smallest, which results from the accounting rules, not from production.

Effectively, the accounting rules require recognition of tax credits somewhat in proportion to our pretax earnings, not as such credits are generated.

In our case, we produced more credits in the first quarter than we could recognize in earnings, but then catch up over the following quarters.

Footnote 1 on page 16 shows this effect.

Finally, some comments on our M&A program.

Excluding the large deals, we did 57 mergers in 2014 at an average multiple of EBITDAC of 5.9 times and a weighted average multiple of 6.7 times.

Average pro forma margins were in the very high 20s.

Second, looking towards 2015 M&A, we can spend about $400 million on nice tuck-in and bolt-on mergers in 2014 without having to issue any stock.

That said, there will be tax-structure deals and mergers where the seller wishes to take our shares; so of course we would do that.

Based on our pipeline, we see opportunities that might push us over $400 million in purchase price.

So if we did another $150 million to $200 million of purchase price, we might need to use about 3 million to 4 million shares in 2015.

Our pipeline is terrific at this point.

All right.

Those are my comments.

And like I said to start, what a great way to finish a game-changing year.

Thanks, Pat.

Thanks, Doug.

Manny, you want to open the lines up?

(Operator Instructions) Michael Nannizzi, Goldman Sachs.

Hey, one question I had was in risk management.

There's been a lot of growth there.

I know you talk about the 16% margin as kind of a target.

Is there operating leverage in that model that could allow you -- you know, if you continue to see the kind of growth that you have seen -- to reset that to 17% this year maybe higher?

Just trying to get an understanding of the leverage of that business and where the leverage might be.

Thanks.

See, I think what we're talking about -- 16.5% of margins.

So there's some opportunity to improve in the risk management segment.

Got it.

And just in terms of what is driving that?

Is it -- is there a relationship between top line and margin?

Or is that just kind of that mid- to high-teens margin business no matter how big you are?

Well, listen, no matter how big we are -- that could change the answer, but I think in the size that Gallagher Bassett is right now, with the investments that we want to make for improving our customers' claim outcomes, we think 16.5% is pretty healthy and industry-leading at this point.

I was going to say the same thing, Mike.

This is Pat.

We believe we have the industry-leading margin.

And I'll tell you, it's not the same as the brokerage business.

When you write new claims business, claims show up, and you'd better have somebody there to adjust them.

Got it, got it.

Okay, great.

And then just trying to get an understanding also of the comp ratios in the brokerage business.

And obviously, there's a lot going into what those numbers were this year and also other operating expense.

Is there a way that we should be thinking about those pieces separately?

Or is it just -- is there just too much noise to be thinking about extracting or extrapolating a trend line?

Listen, I think that our investor supplement on pages 4 and 5 of the investor supplement provided good historical trend on that.

We see a comp ratio in the high 50s, and we see a operating expense ratio in that 17%, 18% range as probably a good go-forward ratio.

Got it.

You've got to look at that for the entire year.

Remember, that can cause issues in our first quarter, because our comp ratio is -- because of our seasonality, what I'm saying, that -- in the high 50s for -- that's for the year; 17%, 18% for operating; that's for the year, too.

But again, our first quarter is so seasonal you'll see those numbers higher than that.

Got it.

Then just wondered -- one quick news point.

I saw that the CFO of international had left.

Can you talk about what is happening in Europe?

Maybe an update on the integration and any sort of update on management out there would be helpful.

Thank you.

Sure.

I was just there last week and had some very good sessions with the leadership team there.

And we have a CFO that was offered another opportunity to work someplace else, that -- we're sorry to lose him, but he's a good guy.

And he's taking an opportunity in private equity that he thinks will be better for him.

But the team remains very solid.

Very pleased with the integration I'm seeing.

As I mentioned in my prepared remarks, we are now trading as Arthur J. Gallagher everywhere.

We are seeing organic growth.

We are selling more than we are losing; that's good.

And I think the troops and the leadership team have, over the last six months, really come together nicely.

Great, thank you.

Adam Klauber, William Blair & Company.

Couple different questions.

How are Noraxis and Wesfarmers doing on an organic basis?

It's not included in organic, but how are they looking so far?

Together, just slightly between 0% and 1% organically between them.

Maybe a little softer in Australia/New Zealand and a little better than that in Canada.

Now, with that caveat, there is some differences in accounting.

We have tried to levelize for that as best as we can, as I give you that answer.

But we are nice, flat, up a point or two between those two units.

Okay, thanks.

And I think you mentioned there is going to be some more integration cost in 2015.

Could you give us some idea -- I guess just more what that's about and what should be the ultimate impact of that integration cost?

Yes, I said at the opening part of my comments that we see $0.07 to $0.09 a quarter in the first quarter and second quarter, and $0.05 to $0.06 a quarter in the third and fourth quarters.

Most of that has to do with system integration, real estate consolidations and moves.

We have incentive compensation for some of the teams that are working on that.

There are some employee change costs that are in that number.

So it's a -- there's, of course, a lot of excess travel that goes on with it, lease abandonment charges.

So it's the common thing that you would see, similar to what we did with Bollinger.

We brought in 12 different units there.

We moved some folks around.

We've rebranded, so there is cost in that.

So it's just the standard integration costs that you would see, just like Bollinger.

And it takes us, Adam, a year to 15 months to integrate a larger deal.

Maybe I will stretch to 18 months on some of them.

Really it's -- each one of them is different.

In Canada, Australia/New Zealand, it's more extracting them from their former parent, those costs.

When you get into the UK, it's a little bit more intricate as you put together Oval, Giles, the old Heath Lambert, and the old Arthur J. Gallagher.

So it depends on the country.

But if you look at the past, Bollinger is done.

And the costs were very similar when it came to that one, too.

Okay.

So do you think 2015 will be for -- you know, I imagine these are mainly Noraxis/Wesfarmers.

Do you think the 2015 will be mainly the end, and 2016 we shouldn't have too much?

Or should these be ongoing through 2016?

No, I think we are pretty well done by the end of 2015.

There will be some drifts.

One of the issues when it comes to real estate abandonment costs is you don't take the charge on abandonment until your last folks are out of the building.

We would never do this, but if you had a 300-person office and two people were left, technically you can't take the charge until the two people move out of the building.

So we would obviously not do that; we would get it done faster.

But there might be a little bit of that that creeps into 2016.

But by and large we will be done.

Okay, okay.

That will be great.

And then switching to the wholesale MGA segment, clearly there's been some pricing pressure on property.

I noticed for most of the year you've had pretty good flow still coming from the standard market to the E&S market that helps submissions.

I'm hearing some inklings that that flow is slowing down a little.

What are you guys seeing in the market?

We had a great fourth quarter, Adam.

We killed it in the fourth quarter.

We had a lot of activity.

I would say the property rate decreases really did affect us in the first and, seriously, in the second quarter -- July 1, September -- those tend to be big months.

But as we came into the fourth quarter, and so that property was behind us, we killed it.

It was fantastic.

Submission flows were up.

Our hit ratios were up.

Remember, we are the largest MGA in the United States.

And so those are, many times, small start-up businesses around the country that are coming in.

That's kind of a good sign for the economy.

We are seeing small start-up businesses that need cover.

So I'm very bullish, and we're excited about the acquisition pipeline in those businesses as well.

Okay, okay.

Thanks, that's helpful.

And then, Doug, on net cash provided by operations, could you give us some idea -- we have it around $350 million, 2013.

Is that going to be up materially in 2014?

I see it above $400 million in 2015.

So we can do $400 million worth of deals, mostly from our free cash flow.

And if we have to use a little stock, if we go to $600 million of deals, we will do that.

But by and large, we see our cash flows being pretty strong.

The nice opportunities that we are seeing are global opportunities to use our cash in acquisitions.

So we are seeing nice opportunities in Australia, and Canada, and New Zealand.

And also, too, on that point, one of the things we have talked about in the past -- if you look at us from a global basis on our cash taxes paid, we are down to basically about 10% of our EBITDA overall, if you just -- you can't use exactly the 10-Q or 10-K numbers, because that has some estimated taxes; but we've done a really good job.

Between our tax credits and our structure internationally, we are paying only about 10% in actual cash taxes paid as a percentage of our EBITDA.

So cash flows are pretty good.

Okay.

One thing -- so if dividends are running in a $200 million-plus range, and then you have $400 million of cash flow, how do you have $400 million for acquisitions?

Well, I took the dividends out when I got to the $200 million.

So if you want to start with a EBITDAC number, 10% goes to taxes; about 10% goes to CapEx; about 5% goes to the cost of reducing our taxes; 25% goes to dividends, so to speak.

You get down to about a 40% number of our EBITDAC number that's available for acquisitions.

Okay, okay.

Maybe we can talk more detailed on it.

I don't want to take up too much time.

But that's helpful, thanks.

John Campbell, Stephens.

Congrats on a good quarter and a good year.

Thank you, John.

Appreciate it.

Absolutely.

So it looks like you guys used some of that aftermarket stock plan in the quarter.

I think you've got about $166 million or so remaining in the balance of the -- I guess the next year or two.

Just trying to get your thoughts on the programs for the remainder of the year.

And then, Doug, is that going to be tied to the north of $400 million acquired rev without using stock comment you just made?

A couple different answers to the question is that when we talk about using stock for acquisitions, we can either use the dribble-out to bring the cash in and then push that out in an acquisition, or we can use cash -- or stock directly to the sellers, depending on the structure.

So my commentary about maybe using 3 million to 4 million shares in 2015 would include -- we could choose to use the dribble-out to do that, or we could choose to do it directly to sellers.

So they are inclusive of one another.

Okay, that makes sense.

And then, Doug, just two housekeeping items here.

So what was CapEx in the quarter?

And then maybe if you can get us a sense for what you guys are budgeting out for the year.

And then is a 35% tax rate a good starting point for brokerage for the year?

Yes to the last question.

I think that in terms of CapEx, the general rule of thumb is whatever we depreciate, we probably spend in CapEx, plus maybe 10% to 15% more of that number.

That's kind of the way that we budget our CapEx.

So I think that was your two pieces of the question, right?

And then CapEx in the quarter?

Oh, CapEx in the quarter.

Hold on a second; I'll see if I can get that.

Maybe $22 million?

Yes, $22 million.

Got it.

Okay, thanks, guys.

Dan Farrell, Sterne, Agee.

A question on your smaller M&A -- the sort of 57 other deals that you do.

How do we think about the margin of those deals coming on?

I know you have talked about the larger ones having a higher margin, but when we think about smaller M&A, does that generally come on at the same margin?

Is it a lower margin?

And then as you bring it onto the platform, you can lift those margins up?

No, technically they pro forma out maybe a couple margin points better than, let's say, our overall brokerage margin segment.

But then by the time we put our employee benefit plans, we don't really -- on the smaller deals, there's not a lot of synergy opportunities, Dan, on the tuck-ins.

The place where we get opportunities on the smaller deals is in our capabilities and resources that allows them to go out and sell more insurance.

Right.

Okay, okay.

And I would say margins -- in general, margin is pretty similar to what we've got.

Right.

Okay.

Pro forma.

Yes, they are in the high 20s, just like ours.

We are in the -- you know, 25%, 27%.

Okay.

And then unrestricted cash of $314 million at the end of the quarter -- how much would you characterize as usable cash within that number?

I think it's about $200 million.

Okay.

Most of that is offshore at this point, and so as our acquisition opportunities internationally -- there's $200 million there.

Also, in our balance sheet, since we're talking about it, is we do have credit carryovers of almost $250 million.

So that's -- those are warehouse credits that we will be able to use to reduce our tax rate going forward, too.

Does that factor into your previous comment that you are sort of in reality at 10% tax rate on the EBITDA?

Do you factor that in when you think about it?

Right now, we are actually producing more credits then we're using.

So we are actually warehousing some of the credits.

Some of the reason why is through 2015, a lot of those credits have a special feature with them that allows us to reduce our AMT down to about 8% or 8.5%.

So those are special credits that it's okay to have in the warehouse, so to speak.

But that will help us reduce our cash taxes paid going forward substantially.

Okay, great.

Thank you very much.

Mark Hughes, SunTrust.

In the corporate segment, you described or suggested there would be a step-up in 2016 in the contribution from the clean coal.

Would it be similar to what we're seeing from 2014 to 2015?

I would hope to better that.

I think it's a little early at this point to say, but we would hope to see a betterment to what we are doing this year.

If you really look at it -- if you look at how these things work, we get plants up and running; we put them in service; and then we move them to different locations during the year.

This is a year there will be a lot of further work by the team.

And we hope to get more of those plants online towards the end of 2015.

So you will see the hard work that's going on right now will start paying in 2016.

And so to be clear, the clean-energy-related contribution of $90 million stepping up to, say, $100 million at the midpoint for 2015 -- it ought to step up even faster in 2016?

Based on what we are seeing now, yes.

That can change, but yes.

And then the 1Q guidance you give for corporate, does that include some de-risking, which I presume would be nonoperational, and you would segregate that out when you report operating earnings?

Or is this -- this did not include the de-risking?

There is no de-risking charge in the first quarter of 2015.

There were non-cash gains in the clean energy line in the first quarter of 2014.

So we will treat that as a adjusted item when we report our 2015 results.

You should be able to see that on page 15 of the investor supplement, where we give you an adjust -- we take reported, corporate; we adjust for the de-risking and for the non-cash clean energy step-up in basis gains; and then we give you 2015 on a comparative basis.

But we don't see step-up in basis gains in 2015, nor do we see a de-risking charge in 2015.

That rollover guidance you gave for the organic growth -- or to help us calculate revenue, does that include all of the deals you did through the end of 2014?

Yes.

So that -- it's not just big deals.

That's all deals through the end of 2014.

Does not include any organic, nor does it include any 2015 mergers that we haven't closed by December 31, 2014.

Then final question: did you give the organic growth in the benefits business?

The benefits business was north of 4% in the fourth quarter.

Thank you very much.

Bob Glasspiegel, Janney Capital.

Question on currency: the numbers you gave us on the impacts for Q1 through Q4 -- those will be adjusted out?

So those are not going to be in the adjusted earnings?

What we will do, Bob, is -- typically, when we present current-year information, in order to make a comparable, we will make an adjustment to the prior year.

So we get to 2015, we will basically adjust 2014 to remove the currency impact as an adjusted item.

Well, I guess -- I'm not sure I follow the answer, sorry.

Is this going to be something we should factor in as a headwind in our adjusted operating earnings?

Or is it going to be neutralized?

Well, it depends on what you start.

What I would do is I would take down the prior-year 2014 by a few pennies and then project off of that -- you know, I said $0.01 in the first quarter, $0.02 to $0.03 in the second, and $0.02 in the third.

So I would drop down 2014 and project off of that, because that will be your -- there will be a new baseline for 2014.

Okay.

I've got to hit you offline on that.

Are you factoring in both income statement and balance sheet when you are giving those numbers?

This is the income statement effect.

We don't have balance sheet changes that go through the P&L.

No assets overseas that get marked?

No, that goes through OCI.

Okay.

And your severance charges and lease were heavy in the quarter.

Anything specifically that was driving the $0.12?

Listen, if you look at the integration efforts that we've had -- are you talking about in the integration line, or are you talking about the severance and lease abandonment lines?

The $0.12 for workforce and lease termination -- $26 million --.

Well, actually, you are on -- the $0.12 was in the acquisition integration line.

We didn't have much in workforce and lease termination -- $1.8 million.

And, of course, it's the $0.12 of acquisition.

Yes, that's up a little bit from the guidance I gave in October by a few pennies.

Largely had an opportunity to push forward on a couple contract terminations, and we did have a nice move that we got taken care of that allowed us to take a charge in the fourth quarter.

Okay, last question: your dividend increase is a lot slower than your EBITDA per-share growth, and you are issuing stock, so -- and the shareholders are getting less of the increase in earnings -- understandably, because you are using the money for deals.

Is that something we should expect?

Or does the dividends and capital management start to march in line with the EBITDA growth at some point?

I think we will probably keep that growth in dividend at a slower rate than EBITDA growth, depending on the deal pipeline.

And the thought process behind that, Pat?

We took our dividends up substantially a number of years ago, Bob -- you remember that -- and got to a point where we kind of had constrained cash with dividends.

Still have the best yield in the business; have shared, I think, nicely with our shareholders our growth.

When we had a slowdown in the Great Recession, we did not deduct any of that from dividend payment.

And I think as we build our capital plan going forward, we see ourselves being modest in dividend increase and continuing to be very acquisitive.

There's just a terrific opportunity for M&A activity right now, Bob.

I think that as the baby boomers are getting closer to retirement, there is really a nice number of family-owned entrepreneurial franchises out there.

So we see lots of M&A activity that can be a good use of our cash.

Got you, thank you.

Arash Soleimani, KBW.

Just wanted to follow up again on the FX question.

So just kind of making up a number here, if we were expecting, let's say -- again, making up a number -- $1.00 for 2015, does it make sense to take that down a few pennies for the FX in the adjusted EPS estimate?

Yes, I think so.

For the whole year, maybe $0.02 or $0.03, and then you're going to have impact of last year.

The real issue is the pound spiked up during the middle of the year and then fell off.

The Canadian and Aussie dollar just kind of had a trickle-down effect throughout the year, and then kind of fell off a little bit, as the Canadian dollar did in the fourth quarter.

So you get a little bit of this spike-up and spike-down during the year.

But I think that's probably a good way to look at it.

Okay, yes -- because in the press release, I think it said FX is excluded from adjusted, but it sounds like the adjustment is made to the prior-year numbers, from what you're saying.

Correct.

Okay.

Yes, we re-present prior year to show the impact of FX so it's comparable without currency movement.

Okay, that makes sense.

Thanks.

And then can you -- I know you talked about some of the rollover numbers from acquisitions.

Can you just talk about the seasonality of revenues in those acquired companies and how that seasonality compares to Gallagher's historical seasonality?

Well, listen, if you roll them all up, and you put them all together, actually it accentuates our seasonality a little bit more.

We were always a small first-quarter company, and in a lot of these transactions we've done it has not, I would say, changed that much.

Okay, okay.

And then the first quarter of 2014 adjustment that you guys made -- this might be, again, a better question for offline -- but if I get to the net adjusted $16.5 million that you have for the first quarter, on a per-share basis, I can't get to that $0.06.

Is there something else in there that could be impacting that, or --?

All right.

Help me.

Where are you?

So I guess it's the corporate as adjusted page of the supplement.

Okay.

And you start with $4.6 million as your net earnings for corporate in the first quarter.

And then with the adjustments, it goes to negative $16.5 million.

And then you have negative $0.06 as the EPS for that quarter in corporate adjusted.

And I guess that's page 15 of the supplement.

So basically just on a per-share basis.

Yes, let me look at that offline.

Okay.

Yes, no, that's fair.

It's probably a better offline question.

Thanks, Arash.

Yes, I appreciate the answers.

Kai Pan, Morgan Stanley.

First question on the organic growth in UK and in Australia/New Zealand, Canada.

It looks like overseas organic is kind of slower than you had in the US.

Just wondering -- it's just market environment over there?

Or is there anything in your control you can improve the organic growth going forward?

Well, let me -- I will touch on some operating aspects and let Doug give you the numbers.

But I think what we're finding is when we put on a nice tuck-in acquisition anywhere in the world, that thing is integrated in nine months.

They are hitting the ground running; Gallagher is helping them; our resources are working; and they are selling more business.

You do these larger ones, like Heath, Bollinger -- it probably takes 18 months until the troops have found the restroom; they know what they're doing; they know how to get to the resources; the resources are engaged; and organic growth is influenced by the fact that they joined Gallagher.

And so I think you have to expect that to occur in Australia, New Zealand, Canada a bit, and the UK.

Now, also, to your point, the market is softer and Australia/New Zealand; a bit softer in Canada; a bit softer in the UK than it is in the United States.

And as Doug said in his prepared remarks, we are seeing almost no impact from market advances or declines in the US domestic business.

That's not true in these other countries.

And Doug can talk about the specific numbers.

And yes, I do think that over time, as we have with our acquisitions in the United States, once they are integrated into Gallagher, organic growth does improve.

You want to talk about the specific numbers?

Yes, I think that when you look at -- of the ones overseas right now, we are seeing nice net unit sales growth in Canada.

We are having nice net unit sales growth in New Zealand.

Australia is the place where bringing our sales culture will help us do that.

But still, they are selling some nice business there.

And then -- and in the UK, we had really, really nice results out of the Oval acquisition.

Giles was steady.

So I'm not seeing any particular weakness as I go around the globe on that.

Okay, that's great.

And then there is a distressed situation -- Towergates in the UK.

You said in the past you're not interested in it.

I just wonder, given the situation over there, do you see organic opportunity from that, from competitors, such as hiring brokers or getting new business?

Kai, we're always looking to hire good people into the organization.

But I would not say that that provides us any astronomical opportunity.

Okay, that's great.

And then a number of questions for Doug.

Just wanted to clarify -- you said a margin expansion from these large deals last year going to help you about 80 to 100 basis points.

Is that for the full year or just for the first quarter?

That's first quarter.

And will that help the subsequent quarter as well?

Well, remember, by the time we get to the second quarter, every deal really will have been in our second-quarter numbers for last year -- except for Noraxis, which is the Canadian acquisition.

Because remember, we bought Oval on April 1; so that was in our second-quarter 2014 numbers.

We bought Wesfarmers effective mid-June, but they have a strong June.

So we picked up some of their numbers.

And really Noraxis we closed on July 1. So the impact of the roll-in of the larger deals will pretty well be in our numbers.

And there might be a little bit of an impact in the second quarter, but I don't have that number in front of me.

Okay.

Organically you said that you expect no expansion in the first quarter.

Is that right?

I think it's very hard for us to show organic expansion in the first quarter, given our seasonality.

Okay.

But you do expect some margin expansion in the latter half of the year?

Listen, I think that depending on what organic is, we have said that anything above 3%, we might have a chance at it.

Anything below 3%, it's hard work to remain flat.

And if you get negative, of course, that's hard to hold margins.

But we will see where organic comes in, and we will have a better feel for that at the end of the first quarter.

Great.

Lastly, if I may, you have a terrific year in terms of number acquisitions we've done.

It seems like people are waiting to join the Gallagher family.

And I just wonder, do you see any increase in competition in terms of getting deals, in terms of just valuation?

Because you are paying still a pretty reasonable -- 6 or 7 times EBITDA.

But I just wonder, is there increasing competition in terms of valuation for deals?

If you take a look at the size of those deals in the 57, I will tell you that there is competition for every single one of them, but it's not as fierce as it is when you get bigger.

Okay, great.

Well, thank you so much for all the answers.

Scott Heleniak, RBC Capital Markets.

I just want to touch on a couple questions, first in risk management.

The organic growth rate was higher than the overall growth rate for that segment.

And just wondered if you could refresh me on the difference.

Is that just currency, then?

In other words, organic --

Say your question again -- that organic growth was --?

It was higher in risk management.

It was 12.5%, but the overall revenue growth rate, I think, was 11.5% for that unit.

So is the difference, is that currency, then?

Yes, it is.

Yes, okay.

I figured it was.

Just clarifying.

And then the -- I wanted to clarify on the risk management margins, the target you gave, the 16.5% -- is that for this coming year?

Or is that just over time you are targeting that?

That's 2015 target.

Okay.

And then the client retention -- you mentioned 95% of risk management, which is very good.

Can you compare that historically -- is that an all-time high?

Or how does it compare to previous years?

I would say it's pretty similar.

Over the last couple of years, it's probably up a point or two.

All right.

And just a question on the recent move in commodity oil prices.

Does that have any impact on your ability to utilize any of the tax credits that you have?

Is there any impact on that at all?

No, there's no phase-out based on oil prices.

There is a phase-out based on coal prices, but as oil comes down in price, so does coal.

So that actually helps us.

And we are a long ways away from a phase-out in coal prices.

Okay, all right.

Thanks a lot.

Paul Newsome, Sandler O'Neill.

Good morning and congratulations on the quarter.

Thank you, Paul.

My first question: are you seeing claim count increases in your risk management business on kind of a same-store basis or an account-by-account basis?

Yes.

We are seeing same-stores or account-by-account up about 5%.

So given that it's mostly workers' comp, if I recall, that suggests that we would get a little bit increase in frequency of workers' comp?

I think we're seeing frequency and more employment.

So it's not that the -- it's not that our customers are less safe; it's that they have more employees.

Excellent.

And I wanted to ask a little bit of a devil's advocate question.

So if we are indeed going into a environment where rate is pretty flat, why is that necessarily a good thing for a brokerage operation, which obviously makes -- you know, all of them make a lot of high margins -- when you could argue that much of what you provide is dealing with the volatility, the inherent volatility in insurance prices, which historically have been pretty volatile.

And you needed a lot of help to make sure you were on top of what was happening in the market.

Well, first of all, Paul, our clients need a lot of help no matter what the rate environment.

And what you had in the past -- historically, you get these hard markets where all hell breaks loose; you can't get the insurance.

It becomes a seller's market.

You basically make every single one of your clients unbelievably angry.

And when the rates start to settle down, your loss business goes up.

When you're in a flat-rate environment, you're not ticking off every single client because prices are going crazy; you've got a reasonable request for increases if, in fact, their losses have not been good; you can help them cope with their loss situation and improve their pricing by reducing loss; and you don't have somebody show up who is a one-off broker with a 25% decrease in the cost of the program.

Now we are all at a level playing field.

Base costs are about the same.

That's why my comments are now it becomes an expertise game.

Who do you want to hire?

You want to hire the Jones Agency down the street that has a really nice guy that plays golf with you on Saturdays, but really doesn't have any expertise?

Or do you want Arthur J. Gallagher, that has literally hundreds of capabilities behind us, to help that client -- regardless of what their businesses and regardless of where they want to play in the world?

Give me that opportunity without having rate declines of any substance: I will outsell my loss business, and I will not have to factor in rate decreases.

And we will do extremely, extremely well.

Thanks for the answers, guys.

And congratulations on the quarter.

Josh Shanker, Deutsche Bank.

I apologize for joining a little late, but given my notoriously byzantine questions, I can't imagine anyone has asked them yet.

So the first question is: just thinking about acquisition pipeline for 2015 and your direct-to-capital ratio, is there any difference in how you think about paying for deals with cash -- whether it's cash on hand versus with debt issuance or paying with equity?

Yes, of course.

We always think about that.

I think this year is that we are kind of targeting a debt-to-EBITDAC ratio of 2.5x by the end of the year.

Our free cash flows -- it does leave us some more borrowing capacity towards the end of the year, too.

But I don't see us issuing a lot of debt this year, and I don't see us using a lot of stock this year.

Our pipeline is good right now.

The multiples are reasonable out there.

And there are just lots of nice franchises that are coming up.

And for us to do 50, 60 deals again in 2015 at a nice revenue multiple -- like this year was $4 million, I think, on a size deal -- so it looks like that we can buy $200 million to $300 million of revenue with cash, and maybe just a smidge more debt, by the end of the year.

And then, obviously, if the appetite is bigger than that, we can use some of our shares.

But right now, when you can pick up nice franchises in the 6 to 7 multiple range, I think that's a good opportunity for us.

And like Pat said, it brings some terrific resources to us, some great niche players that have some great, great -- it will fit well in our niches, fit well in our products set, that we all have some nice programs.

There's some really nice opportunities out there right now.

Okay.

And switching gears a little bit, looking at the investment income and book gains line, do you happen to know the number for book gains?

Yes, it's on page 2. The book gains were 4.7 in the quarter.

Okay.

So that's kind of what I guessed.

And if I look at that, and I look at last quarter, the yield on fiduciary assets seems to be close to 2%.

Am I crazy, or --?

That seems fantastic.

I can't speak to whether you're crazy or not, but I can probably do the math here while we are on the phone.

Let me work on that and see if I can get back to you.

I think that we are seeing some -- we do make some nice money on our fiduciary funds in Australia and New Zealand, where yields a little bit higher there.

That could be influencing a little bit.

But let me see if I can do the math and get back to it.

Now, you did see the premium finance note on page 12.

So if you take out -- maybe that's what you're looking at -- if you take out the investment income on our premium finance business, maybe that will produce a different math for you.

I think we did it.

But we can continue to play around with it.

Let me just look at it here while we're talking.

That's it.

(Operator Instructions) Ken Billingsley, Compass Point.

I just wanted to follow up on adding more plants in 2015.

Can you talk about how the impact of regulatory changes and, I guess until the last few weeks, more milder weather -- the impact that it's going to have on maybe the projection that you had initially set out for plant expansion?

And maybe what would create a slowdown in those expansion plans?

All right, so first of all, regulatory changes on the appetite for coal in the US -- there's no new news in this.

The fact is that most of these plants run till 2021.

It takes a long time to take a plant offline, should a utility decide to do that.

But I just don't see a major disruption by utility because of regulatory changes taking any of our clean energy plants offline.

If they were to do that and shut down a utility, those plants are portable, and they can be moved to another utility that hasn't been shut -- you know, hasn't shut themselves down on that.

So moving the plants around is an option.

I don't see threats by displacement of substantial amounts for natural gas in a lot of our plants that we use.

And frankly, when we sit there and pick plants, we're talking about 33 machines with an opportunity of thousands of boilers and plants around the country.

So most of the places that we put them in that -- we have a long-term view of the utility's appetite to continue to run the plants through 2021.

That said, we will get a plant from time to time that decides to shift to natural gas, and we will take it down and we will move it.

That's why we would rather own a portfolio of 33 of them than own -- you know, maybe own 40% to 50% of those versus own 100% of 15.

There's some nice diversification aspects of that.

So I don't really see the risk that you highlighted there as being a reason why we wouldn't get more plants up and running in 2016.

Okay.

And regarding the natural gas, are these alternatives that are in place using natural gas?

Or is this infrastructure that they have to build out?

Most of them would have to build out substantial infrastructure, and they'd also -- just getting the gas to the plant in such volumes -- there are some plants there that you would have to have some pretty big pipes going across a long range in order to get natural gas into these plants.

The rail lines are there; the coal has been coming in for decades.

So moving there -- that's a big move by the utility plant.

They would have to do a smaller plant that's not running that many tons.

They might be able to pump enough gas into it, but then they've got to retrofit their burners.

It's not an easy thing for them to convert to gas, and it takes a long time.

And we have proactive conversations with the utility managers on this.

So we have insights into what they are going to be doing with our plant, and we don't see big threats from that right now.

And was it mostly your plants -- the 33 that are in place, coal was the primary -- there's not another alternative already in place there now?

That's correct.

Okay, thank you.

Thank you, Ken.

Thanks, everybody, for being with us this morning.

Appreciate your being on the call, and thanks for your questions.

I think that it's fair to say that we just finished with a incredible year, and I couldn't be any prouder of the team and what we accomplished.

We just accomplished an awful lot in 2014, and I'm looking forward to continuing our growth journey in 2015.

So thanks for all of you being with us today and have a good rest of the day.

Thank you.

Ladies and gentlemen, this does conclude today's teleconference.

You may disconnect your lines at this time, and thank you for your participation.