Arthur J. Gallagher & Co. (AJG) 2015 Q3 法說會逐字稿

Good morning and welcome to Arthur J. Gallagher & Company's third-quarter 2015 earnings conference call.

(Operator Instructions)

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 do introduce Mr. J. Patrick Gallagher, Chairman, President and Chief Executive Officer of Arthur J. Gallagher and Company.

Mr. Gallagher, you may begin.

Thank you very much.

Good morning, everyone.

Thanks for joining us on the third-quarter call.

This morning as is the norm, I am joined by Doug Howell our Chief Financial Officer as well as the heads of our operating divisions.

I am very pleased with our quarter.

When we look at all operations, all in, adjusted revenues are up 9%.

Adjusted EBITDAC is up 11%, all in organic growth was 4.1% and total Company adjusted EPS is up 15%.

Our brokerage results were strong again.

Adjusted revenue is up 10%, 3% percent of which were organic.

Adjusted EBITDAC is up 10% percent and our margins expanded by about 10 basis points.

Risk Management had an outstanding quarter.

Revenues were up 9%, all of which is organic.

Adjusted EBITDAC is up 15% and margins improved by 90 basis points.

And our clean energy investments had a terrific quarter.

All in all just a great quarter, which I think is a testament to our strong sales culture.

We work very hard to serve our clients and to aggressively pursue new ones every single day.

Mergers and acquisitions continues to be a key strategy for us.

In the quarter, we completed five mergers, all in the brokerage segment.

Our first nine months we have done nearly 30 acquisitions, with about $180 million in new revenues, and our pipeline remains very strong.

As I do have every quarter, I want to thank all of our new partners for joining us and extend a very warm welcome to our growing family.

Our late 2013 and mid-2014 larger acquisitions are integrating very well.

In the last few months, I've had a chance to visit many of our new branches in New Jersey, Canada, Australia, New Zealand and the UK.

I thought I would comment on those today.

First, let me start with New Jersey.

That is our Bollinger acquisition that we did in the fall of 2013.

We are done with integration and fully converted onto the AJG platform.

We separated the retail benefits and wholesale businesses into our respective verticals; merged four offices; brought in their accounting; migrated 800 folks onto our payroll, email and VoIP systems; converted all of our customers onto our agency management system; and rebranded to Arthur J. Gallagher.

We did it at about 18 months start to stop, and we believe we are now the largest broker in New Jersey.

In September, I was in our New Zealand and Australia offices, which we purchased in June 2014.

Barely with us just a year, Steve Lockwood and his team have already separated our IT structure from Wesfarmers; built a new data center; migrated employees onto our systems; and rebranded our Australian business to Gallagher.

The only thing we have left in early 2016 is to decommission an old data center, which is less than $1 million, and we will be done.

I also visited our Canadian offices which we purchased in July 2014.

Ken Keenan and his team have fully separated from the former parent and are rolling out the new agency management system, which is the same one we use in the US, which should give us good economies of scale.

We are rebranding; we're upgrading infrastructure.

While there's some effort left in 2016, the cost to complete the integration should be less than $5 million.

Finally, I was in the UK in June, and more recent progress reports show Chily and his team are doing a fantastic job pushing forward the integration to businesses we purchased in 2014.

Remember Giles, Oval, our Legacy Gallagher plus remnants of Heath and a dozen smaller mergers occurred in 2014.

Well, rebranding is done, offices are being consolidated.

We moved from nine data centers to two.

Legal entities are being consolidated; we started with nearly 200 and by the end of 2016 we will be down to 25 or 30 key operating entities.

We had 100 duplicate IT applications.

We decommissioned 25 and we expect another 20 to be gone by mid-2016.

More impressive, we've migrated nearly 250,000 retail customers onto our key retail platform.

We expect to spend about $30 million in the UK during 2016 to finalize the integration process.

I will be there again in two weeks, and I am sure the progress will be impressive.

And while that was a lot about building a great fighter jet, let me talk about the pilots, our producers and field sales leaders.

In every single location I visited, they are pumped up.

They are excited about how their local relationships, combined with Gallagher's global resources, can sell more insurance.

They are using our niches; they are using our sales play books; they are sourcing nice tuck-in mergers; they are interacting with our professionals globally as if they have been part of the family for decades.

Simply put, they embody our unique Gallagher culture.

Let me move now to the property-casualty rate environment.

With the exception of large catastrophe-exposed property, rates are by and large flat and very much in line with what we saw in the second quarter.

All in, rate and economy negatively influenced our organic results by less than a point in the quarter.

Internationally, Australia and New Zealand are seeing by far the most downward pressure, especially in auto.

UK is similar to the US, and Canada is flat to up a bit.

Our wholesale business Risk Placement Services had a strong quarter.

Remember RPS places a number of large catastrophe-exposed property schedules, so to post over 6% organic growth in spite of the softening property market is really good work.

Our employee benefits team is very busy assisting our customers as they manage their benefits and HR needs.

In August, we released the results of our annual benefits strategy and benchmarking survey, one of the largest of its kind with over 3,000 US businesses participating.

Interest in the results of this research is greater than ever, and we're finding that employers are still struggling to navigate the impact of the Affordable Care Act.

Balancing increasing cost and complexity, with the need to attract and retain the best and the brightest, this environment presents us with ongoing growth opportunities, as our depth of resources and professionalism of our consultants continues to distinguish Gallagher.

In addition, our private-label insurance exchange, the Gallagher Marketplace, is seeing very high interest and a good number of clients have committed to moving to the exchange.

Year-to-date, we have 79 clients in the exchange and estimate that the number of enrolled in committed employee lives will be about 40,000 by year end.

As I said earlier, our Risk Management business, Gallagher Bassett, had a great quarter with top-line growth of 9% and all of which is organic.

We have mentioned Gallagher Bassett's investments and their product offerings in the past.

Let me give you an example.

During the third quarter we introduced the new risk facts, our proprietary claims management system and Luminos, our state-of-the-art Risk Management information system platform.

All these systems have been in production for a short period of time and both of them have been extremely well received by GB's clients, business partners and employees.

Gallagher Bassett's stated goal is simply to provide our clients globally with the best claims' outcomes.

So all in all, what I think is really a great quarter.

And I will turn it over to you, Doug.

Thanks Pat, and good morning, everyone.

Like you said, the third quarter was another strong quarter for Gallagher, so it is nice to have three of them behind us this year.

Let's start with the first page, the brokerage segment.

Adjusted EPS was $0.57.

As for foreign currency, you will see about $0.02 this quarter, and we expect that amount again in the fourth quarter, but very little impact in 2016 assuming today's exchange rate.

Foreign currency still seems to be the biggest modeling challenge.

To control for the impact of foreign currency, I think you should go back and first reduce your 2014 fourth quarter total reported revenues by about $25 million.

That will get you to about $770 million last year, fourth quarter.

Then apply your organic growth pick to that number.

Next add rollover revenues from M&A, that we show on page 15 of our investor supplement, plus your pick for new M&A in the four fourth quarter and assume most of those close in December.

If you follow this approach, in that order, that should help you refine your models.

As for integration, Pat spent a lot of time today going over the status of each of our integration efforts around the world and our expected cost to complete to 2016.

In total, we're seeing that add up to about $0.08 or so of integration cost in the fourth quarter of 2015.

Then down to about $0.06 in the first quarter of 2016, $0.05 in Q2, $0.03 in Q3 and in Q4 of 2016 and by then we should be done.

Turning to page 3 to the brokerage segment, organic revenue growth.

First, note that all of our larger international mergers are now fully reflected in our organic computations.

In total, they posted about 2.5% organic growth.

The UK portion was over 3%; Canada was over 6%; New Zealand was 2%; and Australia was down about 4%, reflecting a soft market Pat mentioned a few minutes ago.

I think this is absolutely outstanding performance, especially given they are still working through integration and just getting to be comfortable working within the Gallagher family of professionals.

Moving to page 4, to the brokerage segment.

Adjusted EBITDAC margin table, near the bottom of the page.

As we forecasted on our last call, margins came in about flat.

Actually up about 10 basis points, which is actually really good work by the team in a 3% organic growth environment.

Looking forward, last year our brokerage segment posted about 24.4 points of adjusted margin in the fourth quarter.

If we post 3% this coming fourth quarter, and I'm not saying we will our we will not post that, I would not expect to see margins above 25% if we did.

Finally, on the brokerage segment.

Here are some non-cash estimates for the fourth quarter.

For depreciation, assume about $17 million of expense; for amortization about $58 million; acquisition earn out amortization expense, assume about $5 million.

And then as we do more M&A, for every dollar we spend, you will need to increase amortization about 1% of the purchase price per quarter and that should get you close.

Now let's turn to the Risk Management segment on page 5. As Pat said a couple of times, really an excellent quarter across the board.

Of the 9.3% organic growth, domestic was about 9% and international was pushing 11%.

Looking forward, as you model the fourth quarter, two items to remember.

First, you need to reduce fourth quarter 2014 revenues by about $5 million for FX and also reduce it again by about $4.5 million for the large Australian client that went into run-off last year.

That should give you an adjusted 2014 fourth quarter total revenue of about $162 million of revenues.

Then apply your organic growth percentage pick to that adjusted number.

As for margins, we again blew past our 16.5% target margin this quarter.

With that said, I see us more toward that 16.5% target in the fourth quarter of 2015.

Also for Risk Management depreciation, model about $6 million in the fourth quarter and you will get close.

Let's now shift to page 6 to the corporate segment short-cut table.

Two items make it a little noisy, so please take time to look at footnotes 3 and 4 to that short-cut table.

In note 3, you will see the $22.3 million net gain from the litigation settlement.

And then in note 4, you will read that we had positive timing on our clean energy investments.

That pulled about $11 million of earnings from the fourth quarter into the third, which again results mostly to the timing and litigation settlement hitting in the third quarter.

Next, flip to page 7 to the table where we show what we might ultimately earn from our clean energy investments.

The team made tremendous progress in the third quarter.

Demand for our plant surged and we're now down to only a few plants that are not earmarked for a host utility.

Footnote 1 to that table says we will not fully reach the numbers in 2016, but by 2017 we should have a decent chance at hitting that.

If we do, we will see about a 15% year-on-year growth in both 2016 and 2017 from our clean energy investments.

If you turn to page 14 of our investor supplement, we've updated our estimates for the fourth quarter 2015 to reflect the timing I just mentioned.

And, as you work on your 2016 models, just assume about $17 million in interest expense per quarter, about $2 million of M&A cost per quarter, $5 million of corporate costs, and about $4.5 million of litigation settlement costs.

For clean energy, just the bump of 2015 quarterly numbers by about 15%, and that will get you a close enough for now.

I will update all of this in our January call.

Also, to be clear, all of the numbers I just gave you were after-tax net earnings.

Finally from comments on our M&A program.

To date, our average multiple paid is 6.8 times EBITDAC.

Our weighted average multiple is 7.6 and if you exclude the one platform deal that we did, all of the other mergers' weighted average multiple paid is less than 7 times EBITDAC.

When I look at our fourth-quarter pipeline, I see the potential to close another dozen or so tuck-in mergers, also at about a 7 times multiple.

Simply put, we're looking for committed partners that want to stay in the business, join our family of professionals, use our capabilities to sell more insurance and take a fair price for their agency.

Based on that pipeline, we intend on using cash and debt to fund most all of it.

If so, our forecasted fully diluted weighted shares outstanding for the fourth quarter, would be about flat to this quarter.

Those are my comments for this quarter.

And, like I said to start, another really strong quarter.

Back to you, Pat.

Thank you.

Manny, I think we're ready for questions now.

Hopefully some answers.

(Operator Instructions)

Elyse Greenspan of Wells Fargo.

Hi, good morning.

First question I was hoping in terms of the brokerage organic growth, was there any seasonality when we look at a 3% overall to set expectations for the fourth quarter?

Anything that impacted that seasonally or any one-timers in that number?

No.

That would have been reflected already in that.

Our international deals -- our international operations, they do have slightly slower seasonality in the third quarter, but nothing that would impact it dramatically.

Okay.

Just to make sure, when you gave the organic growth numbers, that was just for the acquisitions, right?

In the brokerage segment?

How was the organic growth for the US overall and also internationally on an overall basis?

The US organic was just a tad below 3%.

International is just a touch above 3%, not too terribly far off either way.

Okay.

I noticed the integration costs, I think they were a bit higher than you had pointed to this quarter.

Is that because some charges were pushed up and some of the integration is getting done sooner than you had previously expected?

In there, there is $0.02 on a balance sheet cleanup item that we cleaned up that actually was a non-cash cleanup item that drove that number up just a little bit.

It had nothing to do with the current operations or the current activities.

It just was a balance sheet receivable that did not come in.

Okay.

That is great.

You gave a great outlook in terms of the markets globally.

In terms of Australia, would you say it seems like -- overall, I know, that has been a bit of a troubling market, but have things changed?

Or is it more being consistent with what you've seen through the year?

It has been very consistent.

It is a soft market and that is downward pressure.

It is the old soft market play-book.

Yes.

Actually it is consistent with the market when we bought the OMs acquisition out there.

As a matter of fact, the Australian operations, actually, are coming in after budget or slightly better.

So, the reality of it is the market is -- it has been a known market for us there.

It is nothing surprising to us.

It is just the reality of the market.

And their economy is soft.

Thank you so much, and congrats on a great quarter.

Thanks, Elise.

Ryan Tunis of Credit Suisse.

Thanks, good morning.

Good morning.

The first question is on brokerage margins.

Thinking back to the last call, comparing it to the third quarter of last year when you guys were at $26.8.

I think Doug called out some headwinds for why that would be difficult, perhaps, to repeat.

I'm just wondering from your perspective, what allowed you to deliver better than that this quarter?

Were there maybe some expenses that got pushed into the fourth-quarter?

Or anything along those lines?

Actually the team did a great job of hitting their budget.

We forecasted it to be flat.

We mentioned that in our last call.

The fact that we posted 3% all in organic growth, that is about where we thought it would be, so there's nothing special in that.

Okay, that's helpful.

And then on wholesale, I guess another strong quarter there.

What is driving that and how should we think about the outlook there over the next in the near to medium term?

Giving some of the pricing, I don't think [that caught] on property.

Well part of that Ryan, we are the largest MGA in the country.

And so our underwriting operations are doing very, very well.

But our open market broking folks are as well.

We are soft on the property placements and that is a big part of what they do.

But, we're doing a good job of generating new business.

We had some nice acquisitions there.

They are performing well over the last couple of years and our MGAs are doing extremely well.

Thanks guys.

Thank you.

Sean Dargan of Macquarie.

Thank you.

Good morning.

Just following up on Elyse's question about Australia.

In talking to some people down there, they have indicated that Steadfast and Auss brokers have been pretty aggressive in trying to pick off your producers.

I realize that it's slowing economy in a soft market but to what degree have you stepped competition among local players impacted your organic growth there?

Very little.

I would say at the very outset of the acquisition we had a blip in some turnover, and the turnover is very nicely under control now.

So we are not seeing an excessive turnover whatsoever.

As I said, my trip down there was exciting because the team is young and pumped up.

They have got a lot of good things going on.

And there are a lot of things that we are bringing to the table for them that are strategies and capabilities, that they were not doing under the conglomerate at West Farmers.

Not that West Farmers had anything wrong, it was just a piece of a conglomerate.

This is the business we are in.

We are not losing people by and large to our competitors down there.

And, in fact, I think they are excited about the fact that we bring them a lot more capabilities.

Okay.

I believe you have about 30% market share in New Zealand with Crombie Lockwood.

Is there any room to expand that or is that about as deep as you can go there?

We think we can expand it.

Now, it is a small country and we have got a big share.

But truthfully, we are underrepresented in the corporate marketplace there, and we are not represented in the public sector clients there.

Those are two things that we are very strong in, in the United States.

So we have got people traveling to New Zealand and Australia from the US in our vertical niche capabilities, and we think we can expand that.

Thank you.

One last question about the clean energy strategy.

I think some investors were surprised to see the 15% annualized growth through 2017 and this steady drumbeat of articles in the press about natural gas killing off coal.

I think some folks were concerned about the administration's clean air proposal.

I am wondering if you can give us any color about what is driving the utilization of your plants?

Great question.

First, I do not know why anybody was surprised, I said that if you go back a year ago we said 2015 would be a little bit of a flat year compared to 2014 and then we would have another step up in 2016 and 2017.

So that message has been very consistent for the last 15 months.

The surge in activity, we actually talked about that also in our call that we get a lot of surge of activity in August and September as host utilities look at their capital budgets for next year.

So that is when the robust activity occurs.

Next, in your question, let's work backwards from the clean air act.

That really takes effect in 2022, if it goes in, and it is [grated] into 2030.

Remember, our plants last produced tax credits than 2021, so we don't see those as having a big issue with that line, a big issue with respect to running our plants through 2021.

Next, our plants are better; they're more efficient.

Excuse me, the host utilities where we put our plants are better; they're more efficient; they're earlier on in the dispatch curve.

And so, as a result, they are less likely to be retired than the broader fleet.

So, I do not think it is good to use historical trends to predict what will happen to our 20 different locations.

There are about 600 different utility plants out there, and we're operating about 20 of them and they are better and less likely to retire.

Second of all, the displacement to natural gas.

You can go out to the energy information administration website and you can see that the displacement of coal to use natural gas, there was a surge in that over the last five years.

But even that official site does not predict that happening, certainly not between 2021.

So we think our plants are better positioned.

I think they're less likely and, frankly, we set up a strategic table with our host utilities and we know in advance what their plans are.

And frankly, if we're going to retire a plant, we will not put in one of our clean energy plants.

We believe our plants will run through 2021.

They have better locations.

They are not subjected to natural gas.

They are better placed in the dispatch curve, better placed regionally in terms of coal versus natural gas utilization.

So I do not see the risk that these plants will be displaced the way the broader fleet might have been.

Thank you.

Sure.

Adam Klauber, William Blair.

Thank you.

Good morning.

Good morning, Adam.

A couple of different questions.

On the share count, you issued roughly 12 million shares.

In the release, I think you identify 7 million due to acquisitions and earnouts.

What are the other 5 million for?

I do not know where you got your 12 million from, but the difference in their year-to-date, that excludes the secondary offering that we did in 2014 numbers.

So the 7 million of shares, I would have to look and see where you are getting the 12 million number.

I'm sorry.

The 12 million, you started the year at, I believe, 164.

164.5.

I think you are at 176.5.

Oh, I see what you are asking.

The dribble out shares that are in there.

When we did our ETM.

I am sorry.

What are those shares being used for?

We used those for acquisitions throughout the year.

Remember we'd use the dribble out in order to really buy the William Gallagher agency.

Okay.

So we get to 12 million shares, if you go back to the year-to-date, those are the shares that would have to fund acquisitions this year.

I do not believe we are going to use any here in the fourth quarter.

Our outlook for 2016 is not to use hardly any shares either.

Okay.

As then far as the William Gallagher deal, what is the earnout on that deal?

We do not have an earnout.

An then as far as -- you laid out that there was acquisition cost for this year and next year.

In the press release, you have two different lines.

You have got acquisition cost, but then you have got workforce or restructuring.

(Multiple speakers).

For lease terminations, yes.

Thank you.

Does the number laid out, does that include the lease termination?

Yes it does.

That does.

Okay.

But lease termination related to other activities in lease termination, primarily not related to the acquisition activity.

If it is integration related to severance or lease termination that goes into the acquisition integration line.

If it is just other workforce and lease termination that we are doing as we have downsized some of our locations, it just seemed natural.

That is where we put it is in the workforce and lease termination line.

Okay.

That is helpful.

As far as operating cash flow related to working capital, do you think that will add to cash for this year or take away from cash flow?

What was the question, Adam?

Operating cash flow related to working capital.

Do you think that's going to help operating cash flow or hurt operating cash flow this year?

Actually, I think that we are going to have a positive cash flow on working capital because as we go through the integration and we consolidate massive amounts, for instance, we have over 400 different bank accounts related to the acquisitions that we did.

With Giles, Oval, primarily.

As we consolidate those bank accounts, we believe we will be able to free up more cash.

Right now we have about $200 million of cash in the banks around the world that we can scrape together and use more efficiently once we go through the remaining pieces of our integration efforts.

That should improve working capital.

Should that be more 2016?

Should that be in 2016?

I think we will shake most of it out in 2016.

Great.

Thank you very much.

Thanks, Adam.

Paul Newsome, Sandler O'Neill.

Good morning.

Congratulations in the quarter.

Maybe just a little more about the types of deals that you are looking for prospectively.

And maybe in the context of, obviously some areas have become more competitive in terms of looking for types of deals.

Are you ending up looking at things in different geographies than you were say, a few months ago, and such?

If you recall, one of the things we were excited about as we came into 2015, is the fact that these moves that we made in New Zealand, Australia, Canada, and the UK gave us credible platforms to be able to do bolt-on and tuck-in acquisitions.

We signaled that we would be back to doing our normal acquisitions, and that is, in fact, what we have done.

If you look at 29 transactions in about $180 million, you get an idea of what our average revenue is on these deals.

I will tell you that the pipelines that have built in Australia, New Zealand, the UK, and Canada are becoming more robust every single month.

It is absolutely working the way that we had hope it would work.

We are a credible buyer now in those geographies, which just one year ago we really were not.

In the United States, we have got 30 years of activity that has continued to build our pipeline.

We have got a very strong pipeline.

As Doug mentioned, we think we will close a good number of additional transactions in the fourth quarter and we see a continuation into 2016 of our typical tuck-in acquisitions.

And these are anywhere from $2 million to $10 million that don't frankly demand the same level of multiple that some of the larger transactions that some of our competitors are doing.

That fits right in with the formula we have been doing for 30 years.

Okay.

Fantastic.

Thanks.

Bob Glasspiegel, Janney Capital.

Good morning Arthur J. Gallagher.

Good morning Bob Glasspiegel.

The old man can learn a few tricks here and change his ways.

The UK settlement, it is good news we get dollars in upfront.

I'm a little confused about the incremental expenses that follow on that you highlighted in Footnote 3. Is that rebuilding the organization and hiring?

What those are, those are incremental, really retention agreements that we needed to do to solidify our folks there and some additional headcount that was required in order to work on this.

These are incremental expenses and if you add it all up, it ends up being fairly close to what the settlement ended up being.

So those are the ongoing costs.

And, because you are doing them on a retention basis, you amortize those expenses over the future period of the retention, not against the gain.

So, you get the gain this quarter and then you add up all of the small little costs that go out through the mid part of 2017, and they are pretty close to washing out between the two.

You are housing those in corporate, and, I assume, adjusting them out.

Is there not any sort of business relationship between the retention bonuses you are paying and the production?

First and foremost, we put it in corporate to keep it clean, to keep it matched up in the same line as we can track it a little bit easier over time.

Second of all, these are the incremental amounts that we would view as related to the defection of the management team and not to the core basic business of running the brokerage operation.

So there is no revenues associated with these retention bonuses in your mind?

No.

Okay.

Not for this portion of those items.

Okay.

The recurring cost of running the business is up in the business.

These are not production produced?

These are not producers that you are paying these retention bonuses to, they are management that are replacing the old team?

Is that the way to think about it?

Line share is in management ranks.

Okay, I got it.

Great, thanks a lot.

Thank you Bob.

Dan Farrell of Piper Jaffray.

Good morning.

Thank you for some of the commentary around the integration.

It sounds like that is progressing well.

I wonder if you could comment a little on where you think you stand on achieving some of the synergies that you thought you might be able to get from some of these deals?

Thank you.

I feel really good about it.

A s Doug mentioned, we don't publish budgets and the like, but these enterprises are essentially on plan as we came into 2015.

We knew that Australia was going to face a soft market as was New Zealand, so we took that into account.

Whenever you do significant large deals, I think the very first thing you're looking to is, are you going to renew that book of business?

And are you going to show some growth?

Are there going to be opportunities for people to sell more as you rebrand?

And there is good and bad about rebranding.

I think that is change, and people oftentimes have a difficult time with change.

But by and large, I am incredibly positive.

I will give an example.

I was in Melbourne, Australia just a few weeks ago.

We had our Australian branch managers there and it was a terrific meeting.

You would think that these people have had meetings like this all of the time when they were under West Farmers.

And the fact is, they really had not.

They did not have the tools we are bringing.

Just examples of cross-selling where we have been able to help each other open new opportunities.

We have gotten our public sector people down there a number of times this year.

So things like that are going very well.

When I see all of the enterprises, with the exception of Australia, showing organic growth in the very first operating year after the acquisition, I am extremely pleased.

I think on the cost side too, synergies are there, where as I mentioned, or as Pat mentioned, that the Canadian operations are going to go under the same system that we're running here in the US.

So that will be helpful.

Also, I think in terms of getting to where we go, when we do a small tuck-in acquisition, probably six months to nine months into it, they are pretty well up and running into Gallagher.

They've integrated themselves into the operation.

I think on these larger deals, it has taken us more like 18 months to get them fully into us; getting them training with some of our folks in the US; understanding our capabilities; understand what we can do to help them to sell more business; getting our niche leaders in there.

That takes about 18 months or so.

We are at that point right now.

Truthfully, when you add them all up, the organic was 2.5% for all of the large deals pushed together, so I think that is pretty good.

In my prepared remarks, Dan, I made a couple comments on taking down data centers and migrating people to systems.

That is where we see some synergies as well.

Getting numbers of key operating units from 200 down to 50, that is good work.

That is helpful.

Thank you.

Doug, a quick thing on cash balance about $370 [million] at the end of the quarter.

How much of that is usable cash, would you say?

About $200 million of that is usable, but again it is in a lot bank accounts that I have got to pull together and consolidate in order to really get the efficiency, but that is okay.

It is there; it's ours to use.

It's just going to take me a little bit longer to pull it together.

Okay.

Great.

Thank you very much.

Thanks, Dan.

Sarah DeWitt of JPMorgan.

Good morning.

Follow-up on the clean coal earning.

Is there a point at which you are utilizing all of the clean coal credits so the earnings there should level out at some point?

Or how do you think about the earnings trajectory of those investments beyond 2017?

I would say they are flat to 2017, but at that point we will be harvesting more cash out of them in probably the GAAP earnings.

Right now the GAAP earnings are slightly higher than the cash earnings on that.

But that will flip in 2017 where the actual cash earnings are higher than the GAAP earnings.

So, at that point, I will lay that all out and show it to you.

I would say we have still got ramp-up in 2016 and 2017 and maybe there is a touch in 2018.

But I think in 2018, 2019, 2020, 2021 will be largely flat to 2017.

The cash harvest will be bigger.

Okay.

Great.

Thank you.

Thanks, Sarah.

Seth Canetto of KBW.

Good morning Seth.

I had a question on the risk management.

It seems like the higher risk management margin improvement, is that sustainable?

And probably even more impressive than the higher-margins is the organic growth.

How are you guys achieving such strong results in risk management?

And are there any areas that are specifically driving strong double-digit organic growth there?

I will take the margin, and let Pat talk about the growth.

The margin, we run that business as we've been saying for the last couple years, we are making investments to better our service offering to our customers.

And that is really starting to take hold.

Customers are seeing that the issue is not the service on the claims and the cost.

It's really the claim outcome and we're demonstrating that we can help them get their folks back to work, get them healthy much faster by using our proprietary method, techniques, and systems.

So, that is the reason why the business is doing well and that leads to the margin expansion on it.

But there is a heavy investment load going into that business to make sure that we are offering a competitive environment.

We used to be up 16 points of margin for our targets.

We've moved up to 16.5 for this year.

We'll go through the budget process this fall and we will come to a conclusion with them about what's the margin target for 2016, and what kind of investment level there is.

But right now in that 16% to 17% margin range is comfortable for what we need to offer the clients.

I think Doug made a comment in his prepared remarks, that look to the fourth quarter, it will be closer to the16.5 As far as the top line goes, I think we have just found a very solid new business.

We are blessed to have a terrific organization in Australia and in the UK.

They are contributing significantly.

The United States is, of course, where we have been recognized as leaders in that industry for years and years.

And our pipeline of new business continues to build, and we're hitting on all cylinders.

Our renewals are sensational.

We renew more than our revenue that is expiring.

We typically renew in the area of 101% to 102% of revenue.

That comes from claim-count growth and the organic growth of our clients.

That's not rate increases.

When you have got that kind of retention, and you can put some good new business on, you start to see those types of numbers.

Thanks.

This is probably a question for Doug, but given the lower energy prices we are seeing, is there any impact of the utilization of the Can mod products and could there potentially be any hurdles there?

Well, I mentioned a little bit ago, we believe where we locate our clean energy treatment facilities, at host utilities, we think they are less likely to experience retirements, shutdowns, slowdowns relative to the broader industry trends that you read about.

There are about 700 locations out there in the country.

We're operating about 20 of them, and, even within those 20, we're not operating all of their boilers.

We're operating at their most optimal boilers that they intend to use.

And if you know something about electricity, is there is a dispatch curve.

The first things that get used are nuke and solar and then they move up the dispatch curve and then some of the last-producing units can be natural gas units that are way out on the dispatch curve.

So the utility is operating at 50% to 70% or 90% or there is a demand in the 50% or 70% of demand, most of our plants are positioned where they will first be turned on before they go to other sources.

So we do not see -- and by the way it takes a long time to displace a plant that is burning coal with natural gas.

You have got to get the pipes there.

And pretty well, most of that infrastructure and that development was done between 2008 to 2014.

So that continued decrease in fuel cost by natural gas should not have a dramatic effect on us over the next 5 to 6 years.

Great.

I believe you mentioned earlier on the call, that lower insurance rate in the softening market only impacted organic growth by less than 1 point in the quarter.

How do you guys think of the insurance brokerage organic growth given the concerns in London specialty, Australia and New Zealand?

I think those are baked in our numbers.

The softening, the weakening that we saw in those areas, softening in Australia, they were in our numbers for the third quarter, so I would expect that to be similar in the fourth quarter.

I will tell you, my prepared remarks I said, besides Kat-exposed property, things are still flattish.

If you go back and take a look at the hard market soft market cycles that we've lived with since the 1960s, the soft market typically sees prices coming down 10% to 15% a year, and that can go on for a decade.

We are not seeing that.

If there is an account that needs a rate increase, the market is still trying very hard to put forward a rate increase.

By the same token, if our people come across a very nice account, it hasn't been marketed for a while, it has been very successful and has not burned the market, and it deserves a 15% to 20% decrease, it is going to get it.

I consider that to be a professional kind of deliberate flattish market.

So if rates are down in one line or another, take Worker's Compensation or directors and officers, if rates are down 3% or 4%, that is going to impact our organic.

But it's 3% or 4%.

We will outsell that.

If it is up 2% or 3%, I still say in that band of five, you are talking flat.

That is how the market feels.

All right.

Great.

Thanks a lot for the answers.

Charles Sebaski of BMO Capital Markets.

Good morning.

Thanks.

First question, curious about not the clean coal, but exposure to energy.

I am thinking about some of the larger, recent acquisitions, Canada, Australia, New Zealand, what is the exposure to the energy infrastructure of those books of business?

And what is your level of concern given the challenges in the energy sectors gone on regarding your businesses there?

I'd like to mention, first of all in Austria, New Zealand and Canada, we have about $15 million of total revenues related to energy-related clients.

I cannot say what is the trickle-down effect of some of those, but it is a very small portion of our $2.5 billion revenue.

Our energy exposure in those countries that have large commodity related economies, is about $15 million.

If you look here in the US, we might have $30 million, but a lot of that -- maybe half of that is in the benefits space, even, so when we're talking about having- they're still employing.

We do have nice practices in Houston and we will see a little bit there.

In London, we trade generally through our specialty lines there.

In energy, we might have $20 million of revenue.

So, you can see, if you add all this up, we are somewhere in the $50 million to $70 million of [druck] interview-related revenues out of $2.5 billion of brokerage and $4.5 billion in total.

So I'd say Gallagher Bassett has very little exposure there.

Remember, most of our business is in the SME, the mid-market area.

Those areas are pretty resilient to this type of change in the marketplace.

Excellent.

Thank you.

The other one is on acquisitions and on your use of equity versus cash and debt.

Do you look at that equally when you are contemplating offering shares for acquisitions?

I guess the question is, is the hurdle higher if you need to issue equity versus some of the tuck-ins from cash flow or debt utilization?

First of all, we always want to use cash first and equity second.

That is just the way we do it.

There are times however, because of the structure of the transaction, if we want to do a tax-free exchange, where the seller will, I'll say demand stock, and if that is the case, we will do that.

At this point, there is not -- we always think of equity as more precious.

We have been in such a huge growth spurt over the last three years, that we've needed to use equity, but I just don't see us needing to use that much equity based on our current pipeline of nice tuck-in acquisitions.

If we are out there doing them at 7 times and we're paying cash for them, we'll have more capacity for debt.

I just don't see us using a lot of equity going forward.

What would you say the debt capacity is now relative to outstanding authorizations and plus your relative take on leverage?

I think we could probably do another $200 million to $300 million of permanent debt at this point.

Excellent.

Thank you very much for the answers.

Thanks, Charles.

(Operator Instructions)

Kai Pan of Morgan Stanley.

Good morning.

Thank you.

To follow on Chuck's question on the acquisition, I wonder what's your take on the use of free cash flow going forward.

The balance between doing acquisitions in growing your business as well as shareholder returns including buybacks?

Right now I think that we will take, for any merger partner that would like to join us that has great relationships with their customers, wants to use our capabilities, wants to trade within our niches, use our offshore centers of excellence, use our internship program, if they are willing to sell to us in that 6 to 8 times range, I think we would prefer to do that everyday versus buying back shares.

Right now, we think there is tremendous opportunity to still pick up partners that are committed to be in the business, they want to sell insurance and they want to do it as a part of a global organization to bring capabilities, we would much rather do that than we would buy shares at this point.

And we still have the strongest dividend payout.

Okay.

In terms of EPS gross going forward, do you believe that it incremental it's more positive by acquiring this business the earning contribution from it, more than offset the diluting effects of share issuance?

I do not think that we're going to be issuing a lot of shares going forward, so I wouldn't think there is a diluted effect going forward.

We do not dilute ever on purpose.

Okay.

That is great to hear.

A second question on the industry consolidation.

What is your take on that?

Is the potential impact of benefits to both your businesses on the broker side as well as the administrative side?

You are referring to the carrier consolidation?

Yes.

I think on the benefit side we've seen significant carrier consolidation that has changed that industry significantly over the last 20 years and continues to push us to be more consultants than brokers.

We are no longer really going out to very many clients on the benefits side and talking about what the rate environment is this year.

It is all around consulting about what their human capital needs are, and how we are going to help them to maintain their employee base.

I think consolidation in the property cash lead business is a long cry away from what we saw in benefits.

I think you are going to see more of it.

I think in this environment, this economic environment in this return environment, that is one way you are going to see growth.

Okay.

Thank you so much.

Thanks, Kai.

Manny I think that is about it.

I think we're towards the end here.

I will give a few wrap-up comments, then we will call it a day.

At the outset of the call, I mentioned I was pleased with our organic growth.

All in, 4.1% is a very strong result.

Over the past decade we have invested heavily in our new business and retention strategies.

We brought in sales training and sales management.

Our cross-selling efforts between our wholesale, PC and our benefits teams are at all-time highs.

Our international and US teams are working seamlessly on all types of new business.

Our merger and acquisition pipeline is strong.

So it's safe to say that our aggressive sales culture is alive and well.

We're pleased with the quarter and appreciate you being with us today.

Thank you.

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

You may disconnect your line at this time.

Thank you for your participation and have a wonderful day.

Thank you for your participation and have a wonderful day