Arthur J. Gallagher & Co. (AJG) 2015 Q4 法說會逐字稿

Good morning and welcome to Arthur J. Gallagher & Company's fourth-quarter 2015 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 J. Patrick Gallagher, Chairman, President and CEO of Arthur J. Gallagher & Company.

Mr. Gallagher, you may begin.

Thank you, Brenda.

Good morning, everyone, and thank you for joining us on our fourth-quarter and year-end conference call.

We appreciate you being with us this morning.

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

Today I'm going to comment on total Company financial results, make some comments on our merger and acquisition program, and then I'll move into each segment's results and provide a bit of a wrapup before Doug's comments -- after Doug's comments -- about really an awesome recognition we received via JD Power and Associates, and then we will get to your questions.

We had a great quarter capping a great year.

Total Company, a strong finish to an excellent 2015.

Our combined brokerage and risk management core operations in the fourth quarter posted 4.2% total organic growth, 10% total adjusted revenue growth.

Adjusted EBITDAC was up 12% and we expanded our adjusted margins by 46 basis points.

For the year on a combined basis we posted 5.1 total organic growth -- that's 5.1% -- 17% growth in total adjusted revenues, surpassing $4 billion in revenues, 22% growth in adjusted EBITDAC.

And we expanded our adjusted margins by over 90 basis points.

And to top it all off, we topped the $100 million of net earnings mark from our clean energy investments.

That's up from less than $4 million in net earnings in 2011.

What an amazing run!

And we've got more of that to come in clean energy.

Let me move to some comments on our merger and acquisition program.

We completed 15 mergers totaling $46 million of new annualized revenue in the fourth quarter.

For the year we did 44 mergers, two of which were in the risk management segment, totaling about $230 million in new revenues.

Let me break that down a bit.

$195 million of that was in the United States, split half property/casualty and half employee benefits.

$15 million was in Australia and New Zealand, $15 million in the UK and about $5 million in Canada.

That averages out to about $5 million in revenue per merger.

We paid a weighted average price to EBITDAC of 7.6 times.

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

Two further comments on mergers and acquisitions -- first, since July 2014 when we did our last big deal, Noraxis in Canada, we returned to our program of doing smaller tuck-in mergers, as we forecasted in every conference call and investor meeting since then.

Further, for these mergers we are still paying fair prices and only slightly lower than what we were paying for smaller tuck-in deals prior to 2014, consistently in the 6.5 to 7.5 range.

So when I look forward I see our merger and acquisition program in 2016 as being very similar to the last 18 months.

Our merger pipeline remains very strong, particularly in the United States, and we are also seeing good opportunities in Canada, New Zealand and Australia.

With having platforms in those locations now and most of our integration efforts behind us, merger prospects now see Gallagher as a partner with vast capabilities, and they want to join us.

Further, we do not have any large deals on our plate right now, neither domestic nor international.

And based on our current pipeline, we do not see the need to use stock to fund mergers in 2016.

And second and final comment on mergers -- one of the first things we do when we complete a merger is to quickly collect and analyze their client and carrier data.

Today, we have nearly all of our data from every client and carrier globally in one spot.

We use this data to help our carrier partners develop better programs for our clients and we use this data to help our clients match up with the right carrier based on their needs.

This value add to both our carriers and to our clients gives us the opportunity to enhance our compensation.

We see tremendous opportunities for that in 2016 and beyond.

Let me move now to the brokerage segment.

Brokerage fourth-quarter results were very strong, adjusted revenues up 11%, 2.8% in total organic growth.

Adjusted EBITDAC is up 12% and our adjusted margins expanded by 30 basis points.

Brokerage results for the year were terrific.

For the full year, adjusted revenues were up 19%, 3.6% total organic.

Adjusted EBITDAC up 22% and adjusted margins expanded 70 basis points.

And in 2015 we posted adjusted EBITDAC margins of 26.1%.

That's up over 400 basis points since the full-year 2011, 4 full points of margin expansion.

What a fantastic accomplishment, and it shows our brokerage business is really, really healthy and vibrant.

So let me drill down a bit into each of our brokerage operations around the world.

First, domestically in the United States, that's our retail property/casualty, our retail employee benefits consulting and our wholesale operations, which for the year combined for about $2.1 billion of our $3.3 billion of brokerage segment revenues.

In the fourth quarter these units combined to post 3.5% organic and expanded their margins by about 80 basis points.

For the year they posted 3% organic growth and expanded margins by 120 basis points.

These units all have annual adjusted margins in the very high 20s, about 28%.

And each unit is nearing the upper end of our margin expectations.

To put this into perspective, over a four-year period, as I said just a moment ago, margins in these units are up over 400 basis points, which is really nice work.

Looking towards 2016, we are seeing domestic retail and wholesale P/C units having a slight rate headwind, on average down about 5%, property up more like 10% with casualty a little less than flat.

But we are seeing increases in exposure units offsetting that a little bit, and we are also -- continue to have nice new business growth, and our retentions are holding.

So we see 2016 a lot like 2015 in our domestic retail/wholesale P/C units.

As for our retail employee benefits business, we are seeing more activity in 2016.

Our clients and prospects are now having to deal with the complexities of the ACA.

Much of that happens in the second half of the year, but we still see organic better in 2016 than in 2015 in our benefits units.

Next our international operations -- that's our P/C brokerage operations in Australia, Canada, New Zealand and the UK, which for the year they combined for a little over $1.2 billion of our $3.3 billion brokerage segment revenues.

Combined, they posted 4% organic growth for the full year and expanded margins by 50 basis points.

In aggregate they are posting mid-20s annual adjusted margins.

I think it's worthwhile for me to touch on each country for just a moment, so I'll start with Canada.

About $125 million of annualized revenues.

Fourth-quarter organic was in the mid-2% range.

Margins are similar to our US operations, in the very high 20s, so also near the top of our margin expectations.

When I look at our January 1 renewals, rates are fairly stable to even slightly a bit positive.

As for exposures, while we are not really significantly exposed to energy risks, the broader Canadian economy is suffering because of the knock-on effect of those businesses relying on the energy sector.

But despite all this, the team is in the final push of integration efforts to convert to our systems, and they haven't missed a step.

So I see a similar 2016.

Next, moving to Australia and New Zealand, about $265 million of annualized revenue.

Fourth-quarter organic was near 2%.

Of the two units, New Zealand performs better in terms of organic and margins, which is in line with what we saw when we did the acquisition in 2014.

Both countries have been faced for several years with soft renewal rates, especially in property, and their economies are weak but starting to show a bit of recovery with their weaker currencies.

In addition, our January 1 renewals are starting to show a bottoming of the cycle.

Both New Zealand and Australia are effectively finished with their integration efforts.

It's important to note, in aggregate, margins are nicely in the very high 20s, which is a touch better than what we expected when we purchased them in mid-2014.

So, while we do have some modest opportunity for margin on efficiencies in Australia, in 2016 our real focus is to energize the sales culture in Australia.

I was there in the fall and I can tell you the Australian team is working with their counterparts in the US and New Zealand to build a similar sales and service culture.

Finally, let me move to the UK, about $775 million of annualized revenues.

$360 million of that is retail property/casualty; that's our branch network.

$325 million is London and Bermuda specialty and about $90 million is underwriting and programs.

Altogether, about 1% organic growth in the fourth quarter and a little over 3% for the full year.

Aggregate margins are a little bit over 20%.

So let me make a couple of comments on the three units.

UK retail -- we posted flat organic in the quarter and full-year 2015, and margins are in the very high teens.

We are seeing rates flat to slightly down and we are not seeing much growth in exposures, due to stable economic conditions in the UK.

But posting flat organic is actually quite an accomplishment, given it is this unit that's going through most of the integration work that's remaining from our larger deals.

Remember, we are pushing four different retail organizations together and we have become a top five retailer in the UK in just two years' time.

These retail branches are going through the similar processes that we did in the US over the last five years.

Those are standardizing, simplification, using common technologies, migrating work to our offshore centers of excellence, using our niches and adapting the Gallagher sales culture and learning our retail playbook.

2016 will be the year where we evolve from a unit going through integration to a unit focused on harvesting synergies and executing on our sales and service plans.

Accordingly, we should see a little margin improvement in 2016 and then hopefully much more in 2017.

UK underwriting -- underwriting program is about $90 million in revenues, about 10% margins, which is similar to prior years.

Organic growth was flat for the year but our efforts to improve this business showed promise in the fourth quarter, when we posted over 5% organic growth.

This is a collection of underwriting businesses, many of which came with the retail acquisitions of Heath, Giles and Oval.

We have reconstituted management and these businesses have a line of sight towards improving in 2016 and 2017.

London and Bermuda specialty -- about $325 million in revenue.

For the year these units posted over 5% organic growth.

But it was closer to 1% in the fourth quarter.

We are seeing some pressure on rates in most lines and in particular in the energy and marine lines written by our London specialty units.

Margins are in the lower mid-20s, which is really respectable, given the nature and complexity of this business.

This is the unit that also has about $30 million in revenues from smaller and emerging markets.

It breaks down to about one third in the Caribbean, one third in Norway and one third in South America, which posts similar margins.

Clearly, none of these smaller units is financially significant, but we did these mergers because they have specialties that align well and trade with our UK and Bermuda specialty businesses.

So to recap our brokerage segment, in 2016, while we see retail P/C rates as a headwind, we do see P/C exposure growth offsetting this partially.

We also see employment growth and complexity surrounding the Affordable Care Act as tailwinds for our employee benefits units.

In addition, our history of strong new business generation, solid retention and enhanced value added services for our carrier partners should all result in further organic growth opportunities around the world.

Integration efforts related to our larger mergers we did in the US and Australia, New Zealand and Canada are effectively done and we expect our integrations efforts in the UK to be nearly done by the end of 2016.

Integration costs in 2016 should be less than half of our 2015 amounts.

Margins are excellent in most of our units around the world with some further opportunities for efficiencies in Australia and our UK retail and underwriting businesses.

So let me move to our risk management segment, essentially Gallagher Bassett Services.

Risk management finished the year with an outstanding fourth quarter.

Adjusted organic growth of 10.5%, adjusted EBITDAC grew 17% and margins improved 140 basis points.

For the full year we posted over 11% organic growth, 18% growth in EBITDAC, surpassed 17% of adjusted margins, and we expanded margins by 120 basis points.

Gallagher Bassett is now over $700 million of annual revenue, and since we embarked on our retooling efforts five years ago, it has shown consistent excellent top and bottom line results.

And we see it continuing to gain momentum.

In fact, 2015 was the third year in a row that we posted around 10% organic growth and also hit or exceeded our annual margin targets of nearly 2 full margin points since 2011.

17% EBITDAC margin is our 2016 margin target and near the top of our expectations.

Our US claims management business is about $575 million in annualized revenues and posted especially strong double-digit organic growth for the quarter and full-year margins, as I said earlier, of around 17%.

We have been successful in developing new and improved services for our clients.

Following last quarter's introduction of Luminos, which is Gallagher Bassett's acclaimed risk management information system for clients, we rolled out GB Go, the first of the suite of mobile technology products designed specifically for use on smart phones and tablet devices.

In addition, new medical management products and approaches together with broader adoption of GB products by clients has led to improved claims outcomes as well as increased revenue for Gallagher Bassett.

Strong performance in state-administered workers compensation schemes in Australia pushed Gallagher Bassett's operations to well over $130 million in revenue in 2015, or roughly 20% of the segment's revenue, also posting organic growth of about 10%.

GB's international operations are expected to make a strong contribution again in 2016 with investments in our self-insured and carrier segments scheduled to come online later this year.

So really, truly a remarkable year on all measures, which is a testament to an incredibly strong sales and service culture.

These results don't just happen.

Our team gets up every day and works relentlessly to service our clients and to aggressively demonstrate our capabilities to new prospects.

A great quarter, a great year!

I couldn't be prouder of our colleagues' efforts and what we have accomplished.

Over to you, Doug.

Thanks, Pat.

And good morning, everyone.

Before I start, some housekeeping.

Starting with this quarter you will see on our industrial website to documents plus our earnings release.

One is a supplemental quarterly data document.

That's the one that we have been providing for over a decade.

But you will now see that it contains only historical reported and adjusted information.

The other is a new document.

It's called CFO commentary.

It is this document that contains our forward-looking items.

In other words, it summarizes both the commentary I typically provide in this call plus it has the corporate segment earnings forecast that were previously at the back of the supplement.

We hope this CFO commentary document makes it more investor-friendly and easier to use rather than having to dig out my comments from the conference call transcripts and back pages of the supplementary target.

Okay, onto my comments.

And like Pat said, an excellent quarter to end a terrific year.

Yes, the fourth quarter is a little noisy on the face, but all items are right in line with the forecast we gave you in our October earnings call and then again at our December investor meeting.

Two additional items we didn't forecast back then -- in the brokerage segment you will see a $0.02 one-time tax item gain.

That benefit results from the newly enacted lower statutory rates in the UK related to our net deferred tax obligations on our balance sheet related to our UK operation.

The other item is in the corporate line of the corporate segment, in the tax column.

We had a favorable tax item of about $4 million in the fourth quarter.

We were a little concerned in our estimates in the first three quarters of 2015, when we estimated certain permitted items.

So when we trued up those estimates in the fourth quarter, it adds a couple pennies of gain in the fourth quarter.

But it has no impact on full year.

As for adjustments in 2016, when you digest the information in the new CFO commentary document, two items will stand out.

First you will see FX in 2016 being half the headwind that we saw in 2015.

And second, you will see that we are forecasting integration costs in 2016 to be less than half of the 2015 levels.

I'm really pleased that we are effectively done integrating the larger mergers like Bollinger, OAMPS, Crombie Lockwood and Noraxis.

And by year-end 2016 we should be nearly done with Oval and Giles in the UK.

Now let's turn to page 3 of the earnings release, to the brokerage segment organic table.

You will see supplementals way up and contingents way down in the quarter.

Ignore the geography, as we simply had a couple contracts that had some slight language modification that is causing a flip between lines.

Rather, I suggest that you look at supplementals and contingents in total, and you will see we are up organically 10% in the quarter and up 8% organically for the full year.

Based on current conditions, we expect in 2016 that these lines will organically grow better than the core commissions and fee line.

At the bottom of that same page 3, you also see that we used next to no stock this quarter to fund M&A and you'll see at the bottom of the CFO commentary, first page, we don't anticipate using stock to fund M&A in 2016, either.

I will have some cash flow comments more in a minute.

On pages 5 and 6 of the earnings release you will see that we had nice margin expansion in the brokerage in the risk management segment.

In the CFO commentary you will see that we still believe margin expansion for the brokerage segment is difficult if we don't have 3% organic growth, and you will also see that we are moving up our risk management target in 2016 to 17% from our target of 16.5% in 2015.

All right, let's move to page 7, to the clean energy line on that page.

I'm really pleased that we crossed the $100 million of net earnings mark this year, which came in right at the midpoint of what we forecasted a year ago.

That's really, really great work by the team.

I also want to point out we've added some more convenient disclosures.

On page 12 of our earnings release, on the deferred tax asset line in our balance sheet, we've added a parenthetical disclosure showing that $342 million of our deferred tax asset relates to credits that we've generated but not yet deducted from our tax returns.

Think about it this way.

It is effectively a cash receivable from the government, as it will reduce our cash taxes paid in the future.

I've said before our goal is to pay about 10% of our global EBITDAC in taxes, and these credits are a big part of that strategy.

Looking forward to 2016, you'll see in the second page of the CFO commentary document that we are forecasting about a 15% step-up in earnings in 2016 for our clean energy investments.

That's if we hit the midpoint of the range, about $116 million of net after-tax earnings.

When we were preparing our 2016 estimates for clean energy, we worked closely with our host utility partners and we assess the ever present risks surrounding these investments.

Things like fuel source substitution -- that's are they going to burn coal or natural gas?

We looked at governmental, regulatory and IRS laws and policy changes.

We looked at land shutdowns during the year, both temporary and permanent.

We looked at the location of plants on the power grid utilization curve, looked at our supply chain distribution, so on and so forth.

In the end, as we sit today, we've digested these risks and we feel comfortable with our 2016 estimates.

In addition, our 2016 estimate makes a provision for continued warm winter and then it reverts to more of a normal spring, summer and fall.

Finally, let me move to debt and free cash.

First, free cash -- we have about $275 million of free cash in the balance sheet.

As I said last quarter, all of that is technically free cash of that $275 million.

But until we complete our integration efforts to consolidate legal entities in the UK, about $100 million of that cash is hard to access because it is in hundreds of smaller bank accounts that need minimum balances.

We have plans to free up most of those balances over the course of 2016.

Second, you'll see in the CFO commentary that we are at about 2.5 times debt to EBITDAC ratio.

That is down substantially from around 2.9 to 3 times at the end of 2014.

We believe 2.5 times is about the right level going forward.

Third, you will also see in the CFO commentary that we might go into the debt markets and raise another 3 -- the $200 million to $300 million.

We might do that for several reasons.

We can pay off the line, which is currently at about $200 million.

We can use it for M&A.

We have a strong pipeline.

Or we can use it to have cash on hand to repay the $300 million tranche, which carries the 6.44% interest rate and comes due next year.

Or we can do a combination of all three.

So finally, let me pull it all together.

If you assume 2. times debt, if you assume that we use no stock used in acquisitions earnout, if you assume that we continue to do mergers at that 7.5 weighted average multiple, just like we did in 2015, we will have ample cash to fund our M&A program in 2016, similar to levels that we did in 2015.

Okay, those are my comments.

Back to you, Pat.

Thank you, Doug.

Before we go to questions and answers I just want to make a quick comment about the Gallagher culture.

It's as strong as it has ever been.

We see it in our successful integration efforts.

We see it in our branding efforts around the world.

We see it in our service to our clients.

In December JD Power announced that Arthur J. Gallagher and Company ranks as the highest in customer satisfaction among brokers for large commercial insurance.

This is on top of the fact that earlier in the year we were recognized as one of the world's most ethical companies by the Ethosphere Institute for the fourth straight year.

The Gallagher culture is alive and well and developing and growing year in and year out.

With that, Brenda, we will go to questions and answers.

(Operator Instructions) Ryan Tunis, Credit Suisse.

I think my first question is probably for Doug.

In his CFO deck I think you said it would be difficult to extend margins if organic is below 3%.

I'm just kind of curious.

Under what conditions do you think you could keep margins at least stable, not necessarily expansion but flat margins?

Is it 2%?

Is it 2.5%?

Is there wiggle room on the expense side?

Just curious on that.

Good question.

We are always looking for opportunities to get better.

Our service quality is pretty darn high, if you look at what J. D. Power says.

And we have opportunities to continue to improve that.

When you are in the 2% to 3% range I think that we can hold margins pretty well where they are.

Below that, it might get a little tough.

Okay, understood.

And my follow-up is probably for Pat.

Just thinking back to his comments in December, the 1.5% to 2% organic growth -- just some clarity on what that entailed.

I knew Doug mentioned that supplementals are supposed to probably run north of that level.

Was that just US P&C?

Is that all-in total organic growth?

Is that just base commissions and fees?

What exactly, again, were you referencing there, Pat?

Well, Ryan, I was coming off -- to be perfectly blunt I was coming off of a more pessimistic view, given the October and November results.

And I was really pleased with what we did in December in finishing up the quarter.

My, it's were mostly around US domestic P/C as well as Australia and New Zealand P/C.

But I think, given December and the end of the quarter, I'm a little bit more optimistic.

Remember, organic growth is comprised of -- you mentioned the supplementals, but it's also retention, new business.

So, there's a lot of components that go into that.

And we just really had a strong quarter.

Okay, thanks.

Elyse Greenspan, Wells Fargo.

So just following up a little bit on the last question in terms of the organic growth outlook for this year, since you said you were a little bit more optimistic, how do you see the brokerage organic growth shaking out in 2016, maybe a ballpark number?

And then digging down into that a little bit, do you see some seasonality by quarter in terms of starting off stronger and then getting weaker toward the end of the year, anything that might impact the numbers as we go through 2016?

Well, I'll let Doug speak about the seasonality.

Then I'll come back to my view on organic.

Actually, a good reminder.

Yes.

For those of you that have been on this call for years, we are a highly seasonal company.

Our first quarter is by far our smallest quarter.

Our second and third are about the same, then December comes in just a step below that.

So we are a seasonal company.

So that's why, if you look at our margins, we had 26.1% margins for the entire year.

And I think if you go back to the first quarter in the brokerage segment, they were in the high teens, low 20s.

I don't know -- I can pull that out.

So we are a highly seasonal company.

So let me address your issues around -- or your question, rather, which is a good question, around organic.

Again, what comprises organic?

We go out every single day, we try to get new business.

We are fighting every single week to keep the business we've got.

And that's an ongoing battle.

But, frankly, we know that 90%-plus of the time when we go out to compete, we are competing with someone who's smaller than we are and doesn't have our resources.

I think the ACA is beginning to show an opportunity to have expanded organic growth in our benefits units.

Our wholesale units have been very, very strong in terms of organic growth.

So I'm a little bit more bullish than I was in December.

As I said, I was coming off a weaker October and November then I liked.

I was very, very pleased with what we did in December.

And if we can carry on with that level of new business growth and hold onto our clients, we should do a little better.

I would put that in about 2.5% to 3% to 3.5%.

Great, thank you.

And then in terms of your wholesale business, I know that has been a pretty strong driver of growth, we did see a change in management announced earlier this week.

If you can just comment about that.

Was there any timing associated with that announcement or anything you might want to add there?

Yes.

This is, I think, just a great example of where the Company is.

Over time you will see us transition in a number of responsibilities, and we've got a great succession planning process.

We've got an incredibly strong team.

Joel Cavaness, who takes over the unit now in terms of being the CEO, is someone who has been with us 30-plus years, started his career in our St.

Louis office, was one of the founders of risk placement services in the United States.

And it's just the same hand on the tiller.

I really like that.

Okay.

And last question for Doug -- great commentary in terms of the M&A pipeline and the cash and debt to finance potential deals.

Just assuming your plans at this time don't assume any kind of share repurchase activity in 2016.

Listen, if we have excess cash, which I don't think we will, necessarily, because we have a terrific M&A pipeline, we would buy shares back.

We feel comfortable with our debt level the way it is right now.

I don't feel the need to bring that any lower.

We have lots of good opportunities out there, and if our cash is -- if we have excess cash, we would of course buy our shares back.

Okay.

Thanks so much and congrats on a great quarter.

Michael Nannizzi, Goldman Sachs.

One question on the acquisition environment -- have you seen any change in appetite from private equity, just given higher spreads on lower-rated debt?

Are you seeing any benefit just from your ability to pick up targets?

We haven't seen that come into the marketplace it.

It's a little early yet to see that.

But we are seeing -- the private equity folks are out there.

We don't run into them a lot on our nice little smaller tuck-in acquisitions.

They are more out there trolling for the large platform acquisitions.

But for us we like picking the smaller partners that we can bring in.

But I haven't seen anything on the higher spreads right now impacting multiples paid.

It should happen, but we will see.

Got it.

And then, Doug, is there any risk -- so if natural gas prices, and I'm guessing that's a more relevant benchmark for the clean energy credits.

If natural gas prices remain at these levels, is there any risk or how should we think about the risk that plants could come off-line?

Is that something that -- you alluded to that in your comments.

But if you could just give us some thoughts on that and also just maybe a reminder of what the geographic breakdown of the coal plants where the devices installed are?

Yes, okay, good question.

And I want to make sure that I'm clear on this because I've answered it quite a few times.

But I appreciate the question -- is that we sit down with our host utility partners and we asked them a simple question: are you going to convert this plant to natural gas in the foreseeable future?

And for the ones that are running, the answer has been no, we don't have the plants to convert to natural gas.

Are member, if they do, we can move the plants to another location also.

So it doesn't necessarily mean that that plant all of a sudden ceases to become a revenue-generating plant.

But right now, based on what we are seeing, there was a substantial amount of displacement that happened to natural gas in the early 2000s and into the -- like 2007-2010, when natural gas prices fell through the floor.

We are not seeing that level of displacement now, for a lot of different reasons.

So I don't see that as the risk that's facing us right now when it comes to fuel price differentials there.

And the second piece of your question was what?

Just the geographic breakdown of the coal plants.

Okay, yes, right.

So we have good concentrations of coal plants in areas like Maryland and West Virginia, South Carolina.

We see and we have plants that are in the Midwest -- Iowa, Illinois.

We have plants that are in the West in areas like Arizona.

So those are the locations that we are.

Great, thank you.

Charles Sebaski, BMO.

First question, I guess I will follow up on wholesale.

What was the factor on organic growth from wholesale versus maybe an ex-wholesale brokerage operation?

You are looking for the organic growth in wholesale?

Yes, I'm trying to understand how much of a fact the risk placement wholesale is in the 2% organic operation.

2% -- well, first and foremost, let's go through our domestic wholesale operation.

Is that what you're asking about?

Yes.

That business is about a $250 million business.

It posted about 5% organic for the year.

We saw about the same in the quarter.

So the blend of that across our $2 billion of domestic would be about 10% impact on that organic number.

Okay, that's all I was looking for, I guess.

And then additionally, on the risk management business, do you see that there's any effect on the pushout on the Cadillac tax to 2020?

Do you expect that you have any negative headwind on the growth there?

I think you meant what's the impact on our Gallagher Benefit Service.

On the benefits, excuse me.

Listen, anything that the government can do, which they constantly do to make this more difficult, is great for us.

(Laughs) Okay, thank you very much.

Adam Klauber, William Blair.

A couple different questions -- so was Australia -- was that positive or negative growth for the quarter?

Positive.

In fact, our New Zealand operation had a terrific quarter.

Okay, okay.

Not to beat wholesale to death, but I had heard the market was doing okay but then actually took a stairstep down in November and December renewals.

Did you see that also?

First of all, when you look at our wholesale operation there's two different operations.

We've got our open brokerage business, and then basically we've got our program business in that.

When you look at our open wholesale business, we had a really nice, nice quarter.

In some of our program business, we are seeing some of that move into the standard lines to a certain extent.

New business startups weren't quite as robust but still they posted a decent quarter.

And remember, as a retailer, if it moves from the wholesale business into the retail space, we stand to pick that up over on our retail side.

Okay, thanks.

And then as far as a number of the charges for the year, it looks like between acquisition integration, some of the other adjustments, it was almost negative $0.70.

That seems, if we are sitting here last year, more than you thought.

What cost more compared to what you thought originally last year?

Yes, I think our costs overall -- when I step back and look at it, our integration in areas like the US with Bollinger, when you look at Canada, when you look at New Zealand and Australia, all of them came right in with where we expected the integration efforts and costs to come out.

Over the last couple years we probably spent an extra $50 million in the UK to put together four different retailers that we basically have bought to become the top five broker there.

So that's the problem.

If you look back over the last couple years, that's the difference in the spend there.

Other adjustments, we have the -- all of them are right in line with what we telegraphed in December on that.

We had a non-cash writeoff related to a wholesaler down in Australia.

The channel conflict that developed as a result of that, when we bought Wesfarmers, we had owned the wholesaler before that.

When you buy a big retailer, it does cause some channel conflict there.

So we had a non-cash writeoff there that cost us about $0.09, something like that.

Other than that, most of them are coming in right where we expect them to come in.

Okay.

And as far as the UK retail integration, do you think that's mainly done?

Or is that going to -- is there some extra charges next year for this year, for that also?

We say that our integration costs will be less than half of what they were.

And most of that relates to the UK integration in 2015.

So if you look at the CFO commentary we talk about we expect that to cost us $0.17 to $0.19 next year in integration costs.

And this year the number was more like $0.40.

Okay, thanks.

And then we said -- and I think Pat said it and I said it both -- that we expect those to be substantially down by the end of 2016.

Okay.

And then as far as working capital, in 2016 do you think that will expand or decline?

Well, listen, I think the amount of money that we can shake out of our working capital balances will be substantially higher.

I made a comment in the early part of my script that when we get done with a lot of these legal entity consolidations it frees up a substantial amount of working capital for us.

So even though it's in our cash balances right now, it actually creates about an extra $100 million of available cash for us.

And do you think that will come out in 2016?

Yes.

By the end of 2016 we are pretty well done with most of the integrations, so that would be the spot where we would be able to see it available to use for acquisitions, etc.

Okay, okay.

So -- but to be technical, should that be throughout the year or more should we see that in the back half?

I just got an email yesterday that we consolidated 15 legal entities over there.

They struck them off as of January 26.

I'd have to go back to see how much was in that 26 legal entities that we struck off in the UK to see how much cash -- I don't have that exactly for you.

Okay.

But certainly by the end of the year.

Okay, thanks.

And then one other -- could you remind me, there is an exclusion for client runoff of $17.5 million.

What is that again?

Remember we had the program in Australia, this is in the risk management segment.

Well, that basically is running off the portfolio of claims that we are running off there.

So we won't see revenues from that again.

Okay, okay.

Thanks a lot.

Josh Shanker, Deutsche Bank.

So, Doug and I have had a friendly argument over the last year, and often times Doug's response has been, look, if somebody wants to sell us our business, they want stock, we are going to give them stock.

And now you are saying that that's probably -- the door is closed for that in 2016.

Can we talk about the change of heart a little bit?

Well, let me clarify that, is that if we have somebody that really wants our stock, if they need it in a tax-free reorg, we might give it to them and we will just buy shares back in the market to keep the share count level.

So you are still of mind to it, but you are not going to dilute shareholders in any stock transaction?

Well, first of all, none of these are dilutive.

If we are buying at 7.5 times, we don't see that as dilutive.

But it is something that -- we do not see ourselves wading into stock.

If somebody has to have it for a certain structure, we have ways in order to minimize the impact on shares outstanding.

But I wouldn't consider it to be dilutive.

All right.

And so my other question is what would have to happen for you to think your stock is more attractive than doing acquisitions?

Well, I think you've got to look at it over the long-term.

I think that in this case we really are having success with our smaller acquisition, Rollins.

As a matter of fact, we had one deal, one merger that was $50 million in revenue.

If you take that one out, our weighted average multiple is somewhere around 7-7.2.

We see a pipeline right now that is robust.

We like our ideas of growing the franchise.

When you buy a share of stock back you don't get trade into London, you don't get using our niches, you don't get organic growth, ultimately, out of a share of stock repurchased.

We still have a lot of opportunities to grow out our franchise, especially here in the US.

There are cities that we just don't have presence in right now.

Well, besides -- Josh, let me make a comment.

When we do an acquisition we want a continuing revenue stream and we want and earnings stream.

That's a given.

But we are putting great resources, terrific people into the Company, and that's very hard to put a price on.

Our pricing folks do a good job of holding the line.

As Doug said earlier, we don't dilute our shareholders.

But on top of it, these are new producers.

These are new teams.

You don't do that acquisition and someone else does, it's gone forever.

So I've answered this question over 30 years the same way.

When we've got a great acquisition partner that we want to put on, I'll buy that all day over buying a share.

I understand.

And just in the improved margin outlook for the risk management business, do you feel there's a ceiling to just how good the margins get on this business?

Or can you always find ways to improve it?

And even though 17% is a very excellent margin, do you think there's an opportunity ever to make that better?

Listen, I think that the great strides that have been made over the last five years -- we've just done a tremendous job of retooling that business.

The management team down there and the fact that we are growing organically in the 10% range really shows that we have an offering that we consistently demonstrate better claim outcomes than what their other choices are out there in the marketplace.

Where do I see margins ultimately on that business?

It's not nearly as geared business as the brokerage segment.

When you pick up a new client, you have to put adjusters behind the desk.

And you've got to be ready to handle claims.

So we feel comfortable with 17 points of margin right now.

We'll take a look at it at the end of this year, see how we do.

And we'll either adjust next year or will leave it 17% for another year.

But that business -- it's a scale business.

There's great opportunities for it.

It's a value-added business, so it's not a commodity.

So over time we will see where margins ultimately get.

Okay.

Well, congratulations to both David and Joel on the transition also at RPS.

Well, thanks.

That's a nice comment.

Take care, thanks, guys.

We are going to make the team around here.

So --

Quentin McMillan, KBW.

Doug, thanks very much for the comments around share repo.

I just had a -- not share repo, share -- just maintaining flat shares.

Just had a quick question in terms of the stock comp and what you would be using for a number this year for stock-based compensation growth in shares.

I think you had said the Investor Day may be around $1 million.

Is that a decent estimate for the year?

Yes.

If you look at the back of our investor supplement, we actually have a schedule in there that shows the change in shares outstanding.

It's on page 16 of that supplement.

And if you look at the impact that's related to stock-based compensation for employees, it ends up adding about 1 million-1.2 million a year in our shares.

Now, we also have some that lapses off.

But by and large, if you assume 1 million a year, that's about right.

So that's a pretty decent estimate, if we are not going to use anything for M&A, of what the share growth should be this year, assuming no repurchase?

That's right.

Okay, thanks so much.

Secondly, just in terms of what your debt addition is going to be and holding that leverage ratio constant, if we look at the midpoint of that $200 million to $300 million to $250 million at 2 1/2 times leverage ratio that implies $100 million of EBITDAC growth.

Is that a fair thought of what you guys are looking for, without being too specific?

Yes, that's right.

Okay.

It might be a little lumpy but that's about right.

Okay.

And then last, if I could just touch on Gallagher Bassett and follow up on what Josh was asking there, you mentioned that you are investing specifically in Gallagher Bassett.

And you mentioned Luminos and other initiatives that you have going on.

But you also just said the 10% organic growth range.

First, do you still think that that business in 2016 and maybe the foreseeable future is going to grow that close to double digits range?

And secondly, at that kind of very impressive organic growth, is there still operating leverage in that business?

And if not, why won't there be some operating leverage coming through?

Well, on the organic growth, one of the things about it, when you get into our international operations there's some stairstep growth that happens with that business.

Much of our business in Australia can be in large programs.

So you can see flat growth for a year or so and then all of a sudden we pick up a nice big client and it happens.

So you get a pop-up in organic.

Domestically I think that we are competing on the -- out there at a terrific range.

We think the margins of 17% still allow them to continue to build out their product offering.

And the leverage on it is just the fact that this is still highly an intensive people business.

And when you get claims, you got to put adjusters on, behind a desk, in order to pay those claims.

So we are comfortable with 17% growth, high single-digit type growth, 17% margins, high single-digit organic growth.

That's where we feel the business is right now.

And by the way, I'd comment I believe that 17% is significantly best in class.

Okay, great.

And just if I could sneak one more in on there, just in terms of the way that we think about the business, is the softer rate environment actually a benefit to Gallagher Bassett in some capacity because some of your smaller clients might be looking to strip out cost and looking for ways to not have to have those claims adjusters on their own payroll?

Or does it net out with something where maybe that's not quite the right way to think about it?

No, that's not the right way to think about it.

A hard market is a great growth market for Gallagher Bassett because it pushes more clients into the alternative market.

They will self-insure.

When market soften, clients will purchase insurance at lower levels of retentions.

And sometimes that's not -- that's a headwind for GB.

But by and large, the reason why a client would use Gallagher Bassett is because the claim outcomes on their loss experience are better.

That's the -- so anything you think about it, what's the behavior of a client or a carrier to outsource a certain vertical of claim management within -- we do more for carriers, too -- is that when they see the claims outcomes that Gallagher Bassett demonstrate -- we are paying almost $10 billion of claims through Gallagher Bassett.

We have tremendous expertise.

We can demonstrate our claim outcomes are better.

Great.

Thanks so much for the answers, guys, and congrats on the quarter.

Sarah DeWitt, JPMorgan.

On the brokerage organic growth guidance of 2.5% to 3.5% next year, if we look out a bit longer term over the next couple of years, is that a reasonable range to anticipate?

Or do you think it could get better or do you think it could get worse?

Sarah, I have no clue.

If the market goes in the tank -- I've been through for cycles.

If the market goes in the tank like it did in 2005-2006, our organic is going to suffer.

If the market tightens -- and let's face it, there is some controversy out there right now.

You've got a little bit of firming going on in places like Australia and New Zealand.

You got a little bit of controversy with some of our larger trading partners that are having some management issues.

And there's some renewed discipline around that.

If you get a harder market -- 2001-2002 -- significant double-digit organic.

So the market makes a huge difference.

How we do the new business makes a huge difference.

If we keep our retentions, that plays a huge role.

I have no idea.

Okay.

I'd also just be curious on your view on the P&C market.

How do you think that plays out over the next couple of years?

Does it get more competitive or are we going to start to see some tightening with the dislocation at large players and M&A?

Well, I'll tell you, I've said this many times, I've been pleased and interested to find that over the last five years I would say the P/C market globally -- and also very much in the United States -- has really by and large been flat.

You go back and look at this chart starting in about 1970, this market was violently cyclical.

You'd have times when rates were going up 30% and 40% and times when rates were falling 15% to 25%.

Through the 1990s it seemed never ending.

Companies kept going broke and prices kept getting cut.

You get through 2001, you have a violent hard market.

That softened substantially in 2005-2006.

But literally, since about 2007, maybe 2008, this marketplace has been pretty flat.

And I would consider the present environment, which is about 4% off on general business to 10% off on large property schedules, essentially, with the exception of that property 4% off is pretty close to flat when you are used to what I've seen cyclically.

So I do predict that management of these carriers today have better information, they absolutely understand loss cost inflation and they're going to fight hard not to have a deterioration in their returns.

So my view is that I think they will find a way to get that back closer to flat because they need to make money in underwriting to have any kind of return.

Great, thanks for the answer.

Kai Pan, Morgan Stanley.

So first question probably for Pat -- in the past you commented on in the stable pricing environment actually ideal for your producer to gain new business while the retention rate had been stable.

But now, with the pricing coming down to mid-single digit level, do you think the buyers' buying behavior, shopping behavior change that make it -- would impact your producers, either on the retention side or getting new business?

Well, I think that it probably helps us with new business.

We've got a little bit more of a story to talk about.

But again, I would comment that anywhere around 4% to 5% off is a pretty stable market.

If I'm doing a good job for a client and I'm sitting down and talking to them about their renewal and I say, look, I think that this carrier has been a good partner for a long time, they've paid their claims, etc.

And they are willing to come in at 2 points off.

My suggestion as an advisor is to renew it.

You will renew 90%-plus of those accounts.

So competition is fierce all the time in the business.

But in a market like this I think our story is all about capabilities and about service.

It really is about doing a great job on service, doing a great job for the client on the transaction and being a trusted advisor.

That's great.

Then finally, a larger-picture question is really looking at this on the personal side, basically you see that the direct distribution actually taking share in the marketplace.

I just wondered what is your view on the direct distribution commercial lines, especially in small and middle-market commercial distribution because you heard Berkshire Hathaway started online distribution on the commercial lines.

I just wonder what is your think of the -- both on the challenges side as well as the opportunity side for you guys.

I think there's tremendous opportunities and there's some challenges on the small business side.

I think a lot of that will be traded electronically.

Once you get up to having some real assets, you want a trusted advisor that sits in front of you.

That's not changing.

Well, thanks so much.

Dan Farrell, Piper Jaffray.

Doug, just a quick numbers question.

Do you -- and I apologize if I missed this in your comments.

Do you happen to have a operating cash flow number for fourth quarter?

It would seem that cash ended relatively high, so I'm assuming it was up.

I don't have it here in front of me, but we did show good strong cash flows in the fourth quarter.

If you look at this year, I think since September I think we are up $120 million in cash compared to where we were at September 30 and maybe $180 million more than what we had at the end of 2014.

I said that in our balance sheet right now there's about $275 million of truly free cash in it.

So yes, there was strong operating cash flow in the fourth quarter.

So then if I look at your balance sheet cash, your conservative assumption of what you will generate in free cash flow and then your debt raise that you are looking to potentially do, it would seem that you could not only do the amount of acquisitions that you did last year but probably exceed that if you saw the opportunities.

Is that a fair statement?

Or is there anything else that I'm missing there?

Yes, we could exceed the amounts that we did this last year.

If we could use all the free cash in our balance sheet, and if we can borrow at 2.5 times the new EBITDAC that we get and our new cash flow, we could do more than what we did last year.

Okay.

And then one other thing -- is there anything with regard to this debt raise that you are thinking about a little longer term that positions you for some of the uP/Coming debt maturities?

I know you have one coming up in 2017.

In the back of your mind, is that part of providing some flexibility potentially around that?

Yes.

I said that in my comments earlier, that we have that $300 million tranche that comes due in 2017.

We will look at how things look here in the second quarter and it might make sense that we pull some down.

It really makes no sense to prepay that just because of the defeasance costs on that.

But it could be one of those things where we pull a little bit down.

We may use our line next year to refinance some of that at lower interest rates.

But it is all of the things that we are taking a look at right now.

Great, thank you very much.

(Operator Instructions) Mark Hughes, SunTrust.

Sorry if you got into a little more detail previously, but I think you had said your benefits business you look for more organic in 2016.

I think you had cited the increasing complexity from ACA.

What is more complex this year than last year?

And how much more growth do you think you will get in 2016?

I think what's more complex is that the rules just keep being changed and rewritten.

You have seen -- just as an example, someone brought up the Cadillac tax that everybody was expecting to get started in 2016 has been pushed back a couple of years.

Those things just make for a whole other round of discussions with your clients.

You are preparing them.

You don't know the answer.

If the self-funded part of the individual's cost is calculated into the calculation for the Cadillac tax or is not, that makes a huge difference in what our clients will or won't fund, where they are going to put their employees.

And all of a sudden that changes.

So there's stuff that goes on like that literally every week.

We've got 23-24 people in our compliance department, and the head of that writes an email to all of us about once every week to two weeks, and it's four pages long of new updates on what the rules are.

So those complexities just drive a lot more activity for us.

And we hope to bill it.

Does that mean there's more meaningful changes among your clients, they are doing more wholesale redesigns of benefit plans?

Is that the way we should read it?

Yes.

Okay.

And more so this year than last year.

And then, I'm sorry, the magnitude of that difference?

I don't know, Mark.

I don't know if I can position that for you.

There's just more activity.

I can't really give you a number around it.

Okay.

And then on the wage front, it's something that might have come up in an earlier meeting, maybe one of the analyst days.

Anything in terms of competitive pressure for brokers, anything on the retention front or wage front that's worth noting?

Well, it's a war for talent every single day.

That's why culture is so important.

And yes, we are doing everything we can to make sure we have the best place in this industry to work and give the best resources to those people that work here and pay them really well.

Got you.

And then I'll assume from your more enthusiasm or greater enthusiasm about the organic outlook that January was a pretty good month for you.

Is that fair?

No comment.

Okay.

And for me, I wish Dave McGurn well also.

Thank you.

That's nice of you, Mark.

He's doing great.

He's in Florida already.

Good for him.

We are going to keep Dave involved.

That's one of the things that I'm really excited about.

These are guys that are at a point in time where they want to have less responsibility but don't want to disassociate.

That's wonderful.

Sean Dargan with Macquarie.

Pat, when you were discussing the outlook for brokerage organic growth, I think you discussed at length your thoughts on the P&T market with Sarah.

But you sound pretty upbeat on economic exposure.

If you look at the equity markets at least, there's the pricing and some probability of a global recession.

I'm just wondering, if the US went into a mild recession, which is not our base case, what does that do to organic growth?

It hurts it.

Is there anything in particular that makes you feel more upbeat than some others about economic exposure, at least where you play?

Yes.

First of all, our largest location still remains in the United States.

And my view on the economy in the United States is -- I'm no economist, but when I talked to our midmarket retail, P/C and benefit employers, I would not say they are elated, but they are hiring.

The foot is not off the brake, but they are hiring.

Payrolls are up.

Unemployment is down.

Strengthening dollar certainly doesn't help exports but it certainly does signify that we've got a pretty darn strong economy in the United States.

When I look at Canada, anything that's exposed to energy or natural resources is down.

But beyond that and beyond the knock-on effect, Canada seems to be pretty okay.

New Zealand is strong.

Australia is a bit weak again, based on the economic impact of energy and natural resources, but not drastically so.

And again, we're not that exposed to those industries.

So I can look around and go, where we are playing we tend to be in a pretty good spot.

And the United States seems like it's okay.

All right, that's great.

And just one quick one for Doug regarding the change in FX guidance.

Were there any large drivers behind that?

Well, I just think if you take a look at it, on December 16th, when we were last all together, the pound was around $1.50 and it's somewhere around $1.42 now.

And if you look at the Canadian dollar and Australian dollar, it has recovered a little bit in the last week and a half.

But it was 70% and it's down to -- or 73% down to 70%.

So you see it on a -- in a month we've had a substantial strengthening of the US dollar.

That's the only difference we are seeing.

Got it, thanks.

We have no further questions at this time.

I'd like to turn it back over to you for closing remarks.

Sure.

Thanks, everyone, for joining us.

We are really excited about what we accomplished in 2015 and we are optimistic for 2016.

Have a great day.

This does conclude today's conference call.

You may disconnect your lines at this time.

Sure.

Thanks, everyone, for joining us.

We are really excited about what we accomplished in 2015 and we are optimistic for 2016.

Have a great day.

This does conclude today's conference call.

You may disconnect your lines at this time.