Earnings Call: Q2 2016

Jul 29, 2016

Good morning, welcome to the Arthur J. Gallagher & Co.'s second quarter 2016 earnings conference call. All participants have been placed in a listen-only mode. Your line will be open for questions following the presentation. Today's call is being recorded. If you have any objections, you may disconnect at this time. Some of the comments made during the conference call, including answers given in response to questions, may constitute forward-looking statements within the meanings of the securities laws. These forward-looking statements are subject to certain risks and uncertainties that will be discussed on this call, 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. In addition, for reconciliations for the non-GAAP measures discussed in this call, as well as any other information regarding the use of these measures, please refer to the most recent earnings release and any other materials in the investor relations section of the company's website. It is now my pleasure to introduce J. Patrick Gallagher, Chairman, President, and CEO of Arthur J. Gallagher & Co. Mr. Gallagher, you may begin. Thank you, Donna. Good morning, everyone. Thank you for joining us for our second quarter 2016 earnings call. With me this morning is Doug Howell, our Chief Financial Officer, as well as the heads of our operating divisions. Today, we are going to touch on four key components of our strategy to drive shareholder growth: organic growth, merger growth, improving our quality and productivity, which Doug will spend most of his time on, and fourth, maintaining our unique culture. We have excelled on all four year-to-date. First, let me talk about organic growth. In our brokerage segment, after a terrific first quarter of 4.8% organic growth, we posted 2.2%. That was marked by the loss of a large account that we discussed at our June investor meeting. Excluding the large account, we would have been closer to 2.5%. For the first half, brokerage organic was 3.6%, which in retrospect is darn good based on how I felt coming to the year, especially in this environment. Looking towards the second half of the year, I see our organic somewhere between our second quarter and year-to-date numbers. I see an improvement going forward. Let me break down our organic around the world. I'm extremely pleased every single division posted positive organic growth in the quarter. Our sales culture is alive and well. Domestically, in the United States, we saw about 3% organic growth. Rate and exposure had little over a point of negative impact on our domestic PC renewal results in the second quarter. Most of that was property, which for us is proportionally higher in our second quarter. Domestic casualty lines pricing remains similar to last year, where we're seeing a slight downward pressure, and we are seeing a modest growth in exposure units overall. This remains an environment where our production teams can grow and outperform. Our domestic employee benefit consulting business also posted about 3% organic and is seeing a tremendous amount of new business opportunities. Our teams are showing new prospects our vast array of services, tools, and insights that they need to navigate a tight multi-generational labor market, rising healthcare costs, and increasing regulatory complexities related to the ACA. Our smaller competitors are falling behind each and every day. This business typically grows more in the second half of the year, and it seems to me that that will be the case again this year. Let me move to our international brokerage operations. Since our last call, I've spent a significant amount of time in Australia, Canada, New Zealand, and the U.K. These teams are doing great. In fact, they're on a roll. After just 24 months of being part of the Gallagher family, I'm really pleased with how well we are working together, how our sales plans are becoming integrated, and how our culture is thriving. All together, ex the one large account, our international operations posted about 2% organic growth in the second quarter, even with rates and exposures that are softer internationally than we see here domestically. I'm pleased that our teams are growing through those headwinds, and the results are solid. As a side note, it was really interesting being in the U.K. and Europe during Brexit. Remember, we don't have much business at all from mainland Europe, and insurance has been flowing in and out of London for over 300 years, long before the EU was formed. Other than a possible recession hitting the U.K. and the other EU countries, and your guess about that is about as good as mine, I don't see it as a worrisome event for us in the near term. Longer term, I think we in the industry will successfully navigate any potential changes to the European insurance landscape. Next, let me move to merger and acquisition growth. Over the past two years, we've been true to our focus on smaller tuck-in mergers. The average size for the 13 acquisitions this quarter was $3 million of revenue at an average of seven times EBITDAC. We are still finding really good opportunities at fair prices in the competitive merger environment. Year to date, 21 acquisitions, which should add about $70 million of annualized revenue, and we see a stronger second half of the year for acquisitions. Our pipeline is outstanding. There are a lot of really talented independent family-owned sales and consulting professionals out there. They have excellent relationships with their clients, they have strong sales skills, and they have a very strong entrepreneurial bent. They create value by joining Gallagher, where they have full access to our capabilities, expertise, and resources. I've said for 30 years, pick your partners that have a culture similar to Gallagher and look out. One plus one together does make three, four, and five. I'd like to thank all of our new partners for joining us, and I extend a very warm welcome to our growing Gallagher family of professionals. To wrap up my comments on the brokerage segment, halfway through the year, we've posted 10% total revenue growth, of which 3.6% is organic, adjusted EBITDAC growth of 13%, adjusted EBITDAC margin expansion of 60 basis points. Integration costs are starting to wind down. We have an excellent M&A pipeline at fair multiples. Truly excellent results through the first half. I'd like to move to our Risk Management segment, which is primarily Gallagher Bassett. Risk Management had a more challenging organic quarter. I'm really pleased that we proactively managed expenses and exceeded our 17% margin target. Second quarter organic was challenged for three reasons. First, as we discussed at our Investor Day, we are seeing a bit of a lull in new business inception dates. Second, we experienced fewer new claims in the final two months of the quarter within the U.S. Third, we recently learned that we are not likely to earn a large performance bonus award from our participation in an Australian WorkCover program where we are one of five providers. For the fiscal year ended June 30, the program paid performance fees using 20 different criteria. Several of the metrics had a big stretch. Unfortunately, we fell short. You'll see in the organic table on page six of the earnings release that we earned nothing here in the second quarter in 2016. We believe the other providers fell short too. Let me be clear, I'm disappointed. Going forward, we will return to positive organic growth in the third and fourth quarter. Our client value proposition of delivering superior claim outcomes is stronger than ever. In fact, we recently renewed a big program in Australia. Had two nice new business wins, one in Australia, one in the U.K. Our domestic new business pipeline is solid. Let me move to Clean Energy. Once again, we had a great quarter. The corporate segment earnings came in above the midpoint of the guidance range we previously provided. We're well on our way to delivering nearly 15% growth in annual after-tax earnings. On our culture. Over the past three months, as I said, I have visited the U.K., Canada, Australia, and New Zealand. I can tell you that our unique Gallagher culture is thriving and strong across our entire global footprint. This includes the over 300 promising college students globally learning about the greatest business on Earth in our internship program. We're just wrapping up the 51st year of the Gallagher Summer Intern program. We believe the two-month program is an important investment in our future as we like growing our own. We've delivered an excellent first half of the year. The fundamentals of our business remain strong. We think the second half will even be a bit stronger. Over to you, Doug. All right. Thanks, Pat. Good morning, everyone. Today, I'll do some earnings release housekeeping, spend some time on our quality, productivity, and margins. I'll hit on integration, highlight some Clean Energy items. Then wrap up with some comments on cash and capital management. Okay, to the housekeeping. You'll see that we made changes to our earnings release. We did so because in May, the SEC published new guidance on the presentation of non-GAAP measures. We believe we've now gone the additional mile in the spirit of the new guidance. It makes the tables a little busy, but the punchline here is that we have not removed any of our previous disclosures as we strive to remain as transparent as possible. Please recall that many of my forward-looking comments today can be found on the document called CFO Commentary that we post on our investor relations website. All right. Let me turn to margins, which are a nice indicator, in my opinion, of our quality and productivity. Brokerage adjusted EBITDA margins are up 57 basis points. Risk Management margin came in above our 17% adjusted margin target. Year to date, our margins have expanded in both Brokerage by 60 basis points and Risk Management by 33 basis points. That's really terrific work by the team out there. Within the Brokerage segment, margin expansion came mostly from our international operations. Recall that we believe there is an opportunity to expand margins in our Australia and U.K. retail businesses over the next couple years. We made good progress on that this last quarter as our margin improvement initiatives have kicked in. Let me give you a couple examples. First, we've moved all of our transactional accounting out of London into Glasgow. Once we clean it up in Glasgow, we then ship the work into our offshore centers of excellence, which is really following the blueprint that we built here in the USA over the last 10 years, which allows us as we bring new entities on to move faster than ever before. Second is another example in the U.K. Our retail team standardized core service-related processes such as endorsements, quoting, and renewals across our 50-plus branches. In Australia, we've started consolidating our SME business from 25-plus branches into a few specialized centers that will focus on just small customers. All of this work has driven down our back and middle office costs as we can capitalize on our scale. To me, what's even more exciting is we've dramatically improved the quality of our services and our customer experience. Every day, our folks that work in the middle and back office get up to be better, faster, and wiser on how we spend money. Let me comment specifically also on integration. Recall that we did five large deals in late 2013 and early 2014. We're nearly finished with integration. I was in the U.K. a few weeks ago. The efforts to wrap this up are impressive. I was in Canada in May. By the end of this year, we will have migrated nearly all of the six or seven business units onto the same agency management system we use here in the USA. Second quarter integration costs were right on our forecast of $0.05 a share, about half of last year's amount. You'll see on the CFO Commentary sheet that we are anticipating about $0.06-$0.07 total in the last half of 2016 in integration costs, which is down dramatically from the $0.21 we spent in the last half of 2015. Our efforts are well on track to be done by early 2017. Let me turn to the Risk Management segment, Gallagher Bassett. Over the last several years, we've been improving our service offering to deliver better claim outcomes. Much of the back office improvement is very similar to what we have done in the Brokerage segment. In addition, we have improved the tools our adjusters use, such as automating manual and high-volume processes that are really necessary to do a great job, but frankly, can bog our folks down. We've also shifted nearly 1,000 associates into work-from-home locations, and we've developed some specialized centers to focus on complex, specialized case management. These efforts have allowed us to improve our margins in the Risk Management segment over the last couple of years, and should allow us to post margins for the year in the neighborhood of 17.5%, which is up from our previous target of 17%. Shifting to the Corporate segment. We landed a $0.01 or so above the midpoint of our guidance that we provided during our investor meeting in June. Most of this was due to better Clean Energy earnings, because our plants ran ahead of plan in June due to the hot weather that hit various parts of the country. We're still forecasting between $110 million-$120 million of net earnings for the year. First off was a little stronger, the full year should be about where we estimated six months ago. It's also important to note that by the end of the year, we will have over $400 million of credits on our balance sheet. Effectively, that's a $400 million receivable from the government that will help us reduce our cash taxes paid for many years. As for cash, we've got about $150 million of available cash on our balance sheet, and we're making really good progress in our U.K. bank account consolidation efforts to unlock available cash that we've talked about before. I think that we're down about 30% in the number of open bank accounts since the beginning of the year. As for stock, we used no net shares for M&A this quarter, and we actually bought some shares back during the Brexit market sell-off. We'll use those shares on some future tax-free exchange mergers coming up this year. When you look back, we haven't used any net shares to do M&A in over a year, and I think we can fund deals with cash and debt through year-end. Those are my comments. I think it was an excellent first half of the year. Back to you, Pat. Thank you, Doug. Donna, we'll take some questions and answers now. Thank you. The call is now open for questions. If you have a question, please pick up your handset and press *1 on your telephone at this time. If you're on a speakerphone, please disable that function prior to pressing *1 to ensure optimum sound quality. You may remove yourself from the queue at any point by pressing *2. Again, that's *1 for questions. Our first question is coming from Elyse Greenspan of Wells Fargo. Please proceed with your question. Hi. Good morning. Morning. I was hoping to get a little bit more color on your organic growth outlook that you provided for the second half of the year. That kind of in the range, I guess, of 2.5%-3.5% or so, given the Q2 and half year one levels. How do you see that kind of shaking out domestic and internationally? If the organic growth stays at that, comes in at that level, do you think that we could see kind of the same degree of margin improvement in the brokerage business that we saw in the first half of the year, in the second half? Well, first of all, when we post the organic growth that we posted overcoming a large lost account, the good thing about large accounts is they're great when you write them, and they can make your results lumpy, especially when you lose them. That's on a positive note. I think going forward, we don't have any of those that I know that are under attack right now. I think a return to a more normal 2.5%-3.5% organic is in sight. As it relates to margin improvement, where we see that opportunity is, again, as Doug mentioned in his comments, Australia and the U.K. The little caution I have there is that those markets are a bit softer than what we're seeing domestically. Yeah. In terms of margin, where do we see that? I think in that range. We've always said it's tough to expand margins, and if organic isn't above 3%. If we're above 3%, we might get a little bit of margin expansion. If we're below, I think we'd be able to hold margin in. Australia and New Zealand, you said it's still a bit softer, but what you saw in the second quarter, would you say that that represented kind of sequential improvement from the first quarter? Yes. Okay. What was the- Very nice improvement from 2015. Those teams have really gelled incredibly nicely in developing strong sales cultures. We've always had a very strong sales culture in New Zealand. Australia's coming on great, and the U.K. and Canada as well. What was the wholesale organic growth in the second quarter? In the mid 2s domestically. Remember, property is a headwind for our wholesale business in the second quarter. Okay. In terms of, I appreciate the disclosure you guys provide on the share count. As you guys start to think about deal flow and expectations for 2017, how do you think about kind of managing the share count once we get beyond the end of 2016? Well, first and foremost, we got a terrific deal pipeline. Let's not forget that. Doing deals at less than 7x year to date, it really shows that we can still get some great merger partners at a fair price. Looking next year, I think our cash is better by far next year compared to this year. Integration will be basically done, so we won't have big drags on that. We spent a lot of money on CapEx this year that I don't see us spending next year. I see next year as a much better cash year than even this year. Will we need to use shares in M&A in 2017? Not at current paces. I don't see that as happening. Okay. Thank you very much. Thanks, Elyse. Thank you. Our next question is coming from Kai Pan of Morgan Stanley. Please proceed with your question. Hi, this is Chai Gohil for Kai Pan. I just wanted to go back to margins again. Brokerage margins expanded, and you mentioned it was savings in BI and real estate was also part of it. Doug, just wanted to get some color. If you expect margins to improve in the international operations, and lower integration costs, can it still expand in a sub 3% environment? Right. I think there's two different things. I think overall, if you just look across the whole group, 3% organic growth is kind of the tipping point of margin expansion. When you look at what we're doing to get better in the U.K. retail space and down in Australia in the retail space, there are some opportunities there. It's going to take us another year to 18 months to kind of harvest some of those, but every day those folks are doing a great job. What I really am pleased about is not only are they expanding their individual margins, and remember, these are businesses that are still in the 20% margin range. We're not talking about businesses that aren't making money. They're making terrific money. They're doing this at the same time that they're training their folks. They're adopting the Gallagher playbook when it comes to our sales culture. They're working through just getting better in the back and mid office. At the same time, they're spending money in order to get better at selling. There's margin opportunity there, but remember, these are still businesses that are in the plus 20% margin range. Got it. The second question I have is, in the CFO Commentary, you mentioned higher FX headwinds in the second half. Is that coming from Brexit and anything else that could potentially impact from Brexit? I know you guys mentioned less revenue impact, but anything else? Listen on FX, good point on the CFO commentary. What we say is we've adjusted, we see a little bit more headwind on the revenue lines from the decreased pound that sold off during the Brexit. We really don't see that, we haven't changed our guidance on the impact of EPS. If you recall, Gallagher, like many other global brokers, have a lot of dollar-denominated revenues in the U.K. that is serviced with pound-denominated expenses. There is a little bit of a natural operating hedge there that mitigates some of the impact of the decreasing pound. It's more of a revenue headline story than it is an EPS, sorry. Fortunately for us too, is that we have so many M&A opportunities around the world that we don't need to repatriate our cash into the U.S. to have good uses for it. Even if there is a sell off on the pound, there's some good opportunities for nice tuck-in mergers in the U.K. that we'll use our cash for. That drives well into my final question. In terms of the second half pipeline for M&A, now that the international acquisitions have integrated well, what do you see in terms of potential for international tuck-in acquisitions in terms of your overall second half pipeline? Is it a greater share? What are the valuation multiples you are seeing there? Well, first of all, the platforms are performing exactly as we had hoped. The pipeline is built nicely in Australia, New Zealand, Canada, and the U.K. for tuck-in acquisitions. By tuck-in acquisitions, I mean acquisitions under $10 million in revenue, people that fit our culture, and at multiples that we think are fair. While there's competition and continuing growth in competition in the M&A space, especially from private equity, we're finding that the culture sells well, the pipeline is deep, and the opportunities to expand continue to grow every single quarter. Are the multiples different in international market than in U.S.? Yeah, they're a little higher in Canada, probably the same in the U.K., and maybe slightly lower in New Zealand and Australia. Okay, thanks. Thank you. Thank you. Our next question is coming from Joshua Shanker of Deutsche Bank. Please proceed with your question. Yeah, thank you. Good morning, everyone. Good morning. It seems like a little bit you might have gotten on my favorite hobby horse. It's almost like you're doing a share repurchase program. You intend maybe to issue some shares in the future, but you think your stock is cheap. Can we talk about, is that a new mentality for you to be preemptively buying back stock? No. We've said all along for the last over a decade that we've got three uses for our stock or for our cash. The first is we're going to buy brokers. That's what we're going to do. The second is we're paying a very nice dividend to our shareholders. Thirdly, if there's extra cash, we use that to buy stock back. That's not a change in philosophy over more than a decade. In this case, though, Josh, remember what we're trying to do. If we put out shares for tax-free exchanges, so there's a way for merger partners to exchange their stock for our stock, that creates a tax advantage for them. We'll use shares when we do the acquisition, and then we'll turn around and buy a like amount in the market to keep the number of shares outstanding flat. In the second quarter, we had some opportunities to maybe pre-buy some of that stock when we saw the sell-off after Brexit. We picked up those shares, and we'll probably use those shares as we start closing some tax-free exchanges in the third and the fourth quarter. It makes total sense. Do you have a mental philosophy around what would be the trigger for you to do some pre-buying? I mean, look, you're storing up a lot of tax credits for the future with Clean Energy, even though you can't use them today, you know you'll use them in the future. If you were to buy back stock right now because you think the stock is cheap, you know you're making acquisitions in the future. What's the trigger that you would pre-buy stock? Yeah, I think you have to look at the debt ratio on that, as I think that we want to have a nice, comfortable, safe debt ratio. For us to buy back the stock would mean we'd have to lever up on debt, then use that to buy shares and waiting for the tax credits to monetize into our financial statements from the balance sheet into our debt. That's something, we can look at that, but it's not something that's on our plan right now. Okay. I listened to your commentary about why the negative growth in Gallagher Bassett for the quarter. Going forward, is this an anomaly? Should we expect that negative growth is not a common thing, and we should probably resume a low single-digit growth for the foreseeable future? I don't think we've had a negative quarter at Gallagher Bassett in my memory. Me too. I'm with you. Yeah. From my chair, Josh, yeah, you'll see us return to organic this quarter. Okay. Very good. Well, thank you, and good luck in the remainder of the year. Thank you. All right. Thanks, Josh. Thank you, Josh. Thank you. Our next question is coming from Adam Klauber of William Blair. Please proceed with your question. Good morning, everyone. Morning, Adam. Sorry, I missed some of the earlier comments. Sorry if these are repeats. How's the wholesale business doing now compared to, say, six, nine months ago? Our wholesale business is awesome. It's just awesome. To me it's a corporate gem. I would say, Adam, remember, again, we said on the front, property can be a little weak in the second quarter with the property market right now. Wholesale still was nicely in the upper twos when it comes to organic growth this quarter. It's performing well even in the kind of seasonal property quarter that they have. Well, let me back up my earlier comments, Adam. First of all, we started this thing from scratch about 15 years ago, from dead scratch, de novo startup. Today, we're the largest MGA in the United States, one of the strongest open market brokerage operations. When we started it, we'd hoped that our own domestic PC branches would utilize RPS. We also started it as a true wholesaler, open to our competitors throughout the United States. They've captured 50% of our go-forward wholesale business out of our retail branch network in the United States, and that's because they perform. Okay, thanks. On the benefit brokerage side, how are commission levels this year versus last year? The commission levels on the small accounts are a struggle. I think that we see that with the mandated loss ratios, that in the smaller area that they're squeezed. Remember, our benefits business is a consulting business. Yes, we get commissions, but it's negotiated as a fee. If we're not receiving commissions on an account and we need a fee to do the work, we charge it as a fee. We're very successful at getting the remuneration we deserve in that business. Is the benefit brokerage business, has that grown more or less than the average retail business? A little bit. It grew the same this quarter. In the front end of the comments, we said it grew about 3% this quarter, which is the same as our domestic retail. We also said in the commentary, it tends to grow a little better in the second half of the year, which is natural as customers look for their year-end benefit planning. Also, I'll point out that an awful lot of activity on the M&A side there, Adam. We've got really good M&A pipeline in the benefits business. For all the reasons you would imagine, the ACA is extremely complicated. The brokers that have really nice accounts, 500 lives to 1,000 lives, right in our sweet spot, are lining up to join our enterprise for all kinds of reasons. A lot of which is just the ACA is too difficult to deal with. Right. Okay. Sorry if you mentioned this also, how's growth in Canada going? Really good. Very pleased. Organic, it's a little softer market up there, so organic around 2%. We had seven separate brands when we bought Noraxis. Those brands are all Gallagher now. I was up there in May for a better part of a week, had a chance to interact with a whole bunch of the team, and I will tell you that the interaction between those brands together and then their relations with their brethren in the U.S. and the U.K. is outstanding. Okay, great. Thanks a lot. Thanks, Adam. Thanks, Adam. Thank you. Our next question is coming from Mark Hughes of SunTrust Robinson Humphrey. Please proceed with your question. Thank you. Good morning. Morning, Mark. You had referred, I think, to a slowdown in claims activity within the risk management business. Did I read that correctly? Was that in workers' comp? Was that somewhere else? Primarily workers' compensation in the U.S. Yeah. Which by the way, you can't sit and complain about slower claim growth, right? For our customers, that's a good thing. It can be an indicator that the economy is slowing a bit because typically when you're putting on more shifts, there is more claim activity. This is not unusual. From time to time, Gallagher Bassett will see loss control works better. Clients are working very hard to cut the number of claims, we're helping them do that. Yeah, we've seen it. It's interesting because June was kind of the month that it looked like a little bit of out of pattern number of new arisings, we went back and take a look, there's some times where just once every 22 months or something, you get a slow month. I wouldn't consider it a trend necessarily, but it is something we'll keep an eye out. As July comes in and August comes in together again, we do an investor event in September, we'll update you on it. We've had these patterns before where just some months the claims just don't show up. Pat, I wonder if you could prognosticate the casualty pricing kind of flat to down. How much longer do you think it remains flat here? I got to tell you, Mark, I give a lot of credit to the management teams of our major insurance companies. It's softer, as I said earlier, in New Zealand and Australia, Canada and the U.K., especially in our specialty business in London. Those markets are soft. Here in the U.S., we're coming up five, six years of what I would call flat. When rates are down 1%, 2% or up 1%, 2%, in my experience, that's a flat market. In a typical hard market, rates are jumping 15%, 25%, 30%, 40%, 50%. In a typical soft market, they're dropping 12%, 15%, could be 16%, 17%. We're five or six years now where that band is one and a half to two up, to one and a half to two down. I know that's driven by the lack of investment returns in the investment market, it's pretty darn good discipline by the underwriting community, we saw that again in the quarter. Soft on the property side, I've said this in past quarters, I think our clients deserve that softness. They will pay a price when the wind blows, it hasn't for a number of years, so the property market is soft. Casualty rate and exposures contributed less than 1% negative to our results this quarter domestically. That's pretty good. By the way, that's a great environment for our clients, it's also a great environment for our producers. When rates are dropping 15%-20%, anybody can throw a quote out there and catch it off guard with a number that's so low that you lose your client. Today, it's all around how creative can you be and how helpful can you be to your client in helping them deal with their risk management costs. Thank you. Thanks, Mark. Thank you. Our next question is coming from Charles Sebaski of BMO. Please proceed with your question. Good morning. Thank you. Morning, Chuck. Good morning. I was hoping you can give a little more clarity on the work comp on the industry. I know seems like frequency is down. Any thoughts from what you guys are seeing internally on severity of comp claims? Is severity down as well? Not just for this quarter, but in general this year? No, I think what's happening in comp, which is interesting, is the medical costs are escalating at a level faster than the indemnity side. What you've got is kind of a shift. Severity is remaining about the same. Return to work is really critical. It's all about the medical costs, including pharma, that is something that everybody's concerned about. Okay. You made some comments about the discipline from the underwriter side. Just curious your take as well. There's been a lot of supposed disruption with some of the larger carriers really undergoing some underwriting review in the U.S. Just curious if you would call this disruption at all, if there has been any noticeable shift over this quarter or this year from some of these larger carriers, or is that more press and us on my side talking about than you've actually seen on the ground? No. We've seen it on the ground. We've seen it, I'm not going to mention any specific carriers by name at all. No, we're seeing disruption. The good news is there's plenty of market. Where there's disruption, we're able to move business. There are major companies that are undergoing underwriting reviews, and they're making the moves that they believe. Again, I give them credit. I think we're looking at domestic U.S., pretty darn disciplined senior management. Excellent. Thanks a lot for the answers, guys. Thanks, Chuck. Thanks, Chuck. Once again, that is star one to register any questions at this time. Our next question is coming from Quentin McMillan of KBW. Please proceed with your question. Hi. Thanks very much, guys. I have a couple of quick numbers related questions. The $16 million of FX that you have in the back half, just to ask the dumb question, I guess, fully offset on the expense side, right? We should just anticipate that? Yeah. It says that if you look at the CFO Commentary, it says almost no impact on EPS as a result of that. Okay, great. Two questions on the free cash flow. Doug, thanks. You said the integrations are basically done. Can you quantify that at all in terms of what the benefit will be? Also secondly, on the CapEx, obviously you guys are building the new office space. Can you give us a little bit of an update on sort of maybe what the 2016 CapEx might be and then what 2017 could be to kind of be better than that? Yeah, listen, let me just say it this way. I think that first of all, an integration and for our integration teams out there that are listening, I know you got a lot of hard work left, but financially it's not going to cost us that much between now and the end of the year. I'd like to say it's all done, but maybe in our January call, we'll declare that. When it comes to CapEx, the spending that we've done on the home office building, recall that we have an opportunity for a lot of tax credits to come through on that will improve future cash flow on it. That's about $125 million-$150 million this year that we won't have next year. Integration, we spent well over $100 million in 2015, and we're running somewhere in that $50 million range right now, half, maybe less than that. You're going to free up $200 million next year just in those two numbers alone. I don't see a lot of big real estate moves. We moved a big piece of our real estate in the U.K. this year. We won't have those costs, and that was probably in that $150 million of building costs. There was $125 in the U.S. and $25 in the U.K. I just don't see a lot of those big cash needs coming in 2017. That's a nice pot of money to have. That sounds great. You obviously had on the investor day talking about the $750 million you had for free cash flow for acquisitions to fund everything. Can that $200 million sort of be added on to that pot, and that's kind of what we can think about you have available in the coffers? I think you need to think about $750 again next year because we just wouldn't borrow quite as much money next year at this point. That $200 million, if we have an extra $200 million, we'll still be in the $750 million ability to buy companies next year, funds available to buy companies. Okay, if I can take just one, I apologize if this was answered earlier, I missed the beginning of the call. Just on the negative 3% organic growth, you guys said it's going to bounce back to positive. Obviously, that's been a very high growth business to you. Is there any quantification in terms of maybe the size of the contract that slipped that potentially could be in the back half? Is it going to be low single digit or sort of low to mid? Anything that we can kind of get a little more clarity on? Actually, what's interesting is the account that we didn't pick up the performance bonus income has actually rehired us for the next five years. Actually, we've picked up a large piece of business that flows through that program. We didn't lose any account on the risk management. Rather, we just didn't hit a couple metrics that have clip metrics in it, and we didn't get the performance bonus. We'll be back after it in this next fiscal year that ends in 2017. Okay, great. Thank you so much, guys. Thanks. Bye, Quentin. Thank you. At this time, I'd like to turn the floor back over to management for any additional or closing comments. Thanks, Donna. Yes, I've got a bit of a wrap-up. Thank you again for being with us this morning. We appreciate it. Our teams are focused and energized. We will continue to execute on the four components of our value creation. We will grow organically. We will grow through acquiring the best brokers. We will continue to improve our quality and productivity, and we will invest in our culture. I'm very pleased with the first half results of 2016, and I remain excited about the remainder of the year and beyond. Thank you all for being with us. We appreciate it. Ladies and gentlemen, thank you for your participation. This concludes today's teleconference. You may disconnect your lines at this time, and have a wonderful day