Good morning, welcome to Arthur J. Gallagher & Co.'s second quarter 2014 earnings conference call. Participants have been placed on a listen-only mode. Your lines will be live for the 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 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 & Co.. Mr. Gallagher, you may begin.
Thank you, Christine. Good morning, everyone, thank you very much for joining us this morning. This morning, I'm joined as normal by Doug Howell, our Chief Financial Officer, as well as the heads of our operating divisions. I'll make some comments on the quarter, add some perspective to our press release, discuss our mergers and acquisitions, discuss the rate environment, and give my thoughts on how I feel about our future. I'll turn it over to Doug to make some comments, we'll go to questions and answers. I just have to tell you, I could not be more pleased with our second quarter than I am. It's just unbelievable. What our team accomplished is just outstanding. On April 1st, we announced our acquisition of Oval in the U.K..
In April, we entered into an agreement to acquire OAMPS and Crombie Lockwood in Australia and New Zealand, we closed it in June. We issued a secondary offering and raised just short of $1 billion in April, and we did a $700 million debt offering in June. With all that going on, we completed 17 total mergers, including the ones I just mentioned, for almost $500 million in annualized revenue. We grew our adjusted brokerage revenue 34%. We grew adjusted brokerage EBITDAC 43%, expanded our brokerage margin 190 basis points, grew our risk management revenue 8%, and grew risk management EBITDAC 9%. Our organic growth in the quarter, all in our operating units, was 4.4%. Brokerage-based commissions and fees were up 3.1%. Our brokerage supplemental commissions were up organically 9.1%. Our brokerage contingent commissions organically were up 9.7%, and our risk management organic growth was 7.6%.
By all measures, a terrific quarter. I just could not be prouder of our team. Let me discuss mergers and acquisitions. 17 mergers completed in the quarter is incredible work by our team. Remember, in order to get 17 mergers done in a quarter, we have to show these successful entrepreneurs why they'll be more successful after the deal is done with Gallagher than either going it alone or with another strategic partner. There's competition for these firms, they chose Gallagher. I say this every quarter, welcome to our new partners, thank you for choosing Arthur J. Gallagher & Co.. Welcome to our growing Gallagher family. We've been a very active acquirer for 28 years. We've built our company by finding compatible firms and proving that one plus one can equal three, four, or even five.
What we have accomplished in the last couple of years has truly transformed our company. Consider this. We bought Heath to get us started in the U.K. retail. This led to Giles, Oval, and other bolt-on acquisitions, making us one of the top brokerage firms with over 70 offices throughout the U.K. We became the largest broker in New Zealand. We joined the top 5 in Australia. We joined the top 5 in Canada. We continued our merger and acquisition strategy in the U.S., maintaining our spot at number 3. Let me say this about the firms that we've acquired. They're all middle-market, niche-focused, producer-centric insurance brokerages, right in our sweet spot. I'll tell you, once they join our company, they're like kids in a candy store when they get access to the resources and capabilities that Gallagher brings to them.
We've built a truly global platform with all of our people committed to responding to our clients' and prospects' needs, utilizing our top talent wherever it resides around the world without any barriers. Our integration work streams are all on track. We're winning new accounts, serving our existing client base, and we continue building out our world-class company. The thing that's incredible is that our pipeline for acquisitions remains very, very strong. Let me move to the property casualty rate environment. We did a mid-year survey of our property casualty renewals, you'll read in our release that it shows about a third are getting increases, about a third are flat in terms of rates, and about a third are getting decreases. Let me peel that back a bit. First, recognize it's really a tale of two markets, property and casualty. I'll talk about property first.
20% of our clients in the property arena are renewing up, but these are single-digit type increases. 25% are seeing no change in rate, 40% are renewing down, but single-digit type decreases, and about 20% are renewing down with decreases greater than 10%. Frankly, this is not unreasonable given the fact that we've had no real major catastrophes in the last few years. As for domestic casualty lines, we're seeing what I consider to be rational count and coverage underwriting. 40% of those clients are renewing up, but these are single-digit type increases. 30% are showing no change in rate, 30% are renewing down, but again, single-digit type increases, and very, very few casualty renewals are getting decreases greater than 10%. Beneath that, we're seeing workers' comp, commercial auto, and professional lines more moving on the upside, general liability and umbrella, more flattish to slightly down.
Internationally, as for the U.K., we're seeing similar property rate pressures as in the U.S., casualty lines are flat to slightly down. However, it's important to note that there really wasn't much of a firming market over the last several years in the U.K., we believe underwriters are beginning to take on a more disciplined underwriting approach and are asking for some inflation level rate increases. In Canada, a similar story, property rates are not as challenged as the U.S. because of a couple of large weather events in the last year. In Australia and New Zealand, property is off single-digits, casualty is flat to slightly down, carriers are not really showing any inclination for price increases. Remember, this is important. Over the last three to four years, our results have been influenced by rate and exposure growth by less than 1%.
Our professionals help our clients mitigate costs, they're very good at it. We do not need rate increases to grow this company. Give us a flat rate environment, AJG will sell a lot more business than we lose. We are a sales machine. Everyone at Gallagher understands nothing happens till somebody rings the cash register. I believe today's environment shows continuing discipline on the part of our insurance carriers. All of our major trading partners have been telling us for years they want to account by account underwrite. In other words, what they're saying is, if the account deserves a rate cut, give it to them. If it needs an increase, get it, we are seeing that discipline continue in the market. I do not feel any lessening of that discipline.
I realize there's rate pressure on lines that have produced significant returns to carriers, frankly, that's only fair to our clients. I believe this is anything but a soft market. In fact, it's a great environment for us to grow the business going forward. Let me talk a little bit about our benefits business. Our employee benefit brokers business continues to post some of our best organic growth and margins, also has a robust pipeline for acquisitions. We are right in the middle of one of the most complex and constantly changing challenges facing American businesses, which is the new Health Care Act. This presents us with new opportunities to demonstrate our capabilities to existing clients and prospects. It's also important to note that medical insurance is just one portion of what we provide to our customers.
We offer solutions to the full spectrum of problems around controlling benefits costs, retaining a competitive and productive workforce, offering a range of retirement alternatives. It's just a terrific business for us. Let me move to our property casualty wholesale operation, which we brand as Risk Placement Services. As a domestic wholesaler, RPS was impacted significantly in the quarter by the rate environment. However, we continued to grow our business nicely in the programs MGA arena. Our underwriting expertise continues to deliver solid revenue growth and contingent increases. Finally, I want to talk about our risk management business, which is Gallagher Bassett. We see excellent growth opportunities around the globe. In the U.S., we continue to enhance our base workers' compensation product with unmatched loss control analytics.
In the U.K., we've tailored our systems and processes, allowing us to move from a strong position with governmental customers to commercial customers. In Australia, our development of new IT solutions has positioned us to increase our market share with governmental work care cover programs. By and large, a terrific quarter. Operations are getting stronger every quarter, I want to talk just a little bit about the future. I think that we are positioned for a terrific close to 2015. Barring any change in the economic environment or the rate environment, we should have a solid end of this year, I think we're well set up for 2015. Doug?
Thanks, Pat, and good morning, everyone. It's really nice to report a solid quarter and a solid first half for that matter. Let's start on the first page with the Brokerage segment. Our top line, $0.66 per share, was aided nicely by the addition of Crombie OAMPS, which we closed on June 16th. You'll read at the top of page four that it added about $0.06 to EPS, and know that they earn about 60% of their second quarter earnings in the later half of June. That was great work by the team to get it closed fast enough to nearly overcome the $0.07 of dilution that arose in the 60 days between the secondary stock offer in April and the close on June 16th. That's really good work to the team.
Moving down, you'll see the integration line, which is in line with our forecast, and you heard Pat say that our efforts are going very well. Staying with Brokerage, turning to page two, to the organic revenue table at the bottom. First, while we continue to believe that transparency into the components of Brokerage revenues, that's base, supplemental, and contingent, we believe that's important and useful. Please remember that our mission is to work hard on growing all three. We encourage our team to get appropriate compensation for our services and not to worry at all about where it gets classified on our financial statement. Second, underneath the organic numbers, our global retail operations grew nearly 4%, yet our global wholesale operations were about flat.
Within retail, benefits was a touch better than the P&C business, and within wholesale, those operations in particular felt pressure from the property market, as Pat said. Property renewals are seasonally skewed somewhat to the second quarter, we don't see such a level of headwinds coming into the third and fourth quarter related to property. Third, let me add a bit more to Pat's statement that historically, the firming rate environment wasn't contributing much to organic, basically less than 1% of our organic growth. You'll read on the first page of the earnings release that the property rates negatively impacted commissions, casualty rates had a positive impact. Numerically, property pulled down our overall organic by about 80-90 basis points, and casualty helped our organic by about 20-40 basis points. You can see the headwinds there on the property side.
Let's move to the Brokerage comp operating and adjusted EBITAC margin tables on page three. You'll see that we've added in the footnote to each table the impact of the four larger mergers we completed since last year, second quarter. The punchline is that those four deals, in aggregate, bolstered our margins by about 140 basis points, and we got another 50 basis points of margin expansion from the balance of our operation. We think that's terrific in this environment. Looking over the next couple of quarters, please know that the four larger deals, and now with the Canadian operation closing on July 2nd, in aggregate, are seasonally smaller in the third quarter and will actually produce a drag on overall margins of about 40 basis points. That flips in the fourth quarter, and they'll actually bolster overall margins by a point to a point and a half.
Moving to the brokerage segment, non-cash line items for the remainder of 2014. For amortization, assume about $48 million of expense per quarter. Depreciation will run about $14 million of expense per quarter. As we do more in M&A, for every dollar we spend, you'll need to increase amortization about 1% of the purchase price per quarter. That will get you pretty close. All right. Let me shift now to the risk management segment on page four. Across the board, a great quarter. Revenue's up 8%, margin's nicely above our 16% target. They're doing well integrating the carrier book, and we're still making a lot of client-centric investments at the same time.
Looking towards the third and fourth quarter, please know that we'll give back a little of that margin because as we have said before, we're holding ourselves to a 16% margin target for the year. As for non-cash items, the risk management segment, just assume about $7 million a quarter for depreciation and about $1 million a quarter of amortization. Let me shift to page five, to the corporate segment. In aggregate, right in line with the midpoint of the range we gave last quarter. However, when you look at the separate lines, you'll see that there was a strong quarter from our clean energy investments that covered the additional M&A costs that we spent to close the U.K., Australia, New Zealand, and Canadian operations.
Looking forward, as you know, when modeling the corporate segment, we encourage you to use the shortcut table format we provide on page 14 of our investment supplement. Not a lot of movement since the first quarter, in terms of our guidance looking out for the next two quarters. As I say, when it comes to clean energy, earnings for the year can be difficult to predict, it does have a wide range. Please make sure you consider that when you're doing your models. Finally, some comments on capital management. With our secondary in April and the debt raise in June behind us, as we look out towards the end of 2015, we would like to have our net debt to EBITAC ratio back down into the low 2x position.
That said, our free cash flows, the dribble out shelf we have, our line of credit, and the ability to use stock in tuck-in acquisitions, we're still well positioned to continue our smaller tuck-in M&A program for the rest of this year and well into next year. As you heard Pat say, our pipeline's full, we won't have any problem keeping busy. When I step back and take a look at it from the CFO's chair, we're doing really well organically. Carriers are rationally pricing on an account and line of cover basis. The economy is moving forward. We're working hard on integrating the larger M&A operations and having success there. We're still closing a lot of smaller tuck-in acquisitions, and we have a lot of exciting operational improvement and productivity initiatives going on. Our culture is thriving.
For me, simply put, I think the team is delivering on all fronts. Back to you, Pat.
Thank you, Doug. As Doug said, I think we're hitting on all cylinders. With that, Christine, we'll go to questions and answers.
Thank you. The call is now open for questions. If you have a question, please pick up your handset and press star one on your telephone at this time. If you are on speakerphone, please disable that function prior to pressing star one to ensure optimum sound quality. You may remove your question at any point by pressing star two. Again, that's star one for questions. Thank you. Our first question comes from the line of Sean Dargan with Macquarie. Please proceed with your question.
Yeah, thanks. Doug, I guess, well first, thanks for breaking out the impact of raising equity early in the quarter and not really layering in the earnings until the end. I'm just wondering what your thought process was around pulling the trigger at that point on the equity raise versus waiting.
Simply that we had committed to do that with Wesfarmers on the deal, since we committed to do an all cash deal with them. Frankly, we just didn't want to get caught between the boat and the dock, having a large equity raise sitting out there for 60 days waiting to get done. We sat down with our advisors, and they thought it was a good time to go. Wasn't the best time in the market given the financial sector that week, but I was really happy to get it done and get it behind us.
Great, thanks. What's your view on using the at-the-market option that you have available to you, and what factors into using that to, I guess, fund further acquisitions?
First of all, as you mentioned, it's not very much. What we have left on is $196 million on it, so it's not like it's that big of a shelf sitting there. Typically, if we have in international deals, it's a little bit more difficult to use our stock in acquisitions if we choose to do that. We'd probably use the dribble out if it comes up, in order to do smaller tuck-in international deals where they aren't necessarily positioned well to take our stock in a deal. It's there just as a liquidity measure.
All right. Thank you very much.
Thanks, Sean.
Thanks, Sean.
Our next question comes from the line of Adam Klauber with William Blair. Please proceed with your question.
Thanks. Good morning, guys. Good quarter.
Thanks, Adam. It was a great quarter, Adam.
Sorry, Pat. A couple different questions. How was organic outside of the U.S.?
Internationally, Adam, our organic. Last year at this time, we were running about 10% organic, if you go back and listen to it. It's basically running about the same as our domestic operations right now. If I were going to look for any particular soft spot in international, I would say that our very small affinity programs, we had kind of a gang buster quarter last year on it. It didn't produce as quite as much as we retool some product there. By and large, we're having some nice large account wins there. If I were going to try to break it apart, that's where it would be.
Okay. You mentioned RPS clearly does a lot of property cat. Did that have an impact on organic coming down this year compared to last year?
Absolutely. Oh, yeah. In my prepared remarks, that's why I mentioned it, Adam. Our biggest quarter for property placements is the second quarter, and property is one of our largest lines in the quarter, and it was impacted by probably over 10% reductions.
Yeah. That's the one that caught us just a little bit flat-footed. If I were going to go back and look at our expectations, just the slide in the property market and how it impacted. To pull our overall down 80 to 90 basis points of organic, I guess that's looking on the bright side of it. Casualty rates still being up mitigated some of that overall, That's the one that I probably wouldn't have been able to predict that six months ago.
To put this in perspective, Adam, we're the largest placer of excess and surplus property risks in the state of Florida.
Right. Yeah, no, I know RPS is one of the biggest property players out there. They're extremely good.
By the way, this is completely appropriate for our clients. There's no angst about this. They deserve a decrease. They paid up big time after the last catastrophe, this is what the market should do.
Yeah. No, again, it's normal up and down. Looking at Noraxis and Wesfarmers, clearly they're not included in organic, how are those organizations doing on an organic basis?
New Zealand's doing terrific. Australia's hanging in there kind of flattish from what I can tell. The measurement's a little different because as we pull those companies out of where they were before, Canada's on fire. We think that there's good results up in Canada.
Great. One more question on Wesfarmers, Noraxis particularly. Both good size organizations out of the U.S. How are you changing your management structure? How are you staying on top of those organizations?
Well, first of all, Adam, the detailed level of integration process management that we have, it's really unbelievable. It's like being in a construction truck on a job site. We know every single item that is supposed to occur every single month, whether it be a lease renewal or whether it be some account that should be transferred from a different London brokerage into our London operation, and those work streams are laid out way in advance. These organizations, remember, they're very similar to what we've been building here in the U.S. We've got terrific leadership that has been doing acquisitions of bolt-on acquisitions over the last decade. I said in my prepared remarks, these are niche-focused, producer-centric organizations that look and feel just like us, and they fold into our organization nicely.
In terms of how we manage them, they report into our structure through our international business that is headed by my brother, Tom Gallagher, and by our CEO in the U.K., David Ross, and we fold them in and move on, just like we've done for the last 30 years.
Adam, also on the back office side is you know that there's strong reporting as we manage that, mostly what I'd say the non-production layer. There's strong reporting lines between the CFOs and me, the IT folks, and Eric Dean, our global IT leader. When you look at it, there's the production side of leadership and then the local management leaders. They're responsible for everything. Reporting in, everybody reports into their kind of functional leader also. Just illustratively, for the first 60 days, I had a call almost every day with the CFO of Australia. Highly competent for those that might have met her on the secondary roadshow. Just a terrific CFO there, illustratively.
Okay. That's very helpful. Thanks.
Thanks, Adam.
Our next question comes from the line of Sarah DeWitt with Barclays. Please proceed with your question.
Hi. Good morning.
Good morning.
Good morning, Sarah.
On the three big deals that you've done this year, could you give us an update on how the integration is going? Are you on track to achieve the synergies, and could there be any upside there?
Let me hit the integration side of it, and I'll use it as an illustration, Bollinger. When we bought Bollinger less than a year ago, they're up completely on our agency management systems. All of their centralized payables have been moved into our operations already. All the carrier payables have been moved into our central core. We've got a ton of their real estate consolidated. The teams are working together, and the last thing that really needs to go up is just the phone system to go up on our voiceover IP system. It's pretty well up, but we've got some tweaking to do on it. Clearly, none of these things happen without a lot of hard work, and maybe with this opportunity to talk, please understand that we've got professionals around the globe, that their sole job is to integrate acquisitions.
They've got the integration experience. They're assigned full time to the process. Also, because we're a company that has done so many acquisitions, almost all of our systems are built. That's not only systems, but also processes are built to plug in new partners and new organizations into our systems. It's not like we have, I'm going to use this word, closed architecture that isn't receptive at all for new partners. That basically you can plug and play the new operation. Bollinger illustratively is going very well. Similar stories with Giles and Oval in the U.K. Remember, in Canada and Australia, too, we're basically using their system. We don't have overlap to it, really any degree in New Zealand, Australia, and Canada. We're basically going to be using their system. There's not a lot of integration that goes along with it.
Let me take the ball on that one a little bit, Sarah, on a different angle. What I look at is selling and holding onto clients, right? What I'm really pleased about is with Noraxis in Canada, as an example, we've already got people and resources from the U.S. in areas like mining and natural resources, working together with our new offices in places like Nova Scotia, working on clients. That is exciting. We're already writing new business throughout Australia on areas that in places that we didn't have an opportunity before, but with our capabilities now, our people are out calling on clients saying, "Hey, this is a whole new world." That's what is the bellwether to me. Are we holding onto clients? Are we selling more new business? If that's the case, that generates excitement.
In all three cases, the U.K., Canada, Australia, New Zealand, very good energy.
Financially, there's nothing that makes me think that we won't see our expectations be realized on these financially. I think they're delivering to our early measures. There's still lots of synergies, and frankly, as we start working more and more with them, we see tremendous opportunity. If you look in the press release to the operating expense table, actually, we put a footnote in there, the fact that these larger deals run kind of higher operating expenses than what we do. That's a great opportunity for us to go in there. Doesn't really impact the people that are doing the business. We'll just be able to procure goods and services better. We'll be able to use our offshore centers of excellence better. Our volume purchasing will help. I see that as a great opportunity to realize our synergies.
Great. That's a great answer. Secondly, on the insurance brokerage organic growth, I know you said if prices were flat, you could still grow organically, but if we were to look out a year and prices are down mid-single digits, is that still an environment where you think you can grow organically and expand margins?
Absolutely. Again, in my prepared remarks and in Doug's remarks, we mentioned the fact that even with rate increases, in some instances up 5%-6% over the last three years, the impact on our results has been less than 1%. Our people do a good job of helping our clients renew coverages at costs that are less than what's being requested, and that's by changing deductibles, changing structure, et cetera. If the market is flattish to down single digits, we'll do great.
Remember, some of our clients are still not buying to our recommended level of exposure cover. There's a lot of them that during the Great Recession, opted out of covers that they're going to take the risk on. We still see lots of opportunity for our clients to, if there's a slight rate decrease, let's reduce the deductible a little bit. Let's increase the top end. Maybe you think about buying another line or two that you opted out on. That's what our guys are doing there every day. They sit there and say, "Is your insurance program matching to your risk appetite?" In decreasing prices, people tend to buy a little bit more insurance, which kind of knocks the downside off of that a little bit. We see good opportunity for it in this up two, down two, up three, down three type environment.
Okay, great. Thanks for the answers.
Thanks, Sarah.
Our next question comes from the line of Mark Hughes with SunTrust. Please proceed with your question.
Thank you. Hey, Pat, that was a fabulous quarter. Congratulations.
Hey, Mark. Good start.
Would it be possible to share just rough percentages of property, the revenue from property in 2Q versus what you would see on a full year basis, just so we get a better sense of that seasonality.
Yeah, I think that property, if I look at it in our brokerage business. We'll stick with wholesaling, that in the second quarter, wholesaling, really 60% of their property placements, as a percentage of the revenue, come in the second quarter, and you're down into the 30% or 40% range in terms of their mix. When you look at overall, you're seeing 30%-35% as the mix of business in the second quarter, but the rest of the year, property comprises maybe 20%. Depending on which business, but overall for us, the mix of business is maybe 30% of our business in the second quarter, and then 20% for the other quarters during the year.
Revenue seasonality within the acquired businesses. I'll ask that question, then I'll also ask, under the circumstances, any just general commentary about the 3Q EPS, if you did roughly $0.80 this quarter. How should we think about Q3? You've given us some ideas on the margins, and that's appreciated. Just given the magnitude of the movement in the business this quarter, how should we think about Q3 relative to the number that you just put up?
Well, listen, we've always shied away from providing any EPS discussion with respect to our brokerage and risk management segment. I hate to say it to you, Mark, I'd rather not do that. In terms of how we see seasonality with respect to the bigger deals, like I said in my comments, we see maybe a 40 basis point drag on margins in the third quarter because of the lower seasonality of the big four, actually the five acquisitions that will be in our numbers in the third quarter this year. In the fourth quarter, we see that to be a 1 point-1.5 points up. When you get out to next first quarter, they have an impact of greater than 150 basis points margin expansion.
I'd rather not comment on EPS, there is seasonality in those larger deals, I think if you run it through your models, I think you'll get to a pretty close answer.
Okay, thank you.
Thanks, Mark.
Thanks, Mark.
Our next question comes from the line of John Campbell with Stephens. Please proceed with your question.
Hey, Pat and Doug, good morning.
Good morning, John.
Great quarter.
Thank you.
Good risk management results, I'd say particularly on the margin line. Just first, what's driving that near 17% EBITAC margin? Doug, I know you guys said you're still targeting the 16% for the year, which does imply a little bit of fading over the back half of the year. Just fill us in on some of the investment opportunities and risk, then maybe just assuming greater scale and maybe even tapering investments, what you guys see as peak margins longer term.
Listen, I think that business longer term, we like 16-17 points of margin in the near term. All right? We think we're at kind of full margin on that business. Again, to expand margin in that business, you really need at least 5%-6% organic growth to expand. It's not quite as leveraged as it is on the brokerage side, where we say you need 3% or more in order to expand margin. For us, the back half of the year, purely it's the amount of investments that we want to make in modernizing our product offering, enhancing our quality, improving our productivity, then adding product lines and services to our customers.
The reason why we're above 16 points as margins is the team held off a little bit in making those investments until we see the organic showing up, and it did at 7.6%. The rest of the year, we'd like them to get back into continuing to make some product enhancements. We're getting ready to roll out a new analytics workbench here, the version 3 of that here in the third quarter. This is just product enhancement, product improvement, client service enhancement. We see ourselves in that mode in 2014 and 2015. A little too early to talk about 2016, but that's where we see ourselves.
John, let me comment. These are world-class margins in that business, and there's heavy investments in IT and in people. When you bring on a client, a large commercial client or a large insurance company, you better have the people at the desk because the claims are coming, trust me.
Got it. Got it. Thanks for that color, guys. Just from a housekeeping item, it looks like that international acquired rev, the flow through is driving the brokerage tax rate down. I might have missed this from earlier from you, Doug, but just curious about how to think about that brokerage tax rate going forward, after we assume the annualized impact from the recent international deals.
By the time you roll on the lower tax jurisdictions of Canada, get the full impact of the U.K. with Oval and the lower tax rate again with Australia, you could see that move another one point lower in the near term.
Got it. Thanks, guys.
Thanks.
Our next question comes from the line of Dan Farrell with Sterne Agee. Please proceed with your question.
Hi, good morning.
Good morning, Dan Farrell.
There's been a lot of focus on the large deals. While you've done these, you've also been very active in the smaller transactions. I was wondering if you could just talk about the current environment and pricing that you're seeing on those smaller deals.
Let me talk about the environment. I'll let Doug Howell talk about the pricing. The environment for doing acquisitions just continues to be incredibly strong. What we see globally is there are literally thousands and thousands of smaller agents and brokers around the world. Most of these agencies and brokerages are run by baby boomers. It's clearly their largest asset, and at some point in time, they've got to monetize their life's work. The pipeline just regenerates itself literally month after month with people that are considering. Some of these things take years to get done. Some will move in a couple of months, others will be sort of kicking the tires, looking at whether they want to do it, discussing it with you for literal years.
We just are constantly going through the process of looking for, number one, people that know how to run a good business. We constantly say, "If you don't make money for yourself and your family, you won't make money for us." If you run a good business, if you are really good at clients and have a culture that fits. Another thing people say is, "How can you put on 17 acquisitions in a quarter and change their cultures?" We don't. If the culture doesn't fit us, 99% of our due diligence, once we get over the fact that they make money, is all about whether the culture match is going to be right. Once we get that set, we can literally show how one plus one can equal a lot more than two.
I think it's an interesting business situation right now on a global basis. Our opportunities are literally, just every single month, the list just gets longer and longer of people we're talking to. I'll let Doug talk about the pricing.
Dan, I think that a good question. We did 14 deals in the quarter for $55 million of revenue. That stacks up to about $4 million of revenue per shop. Just terrific sales folks that join us. We're paying about 7x for that in terms of the pricing. Do I see that moving higher? Not on the smaller deals. I think that's a pretty fair price for what we're paying right now. Over a longer time, we've kind of always been in the 6 to 7 times EBITDA range. We see that holding in there. Some of the larger platforms, if they're large geographical folks, maybe we'll pay a little bit more than that, but right in line with what our expectation, nice asset deals where we get to amortize the purchase price, that brings our tax rate down on those.
I don't see much of a different environment. When I look at the deal sheet, there's hundreds and hundreds of those folks on there. I see lots of opportunity to continue to do that. The teams are working on it every day.
Okay. Thank you very much.
Thanks, Dan.
As a reminder, ladies and gentlemen, if you would like to ask a question, press star one on your telephone keypad at this time. Our next question comes from the line of Meyer Shields with KBW. Please proceed with your question.
Okay. Thanks. Good morning, guys.
Morning.
You've talked in the past about how 3% organic growth is generally enough to produce margin expansion. Is that the right sort of threshold for the international deals as well?
Great question. I think so. I think that in most of the environments in which we're operating there, if you take out perhaps Toronto and Sydney, and the operating areas, I think, have enough low-cost environment that I think growth of 3% or more shows some margin expansion opportunities. That said, please realize that New Zealand runs terrific margins. Canada already runs terrific margins. Australia, there's opportunity there. That's where we see the opportunity to grow margin there. Most of the place that we see margin opportunity is because of having more volume, so more premiums that we're writing that we can negotiate better compensation arrangements. Also on the operating side, I think there's opportunities in real estate, consumables, co-sharing of IT systems, et cetera. That's really where we see the margin opportunities, in the operating expense line more than the compensation line.
Okay, fantastic. When you look at the major deals that you've done over the last, let's say year and a bit, are you keeping all of the people that you want?
Absolutely.
Yeah. We've really had good retention there, Meyer.
I have to tell, Meyer, when we've been able to buy people from a private equity concern, five years ago, I would've said we didn't really want to do that. I was wrong. When they get aboard a brokerage run by brokers, they like it.
Okay, fantastic. Glad to hear it.
Our next question comes from the line of Kai Pan with Morgan Stanley. Please proceed with your question.
Good morning.
Good morning, Kai.
Just for the underlying margin expansion for the quarter, Doug, you said about 40 basis points?
50 basis points from the 190 in total, 50 that came from the underlying business, 140 from the four big deals.
Okay. Just on the sort of 50 basis points underlying margin expansion, given that was produced by only like 3.4% organic growth. Just wonder, if you maintain a 3%, 4% organic growth, do we expect to see 50 basis margin expansion going forward?
Maybe, I think that what fueled some of our margin expansion this quarter was increased contingents and supplementals that have a little bit better impact to the bottom line. The big question is what's happening with inflation. I'm not dodging the question, I just don't know. Right now, wage inflation seems to be under control. We still have productivity opportunities that we can use productivity lifts to pay for raises that our folks deserve. We still have opportunities on real estate and consumables. IT systems, there's more demand for IT systems. I can't guarantee if it's not above 3% that we're going to have margin expansion.
Okay, great. On the acquisition front, you did four big deals in a very short amount of time. Is it time to take a pause, step back, and to focus on integration and running your core business? Or are you still constantly on the lookout for the larger deals? Secondly, it looks like you have implanted your flags around all the major English-speaking markets. I just wonder, do you have any appetite in other markets as well?
Well, let me answer that, Kai. First of all, yes, it's time for us to digest and focus on integration. We're doing that every single day. When I talk in my prepared remarks about work streams, we're on top of what's going on in every office, 70 offices around the U.K., 50 new offices in Australia, New Zealand, a bunch of new offices in Canada. Yes, it's time to digest a bit, and we're not looking at any substantial new large deals as we speak. Having said that, are we open to doing acquisitions? Absolutely. Especially our bolt-on acquisitions around the world. One of the reasons we're excited about what we did in Australia is even with the size that we've accomplished in Australia, we'll have less than 5% market share.
Terrific opportunity to do bolt-on acquisitions, we'll continue to do that in Australia, U.K., America, and Canada. Those bolt-ons will be, as Doug said, on the smaller side. As it relates to non-English-speaking territories, you'll recall we took a 21% interest in our Mexican trading partner, Grupo CP. We've opened a small operation in Chile. We'll continue to invest in Latin America, and we look to continue to expand our global footprint. We're a global company. Over 27% of our revenue and 27% of our people are now outside the United States, and we see that as a great expansion opportunity.
I think the dimension and size-wise, too, just so that we're saying. We think it's really important to put our toe in the water in some of these other countries. We did that in the Caribbean initially with a small deal. We did it in Perth, Australia, with a small deal. That leads to other opportunities. Plunging into non-English-speaking countries in a large way right now is not in our strategic plan. Putting our toe in there with a nice $4 million-$5 million agency there, so we can learn the country, learn the business, get some smarts on the ground there, I think that's a nice step over the next couple of years. In the U.S., when we talk about smaller deals, remember, there are some nice $75 million-$100 million transactions or brokers out there that we think might be coming to market.
We would definitely take a look at those. We don't see $500 million deals out there, billion-dollar deals out there that are really percolating around. When we look at this, you have to think of us not doing something greater than $100 million in purchase price. There's a lot of really nice $50 million, $60 million shops out there that are looking to join Gallagher. We'll continue to look at those.
Remember, though, if you take a look at this month's business insurance, if you look at the U.S. top 100, to be number 100 in terms of an agency in the United States, you've got to be $23 million in revenue. Couple that with the fact that we believe there's something like 20,000 agencies in America. That is consistent around the globe as well.
Well, thank you so much. Good luck.
Thank you, Kai. We make our luck.
Our next question comes from the line of Charles Sebaski with BMO Capital Markets. Please proceed with your question.
Good morning. Thanks for getting me in.
Thanks, Charles. What's up?
I wanted to know, just sort of a follow-up there on the acquisitions on the benefits side versus the broker side and how you see that queuing up.
Boy, that's a great question. Thank you for answering that, or asking that, rather. The benefits business right now, let me speak to first domestically in the United States. The new PPACA law basically, in my opinion, puts small benefits brokers out of business. We have 26 people in our compliance department here in Itasca supporting our U.S. business, and 20 of them are attorneys. You think about the compliance issues for anyone with 100 employees or more, and that's a huge number of employers in the United States. They cannot contend with this law, and their brokers and agents can't help them. They're figuring that out. Our pipeline, as it relates to smart consulting and broking firms in the United States that realize they need our capabilities, is extensive. We are clicking off literally an acquisition almost per week when it comes to benefits.
These are great firms with great clients who know that they need the capabilities that we have to be able to serve those clients. Those that aren't recognizing that will die. They will be done in the next decade. What an opportunity for us. Internationally. The opportunity to expand our consulting as it relates to benefits in the U.K., in Canada, in Australia, New Zealand, those are territories for us that are just wide open, and I think we offer a great complement to people who would consider joining us in those regions. We've been very successful. We had a very nice acquisition closed in the U.K. this quarter, and we're very excited about that. Those are capabilities that will actually help us in the U.S. It's a great business for us. It's our next multi-billion dollar business, in my opinion.
We provide a great home for those professionals that want to join us.
Do those international consultant benefits businesses have a similar margin profile to your current business, or is it different in any way?
No, it's very similar.
Okay. I wonder if you have any color in how the cross-selling has been working between, I would especially say in the U.S., as you talked about, these 100-person firms and getting benefits leading to brokerage or vice versa. Any additional insight on that?
Another good question, Charles. That's an area that we focus on intensely, and it's significantly improving quarter by quarter. The opportunity is unbelievable. If you take a look at our property casualty brokerage operation in the U.S. and our benefits operation, about 90% of those businesses are not cross-sold. Both operations are up on salesforce.com, and we are looking at that every single week, and the opportunities are huge.
I appreciate the answers.
Thanks, Charles.
Thanks.
Our next question comes from the line of Michael Nannizzi with Goldman Sachs. Please proceed with your question.
Hi. Thanks. Just most of my question was answered. I have one question just in thinking about M&A. Can you talk about how your tax credit factors into M&A decisions and sort of how scalable those benefits are to the extent that you are able to grow EBITDA through acquisitions? Thanks.
Yeah, I think that the ability to repatriate money from overseas in order to bring it into the U.S. and then not pay the U.S. tax on it, there's opportunities there. We did that with the Canadian deal, and we did it with the Australian deal, and it brings our multiple down on what we pay by about one turn. We think there's opportunities. In the U.S., obviously generating more U.S. taxable income, there's opportunities to use more of our tax credits to do that. We're running up towards $100 million of earnings a year off of that business right now. We think there's still some more opportunities to move that higher. I think after about 2015, 2016, it'll kind of be at terminal velocity there. We see it as an opportunity, but would have we still done the Australian, Canadian deals without them? Absolutely.
The multiple we paid still was a fair multiple. This is a little bit of icing on the cake. We'd never do a deal just because we can use more tax credits. That's something, you got to get the right deal. Frankly, the ability to grow our U.S. taxable income and use more of our tax credits is an opportunity for us over the next seven years. Remember, these programs run out in 2021. We can produce enough credits maybe to get us to 2023 or 2024. By and large, it's a nice cash generator to fund these acquisitions for this next six or seven years, but we don't do a deal just because of the credits.
All right. That's fair. Great. Thank you.
Thank you, Mike.
Thanks, Mike.
Our next question is a follow-up question from Mark Hughes with SunTrust. Please proceed with your question.
Yes, thank you. Any updated thoughts on the exchange opportunity? Is any business changing hands because of exchanges, either for you or competitors?
Mark, that's a great question. Let me handle that. We take a very strong position on this, which is, A, we do have a private insurance exchange that we've helped start in partnership with Liazon, and we offer that as one of the many things that we'll do for clients. We look at exchanges as just more of the same, frankly. I mean, our entire history is going into clients' offices and helping them sort through what they should do with their risk and what they should do with their benefits. These are new opportunities to move to new contribution approaches as opposed to defined benefits of defined contribution approach, and there are lots of different exchanges. Really what it does is it provides, again, some confusion to our clients. It's difficult for our clients to sort through all these options on their own.
It's just more of the same when it comes to sitting down with clients and helping them sort through what should they do with their benefits. Remember, it's not just the health insurance spend that clients are dealing with. Probably in most businesses, compensation and benefits is one of their leading largest expenses, right? Benefits is part of that. What we're helping our clients sort through is what they do about their workforce. What's the strategic approach to keeping their people and making sure that they're giving them the benefits package that's competitive, that includes health insurance and may include an exchange, and it may not. That just makes for more work for us.
Thank you.
Mr. Gallagher, we have no further questions at this time. I would now like to turn the floor back over to you for closing comments.
Thank you, Christine. I just have one very brief thing to say, and that is thank you again, everyone, for joining us this morning. I already said this, I think it bears repeating. I could not be prouder of what our team continues to deliver, first to our clients, and then secondly to our shareholders. The thing that's kind of fun about being in my seat is that while I'm pleased with the quarter, I'm incredibly confident that this franchise is just getting started. Thank you for being with us this morning. Look forward to talking to you in a quarter.
This concludes today's conference call. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.